ENERGY EAST CORPORATION
RGS ENERGY GROUP, INC.
FILING TYPE: U-1/A
DESCRIPTION: AMENDMENT NO. 4 TO APPLICATION/
DECLARATION UNDER THE ACT
FILING DATE: JUNE 27, 2002
PERIOD END: N/A
PRIMARY EXCHANGE: NEW YORK STOCK EXCHANGE
TICKER: EAS
RGS
TABLE OF CONTENTS
PAGE
----
ITEM 1. DESCRIPTION OF PROPOSED MERGER. . . . . . . . . . . . . . . . . . . 1
A. INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. General Request . . . . . . . . . . . . . . . . . . . . . . . 2
2. Overview of the Merger. . . . . . . . . . . . . . . . . . . . 3
B. DESCRIPTION OF THE PARTIES TO THE MERGER. . . . . . . . . . . . . . 3
1. Energy East . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. RGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
C. DESCRIPTION OF THE MERGER . . . . . . . . . . . . . . . . . . . . . 10
D. MANAGEMENT AND OPERATION OF THE COMPANIES
FOLLOWING THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 2. FEES, COMMISSIONS AND EXPENSES . . . . . . . . . . . . . . . . . . 13
ITEM 3. APPLICABLE STATUTORY AND REGULATORY PROVISIONS . . . . . . . . . . 13
A. SECTION 9(A)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 16
B. SECTION 10(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1. Section 10(b)(1). . . . . . . . . . . . . . . . . . . . . . . 18
2. Section 10(b)(2). . . . . . . . . . . . . . . . . . . . . . . 21
3. Section 10(b)(3). . . . . . . . . . . . . . . . . . . . . . . 24
C. SECTION 10(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1. Acquisition Must be Lawful. . . . . . . . . . . . . . . . . . 27
2. Combination and Integration of Electric Utility Operations. . 28
3. Combination of Gas Utility Operations . . . . . . . . . . . . 35
4. Economies and Efficiencies from the Merger (Section 10(c)(2)) 46
5. Retention of Non-Utility Businesses . . . . . . . . . . . . . 50
D. SECTION 10(F) . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
E. POST-MERGER CORPORATE STRUCTURE: INTERMEDIATE
HOLDING COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . 53
ITEM 4. REGULATORY APPROVALS . . . . . . . . . . . . . . . . . . . . . . . 55
A. ANTITRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
B. FEDERAL POWER ACT . . . . . . . . . . . . . . . . . . . . . . . . . 55
C. ATOMIC ENERGY ACT . . . . . . . . . . . . . . . . . . . . . . . . . 55
D. TELECOMMUNICATIONS ACT. . . . . . . . . . . . . . . . . . . . . . . 56
E. STATE PUBLIC UTILITY REGULATION . . . . . . . . . . . . . . . . . . 56
ITEM 5. PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 56
A. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
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B. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 58
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS . . . . . . . . . . . . . . 58
ii
Filed June 27, 2002
No. ____________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 4 TO
FORM U-1
APPLICATION/DECLARATION
UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Energy East Corporation
P. O. Box 12904, Albany, New York 12212-2904
RGS Energy Group, Inc.
89 East Avenue, Rochester, New York 14649-0001
Eagle Merger Corp.
P.O. Box 12904, Albany, New York 12212-2904
(Name of companies filing this statement and
address of principal executive offices)
Kenneth M. Jasinski Thomas S. Richards
Executive Vice President and Chairman, President and Chief
Chief Financial Officer Executive Officer
Energy East Corporation RGS Energy Group, Inc.
Vice President, Secretary and 89 East Avenue
General Counsel Rochester, New York 14649-0002
Eagle Merger Corp. Telephone: (716) 546-2700
P.O. Box 12904
Albany, New York 12212-2904
Telephone: (518) 434-3049
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders and
communications to:
Adam Wenner, Esq. Frank Lee, Esq.
Vinson & Elkins L.L.P. Huber Lawrence & Abell
1455 Pennsylvania Avenue, N.W. 605 Third Avenue
Washington, D.C. 20004-1008 New York, New York 10158
Telephone: (202) 639-6533 Telephone: (212) 682-6200
2
The Form U-1 Application/Declaration in this proceeding originally filed
with the Securities and Exchange Commission on June 20, 2001, and as amended on
May 9, 2002, May 30, 2002, and May 31, 2002, is hereby amended and restated in
its entirety as follows:
ITEM 1. DESCRIPTION OF PROPOSED MERGER
A. INTRODUCTION
This Application/Declaration seeks approvals relating to the proposed
combination of Energy East Corporation ("Energy East") with RGS Energy Group,
Inc. ("RGS") (collectively the "Companies") pursuant to which RGS will become a
direct subsidiary of Energy East (the proposed combination is referred to as the
"Merger"). Energy East has registered with the Securities and Exchange
Commission (the "SEC" or "Commission") as a holding company under Section 5 of
the Public Utility Holding Company Act of 1935 (the "Act").
The Merger is expected to produce substantial benefits to the public,
investors and consumers, and the Merger meets all applicable standards of the
Act. The Companies estimate total cost savings resulting from joint management
of procurement, information technology and other administrative and general
areas at approximately $50 million per year, with an anticipated total of
approximately $533 million of estimated net cost savings over the ten-year
period 2002-2011. The Companies believe that the Merger will allow shareholders
and consumers to participate in a larger, financially stronger company that,
through a combination of the capital, management, and technical expertise of
both Companies, will be a viable competitor in the rapidly evolving market for
energy and energy services, will be able to achieve increased financial
stability and strength, greater opportunities for earnings growth, reduction of
operating costs, efficiencies of operation, better use of facilities for the
benefit of customers, improved ability to use new technologies, greater retail
and industrial sales diversity, and optimization of their respective portfolios
of gas supply and transportation through joint management. The Companies believe
the Merger will significantly improve the competitive positions of their utility
subsidiaries and create greater opportunities for growth.
Additionally, the Merger will result in benefits to the public, investors
and consumers by allowing Energy East, through the acquisition of RGS, to become
a larger, financially stronger company that will have the combined resources,
experience and talent to focus on providing high-quality and cost-efficient
energy and delivery products and services to customers in the northeast. In the
last few years, industry and regulators have begun implementing a transition to
competitive wholesale and retail markets in New York State and elsewhere in the
country. The stronger organization resulting from the Merger should enhance the
ability of the utilities to provide high-quality service to their customers
during the volatile period of transition to full competition.
Moreover, the Merger will join two companies with similar management
approaches and similar business objectives. The utility subsidiaries of Energy
East and RGS operate in comparable service territories and are subject to
regulation by state commissions that have been engaged in restructuring utility
operations and aggressively pursuing retail competition policies for the past
several years. Open retail access is available today on the electric
transmission and distribution systems of the Companies' three principal electric
utility company subsidiaries,
Central Maine Power Company ("Central Maine Power"), New York State Electric &
Gas Corporation ("NYSEG"), and Rochester Gas and Electric Corporation ("RG&E").
This Application/Declaration will show that the Merger fits within existing
Commission precedent and is made possible, applying the standards of the Act, by
reason of significant legislative, regulatory and technological changes that
have occurred in the electric and gas utility industries in recent years.
Approving the Merger as requested will not result in any of the harms Congress
sought to prevent by adopting the Act and will be consistent with the
requirements of the Act.
The Act was intended, among other things, to prevent the evils that arise
"when the growth and extension of holding companies bears no relation to the
economy of management and operation or integration and coordination of related
operating properties." In contrast, post-Merger Energy East will exemplify the
growth that promotes economies and coordination of related operating properties
within a single region in a manner consistent not only with the policies of the
Act, but also with the policies of both the Federal Energy Regulatory Commission
("FERC") and state regulatory initiatives. Moreover, as discussed in detail
below, by placing two interconnected utilities under common ownership, the
Merger will increase the efficiency of the competitive markets in the State of
New York and in the northeast United States, thereby "serv(ing) the public
interest by tending toward the economical and efficient development of an
integrated public utility system."
The shareholders of RGS approved the Merger with Energy East at a meeting
held on June 15, 2001. Energy East and RGS have submitted applications
requesting approval of the Merger and/or related matters to the appropriate
state and federal regulators, including the New York Public Service Commission
("NYPSC"), the FERC, the Nuclear Regulatory Commission ("NRC"), and the Federal
Communications Commission ("FCC"). Energy East and RGS have also made the
required filings with the Antitrust Division of the U.S. Department of Justice
("DOJ") and the Federal Trade Commission ("FTC") under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR Act"). See Exhibits D-1
through D-8 and Item 4 below for additional detail regarding these regulatory
approvals. Favorable responses have been received from each of these regulators.
1. General Request
---------------
Pursuant to Sections 9(a)(2) and 10 of the Act, Energy East hereby requests
authorization and approval of the Commission to acquire, by means of the Merger,
100% of the issued and outstanding common shares of RGS. A chart of the
proposed corporate structure of Energy East following consummation of the Merger
is attached hereto as Exhibit E-4. Energy East also hereby requests that the
Commission approve:
(i) the operation of post-Merger Energy East as a combination electric
and gas utility holding company;
(ii) the acquisition by Energy East of the non-utility activities,
businesses and investments of RGS;
(iii) the acquisition of shares of common stock of NYSEG by RGS;
2
(iv) the acquisition by Eagle Merger Corp. ("Eagle") of RGS;
(v) the acquisition of shares of Eagle by Energy East;
(vi) the retention by Energy East of RGS as an intermediate holding
company; and
(vii) the exemption of RGS from regulation as a holding company under the
Act.
2. Overview of the Merger
-------------------------
Pursuant to an Agreement and Plan of Merger, dated as of February 16, 2001
(the "Merger Agreement"), RGS will be merged with and into Eagle, a New York
corporation, which will be a wholly-owned subsidiary of Energy East at the
effective time of the Merger, with Eagle being the surviving corporation. Eagle
will continue to conduct RGS's businesses under the name "RGS Energy Group,
Inc." as a direct, wholly-owned subsidiary of Energy East. Subject to
regulatory approval, Energy East will purchase all common shares of RGS for
$39.50 in cash per share, shares of Energy East common stock valued at $39.50
(subject to restrictions on the maximum and minimum number of shares of Energy
East common stock to be issued) or a combination of cash and Energy East common
stock. Each RGS shareholder would be able to elect the form of consideration
that such shareholder wishes to receive, subject to proration, so that 55
percent of the RGS shares would be exchanged for cash and 45 percent would be
exchanged for Energy East common stock. Energy East will also assume
approximately $1.0 billion of RGS debt. The Merger Agreement is incorporated by
reference as Exhibit B-1 hereto.
As a result of these transactions, RGS will become a direct subsidiary of
Energy East. RG&E and the non-regulated subsidiaries of RGS will continue as
subsidiaries of RGS and will become indirect subsidiaries of Energy East. As
soon as practicable after the effective time of the Merger (but in no event
later than five days following the effective time), Energy East will transfer
all of NYSEG's common stock to RGS, so that NYSEG and RG&E can be operated under
a combined management structure.
B. DESCRIPTION OF THE PARTIES TO THE MERGER
1. Energy East
------------
Energy East is currently a registered public utility holding company,(1)
and neither owns nor operates any physical properties. Through its subsidiaries,
Energy East is an energy services and delivery company with operations in New
York, Connecticut, Massachusetts, Maine and New Hampshire, serving 1,419,000
electricity customers and 614,000 natural gas customers. Energy East has
corporate offices in New York and Maine. Energy East's common stock is publicly
traded on the New York Stock Exchange under the symbol "EAS." Energy East's
principal executive offices are located at P. O. Box 12904, Albany, New York. In
2001,
--------------------------------
(1) Energy East registered with the Commission under Section 5 of the Act
following its acquisition of CMP Group, CTG Resources and Berkshire Energy.
3
approximately 67% of Energy East's operating revenue was derived from
electricity deliveries, while approximately 27% of its operating revenue was
derived from natural gas deliveries. On May 1, 1998, Energy East became the
parent of NYSEG.(2) On February 8, 2000, Energy East became the parent of
Connecticut Energy Corporation ("Connecticut Energy"),(3) and on September 1,
2000, Energy East became the parent of CMP Group, Inc., CTG Resources, Inc.
("CTG Resources") and Berkshire Energy Resources ("Berkshire Energy").(4)
As described below, Energy East holds direct or indirect interests in eight
public utility companies, each of which is wholly-owned by companies within the
Energy East system unless otherwise noted: (1) NYSEG, (2) Central Maine Power;
(3) Maine Electric Power Company, Inc. ("MEPCo") (78.3% voting interest held by
Central Maine Power); (4) NORVARCO (50% partnership interest in Chester SVC
Partnership, an electric utility company under the Act); (5) Maine Natural Gas
Corporation, (6) Connecticut Natural Gas Corporation, (7) The Berkshire Gas
Company, and (8) The Southern Connecticut Gas Company (collectively, the "Energy
East Utility Subsidiaries").
(a) Public Utility Operations of Energy East
New York State Electric & Gas Corporation
-----------------------------------------------
NYSEG, a regulated public utility incorporated under the laws of the State
of New York, is a combination electric and gas utility providing delivery
service to approximately 829,000 electricity customers and approximately 250,000
natural gas customers. NYSEG has divested substantially all of its generating
assets. It retains several hydroelectric facilities with an aggregate capacity
of 61 MW, two internal combustion facilities with an aggregate capacity of 9 MW,
non-utility generation ("NUG") contracts and contracts pursuant to which the New
York Power Authority ("NYPA") sells power to NYSEG. NYSEG has sold its 18%
ownership interest in the Nine Mile Point Unit 2 nuclear plant ("NMP2"). NYSEG
is engaged in the business of transmitting and distributing electricity and
transporting, storing and distributing natural gas.
NYSEG's service territory, 99% of which is located outside the corporate
limits of cities, is in the central, eastern and western parts of the State of
New York. NYSEG's service territory has an area of approximately 20,000 square
miles and a population of 2,500,000. The larger cities in which NYSEG serves
both electricity and natural gas customers are Binghamton, Elmira, Auburn,
Geneva, Ithaca and Lockport, New York. The service territory reflects a
diversified economy, including high-tech firms, light industry, colleges and
universities, agriculture and recreational facilities. No customer accounts for
more than 5% of either electric or natural gas revenues. During the period 1999
through 2001, approximately 83% of NYSEG's
--------------------------------
(2) Energy East Corporation, et al., HCAR No. 26834 (Mar. 4, 1998).
(3) Energy East Corporation, et al., HCAR No. 27128 (Feb. 2, 2000).
(4) Energy East Corporation, et al., HCAR No. 27224 (Aug. 31, 2000) (the "CMP
Order").
4
operating revenue was derived from electricity deliveries, with the balance
derived from natural gas service.
NYSEG is engaged almost entirely in the transmission and distribution of
electricity and the distribution of natural gas. As of December 31, 2001,
NYSEG's electric transmission system consisted of approximately 4,384 circuit
miles of line. NYSEG's electric distribution system consisted of 34,027
pole-miles of overhead lines and 2,321 miles of underground lines. NYSEG has
transferred control of its transmission system to the New York Independent
System Operator ("NYISO").(5) The NYISO, an independent operator of utilities'
transmission systems, operates the transmission systems of all of the public
utility systems in New York.
Central Maine Power Company
------------------------------
Central Maine Power is engaged in transmitting and distributing electricity
generated by others to retail customers in Maine. Central Maine Power is the
largest transmission and distribution electric utility in Maine and serves
approximately 555,000 customers in its 11,000 square-mile service area in
southern and central Maine. Central Maine Power had approximately $815 million
in consolidated electric operating revenues in the twelve month period ended
December 31, 2001. Central Maine Power, a utility subsidiary wholly owned by
CMP Group, is subject to the regulatory authority of the MPUC and FERC. CMP
Group is an intermediate holding company subject to regulation under the Act as
a subsidiary of a registered holding company and exempt from registration
pursuant to Section 3(a)(2) of the Act.(6)
Central Maine Power has divested and/or relinquished control over all of
its generating assets and purchase power contracts and now functions as an
electric transmission and distribution utility. Central Maine Power has sold its
hydroelectric, fossil and biomass generating assets.(7) It has sold its
entitlements to purchase capacity and energy under the NUG contracts, and from
its 4.25% interest in the Vermont Yankee nuclear plant ("Vermont Yankee"), as
well as its entitlement in a firm energy contract with Hydro Quebec. The sales
of generating capacity and entitlements to purchase capacity and energy under
NUG contracts, nuclear interests and the Hydro Quebec contract were conducted
pursuant to the requirements of Maine's electric utility restructuring
legislation and MPUC Rules and Regulations.(8) As of March 1, 2000, Central
Maine Power no longer controls generation resources. Also beginning March 1,
2000, all retail electric consumers in Maine were authorized to choose their
electric supplier. Under Maine law, Central Maine Power is unable to serve
retail customers except through the creation of a marketing affiliate or as
directed by the MPUC. CMP Group has elected not to take the steps required under
Maine's electric utility restructuring legislation to participate, through
--------------------------------
(5) Central Hudson Gas & Electric Corp., et al., 87 F.E.R.C. P. 61,135 (1999).
(6) Energy East Corporation, et al., HCAR No. 27224 (Aug. 31, 2000) (the "CMP
Order").
(7) Central Maine Power sold these assets to a non-affiliated third party, FPL
Energy, a subsidiary of FPL Group.
(8) 35-A M.R.S.A. Sec. 3204; and Chapt. 307 MPUC Rules and Regulations.
5
an affiliate, as a retail electric supplier. Under an order of the MPUC, Central
Maine Power is required to arrange standard offer energy service for its medium
and large commercial and industrial customers who do not select an electricity
supplier. Central Maine Power has arranged service for those classes.
As of December 31, 2001, Central Maine Power's electric transmission system
consisted of approximately 2,546 circuit miles of line. Its electric
distribution system consisted of 21,948 pole miles of overhead lines and 139
miles of underground lines. Central Maine Power is a member of the New England
Power Pool ("NEPOOL") and has transferred control over its pool transmission
facilities ("PTF") system to ISO New England Inc. ("ISO-NE").(9) It maintains
high-voltage connections with other electric systems at the New Hampshire and
New Brunswick, Canada borders.
MEPCo and NORVARCO
--------------------
Central Maine Power has two electric utility subsidiaries which are
organized and operate exclusively in Maine: MEPCo and NORVARCO. (Central Maine
Power, MEPCo and NORVARCO are referred to collectively as the "CMP Electric
Utilities.") MEPCo owns and operates a 345kV transmission interconnection
between the Maine-New Brunswick, Canada international border at Orient, Maine.
Central Maine Power owns a 78.3% voting interest in MEPCo. The remaining
interests in MEPCo are held by Bangor Hydro Electric Company ("Bangor
Hydro-Electric") (approximately 14.2%) and Maine Public Service Company
(approximately 7.5%). NORVARCO holds a 50% general partnership interest in
Chester SVC Partnership, a general partnership which owns a static var
compensator located in Chester, Maine, adjacent to MEPCo's transmission
interconnection. The other 50% interest in Chester SVC Partnership is held by
Bangor Var Company, a subsidiary of Bangor Hydro-Electric.
Other Nuclear Interests
-------------------------
Central Maine Power owns a 38% voting interest in Maine Yankee Atomic Power
Company, which owns the Maine Yankee nuclear electric generating plant in
Wiscasset, Maine. Maine Yankee's plant was permanently shut down on August 6,
1997. Central Maine Power also holds (i) a 9.5% voting interest in Yankee
Atomic Electric Company, which has permanently shut down its plant located in
Rowe, Massachusetts, and (ii) a 6% interest in Connecticut Yankee Atomic Power
Company, which has permanently shut down its plant in Haddam, Connecticut.
Central Maine Power also holds a 4.25% utility interest in Vermont Yankee
Nuclear Corporation, which owns an operating nuclear plant in Vermont.
--------------------------------
(9) New England Power Pool, 79 F.E.R.C. P. 61,374 (1997). ISO-NE operates the
transmission systems of all of the public utility system in New England. A
description of ISO-NE appears in Item 3.C.2.(b).(ii).
6
Maine Natural Gas Corporation
--------------------------------
Maine Natural Gas Corporation ("Maine Gas"), formerly CMP Natural Gas,
L.L.C., was established to furnish natural gas distribution service, on a
non-exclusive basis, in certain areas of Maine, including, among others, the
Bethel, Windham, Augusta, Waterville and Bangor metropolitan areas, and the
coastal area, including Brunswick and Bath. Maine Gas began to provide service
to retail customers in May 1999. Maine Gas is a wholly-owned subsidiary of
Energy East Enterprises, Inc., a wholly-owned subsidiary of Energy East.
Connecticut Natural Gas Corporation
--------------------------------------
Connecticut Natural Gas Corporation ("CNGC") distributes gas to
approximately 150,000 customers in 22 Connecticut communities, principally in
the Hartford-New Britain area and Greenwich. CNGC's gas distribution business
is subject to regulation by the DPUC as to franchises, rates, standards of
service, issuance of securities, safety practices and certain other matters.
Retail sales of gas by CNGC and deliveries of gas owned by others are made
pursuant to rate schedules and contracts filed with and subject to DPUC
approval. CNGC is a utility subsidiary wholly owned by CTG Resources. CTG
Resources is an intermediate holding company subject to regulation under the Act
as a subsidiary of a registered holding company and exempt from registration
pursuant to Section 3(a)(1) of the Act.(10)
The Berkshire Gas Company
----------------------------
The Berkshire Gas Company ("Berkshire Gas") sells and distributes natural
gas to approximately 35,000 retail customers in 20 communities in western
Massachusetts. Berkshire Gas operates a natural gas distribution pipeline
comprising some 715 miles of natural gas distribution mains. Berkshire Gas is
subject to regulation by the Massachusetts Department of Telecommunications and
Energy ("MDTE"). Berkshire Gas is a "natural gas company" under Section 2(6) of
the Natural Gas Act, 15 U.S.C. Sec. 717(a)(6), with respect to certain sales for
resale of natural gas. Berkshire Gas has secured a "blanket certificate" for
such transactions from the FERC. Berkshire Gas is a utility subsidiary wholly
owned by Berkshire Energy. Berkshire Energy is an intermediate holding company
subject to regulation under the Act as a subsidiary of a registered holding
company and exempt from registration pursuant to Section 3(a)(1) of the Act.(11)
The Southern Connecticut Gas Company
----------------------------------------
The Southern Connecticut Gas Company ("Southern Connecticut Gas"), a public
service company incorporated under the laws of the State of Connecticut, is
engaged in the retail distribution of natural gas for residential, commercial
and industrial users and the transportation of natural gas for commercial and
industrial users. Southern Connecticut Gas is a "gas utility company" as defined
in Section 2(a)(4) of the Act. Southern Connecticut Gas serves
--------------------------------
(10) Energy East Corporation, et al., HCAR No. 27224 (Aug. 31, 2000).
(11) Id.
7
approximately 169,000 customers in the State of Connecticut, primarily in 22
towns along the southern Connecticut coast from Westport to Old Saybrook, which
include the urban communities of Bridgeport and New Haven. Southern Connecticut
Gas is the sole distributor of natural gas, other than bottled gas, in its
service area. Southern Connecticut Gas is a utility subsidiary wholly-owned by
Connecticut Energy. Connecticut Energy is an intermediate holding company
subject to regulation under the Act as a subsidiary of a registered holding
company and exempt from registration pursuant to Section 3(a)(1) of the Act.(12)
(b) Non-Utility Affiliates of Energy East
Energy East also has a number of direct and indirect subsidiaries that are
not "public utility companies" under the Act. With certain minor exceptions, the
Commission determined that these non-utility interests could be retained by
Energy East following its registration as a public utility holding company.(13)
Energy East's direct non-utility subsidiaries are: (1) Berkshire Energy, the
parent of Berkshire Gas; (2) CMP Group, whose subsidiaries include Central Maine
Power and Mainecom Services, a telecommunications service provider; (3)
Connecticut Energy, the parent of Southern Connecticut Gas; (4) CTG Resources,
the parent of CNGC; (5) The Energy Network, Inc., whose subsidiaries focus on
peaking generation, energy services and telecommunications; (6) Energy East
Enterprises, Inc., which owns natural gas and propane air distribution companies
and is developing gas storage in upstate New York;(14) (7) Energy East
Management Corporation ("EE Management"), a management services company,(15) and
(8) Energy East Capital Trusts I and II, statutory business trusts. Energy
East's non-utility subsidiaries are listed and described at Exhibit H-1.
For the twelve months ended December 31, 2001, electric revenues of
approximately $2,504,896,000 and natural gas revenues of approximately
$1,026,124,000 accounted for approximately 67% and 27%, respectively, of Energy
East's consolidated gross operating revenues. Energy East's utility operating
income and utility net income available for common stock were $642,939,000 and
$246,720,000, respectively. Consolidated assets of Energy East and its
subsidiaries as of December 31, 2001, were approximately $7.3 billion,
consisting of $3.6 billion in net utility plant and $3.7 billion in other
utility and non-utility assets. For the twelve months ended December 31, 2001,
consolidated operating revenues, operating income and net income for Energy East
and its subsidiaries were approximately $3,759,787,000, $636,888,000, and
$187,607,000, respectively.
2. RGS
---
RGS is the parent company of RG&E, a gas and electric utility serving
upstate New York. Incorporated in 1998 in the State of New York, RGS became the
holding company
--------------------------------
(12) Id.
(13) Id.
(14) Energy East Corporation, et al., HCAR No. 26976 (Feb. 12, 1999).
(15) Energy East Corporation, et al., HCAR No. 27248 (Oct. 13, 2000).
8
for RG&E on August 2, 1999. RGS is a public utility holding company by virtue of
its owning all of the common shares of stock of RG&E, a public utility company
as defined in the Act. RGS, through its subsidiaries, is an energy generation
and delivery, products and services company with operations in New York. RGS
common stock is publicly traded on the New York Stock Exchange under the symbol
"RGS." RGS's principal executive offices are located at 89 East Avenue,
Rochester, New York 14649-0002. Pursuant to a Commission order granting its
request for an exemption under Section 3(a)(1) of the Act, RGS is currently
exempt from all provisions of the Act, except Section 9(a)(2).(16)
(a) Public Utility Operations of RGS
RG&E
----
RG&E is engaged principally in the business of generating, purchasing,
transmitting and distributing electricity, and purchasing, transporting and
distributing natural gas. RG&E's three major generating facilities are its
Ginna Nuclear Plant and two fossil fuel generating stations, the Russell and
Allegany Stations. In terms of capacity, these comprise 55%, 29% and 7%,
respectively, of RG&E's current electric generating system. RG&E sold its share
of NMP2.
RG&E's service territory is in upstate New York in parts of nine counties.
RG&E's service territory has an area of approximately 2,700 square miles and a
population of one million people. RG&E provides delivery service to
approximately 353,000 electric customers and 289,000 natural gas customers. The
larger cities in which RG&E serves both electricity and natural gas customers
are Rochester and Canandaigua. During 1999 through 2001, approximately 68% of
RG&E's operating revenue was derived from electric service with the balance
derived from natural gas service, liquid fuels and other services. At December
31, 2001, RG&E had 1,993 employees.
(b) Non-Utility Affiliates of RGS
RGS also holds a number of direct and indirect subsidiaries that are not
"public utility companies" under the Act. Active RGS non-utility subsidiaries
are as follows, with additional information regarding these, as well as RGS's
inactive non-utility companies, filed at Exhibit H-2 hereto.
Energetix, Inc.
----------------
Energetix, Inc. ("Energetix"), a wholly-owned subsidiary of RGS, offers
electricity and natural gas services to retail customers throughout New York
State. Energetix has authorization from the FERC to engage in sales for resale
of electricity at market-based rates, (17) and is a customer of the NYISO.
Energetix owns no generation, transmission or distribution facilities.
--------------------------------
(16) Rochester Gas and Electric Holdco, HCAR No. 26991 (Mar. 16, 1999). As
discussed infra, Energy East requests that, following the Merger, RGS retain its
Section 3(a)(1) exemption.
(17) Rochester Gas & Electric Corp., 80 F.E.R.C. P. 61,284 (1997).
9
Subsidiary companies under Energetix's control include Griffith Oil Co.,
Inc., an oil and propane distribution company in New York State, and Avrimac
Corporation, which through its subsidiaries sells propane and a limited
selection of electric and gas appliances in western and central New York.
Energetix and its subsidiary companies have 602 employees and operate 29
customer service centers.
RGS Development Corporation
-----------------------------
In 1998, the Company formed RGS Development Corporation ("RGS Development")
to pursue unregulated business opportunities in the energy marketplace. RGS
Development provides energy systems development and management services.
Insurance and Investment Interest
------------------------------------
RG&E is a member of the Nuclear Electric Insurance Limited. RG&E's account
balance at Nuclear Electric Insurance Limited as of December 31, 2000, was
$42,556,000. While RG&E is a member of this insurance company, that company's
by-laws do not recognize its members as having an ownership interest in the
company.
For the twelve months ended December 31, 2001, electric revenues of
approximately $728,099,000 and gas revenues of approximately $311,377,000
accounted for approximately 70% and 30%, respectively, of RGS's consolidated
gross utility revenues. RGS's utility operating income and utility net income
available for common stock were $134,565,000 and $69,950,000, respectively.
Consolidated assets of RGS and its subsidiaries as of December 31, 2001, were
approximately $2.5 billion, consisting of $1.2 billion in net utility plant and
$1.3 billion in other utility and non-utility assets. For the twelve months
ended December 31, 2001, consolidated operating revenues, operating income and
net income for RGS and its subsidiaries were approximately $1,530,492,000,
$137,328,000 and $73,040,000, respectively.
3. Eagle Merger Corp.
Eagle is a New York corporation of which Energy East will acquire all of
the outstanding shares of common stock. RGS will be merged with and into Eagle,
with Eagle being the surviving corporation.
C. DESCRIPTION OF THE MERGER
Pursuant to the Merger Agreement, RGS will merge with and into Eagle, with
Eagle being the surviving corporation. Eagle will continue to conduct RGS's
businesses under the name "RGS Energy Group, Inc." as a direct, wholly-owned
subsidiary of Energy East. Subject to regulatory approval, Energy East will
purchase all common shares of RGS for $39.50 in cash per share, shares of Energy
East common stock valued at $39.50 (subject to restrictions on the maximum and
minimum number of shares of Energy East common stock to be issued) or a
10
combination of cash and Energy East common stock. Energy East will also assume
approximately $1.0 billion of RGS debt.(18)
As a result of these transactions, RGS will become a direct subsidiary of
Energy East. RG&E and the non-public utility subsidiaries of RGS will continue
as subsidiaries of RGS and will become indirect subsidiaries of Energy East. As
soon as practicable after the effective time of the Merger (but in no event
later than five days following the effective time), Energy East will transfer
all of NYSEG's common stock to RGS, so that NYSEG and RG&E can be operated under
a combined management structure.
Under the terms of the Merger Agreement, each outstanding share of RGS
common stock will be converted into the right to receive: (i) $39.50 in cash;
(ii) a number of shares of Energy East common stock valued at $39.50, so long as
Energy East's common stock price is between $16.57 and $22.41; or (iii) a
combination of cash and Energy East common stock. Each RGS shareholder would be
able to elect the form of consideration they wish to receive, subject to
proration so that 55% of the RGS shares would be exchanged for cash, and 45%
would be exchanged for Energy East common stock.(19)
Each RGS share converted into Energy East common stock would receive not
less than 1.7626 and not more than 2.3838 shares of Energy East common stock,
depending on the average closing price of Energy East common stock during a
20-day trading period ending two trading days prior to the effective time of the
Merger. For example, based on Energy East's
--------------------------------
(18) On September 12, 2000, the Commission issued an order (the "Financing
Order") authorizing (1) ongoing financing activities of Energy East and its
subsidiaries; (2) intrasystem extensions of credit; (3) the creation,
acquisition or sale of non-utility subsidiaries; (4) the payment of dividends
out of capital and unearned surplus; and (5) other related matters pertaining to
Energy East and its subsidiaries. On November 15, 2001, Energy East submitted
Post-Effective Amendment No. 1 to its Form U-1 relating to the acquisition of
CMP Group. That application is currently pending before the Commission. The
authorizations granted in the Financing Order are sufficient to enable Energy
East to complete the Merger, and thus Commission action on Post-Effective
Amendment No. 1 is not required for Energy East prior to the closing of the
Merger. See Energy East Corp., et al., HCAR No. 35-27228, 70-9609, Order
Authorizing Various External and Intrasystem Financing Transactions and
Reservation of Jurisdiction (Sept. 12, 2000).
(19) If RGS shareholders owning more than 55% of RGS shares elect to receive
cash, the number of RGS shares converted into cash will be less than the number
elected. Similarly, if RGS shareholders owning more than 45% of RGS shares elect
to receive Energy East shares, the number of RGS shares converted into stock
will be less than the number elected. For tax reasons more fully explained in
the Merger Agreement, Energy East may have to increase the number of RGS shares
converted into Energy East shares and decrease the number of RGS shares
converted into cash. In the alternative, RGS may elect under some circumstances
to have the Merger restructured so that Eagle would merge with and into RGS (in
a transaction that would be fully taxable to RGS shareholders), and RGS would be
the surviving company.
11
closing price of $21.00, RGS Energy shareholders who choose to receive Energy
East common stock would receive 1.8810 Energy East shares for each RGS Energy
share.
To carry out the Merger, Energy East expects to pay RGS shareholders
approximately $750 million in cash consideration, as well as approximately 27.4
million shares of common stock of Energy East, valued at approximately $615
million, based on the June 26, 2002 closing price of Energy East common stock of
$22.47 per share. Energy East has funded the cash consideration with the
proceeds from the issuance of long-term debt issued by Energy East and with
trust preferred securities issued by a finance subsidiary.(20)
D. MANAGEMENT AND OPERATION OF THE COMPANIES FOLLOWING THE MERGER
Commencing at the effective time of the Merger, and continuing until his
successor is duly elected, Thomas S. Richards will be an Executive Vice
President of Energy East, Chairman, President and Chief Executive Officer of RGS
and Chairman and Chief Executive Officer of NYSEG and RG&E.
At the effective time of the Merger, the Energy East Board of Directors
will be increased by three members, and the three new members will be Mr.
Richards and two RGS outside directors. The remaining members of the RGS Board
immediately prior to the Merger will form an Advisory Board to the Board of
Directors of RGS.
The Board of Directors of RGS will consist of three members: Wesley W. von
Schack, the Chairman, President and Chief Executive Officer of Energy East;
Kenneth M. Jasinski, the Executive Vice President and Chief Financial Officer of
Energy East; and Mr. Richards. The post-Merger Board of Directors of NYSEG will
consist of four members: its three present members - Mr. von Schack, Ralph R.
Tedesco and Mr. Jasinski - plus Mr. Richards. The post-Merger Board of Directors
of RG&E will consist of Mr. von Schack, Mr. Jasinski, Mr. Richards and a fourth
member to be named by RGS. Mr. Richards will be Chairman and Chief Executive
Officer of RG&E and NYSEG.
Following the Merger, Energy East's corporate headquarters will remain in
Albany, New York. The corporate headquarters of RGS, NYSEG and RG&E will be in
Rochester, New York and the operations center for NYSEG will remain in
Binghamton, New York. EE Management, an Energy East subsidiary which provides
procurement, information services, and other administrative and general
services,(21) will also be headquartered in Rochester and will have at least 40
employees in Rochester, New York.
--------------------------------
(20) The Commission authorized these actions in its September 12, 2000 order
relating to financing. Energy East Corporation, et al., HCAR No. 27228. Under
the September 12, 2000 order, Energy East was authorized to issue during the
period ending March 31, 2003, an aggregate of $2.5 billion of common, preferred
and long-term debt, and short-term debt in an aggregate principal amount of $750
million, provided that the aggregate amount outstanding of all debt at any time
during such period shall not exceed $1.5 billion. Prior to the Merger, Energy
East had outstanding $500 million of long-term debt (excluding debt issued to
help finance the Merger) and common stock issuances during the authorization
period of approximately $15 million. The aggregate amount of common, preferred
and long-term debt left available for issuance under such order was $1.985
billion, and the aggregate amount of all indebtedness left available for
issuance under such order was $1.0 billion. After the Merger, the aggregate
amount of common, preferred and long-term debt available for issuance under such
order will be $375 million, and the aggregate amount of all indebtedness
available for issuance under such order will be $350 million.
(21) EE Management is a Commission-authorized service company for the Energy
East holding company system. The Commission authorized EE Management's
intra-system service transactions on October 13, 2000. Energy East Corporation,
et al., HCAR No. 27248 (Oct. 13, 2000).
12
ITEM 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, by the Companies in connection with the Merger, including the
solicitation of proxies, the payment of legal and investment banker fees and
other related matters are estimated as follows:
Commission filing fee for Proxy Statement $ 128,887
Accountants' fees 200,000
Legal fees and expenses 6,300,000
Shareholder communication and proxy solicitation 300,000
Investment bankers' fees and expenses 12,800,000
Consulting fees related to the Merger 750,000
Expenses related to integrating the operations of the merged
company and miscellaneous 9,621,113
------------
TOTAL . . . . . . . . . . . . . . . . . . . . . $ 30,100,000
============
ITEM 3. APPLICABLE STATUTORY AND REGULATORY PROVISIONS
The following sections of the Act and the Commission's rules thereunder are
or may be directly or indirectly applicable to the proposed Merger:
Section of the Act Transactions to which section or rule is or may be applicable
------------------- -------------------------------------------------------------
9(a)(2), 10 Acquisition by Energy East of RGS; acquisition indirectly by
Energy East of common stock of public utility subsidiary of RGS;
acquisition by RGS of common stock of NYSEG; acquisition by
Energy East of shares of Eagle.
8, 11(b) Retention by Energy East of its existing retail gas utility operations;
retention by Energy East of non-utility businesses of RGS; and
operation of Energy East as a combination electric and gas utility
holding company.
11(b)(2) Retention by Energy East of RGS as an intermediate holding
company.
3(a)(1) Exemption of RGS from all provisions of the Act except for
Section 9(a)(2).
Rules
-----
53-54 Transactions involving electric wholesale generators ("EWGs")
and/or foreign utility companies ("FUCOs")
58 Retention by Energy East of non-utility businesses of RGS.
80-92 Affiliate transactions, generally.
To the extent that other sections of the Act are deemed applicable to the
Merger, such sections should be considered to be set forth in this Item 3.
13
Background
----------
As discussed in more detail below, the RGS and Energy East electric systems
are directly interconnected, and the Merger satisfies all of the Commission's
other requirements to constitute an electric integrated public utility system
within the meaning of Sections (2)(A)(29) and 10(c)(2) of the Act. Moreover,
new market dynamics and the Commission's current criteria regarding what
constitutes the economical and efficient development of an integrated public
utility system further support the Commission's approval of the Merger. The
Commission has long recognized that as the industry changes -- by means of
technological development and by reason of new laws and regulations -- the
Commission faces the task of applying the requirements of the Act in light of
these changing conditions. Such changes since 1935 have made it possible for
larger and geographically more diverse companies to satisfy the standards of the
Act.(22)
In recent years the Commission has emphasized that the Act "creates a
system of pervasive and continuing economic regulation that must in some measure
at least be fashioned from time to time to keep pace with changing economic and
regulatory climates."(23) The Commission has attempted to "respond flexibly to
the legislative, regulatory and technological changes that are transforming the
structure and shape of the utility industry," as recommended by Division of
Investment Management (the "Staff") in its report issued in June 1995 entitled
"The Regulation of Public Utility Holding Companies" (the "1995 Report").
Indeed, with specific reference to the integration requirements of the Act, the
1995 Report explains:
The statute recognizes . . . that the application of the integration
standard must be able to adjust in response to changes in "the state
of the art." As discussed previously, the Division believes the SEC
must respond realistically to the changes in the utility industry and
interpret more flexibly each piece of the integration equation.(24)
The current state of the art in the electric power industry is
characterized by the development of competitive wholesale electric supply
markets resulting from changes in federal law and regulations and the adoption
by states of utility restructuring policies leading to retail customer choice
and other changes. Increasingly, electric utilities no longer rely solely on
acquiring their own, more efficient generation to achieve efficiencies and
economies.
--------------------------------
(22) See, e.g., American Electric Power Company, Inc., HCAR No. 20633 (July 21,
1978).
(23) Union Electric Co., HCAR No. 18368, n. 52 (Apr. 10, 1974), quoted in
Consolidated Natural Gas Co., HCAR No. 26512 (Apr. 30, 1996) (authorizing
international joint venture to engage in energy marketing activities); Eastern
Utilities Associates, HCAR No. 26232 (Feb. 15, 1995) (removing restrictions on
energy management activities); and Southern Co., HCAR No. 25639 (Sept. 23, 1992)
(approving acquisition of foreign public-utility subsidiary company).
(24) 1995 Report at 71.
14
Because of these changes, the electric utility industry today is much
different from what it was even in the recent past. The utility market model,
with generation functionally unbundled from transmission and distribution, is
supplanting the vertically integrated monopoly model throughout the country.
Developments in federal law and regulations have led to a wholesale competitive
electric generating market.(25) The access for all eligible parties to
interstate transmission is a critical component of this market. The market model
has evolved further in some states, like New York. In New York, many retail
customers have a choice in determining who will supply their electric power.
Customer choice -- the elimination of the traditional monopoly over the
generation aspects of electric service -- fundamentally changes the nature of
regulation. New York has adopted policies seeking to provide consumers the
benefits of competition, and retail electric power competition in New York is
being phased in through individual utility restructuring plans approved by the
NYPSC. Retail competition on NYSEG began on August 1, 1998, with full retail
access taking place by August 1, 1999.(26) Retail competition on RG&E began on
April 1, 1998, with all limits on participation in retail access expiring on
July 1, 2001.(27) Beginning March 31, 2000, all retail electric consumers in
Maine were authorized to choose their electric supplier.(28)
Similar market-oriented reforms illustrate the current "state of the art"
in the natural gas industry. Over the last decade, FERC has mandated open-access
transportation on interstate natural gas pipelines and the "unbundling" of
interstate pipeline gas services such as transportation, sales and storage.(29)
FERC also initiated rules that allow firm holders of pipeline capacity to resell
or release their capacity to other shippers and required pipelines to permit
--------------------------------
(25) See, e.g., Promoting Wholesale Competition Through Open Access
Non-Discriminatory Transmission Service by Public Utilities; Recovery of
Stranded Costs by Public Utilities, Order No. 888, FERC Stats. & Regs., Regs.
Preambles P. 31,036 (1996) (subsequent history omitted).
(26) New York State Electric & Gas Corporation's Plan for Electric
Rate/Restructuring, NYPSC Opinion No. 95-17 (Case No. 96-E-0891) (Jan. 27,
1998).
(27) Rochester Gas and Electric Corporation's Plans for Electric Rates and
Restructuring, NYPSC Opinion No. 98-1 (Case No. 96-E-0898) (Jan. 14, 1998).
(28) As discussed above, under Maine law, Central Maine Power is unable to serve
retail customers except through the creation of a marketing affiliate or as
directed by the MPUC. CMP Group has elected not to take the steps required under
Maine's electric utility restructuring legislation to participate, through an
affiliate, as a retail electric supplier. Under an order of the MPUC, Central
Maine Power is required to arrange standard offer energy service for its medium
and large commercial and industrial customers who do not select an electricity
supplier. Central Maine Power has arranged service for those classes.
(29) Pipeline Service Obligations and Revisions to Regulations Governing
Self-Implementing Transportation Under Part 284 of the Commission's Regulations,
Order No. 636, FERC Stats. & Regs., Regs. Preambles [1991-1996] P. 30,930 (Apr.
8, 1992).
15
shippers to use flexible receipt and delivery points.(30) These and other
regulatory changes have brought substantial changes to the natural gas market.
As FERC recognized in its recently issued Order No. 637,(31) upstream and
downstream market centers and gas trading points are increasing, providing
shippers with greater gas supply and capacity choices. Electronic commerce has
grown rapidly, providing greater liquidity in commodity markets and with the
promise of providing such liquidity in the transportation market as well.
Additionally, unbundling for small volume customers, including residential,
provides the opportunity for small commercial firms and residential consumers to
purchase their gas supplies in a competitive market. Similar to its structural
changes to the electric market, in 1998 the NYPSC adopted policies designed to
encourage local distribution companies to exit the merchant function during a
three-to-seven year transition period.(32)
The Companies believe that the Merger will result in an integrated
public-utility system positioned for competition in the utility industry of the
future. Open access to electric power and natural gas transmission, retail
electric and natural gas competition and technological changes are promoting the
growth of larger and more competitive regional wholesale power markets and more
competitive markets for natural gas.
A. SECTION 9(A)(2)
Section 9(a)(2) of the Act makes it unlawful, without approval of the
Commission under Section 10, "for any person to acquire, directly or indirectly,
any security of any public utility company, if such person is an affiliate of
such company and of any other public utility or holding company, or will by
virtue of such acquisition become such an affiliate." Under the definition set
forth in Section 2(a)(11)(A) of the Act, an "affiliate" of a specified company
means "any person that directly or indirectly owns, controls, or holds with
power to vote, 5 per centum or more of the outstanding voting securities of such
specified company," and "any company 5 per centum or more of whose outstanding
voting securities are owned, controlled, or held with power to vote, directly or
indirectly, by such specified company."
Energy East is a holding company registered pursuant to Section 5 of the
Act. As a result of the Merger, Energy East will indirectly acquire more than
five percent of the voting securities of RG&E, the public utility subsidiary of
RGS. Energy East will thus become an "affiliate," as defined in Section
2(a)(11)(A) of the Act, of RG&E. Additionally, as soon as practicable after the
effective time of the Merger, Energy East will transfer all of NYSEG's common
stock to RGS, so that NYSEG and RG&E can be operated under a combined management
structure.
--------------------------------
(30) Id.
(31) Regulation of Short-Term Natural Gas Transportation Services, and
Regulation of Interstate Natural Gas Transportation Services, Order No. 637,
FERC Stats. & Regs., Regs. Preambles P. 31,091 (Feb. 9, 2000) (subsequent
history omitted).
(32) Policy Statement on Issues Associated with Future of Natural Gas Industry
and Role of LDCs, NYPSC Case Nos. 93-G-0932 and 97-G-1380.
16
NYSEG would thus become a subsidiary of RGS. Accordingly, Energy East must
obtain the approval of the Commission for the Merger under Sections 9(a)(2) and
10 of the Act. The statutory standards to be considered by the Commission in
evaluating the proposed transaction are set forth in Sections 10(b), 10(c) and
10(f) of the Act.
The Companies believe that the Merger complies with all of the applicable
provisions of Section 10 of the Act and should be approved by the Commission.
Thus:
- the Merger will not create detrimental interlocking relations or
concentration of control;
- the consideration to be paid in the Merger is fair and reasonable;
- the Merger will not result in an unduly complicated capital structure for
the post-Merger Energy East system;
- the Merger is in the public interest and the interests of investors and
consumers;
- the Merger is consistent with Sections 8 and 11 of the Act;
- the Merger tends toward the economical and efficient development of an
integrated public utility system; and
- the Merger will comply with all applicable state laws.
The Commission's approval of this Application/Declaration will facilitate
the creation of a holding company which will be better able to compete in the
rapidly evolving utility industry, and is consistent with the Commission's
precedents for transactions previously approved by the Commission under the Act.
Additionally, the Merger and the requests contained in this
Application/Declaration are consistent with the interpretive recommendations
made by the Division in the 1995 Report.(33) The Division's overall
recommendation that the Commission "act administratively to modernize and
simplify holding company regulation and minimize regulatory overlap, while
protecting the interests of consumers and investors," is germane to the
Commission's review of this Application/Declaration since, as demonstrated
below, the Merger will benefit both consumers and shareholders of post-Merger
Energy East and since the other federal and state regulatory authorities with
jurisdiction over the Merger have approved the Merger as in the public interest.
In addition, as discussed in more detail in each applicable item below, the
specific recommendations of the Division with regard to utility ownership(34)
and diversification,(35) in particular, are applicable to the Merger.
--------------------------------
(33) Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report.
(34) Among other things, the 1995 Report recommends that the Commission should
apply a more flexible interpretation of the integration requirements under the
Act; interconnection through power pools, reliability councils and wheeling
arrangements can satisfy the physical
(continued. . . . .)
17
B. SECTION 10(B)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to an extent
detrimental to the public interest or the interests of investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other remuneration, to
whomsoever paid, to be given, directly or indirectly, in connection with such
acquisition is not reasonable or does not bear a fair relation to the sums
invested in or the earning capacity of the utility assets to be acquired or the
utility assets underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure of
the holding company system of the applicant or will be detrimental to the public
interest or the interests of investors or consumers or the proper functioning of
such holding company system.
1. Section 10(b)(1)
-----------------
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system.(36) In applying
Section 10(b)(1) to utility acquisitions, the Commission must determine whether
the acquisition will create "the type of structures and combinations at which
the Act was specifically directed."(37) As discussed below, the Merger will not
create a "huge, complex, and irrational
--------------------------------
(continued. . . . .)
interconnection requirement of Section 2(a)(29); the geographic requirements of
Section 2(a)(29)(A) should be interpreted flexibly, recognizing technical
advances consistent with the purposes and provisions of the Act; the
Commission's analysis should focus on whether the resulting system will be
subject to effective regulation; the Commission should liberalize its
interpretation of the "A-B-C" clauses and permit combination systems where the
affected states agree, and the Commission should "watchfully defer" to the work
of other regulators. 1995 Report at 71-77.
(35) The 1995 Report recommends that, for example, the Commission should
promulgate rules to reduce the regulatory burdens associated with energy-related
diversification and the Commission should adopt a more flexible approach in
considering all other requests to enter into diversified activities. 1995 Report
at 88-90. The recommendations regarding energy-related diversification were
incorporated in Rule 58.
(36) American Electric Power Co., 46 S.E.C. 1299, 1309 (1978).
(37) Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968).
18
system," but rather will afford the opportunity to achieve economies of scale
and efficiencies which are expected to benefit investors and consumers.(38)
The Merger is not being undertaken for the purpose of extending Energy
East's control over regulated public utilities and will not lead to the type of
concentration of control over utilities, unrelated to operating efficiencies,
that Section 10(b)(1) was intended to prevent. The primary objective of Energy
East in the Merger is to become positioned to participate in the growing and
increasingly competitive northeastern United States energy market. The Companies
believe that their combination provides a unique opportunity for Energy East and
RGS, as well as their respective shareholders, customers and employees, to
participate in the formation of a competitive energy services provider in the
rapidly evolving energy services business and to share in the benefits of
industry restructuring which is already occurring in New York, Maine,
Connecticut, Massachusetts and other states.
Size: If approved, the post-Merger Energy East system will serve
----
approximately 1,772,000 electric customers in two states and 903,000 gas
customers in four states. As of December 31, 2001, (1) the combined assets of
Energy East and RGS would have totaled approximately $10.3 billion; and (2)
combined operating revenues of these Companies would have totaled approximately
$5.3 billion for the twelve months ended December 31, 2001.
By comparison, there are a number of companies that are larger than the
post-Merger Energy East system. The tables attached as Exhibit E-5 to this
Application/Declaration show the post-Merger Energy East system's size relative
to other electricity and natural gas companies in terms of operating revenues,
assets and customers, on both a regional and a national basis.
As illustrated by the tables in Exhibit E-5, Energy East will be small in
comparison to the total of electricity and gas utilities operating in contiguous
regions, as well as in comparison to the total of all utilities in the United
States.
The assets, operating revenues and customers of Energy East will comprise a
moderate percentage of electricity and gas utilities operating in contiguous
regions, and a very small percentage of total electric and gas utilities in the
United States. Energy East's operations will not exceed the economies of the
scale of current electric generation and transmission technology, or gas
transportation technology, or provide undue power or control to Energy East in
the region in which it will provide service.(39)
Efficiencies and economies: The Commission has rejected a mechanical size
---------------------------
analysis under Section 10(b)(1) in favor of assessing the size of the resulting
system with reference to the efficiencies and economies that can be achieved
through the integration and coordination of utility operations. More recent
pronouncements of the Commission confirm that size is not
--------------------------------
(38) American Electric Power Co., 46 S.E.C. at 1307 (1978).
(39) Source: FERC Forms and other data compiled by RDI in its PowerDat and
GasDat data bases for 1999.
19
determinative, particularly in light of the improved economies of scale that can
be achieved through a combination.(40)
By virtue of the Merger, post-Merger Energy East will be in a position to
realize the "opportunities for economies of scale, the elimination of duplicate
facilities and activities, the sharing of production capacity and reserves and
generally more efficient operations" described by the Commission in American
Electric Power Co.(41) Among other things, the Merger is expected to yield
significant capital expenditure savings through facilities consolidation,
corporate and administrative programs, non-fuel purchasing economies and
combined gas supply. These expected economies and efficiencies from the combined
utility operations are described in greater detail below.
Competitive Effects: In Northeast Utilities,(42) the Commission stated that
-------------------
"antitrust ramifications of an acquisition must be considered in light of the
fact that public utilities are regulated monopolies and that federal and state
administrative agencies regulate the rates charged consumers." Energy East and
RGS have filed Notification and Report Forms with the DOJ and FTC pursuant to
the HSR Act describing the effects of the Merger on competition in the relevant
markets, and the applicable waiting periods under the HSR Act have expired. The
NYPSC has also considered the competitive effects of combining the utility
systems of RGS and Energy East pursuant to the Companies' Joint Petition for
Approval of Merger and Stock Acquisition. See Exhibit D-3.
In addition, the competitive impact of the Merger has been considered by
FERC pursuant to the May 9, 2001 filing of Energy East and RGS with FERC under
Section 203 of the Federal Power Act and the FERC's September 26, 2001 order
approving the merger. A detailed explanation concerning why such Merger will not
threaten competition in even the most narrowly drawn geographic and product
markets is set forth in the prepared testimony of Dr. William Hieronymus, an
economist and Member of the Management Group of PA Consulting, Inc. (successor
to PHB Hagler Bailly, Inc.), filed with the FERC application. Dr. Hieronymus's
testimony addresses potential horizontal and vertical market power related to
Energy East's Merger with RGS. Dr. Hieronymus concludes that no market power
concerns are raised by the proposed Merger. Specifically, Dr. Hieronymus
concludes that the Merger will not lead to material increases in concentration
in any relevant market. The markets in which the Companies operate generally are
unconcentrated, the result of massive industry restructuring in New York and New
England. Energy East and RGS control only a modest amount of generation in New
York. CMP no longer controls any generation. Additionally, Dr. Hieronymus
concludes that the Merger will not create vertical market power arising from the
Companies' control of transmission facilities or generating sites, nor from
their activities in the natural gas markets. All relevant portions of the
Companies' electric transmission facilities are controlled by their
--------------------------------
(40) See, e.g., 1995 Report at 73-4; Centerior Energy Corp., HCAR No. 24073
(April 29, 1986).
(41) American Elec. Power Co., Inc., 46 S.E.C.1299, 1309 (1978).
(42) Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990).
20
respective ISOs, and there is no dominant control by the Companies over
generating sites in the relevant markets.(43)
The Merger has been carefully structured to protect the interests of
consumers and other local interests while ensuring that the only management
interlocks created are those which are necessary to integrate RGS into the
Energy East system. Furthermore, there will be continuity of management because,
following the Merger, the management of NYSEG and RG&E will largely be comprised
of their respective current management. In addition, the Merger Agreement
provides that the current RG&E Board of Directors (other than the three
directors who will join the Energy East Board) will serve as an advisory board
to the surviving company. The advisory board will meet at least quarterly, and
will provide advice to the surviving company's board of directors as requested.
Such continuity of management oversight will help to assure that the management
of the regulated utility subsidiaries of RGS remain responsive to local
regulation and to other essentially local interests. For the reasons set forth
above, the Merger will not "tend toward interlocking relations or the
concentration of control" of public utility companies, of a kind or to the
extent detrimental to the public interest or the interests of investors or
customers within the meaning of Section 10(b)(1) of the Act.
2. Section 10(b)(2)
-----------------
(a) Reasonableness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration to be given by Energy East to the holders of RGS common stock in
connection with the Merger, including fees and expenses of the Merger, is
reasonable and whether it bears a fair relation to the investment in and earning
capacity of the utility assets underlying the securities being acquired. Market
prices at which securities are traded have always been strong indicators as to
values. As shown in the table below, the most recent quarterly price data, high
and low, for RGS common shares prior to the Merger's announcement provide
support for the consideration paid in the Merger.
--------------------------------
(43) Testimony of Dr. William H. Hieronymus, Exhibit D-1 at Exhibit J-1, pp.
5-6.
21
COMPARATIVE PER SHARE MARKET PRICE:
ENERGY EAST
PRICE RANGE
CASH DIVIDENDS
--------------
HIGH LOW PER SHARE
------ ------ --------------
2000
First Quarter $23.63 $18.81 $.22
Second Quarter $22.94 $19.00 $.22
Third Quarter $23.50 $17.94 $.22
Fourth Quarter $22.63 $18.44 $.22
2001
First Quarter $20.31 $16.96 $.23
Second Quarter $21.20 $17.41 $.23
Third Quarter $22.14 $18.99 $.23
Fourth Quarter $21.49 $17.65 $.23
RGS
PRICE RANGE
CASH DIVIDENDS
--------------
HIGH LOW PER SHARE
------ ------ --------------
2000
First Quarter $21.88 $18.69 $.45
Second Quarter $24.50 $20.50 $.45
Third Quarter $28.38 $22.25 $.45
Fourth Quarter $33.31 $27.38 $.45
2001
First Quarter $37.48 $27.75 $.45
Second Quarter $38.50 $36.05 $.45
Third Quarter $39.24 $37.34 $.45
Fourth Quarter $39.35 $37.60 $.45
On February 16, 2001, the last full trading day before the public
announcement of the execution and delivery of the Merger Agreement, the closing
price per share of RGS common stock as reported on the NYSE - Composite
Transaction of RGS common stock was $33.10.
In its determinations as to whether or not a price meets the reasonableness
standard, the Commission has considered whether the price was decided as the
result of arm's-length negotiations(44) and the opinions of investment
bankers,(45) among other things. For the reasons
--------------------------------
(44) In the Matter of American Natural Gas Company, HCAR No. 15620 (Dec. 12,
1966).
(45) Consolidated Natural Gas Company, HCAR No. 25040 (Feb. 14, 1990).
22
given below, there is no basis in this case for the Commission to make any
negative findings concerning the consideration being offered by Energy East in
the Merger. The Commission has previously recognized that when the consideration
to be paid in an acquisition is the result of arm's-length negotiations between
the management of the companies involved, supported by opinions of financial
advisors, there is persuasive evidence that the requirements of Section 10(b)(2)
have been satisfied.(46) The agreed-upon level of consideration was the product
of extensive and vigorous arm's-length negotiations between Energy East and RGS.
These negotiations were preceded by appropriate due diligence, analysis and
evaluation of the assets, liabilities and business prospects of the respective
companies. An extensive discussion of the negotiations that took place in
connection with the Merger is found at pages 23 - 27 of the Proxy Statement,
incorporated by reference as Exhibit C-1.
Finally, Energy East engaged UBS Warburg LLC ("UBS Warburg") with respect
to the Merger. UBS Warburg provided a "fairness" opinion regarding the Merger to
the Energy East Board of Directors. See Exhibit G-1. RGS engaged Morgan Stanley
& Co., Incorporated ("Morgan Stanley") with respect to the Merger. Morgan
Stanley provided a fairness opinion regarding the Merger to the RGS Board of
Directors. See Exhibit G-2. Based on the foregoing, and in light of these
opinions and an analysis of all relevant factors, including the benefits that
may be realized as a result of the Merger, as well as Commission precedent,
there is a sufficient basis for the Commission to find that the conversion ratio
falls within the range of reasonableness, and the consideration to be paid in
the Merger bears a fair relation to the sums invested in, and the earning
capacity of, the utility assets of RGS.
(b) Reasonableness of Fees
The Companies believe that the overall fees, commissions and expenses
incurred and to be incurred in connection with the Merger are reasonable and
fair in light of the size and complexity of the Merger relative to other
transactions and the anticipated benefits of the Merger to the public, investors
and consumers, that they are consistent with recent precedent, and that they
meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application/Declaration, Energy East and
RGS, together, expect to incur a combined total of approximately $30.1 million
in fees, commissions and expenses in connection with the Merger, including
expenses related to integrating the operations of the merged company. Such fees
will be paid on an arm's-length basis to third parties and are consistent with
fees, commissions and expenses paid for similar transactions and approved by the
Commission as reasonable. For example, Northeast Utilities alone incurred $46.5
million in fees and expenses in connection with its acquisition of Public
Service of New Hampshire, and
--------------------------------
(46) Entergy Corporation, et al., HCAR No. 25952 (Dec. 17, 1993); The Southern
Company, et al., 40 S.E.C. Docket 350 at 352 (Feb. 12, 1988).
23
Entergy incurred $38 million in fees in connection with its acquisition of Gulf
States Utilities -- which amounts all were approved as reasonable by the
Commission.(47)
The Companies also believe that the financial advisory fees payable to
their respective investment bankers are fair and reasonable for similar reasons.
Pursuant to the engagement letter between Morgan Stanley and RGS dated January
18, 2001, Morgan Stanley has earned a fee of $3,058,965 for the rendering of the
Morgan Stanley opinion and the public announcement of the Merger. In addition,
Morgan Stanley will receive a fee of $3,058,965, payable upon the approval by
RGS's shareholders, and another $3,058,965 upon completion of the Merger. Morgan
Stanley will also be reimbursed for certain of its related expenses. Morgan
Stanley will not be entitled to any additional fees or compensation in the event
the Merger is not approved or otherwise completed. RGS has agreed, under
separate agreement, to indemnify Morgan Stanley against certain liabilities,
including liabilities under federal securities laws, relating to or arising out
of its engagement.
Pursuant to the engagement letter between Energy East and UBS Warburg,
Energy East paid UBS Warburg $2 million upon the rendering of UBS Warburg's
fairness opinion. In addition, UBS Warburg received a $1 million payment at the
time of the Energy East shareholder approval of the issuance of Energy East
shares in connection with the Merger. At the completion of the Merger, UBS
Warburg will receive a fee of $0.8 million. Energy East has agreed to indemnify
UBS Warburg against certain liabilities, including liabilities under federal
securities laws, relating to or arising out of its engagement. In the past, UBS
Warburg and its predecessors have provided investment banking services to Energy
East and received customary compensation for rendering such services.
The investment banking fees paid by RGS and Energy East are lower than fees
paid in other similar transactions and approved by the Commission as reasonable.
The fees reflect the financial marketplace, in which investment banking firms
actively compete with each other to act as financial advisors to merger
partners.
3. Section 10(b) (3)
-------------------
Section 10(b)(3) requires the Commission to determine whether the Merger
will unduly complicate Energy East's capital structure or will be detrimental to
the public interest, the interests of investors or consumers or the proper
functioning of Energy East's system.
The Commission has found that an acquisition satisfies this requirement
where the effect of a proposed acquisition on the acquirer's capital structure
is negligible and the equity position is at or above the traditionally
acceptable 30% level prescribed by the Commission.(48) The
--------------------------------
(47) See Northeast Utilities, HCAR No. 25548 (June 3, 1992) ("Northeast");
Entergy Corporation, et al., HCAR No. 5952 (Dec. 17, 1993).
(48) See, e.g., Entergy Corp., 55 S.E.C. 2035 (Dec. 17, 1993); Northeast
Utilities, 47 S.E.C. 1279 (1990).
24
Commission has approved common equity to total capitalization ratios as low as
27.6%.(49) Under these standards, the proposed combination of Energy East and
RGS will not unduly complicate the capital structure of the combined system.
Set forth below are summaries of the historical capital structures of
Energy East and RGS as of December 31, 2001, and the pro forma consolidated
capital structure of post-Merger Energy East as of December 31, 2001:
------------------------------------------------------------------------
Pre-Merger Energy East and
RGS
(Dollars in thousands)
(unaudited)
Energy East RGS
------------------------------------------------------------------------
Common Stock Equity $1,781,177 35.34% $ 778,606 44.49%
Preferred stock not subject
to mandatory redemption 43,373 .86% 47,000 2.68%
(of subsidiaries)
Company-obligated
mandatorily redeemable 345,000 6.85% --- ---
trust preferred securities of
subsidiary holding solely
parent debentures
Preferred stock subject to --- --- 25,000 1.43%
mandatory redemption (of
subsidiaries)
Notes Payable 173,383 3.44% --- ---
Long-term Debt, including
current maturities 2,696,956 53.51% 899,567 51.40%
---------- ------ ---------- ------
Total $5,039,889 100% $1,750,173 100%
--------------------------------
(49) See Northeast, supra.
25
--------------------------------------------------------------------------
Post-Merger Energy East Pro Forma Consolidated Capital Structure
(Dollars in thousands)
(unaudited)
--------------------------------------------------------------------------
Common Stock Equity (incl. additional paid in capital) $2,397,321 33.85%
Preferred stock not subject to mandatory redemption
(of subsidiaries) 90,373 1.28%
Company-obligated mandatorily redeemable trust
preferred securities of subsidiary holding solely 345,000 4.87%
parent debentures
Preferred stock subject to mandatory redemption (of
subsidiaries) 25,000 0.35%
Notes Payable 223,383 3.15%
Long-Term Debt, including current maturities 4,001,523 56.50%
---------- ------
Total $7,082,600 100%
As can be seen from these tables, post-Merger Energy East's pro forma
consolidated equity to total capitalization will be 33.85%, which will be
significantly higher than Northeast Utilities' approved 27.6% common equity
position and will exceed the traditionally accepted 30% level. The capital
structure of post-Merger Energy East will also be substantially similar to the
capital structures approved by the Commission in other orders.(50)
Protected interests: As set forth more fully in Item 3.C.4 (Economies and
--------------------
Efficiencies from the Merger (Section 10(c)(2)), and elsewhere in this
Application/Declaration, the Merger is expected to result in economies and will
integrate and improve the efficiency of the Energy East and RGS utility systems.
The Merger will create an entity poised to respond effectively to the
fundamental changes taking place in the markets for natural gas and electric
power and to compete effectively for consumers' business. The Merger will
therefore be in the public interest and the interests of investors and
consumers, and will not be detrimental to the proper functioning of the
resulting holding company system.
As indicated previously, consummation of the Merger is conditioned upon
receipt not only of the Commission's approval, but also on the NYPSC, and on
FERC and other federal regulatory approvals. Those regulatory approvals, which
have been obtained, give additional assurance that the interests of retail
customers are adequately protected. Approval of the Merger by FERC and the NYPSC
further assure that there is no significant adverse effect on competition. In
sum, because the Merger does not add any complexity to Energy East's capital
structure, is in the interest of investors and consumers, and is consistent with
the public interest, the requirements of Section 10(b)(3) are met.
--------------------------------
(50) See, e.g., Ameren Corporation, HCAR No. 26809 (Dec. 30, 1997); CINergy
Corp., HCAR No. 26934 (Nov. 2, 1998); and Centerior Energy Corp., HCAR No. 24073
(April 29, 1986).
26
C. SECTION 10(c)
Section 10(c) of the Act provides that, notwithstanding the provisions of
Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of Section 11; or
(2) the acquisition of securities or utility assets of a public utility or
holding company unless the Commission finds that such acquisition will
serve the public interest by tending towards the economical and the
efficient development of an integrated public utility system.
1. Acquisition Must be Lawful
-----------------------------
Section 10(c)(1) requires that an acquisition be lawful under Section 8.
Section 8 prohibits registered holding companies from acquiring, owning
interests in or operating both a gas and an electric utility serving
substantially the same area if state law prohibits it. Section 8 indicates that
a registered holding company may own both gas and electric utilities where, as
here, the acquisition is subject to approval by the state utility commissions
with jurisdiction over the acquired companies. RGS, along with Energy East,
NYSEG, RG&E and Eagle, filed an application with the NYPSC to carry out the
Merger, which application is attached at Exhibit D-3. This application was
approved by the NYPSC by order issued on February 27, 2002, which order is
attached as Exhibit D-4.
Section 10(c)(1) further requires that an acquisition not be detrimental to
carrying out the provisions of Section 11 of the Act. Section 11(a) of the Act
requires the Commission to examine the corporate structure of registered holding
companies to ensure that unnecessary complexities are eliminated and voting
powers are fairly and equitably distributed. As described above, the Merger will
not result in unnecessary complexities or unfair voting powers.
Although Section 11(b)(1) generally requires a registered holding company
system to limit its operations "to a single integrated public utility system,
and to such other businesses as are reasonably incidental, or economically
necessary or appropriate to the operations of such integrated public utility
system," a combination integrated gas and electric system within a registered
holding company is permissible under Section 8.(51) Additionally, Section
11(b)(1) provides that "one or more additional integrated public utility
systems" may be retained if, as here, certain criteria are met. Section 11(b)(2)
directs the Commission "to ensure that the corporate structure or continued
existence of any company in the holding company system does not unduly or
unnecessarily complicate the structure, or unfairly or inequitably distribute
voting power among security holders, of such holding company system."
--------------------------------
(51) See, e.g., New Century Energies, Inc., HCAR No. 26748 (Aug. 1, 1997).
27
As detailed below, the Merger will not be detrimental to the carrying out
of the provisions of Section 11. The combination of the NYSEG, RG&E and Central
Maine Power electric system will result in a single, integrated electric utility
system (the "new Energy East Electric System"). Integration of the new Energy
East Electric System will be facilitated by NYSEG's and RG&E's direct
interconnection, as well as their participation in the same ISO. Further, the
combination of Energy East's current gas system with the gas operations of RG&E
will result in a single, integrated gas utility system with operations in the
same states as the electric system or states adjoining those states (the "new
Energy East Gas System"). The Commission should accordingly find that the new
Energy East Electric System will be the primary integrated public utility system
for purposes of Section 11(b)(1) and the new Energy East Gas System is a
permissible additional system under Section 11(b)(1)A-C.
Furthermore, Section 10(c)(2) requires that the Commission approve a
proposed transaction if it will serve the public interest by tending toward the
economical and efficient development of an integrated public utility system.
This Section 10(c)(2) standard is met where the likely benefits of the
acquisition exceed its likely cost.(52) As discussed below, the Merger will
result in the creation of an integrated electric utility system and an
additional integrated gas utility system and will produce economies and
efficiencies more than sufficient to satisfy the standards of Section 10(c)(2).
2. Combination and Integration of Electric Utility Operations
------------------------------------------------------------
Section 2(a)(29)(A) of the Act defines an "integrated public utility
system," as applied to electric utilities, as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operation to a
single area or region, in one or more states, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation.
As the definition suggests, and the Commission has observed, Section 11 is
not intended to impose "rigid concepts" but rather create a "flexible" standard
designed "to accommodate changes in the electric utility industry."(53) The
Commission has established four standards under the statutory integration
requirement:
--------------------------------
(52) See City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992).
(53) Unitil Corp., HCAR No. 25524 (April 24, 1992).
28
(1) The utility assets of the system are physically interconnected or
capable of physical interconnection;
(2) The utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
(3) The system must be confined in its operations to a single area or
region; and
(4) The system must not be so large as to impair (considering the state of
the art and the area or region affected) the advantages of localized
management, efficient operation, and the effectiveness of regulation.
NYSEG and RG&E have adjacent electric service territories that are
physically interconnected at eight locations.(54) The Commission has ruled that
the combination of NYSEG and Central Maine Power creates a single integrated
electric transmission system serving the northeast region of the United
States.(55) The addition of RG&E to this system will enhance the integration of
this system. As discussed below, the Merger satisfies all four of the
Commission's standards under the integration requirement.
(i) Physical interconnection or capability of physical
interconnection
The NYSEG and RG&E electric utility facilities clearly satisfy the
requirement that they be "physically interconnected or capable of physical
interconnection." As described above, NYSEG and RG&E are physically
interconnected at eight locations. Thus, under the Commission's traditionally
applied standards, the Merger satisfies the Act's interconnection
requirements.(56) In addition, NYSEG and RG&E satisfy the interconnection
requirement through
--------------------------------
(54) The two systems are physically interconnected at the following points:
South Perry (NYSEG) - South Perry (RG&E): 115kV-125MVA
Macedon (NYSEG) - Quaker Road (RG&E): 115kV-60MVA
Sleight Road (NYSEG) - Clyde (RG&E): 115kV-39MVA
Sleight Road (NYSEG) - Quaker Road (RG&E): 115kV-150MVA
In addition, the following are normally open interconnects used for
emergency supply:
Clyde (NYSEG) - Browns Corners (RG&E): 34.5kV-23.9MVA
Savannah (NYSEG) - Wolcott (RG&E): 34.5kV-23.9MVA
Portageville (NYSEG) - Portageville (RG&E): 34.5kV-12MVA
Leicester (NYSEG) - Leicester (RG&E): 34.5kV-12MVA
(55) Energy East Corporation, et al., HCAR No. 27224 (Aug. 31, 2000).
(56) In applying the requirement that the electric generation and/or
transmission and/or distribution facilities comprising the system be "physically
interconnected or capable of physical
(continued. . . . .)
29
their membership in the NYISO.(57) The Commission has determined that the
interconnection requirement is met through memberships in "tight" power pools
and ISOs.(58) In 1992, for example, the Commission approved the merger of Unitil
Corporation with Fitchburg Gas and Electric Light Company, based on their common
membership in NEPOOL,(59) In 1998, based on Unitil, the Commission found that
Delmarva Power & Light Company and Atlantic Energy, Inc. met the physical
interconnection requirements of Section 2(a)(29)(A) through their common
membership in PJM Interconnection, LLC ("PJM"), which was a regional power pool
and the first FERC-approved, operational ISO.(60) In both Unitil and Conectiv,
the Commission stated that it was not necessary for the applicant to construct
an additional transmission line interconnecting the affected electric utility
companies "since present transmission arrangements provide adequate
service."(61) The Commission's precedent regarding tight power pools thus
directly supports a finding of physical interconnection with regard to the RG&E
and NYSEG systems.
--------------------------------
(continued. . . . .)
interconnection," the Commission has historically focused on physical
interconnection through facilities that the parties owned or, by contract,
controlled. See, e.g., Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990)
("Northeast Utilities") at note 85, supplemented, HCAR No. 25273 (March 15,
1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992);
Centerior Energy Corp., HCAR No. 24073 (April 29, 1986).
(57) The Commission has previously found that Central Maine Power and NYSEG
satisfy the interconnection requirements. Energy East Corporation, et al., HCAR
No. 27224 (Aug. 31, 2000). As the Commission noted in its order, the NYISO and
ISO NE coordinate their scheduling and operations so as to enable "cross-border"
transactions to occur seamlessly. The high degree of integrated operations
insures that the two systems are operated as a coordinated system in which the
flow of energy is "centrally controlled and allocated, as need or economy
directs," and in which no generator, purchaser, or transmission owner operates
in isolation. Id., slip op. at 25 (citations omitted).
(58) See, e.g., Unitil Corp., supra (interconnection through NEPOOL), and
Conectiv, Inc. HCAR No. 26832 (Feb. 25, 1998) (interconnection through PJM,
Inc.). See also Yankee Atomic Elec. Co., 41 S.E.C. 552, 565 (1955) (authorizing
various New England companies to acquire interests in a commonly-owned nuclear
power company and finding the interconnection requirement met because the New
England transmission grid already interconnected the companies).
(59) New England Power Pool, 79 F.E.R.C. P. 61,374 (1997); New England Power
Pool, 83 F.E.R.C. P. 61,045 (1998).
(60) Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998).
(61) Unitil Corp., HCAR No. 25524 (1992), citing Electric Energy, Inc., 38
S.E.C. 658, 669 (1953) (direct interconnection not required in circumstances
which would have resulted in an uneconomic duplication of transmission
facilities); Conectiv, Inc., HCAR No. 26832, at 1998 SEC LEXIS 326, at 29, note
27.
30
(ii) Coordination of electric operations
(a) Power Pools and ISOs
The Merger satisfies the requirement that the utility assets, under normal
conditions, may be "economically operated as a single interconnected and
coordinated system."(62) The Commission has interpreted this language to refer
to the physical operation of utility assets as a system in which, among other
things, the generation and/or flow of current within the system be centrally
controlled and allocated as need or economy directs.(63)
While the definition reflects an assumption that the holding company would
coordinate the operations of the integrated system,(64) the Commission has
recognized the "Congress did not intend to impose rigid concepts but instead
expressly included flexible considerations" to accommodate changes in the
electric utility industry.(65) Thus, the Commission has considered advances in
technology and the particular operating circumstances in applying the
integration standards.(66) In its decision approving the acquisition of Public
Service Company of New
--------------------------------
(62) See id., citing Cities Services Co., 14 S.E.C. 28, 55 (1943) (Congress
intended that the utility properties be so connected and operated that there is
coordination among all parts, and that those parts bear an integral operating
relationship to one another).
(63) North American Co., HCAR No. 10320 (1950) supra at 242, note 15. The
Commission explained that "even though we find physical interconnection exists
or may be effected, evidence is necessary that in fact the isolated territories
are or can be so operated in conjunction with the remainder of the system that
central control is available for the routing of power within the system."
(64) In 1935, an electric utility system generally included local generation,
transmission and distribution, little long-distance transmission, no joint
ownership of generation or transmission facilities, and no power pools.
(65) Mississippi Valley Generating Co., 36 S.E.C. 159, 186 (1955), cited in
Yankee Atomic Elec. Co., 36 S.E.C. 552, 565 (1965). ("We have stated that '[w]e
think it clear from the language of Section 2(a)(29)(A), which defines an
integrated public utility system that Congress did not intend to imposed [sic]
rigid concepts with respect thereto"'). Yankee Atomic Electric Co., HCAR No.
13048 (Nov. 25, 1955). Accord, Unitil, supra, note 8.
(66) In New England Elec. Sys., 38 S.E.C. 193, 198-99 (1958), for example, the
Commission found that an electric utility system could be economically operated
as a single interconnected and coordinated system because the holding company's
internal coordination system was supplemented by contractual arrangements with
nonaffiliates for power and transmission.
In Yankee Atomic Elec. Co., 36 S.E.C. 552, 565 (1965) the Commission found the
coordination requirement satisfied because each system could absorb its full
share of plant output, as set by a predetermined schedule, and because operating
necessity or technological developments would determine when the plant would be
serviced, modified or retired. See also Connecticut Yankee Atomic Power Co., 41
S.E.C. 705, 710 (1963); Unitil, supra note 8; and National Grid Group plc,
Holding Co. Act Release No. 27154 (March 15, 2000).
31
Hampshire ("PSNH") by Northeast Utilities ("Northeast"), the Commission noted,
"the operation of generating and transmitting facilities of PSNH and the
Northeast operating companies is coordinated and centrally dispatched under the
NEPOOL Agreement."(67) Similarly, in Unitil, the Commission concluded that the
combined electric utility assets of the companies may be operated as a single
interconnected and coordinated system through their participation in NEPOOL.(68)
In Unitil, the Commission noted that NEPOOL is a "tight" power pool, which
consists of electric systems "which coordinate the planning and/or operation of
their bulk power facilities for the purpose of achieving greater economy and
reliability in accordance with a contractual agreement that establishes each
member's responsibilities."(69) The Commission stated that tight power pools:
have centralized dispatch of generating facilities, whereby
energy and operating reserves are interchanged among the
participant systems and transferred over facilities owned by
the individual participants. Participants have contractual
requirements relating to generating capacity and operating
reserves, together with specific financial penalties if
these requirements are not met. Sufficient transmission
capacity is made available to realize the full value of
operating and planning coordination.(70)
The Commission further recognized that NYPP, the predecessor to the NYISO,
similarly is a tight power pool, in terms of its level of centralization and
automation.(71)
NYSEG and RG&E have transferred scheduling and operational control over
their high-voltage transmission facilities to the NYISO. The NYISO commits and
dispatches generation assets and operates the combined transmission assets of
its participants as a single electrical system, ensuring that transmission
capacity is provided to enable the market to function. Moreover, the generating
assets of RG&E and NYSEG are centrally dispatched through NYISO procedures. In
addition, the NYISO energy markets operate on a bid price basis and the dispatch
of any facility will depend upon its bid. To meet their respective retail load
obligations, NYSEG
--------------------------------
(67) Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990), n. 85, supplemented,
HCAR No. 25273 (Mar. 15, 1991), aff'd sub nom. City of Holyoke v. S.E.C., 972
F.2d 358 (D.C. Cir. 1992).
(68) Unitil, supra note 8. See also Conectiv, Inc., HCAR No. 26832 (Feb. 25,
1998) (the Commission found that Delmarva Power & Light Company and Atlantic
Energy, Inc. met the physical interconnection requirements through their common
membership in PJM Interconnection, LLC, which was a regional power pool and the
first FERC-approved operational ISO).
(69) Id. at n. 22.
(70) Id.
(71) Id.
32
and RG&E will jointly purchase and schedule the delivery of capacity and energy
on an economic basis. Transmission service over both the NYSEG and RG&E systems
will be provided through the NYISO tariff.
(b) Other Means of Coordination.
As noted above, the Companies project that bringing Energy East and RGS
together will produce net savings of approximately $50 million per year. Those
savings will be achieved in part through the common management of NYSEG and RG&E
in areas such as procurement, information systems and other administrative and
general areas. As affiliates of a bigger company, RG&E and NYSEG become more
valuable customers to potential supplies, which will enable the two utilities to
negotiate more aggressively for goods and services, thereby achieving
efficiencies and savings in the areas of energy supply and materials
procurement. Moreover, since electric demand in NYSEG's service area peaks in
the winter while RG&E's peak occurs during the summer, together the Companies
will have a higher annual electric load factor than either would have
separately, which can provide advantages in the purchase of power and the
utilization of generation assets.
Appendix E to the Companies' petition to the NYPSC for approval of the
Merger (72) consists of the affidavit of Thomas J. Flaherty of Deloitte
Consulting L.P., which affidavit describes the categories and levels of
Merger-related cost savings that are anticipated to result from the Merger. In
addition to savings in the areas of staffing and corporate and administrative
programs, Mr. Flaherty identifies the ability of the combined Companies to
obtain purchasing economies in the nonfuel area resulting from the aggregation
of materials and supplies volumes, as well as service contracts. Regarding
energy supply, savings can be obtained in the area of gas supply from combining
the Companies' gas supply portfolio to eliminate unnecessary capacity
redundancies and to achieve greater purchasing leverage in the marketplace. In
addition, energy sourcing savings can be obtained by consolidating system
operations to achieve benefits from the amount of load shifted to baseload from
peaking and intermediate cycling as a result of noncoincidental peaks between
the companies.
In its order approving the Merger, the NYPSC allocated to customers 50% of
the synergy savings for the first five years following the close of the Merger.
Customers also will share in the benefits of synergy savings beyond the fifth
year, the percentage of sharing to be determined in future rate proceedings.
NYSEG and RG&E are committed to the principle of protecting customers to the
extent feasible from the volatility and price increases that have accompanied
the transition to a competitive marketplace in electricity. NYSEG and RG&E have
been addressing the risk of rising fuel, power and natural gas costs. The
savings that will result from the Merger enhance both Companies' ability to
manage these costs in the coming years, thereby benefiting their customers.
(72) This Petition is described in Item 4.E. below, and the Petition, including
Mr. Flaherty's affidavit, is attached as Exhibit D-3.
33
Finally, NYSEG and RG&E intend to continue to operate in their respective
service areas under their own names and with their own workforces in the field.
Having separate utilities as part of one holding company system will facilitate
the Companies' ability to cooperate in normal conditions and in times of
emergency such as ice storms, blizzards and other natural disasters. Similar
opportunities will be available with respect to more routine, day-to-day
administrative and general functions.
(iii) Single area or region
The Commission's third requirement for integration is also satisfied. The
Energy East electric system will operate in a single area or region. The
electric system will operate in upstate New York and central and southern Maine
in the northeast region of the United States. NYSEG and RG&E share over 200
miles of contiguous service territory and will provide service to upstate New
York customers. Although the service territories of NYSEG and RG&E do not touch
or overlap with the service territory of Central Maine Power, they are within
the same general region. The Commission has specifically approved NYSEG and
Central Maine Power as operating within a single area or region,(73) and has
authorized a number of similar combinations of electric utilities.(74) The
Commission has made clear that the "single area or region" requirement does not
mandate that a system's operations be confined to a small geographic area or a
single state. In considering size, the Commission has consistently found that
utility systems spanning multiple states satisfy the single area or region
requirement of the Act.(75) Given the high level of interpool transactions and
ready transmission access between NEPOOL and NYISO, and the elimination of rate
pancaking, the net effect is a regional northeast U.S. grid, from both an
operational and economic standpoint. By virtue of their common memberships in
the highly interactive NYISO and NEPOOL, NYSEG, RG&E and Central Maine Power
will be part of the same region.
(iv) Not so large as to impair advantages of localized
management, efficient operation, and the effectiveness
of regulation
Finally, with respect to the Commission's fourth requirement, the Energy
East system will not be so large as to impair the advantages of localized
management, efficient operations, and the effectiveness of regulation. RGS will
maintain its corporate headquarters in Rochester,
--------------------------------
(73) Id.
(74) See, e.g., CP&L Energy, Inc., HCAR No. 27284 (Nov. 27, 2000); WPS
Resources Corp., HCAR No. 26922 (Sept. 28, 1998). See also, National Grid Group
plc, et al., HCAR No. 27490 (January 16, 2002) (electric system of New National
Grid, including Niagara Mohawk Power Company, extending from New York/Canada
border to eastern Massachusetts, found to operate in a single area or region).
(75) See, e.g., American Electric Power Co., HCAR No. 27186 (June 14, 2000)
("AEP")(approving power system covering portions of eleven states); Entergy,
supra, (approving power system covering portions of four states); New Century
Energies, Inc., HCAR No. 26748 (Aug. 1, 1997) (approving integrated system
covering portions of five states).
34
New York. After the Merger, Energy East will maintain its principal office in
Albany, New York. The management of post-Merger Energy East will be drawn
primarily from the existing management of Energy East and RGS and their
subsidiaries.(76) This structure will preserve all the benefits of localized
management that Energy East and RGS presently enjoy while simultaneously
allowing for the efficiencies and economies that will derive from the Merger.
Additionally, the post-Merger Energy East system will not impair the
effectiveness of state regulation. Energy East's and RGS' utility subsidiaries
will continue their separate existence as before and their utility operations
will remain subject to the same regulatory authorities by which they are
presently regulated, namely the NYPSC, MPUC, DPUC, MDTE, the FERC and the NRC.
All required regulatory approvals have been obtained and Energy East and RGS, to
the extent necessary, are continuing to apprise the various agencies on the
status of the Merger. Pursuant to the recommendations contained in the 1995
Report this last factor is significant, as the Division stated therein "where
the affected state and local regulators concur, the [Commission] should
interpret the integration standard flexibly to permit non-traditional systems if
the standards of the Act are otherwise met,"(77) especially since the Merger
will result in a system similar to the traditional registered holding company
system.
The electric operations of NYSEG, Central Maine Power and RG&E are
coordinated through joint planning with, and for, NYISO and ISO-NE and joint
distribution activities. Given the close coordination of NYISO and ISO-NE, the
area encompassed should be considered a single area or region and given the
maintenance of utility corporate headquarters in Connecticut, Maine, New York
and Massachusetts, and ongoing regulation by various state and federal
authorities, there is no impairment of localized management, efficient operation
or effective regulation.
3. Combination of Gas Utility Operations
-----------------------------------------
(a) Section 10(c)(1)
Energy East's acquisition of the gas operations of RG&E as well as Energy
East's retention of the existing gas operations of NYSEG, Maine Gas, CNGC,
Southern Connecticut Gas, and Berkshire Gas is lawful under Section 8 of the Act
and would not be detrimental to the carrying out of Section 11 of the Act.
--------------------------------
(76) The Commission has found that an acquisition does not impair the advantages
of localized management where the new holding company's "management [would be]
drawn from the present management," (Centerior, supra) or where the acquired
company's management would remain substantially intact. (AEP, supra).
(77) 1995 Report at 74.
35
(i) Section 8
Section 8 of the Act provides that:
[w]henever a State law prohibits, or requires approval or
authorization of, the ownership or operation by a single company of
the utility assets of an electric utility company and a gas utility
company serving substantially the same territory, it shall be unlawful
for a registered holding company, or any subsidiary company thereof
(1) to take any step, without the express approval of the state
commission of such state, which results in its having a direct or
indirect interest in an electric utility company and a gas company
serving substantially the same territory; or (2) if it already has any
such interest, to acquire, without the express approval of the state
commission, any direct or indirect interest in an electric utility
company or gas utility company serving substantially the same
territory as that served by such companies in which it already has an
interest.
A fair reading of this section indicates that, with the approval of the
relevant state utility commissions, registered holding company systems can
include both integrated electric utility systems and integrated gas utility
systems.
Energy East, as a combination company, is permissible pursuant to the terms
of Section 8 of the Act and is in the public interest. First, the combination of
electric and gas operations in Energy East is lawful under all applicable state
laws and regulations. The Merger will not result in any change in the provision
of gas and electric services of any so-called combination system within a given
state. Energy East, through NYSEG, will continue to provide electric and gas
service in the State of New York, CMP Group, through its utility subsidiaries,
will continue to provide electric service in the State of Maine, and RGS,
through its utility subsidiary, will continue to provide electric and gas
service in the State of New York. Since New York and Maine both permit
combination gas and electric utilities serving the same area, the Merger does
not raise any issue under Section 8. Moreover, earlier concerns that a holding
company such as Energy East would be able to greatly emphasize one form of
energy over the other based on its own agenda have substantially receded because
of the competitive nature of the energy market, which requires utilities to meet
customer demand for energy in whatever form. Furthermore, state regulators will
have sufficient control over, and are unlikely to approve, a combination company
that attempts to undertake such practices.
(ii) Section 11
Even if Section 8 of the Act were not interpreted as generally permitting
the combination of separate gas systems where such combination is approved and
accepted by the relevant state commissions, Sections 10 and 11 of the Act
contain additional provisions that permit the retention by Energy East of its
existing integrated gas system and the acquisition of the gas operations of
RG&E.
Section 10(c)(1) prevents the Commission from approving an acquisition that
"would be detrimental to the carrying out of the provisions of Section 11."
Section 11(b)(1) of the Act generally confines the utility properties of a
registered holding company to a "single integrated public-utility system,"
either gas or electric.
36
An exception to the requirement of a "single system" is provided in Section
11(b)(1) A-C (the "ABC clauses").(78) A registered holding company may own one
or more additional integrated public utility systems -- i.e., gas as well as
electric -- if each system meets the criteria set forth in these clauses. As
discussed below, post-Merger Energy East qualifies under the exception
established pursuant to the ABC clauses to retain the integrated gas system,
comprised of Energy East's existing gas operations and the gas operation of
RG&E.
(b) "ABC" Clauses
Section 11(b)(1) of the Act permits a registered holding company to control
one or more additional integrated public utility systems if:
(A) each of such additional systems cannot be operated as an
independent system without the loss of substantial economies
which can be secured by the retention of control by such holding
company of such system;
(B) all of such additional systems are located in one state,
adjoining states, or a contiguous foreign country; and
(C) the continued combination of such systems under the control of
such holding company is not so large (considering the state of
the art and the area or region affected) as to impair the
advantages of localized management, efficient operation, or the
effectiveness of regulation.
For the reasons set forth below, a divestiture order would be contrary to
the public interest and Energy East therefore requests that the Commission
authorize retention of Energy East's existing gas operations. Furthermore,
Energy East requests that the Commission authorize Energy East's acquisition of
the gas operations of RG&E.
In the 1995 Report, the Commission Staff recommended that the Commission
"liberalize its interpretation of the 'ABC' clauses."(79) In its recent
decisions in Exelon Corporation,(80) Conectiv, Inc.,(81) and WPL Holdings,
Inc.,(82) the Commission applied the ABC clauses to proposed acquisitions by
to-be-registered holding companies. The Commission reconsidered and rejected the
implicit requirement, in many of its earlier decisions, of evidence of a severe,
even crippling, effect of divestiture upon the separated system, stating that
this approach is outmoded in the contemporary utility industry, and explained
that as a result of the convergence of the gas and electric industries now under
way, separation of gas and electric businesses may cause the separated entities
to be weaker competitors than they would be together, and that this
--------------------------------
(78) See generally NIPSCO Industries, Inc., HCAR No. 26975 (Feb. 10, 1999).
(79) 1995 Report at 74.
(80) Exelon Corporation, HCAR No. 27256 (Oct. 19, 2000).
(81) Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998).
(82) WPL Holdings, Inc., HCAR No. 26856 (Apr. 14, 1998).
37
factor operates to compound the loss of economies represented by increased
costs. The above-cited decisions support a favorable consideration by the
Commission of the instant Application/Declaration.
Historically, under its previous narrow interpretation of Section
11(b)(1)(a), as a guide to determining whether lost economies are "substantial,"
the Commission has given consideration to ratios which measure the projected
loss of economies as a percentage of: (1) total utility operating revenues; (2)
total utility expense or "operating revenue deductions;" (3) gross utility
income; and (4) net gas utility operating income. Although the Commission has
declined to draw a bright-line numerical test under Section 11(b)(1)(a), it has
indicated that cost increases resulting in a 6.78% loss of operating revenues, a
9.72% increase in operating revenue deductions, a 25.44 % loss of gross gas
income and a 42.46% loss of net income would afford an "impressive basis for
finding a loss of substantial economies."(83)
Here, the lost economies that would be experienced if the gas properties of
Energy East were to be operated on a stand-alone basis substantially exceed
these numbers, without any increase in benefits to consumers from such
divestiture. The Companies have provided, at Exhibit J-1, an "Analysis of the
Economic Impact of a Divestiture of the Gas Operations of Rochester Gas &
Electric." ("Divestiture Analysis") As shown in Table I-1 of that analysis,
divestiture of RG&E gas business into a stand-alone gas company would result in
a 14.74% loss of operating revenues, a 15.86% increase in operating revenue
deductions, a 208.58% loss of gross gas income, and a 367.09% loss of net gas
income. These figures show that the lost economies associated with the
divestiture of Energy East's gas business are substantial, even under a narrow
interpretation of Section 11(b)(1)(A).
The Divestiture Analysis quantifies the results of divesting RG&E's natural
gas business and assets into a stand-alone company (referred to as "NewGasCo")
which would serve RG&E's natural gas customers at a level of service, quality
and safety comparable to the level currently served by RG&E. If it is assumed
that NewGasCo is allowed by state regulators to increase its rate revenue to
recover increased costs resulting from divestiture, NewGasCo's natural gas
customers will see an overall rate increase of about 15.4%, as shown in Table
I-2 of the Divestiture Analysis. This significant increase in rates would bring
no attendant increase in the level or quality of service. Moreover, such a rate
increase would come at a time when NewGasCo would be facing the emergence of
retail competition and increased competition in the energy industry. The
projected impact on customers includes lost economies of $47.5 million, plus an
additional $2.0 million in associated income taxes, yielding total economic
losses of $49.5 million.
In addition to the foregoing impacts relating to the natural gas business,
divesting RG&E's natural gas business would result in a rate increase of about
5.2% to RG&E's remaining electric customers. The analysis underlying this
conclusion assumed that state regulators would allow the pass-through to the
Company's electric customers of electric business unit lost economies, as well
as associated income taxes. Under this case, RG&E's electric customers
--------------------------------
(83) Engineers Public Service Co., 12 S.E.C. 41, 59 (1942) (citation omitted).
38
would realize economic losses of about $28.3 million, as shown in Table I-3 of
the Divestiture Analysis. This impact is primarily due to: (1) the expense
associated with additional electric business unit employees being required to
support functions that previously were provided jointly for RG&E's utility
business units; (2) increases in the allocation of certain fixed costs which
were previously allocated among both of RG&E's utility business units; and (3)
the capital cost associated with the transfer of assets, as well as the
acquisition of new assets, into the electric rate base.
In sum, the Divestiture Analysis indicates that, in all likelihood, the
forced divestiture of RG&E's natural gas business and assets would result in the
realization of significant operational inefficiencies affecting NewGasCo's
shareholders and/or customers and RG&E's remaining electric customers. NewGasCo
would realize incremental costs associated with labor and other resources,
because it would no longer be able to share these resources with RG&E's electric
segment. Overall, economic losses to NewGasCo of approximately $49.5 million
were identified in the Divestiture Analysis.
In addition to the quantified economic losses associated with the
divestiture of the gas operations of RG&E, divestiture would cause a
significant, although difficult to quantify, amount of damage to post-Merger
Energy East's customers and would disrupt plans of its regulators to create a
fluid and efficient total energy marketplace, and set of services. Likewise,
divestiture would interfere with Energy East's ability to compete in the
marketplace. Such costs to customers involve the additional expenses of doing
business with two utilities instead of one (i.e., additional telephone calls for
service and billing inquiries, additional postage expense, and cost of providing
access to meters and other facilities for two utilities) and costs associated
with making the entities supply information to shareholders and publish the
reports required by the Act. Similarly, increased costs would involve additional
duties for the staff of the NYPSC as a result of that agency dealing with an
additional utility. These additional duties would largely be the result of
duplicating existing functions, such as separate requests for approval of
financing and rate case requests.
Energy East's competitive position in the market would also suffer from
divestiture of RG&E's gas operations because, as the utility industry moves
toward a complete energy services concept, competitive companies must be able to
offer customers a range of options to meet their energy needs. The Commission
has recognized that significant economies and competitive advantages result from
the ownership of both gas and electric operations.(84) Divestiture of gas
operations would render Energy East unable to offer certain of its customers a
significant and important option, namely gas services, and could damage Energy
East's long-term competitive potential. As the Commission recognized in New
Century Energies, Inc., in a competitive utility environment, any loss of
economies threatens a utility's competitive position, and even a "small"
--------------------------------
(84) NiSource Inc., HCAR No. 27263 (Oct. 30, 2000); Exelon Corp., HCAR No. 27256
(Oct. 19, 2000).
39
loss of economies may render a utility vulnerable to significant erosion of its
competitive position.(85)
With respect to Clause B, as the Commission noted in WPL Holdings,
Inc.,(86) "[c]lause B contemplates the location of an additional system in the
same state as the principal system or in adjoining states."(87) Here, Energy
East's principal system (the integrated electric system) will be located in New
York and Maine, and the "additional system" -- the integrated natural gas system
-- will be located in the same states of New York and Maine and in the adjoining
States of Connecticut and Massachusetts. Hence, Clause B of the ABC clauses is
satisfied.
With respect to Clause C, the continued combination of the gas operations
under Energy East is not so large (considering the state of the art and the area
or region affected) as to impair the advantages of localized management. The gas
operations of Energy East and of RG&E will continue to be the same as they are
today with some 614,000 (Energy East) and 289,000 (RG&E) customers in four
states and confined to a relatively small area.(88) As the Commission has
recognized elsewhere, the determinative consideration under this criterion is
not size alone or size in the absolute sense, either big or small, but size in
relation to its effect, if any, on localized management, efficient operation and
effective regulation.(89) Management currently is and will remain geographically
close to gas operations, thereby preserving the advantages of localized
management. From the standpoint of regulatory effectiveness, each gas operation
is organized in a separate corporation by regulatory jurisdiction thus
facilitating state regulation. Finally, as detailed below, the Companies' gas
operations will realize additional economies as a result of the Merger. Far from
impairing the advantages of efficient operation, the continued combination of
the gas operations under Energy East will facilitate and enhance the efficiency
of gas operations.
In summary, the addition of RG&E to the Energy East system in the State of
New York, where NYSEG already serves approximately 250,000 natural gas
customers, will add 289,000 natural gas customers to Energy East's existing base
of about 614,000 natural gas customers. Such additions will bring about the
benefits described above. Energy East should therefore be permitted to retain
its existing gas operations while being allowed to acquire and retain the
natural gas utility assets of RG&E.
--------------------------------
(85) New Century Energies, Inc., HCAR No. 26749, citing 1995 Report at 71. See
also WPL Holdings, Inc., HCAR No. 26856 (Apr. 14, 1998), citing 1995 Report at
71.
(86) HCAR No. 26856 (Apr. 14, 1998).
(87) Id. at n.44.
(88) The relative sizes of yhe NYSEG, RG&E, Southern Connecticut Gas, Maine Gas,
CNGC and Berkshire Gas natural gas operations are shown on one of the maps
contained in Exhibit E-1.
(89) See, e.g., Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998).
40
(c) Gas utility integration standards (Section 10(b)(2))
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies as:
[A] system consisting of one or more gas utility companies which are
so located and related that substantial economies may be effectuated
by being operated as a single coordinated system confined in its
operation to a single area or region, in one or more states, not so
large as to impair (considering the state of the art and the area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation: Provided, that gas
utility companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
Unlike the definition of an "integrated electric utility system" in Section
2(a)(29)(A) of the Act, physical interconnection of the component parts of a gas
utility system is not mentioned. Furthermore, the Commission has not
traditionally required that the pipeline facilities of an integrated system be
interconnected.(90)
The combination of Energy East's gas facilities with the gas facilities of
RG&E will satisfy the integration standard set forth in Section 2(a)(29)(B) of
the Act for the following reasons:
- Energy East's existing gas facilities and RG&E will share a "common
source of supply" and will be operated as a "single coordinated
system;"
- Energy East's gas facilities and RG&E will be able to achieve
"substantial economies" in gas supply through the increased purchasing
power and gas supply coordination that will result from being part of
the larger combined gas system;
- As the two smallest of the combined gas operations, Maine Gas and
Berkshire Gas and the customers of these two gas companies will
continue to particularly benefit from these efficiencies, and will
benefit from the expertise of RG&E in such areas as engineering,
construction, training, meter service, testing, marketing and gas
transportation; and
- The area or region served by the post-merger Energy East gas
facilities will not be "so large as to impair the advantages of
localized management, efficient operation, and the effectiveness of
regulation." To the contrary, management of these
--------------------------------
(90) See In the Matter of Pennzoil Company, HCAR No. 15963 (1968) (finding an
integrated system where respective facilities both connected with an
unaffiliated transmission company but not each other). See also In the Matter of
American Natural Gas Co., HCAR No. 15620 (1966) ("it is clear the integrated or
coordinated operations of a gas system under the Act may exist in the absence of
[physical] interconnection").
41
companies' utility subsidiaries will largely remain intact after the
consummation of the Merger, and will be subject to effective local
regulation.
(i) Section 2(a)(29)(B): "substantial economies may be
effectuated by being operated as a single coordinated
system"
The gas departments of RG&E and of the Energy East gas utility subsidiaries
will be operated in a coordinated fashion as to portfolio design and strategy,
procurement, storage optimization, price risk management and contract
administration. Energy East and RGS are in the process of identifying specific
components of their gas portfolios which, through joint management and
coordination, will enable the combined companies to realize opportunities for
savings in the marketplace.(91)
With regard to natural gas service, Energy East and RGS gas subsidiaries
purchase significant amounts of gas from the same supply basins in western
Canada and Texas/Louisiana, holding capacity on the Dominion, Empire State,
TransCanada, Texas Gas and Tennessee pipelines, and contract for storage
services in Pennsylvania, New York and Canada. These common portfolio resources
may bring long-term benefits to the Companies' customers. Moreover, as the
dynamics and structure of the natural gas industry continue to change, the
marketplace will create even more options for the Companies to provide value
through coordination of their respective gas supply portfolios. For example,
demand and pricing differentials now exist and will continue to occur and,
through coordinated management of their portfolios of physical and contractual
assets, the Companies will be better positioned to take advantage of changing
market conditions.
(ii) Section 2(a)(29)(B): "a single area or region in one or
more states"
After consummation of the Merger, Energy East's gas operations will be
located in a single region -- the northeastern United States. The gas operations
of NYSEG and RG&E will be located entirely within the State of New York.
Although the NYSEG, CNGC, Maine Gas, Southern Connecticut Gas and Berkshire Gas
retail gas service areas will be separated by a distance of several hundred
miles and, in the case of Maine Gas, are located in non-contiguous states, such
factors by themselves are not determinative. The Commission has made clear that
systems separated by intervening territories are in the same region because they
procure gas from a "common source of supply."(92)
--------------------------------
(91) See also Item 3.C.3 Economies and Efficiencies from the Merger (Section
10(c)(2)) for information concerning Merger economies and efficiencies.
(92) See Energy East Corporation, et al., HCAR No. 27224 (Aug. 31, 2000). See
also NIPSCO, HCAR No. 26975 (Feb. 10, 1999) (authorizing holding company with
operating company in Indiana to acquire a gas utility in Massachusetts where the
gas utilities in each state received significant amounts of gas from the same
supply basin).
42
Section 2(a)(29)(B) specifically contemplates that "gas utility companies
deriving natural gas from a common source of supply may be deemed to be included
in a single area or region." Moreover, in considering whether an "area or
region" is so large as to impair "the advantages of localized management,
efficient operation, and the effectiveness of regulation," the Commission must
consider the "state of the art" in the industry. Both the Commission's
precedent and the "state of the art" in the natural gas industry lead to the
conclusion that, with the RG&E gas system included, Energy East's gas utility
system will operate as a coordinated system confined in its operation to a
single area or region because the Energy East and RG&E systems will derive
almost all of their natural gas from a common source of supply.
The Act, the Commission's orders and rulings, and the Commission staff's
no-action letters do not provide a definition as to what constitutes a "common
source of supply." Historically, in determining whether two gas companies share
a "common source of supply," the Commission has looked to such issues as from
whom the distribution companies within the system receive a significant portion
of their gas supply.(93) The Commission has also considered both purchases of
gas from a common pipeline,(94) as well as from different pipelines when the gas
originates from the same gas field.(95) Since the time of most of these
decisions, the state of the art in the industry has developed to allow efficient
operation of systems whose gas supplies derive from many sources within the
supply regions or markets.
Following consummation of the Merger, the NYSEG, CNGC, Maine Gas, Southern
Connecticut Gas, Berkshire Gas and RG&E gas facilities will derive substantially
all of their gas from a common source of supply under Section 2(a)(29)(B). NYSEG
receives approximately 56% of its gas supply from the Texas and Louisiana Basins
and approximately 32% of its gas supply from the Western Canadian Sedimentary
Basin, which together account for over 88% of NYSEG's gas supply. In addition,
over 59% of NYSEG's total transportation capacity requirements are carried on
the Dominion Transmission, Empire State, Texas Gas Transmission and TransCanada
pipelines. Southern Connecticut Gas receives approximately 64% of its gas supply
from the Texas and Louisiana Basins and approximately 35% of its gas supply from
the Western Canadian Sedimentary Basin, which together account for 99% of
Southern Connecticut
--------------------------------
(93) See, e.g., In the Matter of Philadelphia Company and Standard Power and
Light Co., HCAR No. 8242 (1948) ("most of the gas used by these companies in
their operations is obtained from common sources of supply"); Consolidated
Natural Gas Co., HCAR No. 25040 (1990) (finding integrated system where each
company derived natural gas from two transmission companies, although one such
company also received gas from other sources).
(94) In the Matter of the North American Co., HCAR No. 10320 (1950) (finding
Panhandle Eastern pipeline to be a common source of supply).
(95) See In the Matter of Central Power Company and Northwestern Public Service
Co., HCAR No. 2471 (1941), in which the Commission declared an integrated system
to exist where two entities purchase from different pipeline companies since
"both pipelines run out of the Otis field, side by side, and are interconnected
at various points in their transmission system; and that they are within two
miles of each other at Kearney."
43
Gas's gas supply. In addition, nearly all of Southern Connecticut Gas's total
transportation capacity requirements from each of the basins mentioned above are
carried on the Tennessee, Iroquois, Algonquin and Texas Eastern pipelines. With
regard to CTG Resources' gas subsidiary, CNGC, approximately 78% of CNGC's gas
supply is received from the Texas and Louisiana basins, and approximately 21% of
its gas supply is received from the Western Canadian Sedimentary Basin, which
together account for over 99% of CNGC's gas supply. Nearly all of CNGC's total
transportation capacity requirements are carried on the Tennessee, Iroquois,
Algonquin, and Texas Eastern pipelines. With regard to Maine Gas, approximately
100% of Maine Gas's gas supply is currently received from the Portland Natural
Gas Transmission System ("PNGTS") pipeline, which is interconnected with the
TransCanada Pipeline, carrying Western Canadian Sedimentary Basin gas. When
fully developed, Maine Gas will continue to receive at least 50% of its gas
supply from the Western Canadian Sedimentary Basin through the TransCanada
Pipeline and the PNGTS pipeline. With regard to Berkshire Energy's gas
subsidiary, Berkshire Gas, approximately 92% of Berkshire Gas's gas supply is
received from the Texas and Louisiana basins, and approximately 3% of its gas
supply is received from the Western Canadian Sedimentary Basin, which together
account for 95% of Berkshire Gas's gas supply. One hundred percent of Berkshire
Gas' total transportation capacity requirements are carried on the Tennessee
pipeline. RG&E receives approximately 10% of its gas supply from the Texas and
Louisiana Basins, 30% of its gas supply from the Southpoint market area and
approximately 60% of its gas supply from the Western Canadian Sedimentary Basin,
which together account for 100% of RG&E's supply. In addition, nearly all of
RG&E's total transportation capacity requirements are carried on the Dominion
Transmission, Empire State, Texas Gas Transmission and TransCanada
pipelines.(96)
In addition, Sable Island gas supply from offshore Nova Scotia via the
newly constructed Maritimes & Northeast Pipeline will be available to all Energy
East gas affiliates via the Tennessee Gas Pipeline, which connects to the
Maritimes & Northeast Pipeline at Dracut, Massachusetts. It is anticipated that,
as Sable Island is developed, the Energy East gas facilities will draw a growing
percentage of supplies from this important new supply basin.
It is also anticipated that other new sources of natural gas for northeast
U.S. markets may become generally available to Energy East system utility
companies. Additional liquefied natural gas supplies from new production
facilities in the Caribbean Basin will arrive at Distrigas of Massachusetts
terminal in Everett, Massachusetts, through Distrigas's expansion of its
vaporization and compression capabilities.
Purchases from and through a common pipeline, as well as purchases from a
common gas field, have been found to satisfy the "common source of supply"
requirement of Section 2(a)(29)(B) of the Act.(97) There is thus substantial
evidence that the Energy East gas
--------------------------------
(96) RG&E also holds transportation capacity on ANR Pipelines Company, Great
Lakes Transmission Company, L.P. and TransContinental Gas Pipeline. Such
capacity has been released to other shippers for terms ranging from three to
eight years.
(97) See, e.g., NIPSCO, supra.
44
facilities will share a common source of supply with RG&E for a significant
amount of their respective gas supplies.
Any determination of the appropriate size of the area or region calls for
consideration of the "state of the art" in the gas industry. In this regard, the
"state of the art" in the gas industry continues to evolve and change, primarily
as a result of decontrol of wellhead prices, the continuing development of an
integrated national gas transportation network, the construction of new pipeline
capacity, the emergence of marketers and brokers, and the "un-bundling" of the
commodity and transportation functions of pipelines and local distribution
companies in response to various FERC and state initiatives.(98) Of particular
importance has been the development, evolution and operation of market centers,
trading hubs, and pooling areas. Today, trading activity conducted at market
centers and trading hubs play an increasingly vital role in the overall
management of the assets in a gas portfolio (supply, transportation and
storage).
As a result of these developments, coordination of the operations of two
non-contiguous gas companies is no longer dependent solely upon having
contractual capacity on the same interstate pipelines, so long as the two
companies both have access to one or more common market centers or trading hubs.
Importantly, these developments in the state of the art in the gas industry now
allow gas distribution companies operating in a much larger area or region of
the country to realize operating economies and efficiencies from coordinated
operation that were once thought to be achievable only by contiguous or nearly
contiguous gas companies supplied by the same interstate pipelines.(99)
As indicated above, because NYSEG, RG&E, Southern Connecticut Gas, CNGC,
Maine Gas and Berkshire Gas will potentially share access through their
respective pipeline transporters to industry-recognized market and supply area
hubs, they will have the enhanced ability to physically coordinate and manage
their portfolios of supply, transportation and storage and to support, if
necessary, the underlying physical side of various financial derivatives as a
means of managing price volatility.
(iii) Section 2(a)(29)(B): System size from perspective
of "the advantages of local management, efficient
operation and the effectiveness of regulation."
The integrated gas system to be formed by the combination of the Energy
East gas facilities with RG&E will not be "so large as to impair (considering
the state of the art and the area or region affected) the advantages of
localized management, efficient operation and the effectiveness of regulation."
Although RG&E gas supply personnel will report to an officer of Energy East,
RG&E will retain gas supply personnel in Rochester, New York. Further, RG&E's
affiliation with Energy East is expected to result in economies and
efficiencies, as discussed in more detail below.
--------------------------------
(98) Id.; 1995 Report at 29-31.
(99) See, e.g., New Century Energies, Inc., supra.
45
Finally, the Merger will not have an adverse effect upon effective
regulation. Following the Merger, RG&E will remain subject to regulation by the
NYPSC. Accordingly, the Commission should find that the size requirements of
Section 2(a)(29)(B) of the Act are satisfied.
For all of the above reasons, the combined gas operations of Energy East
and RG&E will constitute a single integrated gas utility system.
4. Economies and Efficiencies from the Merger (Section 10(c)(2))
-------------------------------------------------------------
As discussed above, Section 10(c)(2) requires that the Commission approve a
proposed transaction if it will serve the public interest by tending toward the
economical and efficient development of an integrated public utility system.
Through the Merger, the Companies will create an entity that is well situated to
compete effectively in an increasingly active market. The efficiencies and
economies brought about through the Merger, and described in more detail below,
thereby serve the public interest, as required by Section 10(c)(2) of the Act.
Although many of the anticipated economies and efficiencies will be fully
realizable only in the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) have been met.(100) Furthermore,
Section 10(c)(2) of the Act does not require that the future savings be large in
relation to the Gross revenues of the companies involved.(101) In addition, some
potential benefits cannot be precisely estimated; nevertheless they should be
considered.(102) The Companies believe that the Merger will provide significant
financial and organizational advantages and, as a result, the potential for
substantial economies and efficiencies should be found to meet the standard of
Section 10(c)(2) of the Act.
The Companies have identified the following areas in which the merged
Company may achieve savings: growth margin, gas supply, labor, administrative
and general expenses, and non-fuel purchasing economies. The Companies estimate
total cost savings resulting from the Merger at approximately $50 million per
year, with an anticipated total of approximately $533 million of estimated net
cost savings over the ten-year period 2002-2011. (This total figure has been
adjusted to reflect approximately $167 million of out-of-pocket costs to be
incurred to achieve these savings and approximately $93 million of cost-cutting
measures by the Companies prior to the Merger.)
--------------------------------
(100) See American Electric Power Co., 46 S.E.C. 1299, 1320-1321 (1978).
(101) See American Natural Gas Co., 43 S.E.C. 203 at 208 (1966).
(102) "[S]pecific dollar forecasts of future savings are not necessarily
required; a demonstrated potential for economies will suffice even when these
are not precisely quantifiable." Centerior Energy Corp., HCAR No. 24073 (April
29, 1986) (citation omitted); see also In Re Consolidated Edison, Inc., HCAR No.
27021 (May 13, 1999); National Grid Group PLC, HCAR No. 27154 (March 15, 2000).
46
The Companies have undertaken a study of the economies and efficiencies
resulting from the Merger. That study, performed by Mr. Thomas J. Flaherty of
Deloitte Consulting L.P., describes the categories and levels of Merger-related
cost savings that are anticipated to result from the Merger. Mr. Flaherty's
affidavit also describes the process by which the categories and quantifications
were derived. Mr. Flaherty's affidavit is attached as Appendix E to the NYPSC
Merger Application, Exhibit D-3. The Companies have identified areas where joint
management, coordination and/or consolidation should enable the Companies to
achieve synergies. As stated previously, synergies would result from elimination
of duplicative corporate, administrative and technical support staffing. In
addition, synergies are expected to result from greater efficiencies in
corporate and administrative programs, purchasing economics (nonfuel), energy
sourcing savings and gas supply savings.
Mr. Flaherty's estimates of cost savings were developed on a nominal cost
basis over a ten-year period from January 1, 2002, to December 31, 2011. This
provides a long-term view of attainable savings. Although the cost savings
estimated for the ten-year period generally will continue into future periods,
estimates of cost savings are presented in nominal dollars and are limited to
the first ten years following the Merger.
Savings estimates reflect those areas where the total level of costs can be
affected by actions of management that are the direct result of the combination
of NYSEG and RG&E. These savings areas are derived from the operational
synergies that are created by integration of two previously independent
operations. The cost savings related to the integration of common functions of
the Companies are predicated upon operating the Companies under common
management, where appropriate and practical. These savings areas would
typically flow from either cost reduction or avoidance of parallel expenditures.
As detailed in Mr. Flaherty's affidavit, there are four primary categories
of cost savings that have been quantified.
- Staffing - Position reductions related to redundancies associated with
corporate, administrative and technical support functions are
categorized as Corporate Staffing, and position reductions related to
redundancies associated with operations related to the distribution
business are categorized as Operations Support Staffing. The Companies
estimate that the total cost savings from Corporate Staffing
reductions for the ten-year period ending December 31, 2011, are
estimated at $204.3 million. Savings derived from Operations Support
Staffing reductions are estimated to total $87.1 million for the same
ten-year period.
- Corporate and Administrative programs - This category includes
reductions in nonlabor programs and expenses, such as insurance and
shareholder services, resulting from economies of scale and cost
avoidance. The Companies estimate that savings in this area over the
ten-year period will amount to approximately $304.5 million, with the
greatest savings to be achieved through consolidation of information
technology ("IT") departments and avoidance of redundant new IT
systems development.
- Purchasing Economies (nonfuel) - Savings will also be achieved through
aggregation of materials and supplies volumes and services contracts
to increase purchasing
47
power and to reduce required reorder volumes and associated carrying
costs. The Companies estimate that the savings in this area over the
ten-year period will amount to approximately $63.4 million.
- Energy Supply - Energy Sourcing savings are driven by consolidating
system operations to achieve benefits from the amount of load shifted
to baseload from peaking and intermediate cycling as a result of
noncoincidental peaks between the companies. This increase in the mix
of baseload within the overall supply portfolio provides estimated
savings of $102.1 million over ten years. Gas supply savings are
derived from combining the gas supply portfolio to eliminate
unnecessary capacity redundancies and achieve greater purchasing
leverage in the marketplace. Savings on the gas portfolio is available
through pipeline capacity release in the early years and non-renewal
in later years for a ten-year total savings of $77.2 million.
Cost savings initiatives which were already planned prior to the Merger
were subtracted from the gross savings estimates because there would be some
overlap between these initiatives and identified cost savings resulting from the
Merger. These ongoing or future initiatives will contribute to lower total
costs to customers. The Merger thus allows the Companies to achieve additional
cost savings opportunities beyond those previously identified.
The total estimated cost savings identified from the Merger over the first
ten years after the Merger, after being adjusted for costs-to-achieve and
premerger initiatives, are approximately $533 million.
The geographical locations of the respective electric energy service
territories of NYSEG and RG&E, which operate in the same ISO, provide an
opportunity to integrate their electric utility operations efficiently. The
combined system can be operated as a single, larger cohesive system, with
virtually no modification needed with respect to existing transmission
facilities. As the structure of the electric utility industry continues to
evolve, the marketplace will create additional opportunities for the Companies
to create value through integrated operations and increased efficiencies.
Moreover, since electric demand in NYSEG's service area peaks in the winter,
while RG&E's peak occurs during the summer, together the Companies will have a
higher annual electric load factor than either would have separately, which can
provide advantages in the purchase of power and the utilization of generation
assets.
The Companies believe that their combination offers significant strategic
and financial benefits to each company and shareholders, as well as to each
company's respective employees and customers. These benefits include, among
others: (i) maintenance of competitive rates that will improve the combined
entity's ability to meet the challenges of the increasingly competitive
environment in both the electric and gas utility industry, (ii) over time, a
reduction in operating costs and expenditures resulting from integration of
corporate and administrative functions, including limiting duplicative capital
expenditures for administrative and customer service programs and information
systems, and savings in areas such as outside legal, audit and consulting fees,
(iii) greater purchasing power for gas supply and for items such as
transportation services and operational goods and services, (iv) enhanced
opportunities for expansion into non-utility businesses, (v) expanded management
resources and ability to select leadership from a larger and more diverse
management pool, and (vi) a financially stronger company that, through the use
of the combined capital, management, and technical expertise of each Company,
will be able to achieve greater financial stability and strength and greater
opportunities for earnings
48
growth, reduction of operating costs, efficiencies of operation, better use of
facilities for the benefit of customers, improved ability to use new
technologies, greater retail and industrial sales diversity, improved capability
to compete in wholesale power markets and joint management and optimization of
their respective portfolios of gas supply, transportation and storage assets.
The Applicants believe that over time the Merger will generate efficiencies and
economies which would not be available to the separate companies absent the
Merger and which will enable post-Merger Energy East to continue to be a
low-cost competitor in the marketplace.
In addition to the benefits described above, there are other benefits
which, while presently difficult to quantify, are nonetheless substantial.
These other benefits include:
- Increased Scale -- As competition intensifies within the gas and
electric industry, the Companies believe scale will be one dimension
that will contribute to overall business success. Scale has importance
in many areas, including utility operations, product development,
advertising and corporate services. The Merger is expected to improve
the profitability of the combined company by adding approximately
642,000 customers to Energy East's existing customer base and
providing increased economies of scale in all of these areas.
- Competitive Prices and Services -- Sales to industrial, large
commercial and wholesale customers are considered to be at greatest
near-term risk as a result of increased competition in the electric
utility industry. The Merger will enable Energy East to meet the
challenges of the increased competition and will create operating
efficiencies through which Energy East will be able to provide more
competitive prices to customers.
- More Balanced Customer Base -- The Merger will create a larger company
with a more diverse customer base. This should reduce post-Merger
Energy East's exposure to adverse changes in any sector's economic and
competitive conditions.
- Financial Flexibility -- By creating a company with a larger market
capitalization than had been previously experienced by any of the
Companies considered on an individual basis, the Merger should improve
Energy East's overall credit quality and liquidity of the securities
and therefore improve Energy East's ability to fund continued growth.
- Regional Platform for Growth -- The combination of Energy East and RGS
will create a regional platform for growth in the northeastern United
States. Energy East plans to expand relationships with existing
customers and to develop relationships with new customers in the
region. Energy East will use its combined distribution channels to
market a portfolio of energy-related products throughout the region
and will follow regional relationships to other geographical areas.
- Safety Benefits -- Among the short-term safety benefits anticipated
from the Merger are: improved, more efficient safety operations;
enhanced emergency management for both gas and electric operations;
improved efficiency of tree trimming operations;
49
improved management of contractor resources; and consolidation of call
center operations to address emergency situations.
- Reliability -- Reliability can also be enhanced with the integration
of regional operations. The increased efficiencies gained through
optimal work crew deployment will result in more rapid restoration of
service following interruptions. In particular, emergency operations,
resulting from widespread outages due to storms or other events, will
be supported by the availability of a larger pool of resources. These
additional resources, trained and activated according to a common
Emergency Plan, will effect restoration of service more quickly and
efficiently. Over the longer term, NYSEG and RG&E expect to be able to
coordinate infrastructure improvements across franchise lines, with a
potential reduction in capital needs. The utilities also anticipate
greater integration of territorial operations, including offices and
crew deployment, resulting in less travel, better response time, and
improved customer service.
For the above stated reasons, the Commission should find that the
integration criteria are satisfied and approve the proposed Merger.
5. Retention of Non-Utility Businesses
--------------------------------------
As a result of the Merger, the non-utility businesses and interests of RGS
will become businesses and interests of Energy East. The total assets of all
non-utility investments of RGS as of December 31, 2001, totaled approximately
$58 million.
Corporate charts showing the subsidiaries, including non-utility
subsidiaries, of RGS are filed as Exhibit E-3. A corporate chart showing the
projected arrangement of these subsidiaries under post-Merger Energy East
immediately after consummation of the Merger is filed as Exhibit E-4.
Section 11(b)(1) generally limits a registered holding company to retain
"such other businesses as are reasonably incidental, or economically necessary
or appropriate, to the operations of [an] integrated public utility system."
Although the Commission has traditionally interpreted this provision to require
an operating or "functional" relationship between the non-utility activity and
the system's core utility business, in its recent release promulgating Rule
58,(103) the Commission stated that it "has sought to respond to developments in
the industry by expanding its concept of a functional relationship." The
Commission added "that various considerations, including developments in the
industry, the Commission's familiarity with the particular non-utility
activities at issue, the absence of significant risks inherent in the particular
venture, the specific protections provided for consumers and the absence of
objections by the relevant state regulators, made it unnecessary to adhere
rigidly to the types of administrative
--------------------------------
(103) Exemption of Acquisition by Registered Public-Utility Holding Companies of
Securities of Non-utility Companies Engaged in Certain Energy-related and
Gas-related Activities, HCAR No. 26667 (Feb. 14, 1997) ("Rule 58").
50
measures" used in the past. Furthermore, in the 1995 Report, the SEC Staff
recommended that the Commission replace the use of bright-line limitations with
a more flexible standard that would take into account the risks inherent in the
particular venture and the specific protections provided for consumers.(104)
With certain minor exceptions, the Commission determined that Energy East's
existing non-utility subsidiaries could be retained by Energy East once it had
registered as a public utility holding company.(105) Energy East seeks
authorization to retain the non-utility subsidiaries of RGS. The new non-utility
business interests that post-Merger Energy East will directly or indirectly hold
as a result of the Merger all meet the Commission's standards for retention.
The existing direct and indirect non-utility business interests of RGS fall
within the ambit of Rule 58 or are otherwise functionally related to the utility
business of the registered holding company and justifiable under Commission
precedent. Exhibit H-2, filed herewith, contains a listing of all the
non-utility subsidiaries that Energy East will hold directly or indirectly as a
result of the Merger, and sets forth the basis for their retention by Energy
East after the Merger.
The exemption provided under Rule 58 will be available only if the
aggregate investment by the registered holding company and its subsidiaries in
energy-related companies does not exceed the greater of $50 million or 15% of
consolidated capitalization. Consistent with the Commission's decisions in CP&L
Energy, Inc.,(106) investments made by RGS prior to the effective date of the
Merger should not count in the calculation of the 15% limit for purposes of Rule
58. Such exclusion is appropriate in view of the fact that at the time of the
investments RGS was not subject to the restrictions that Section 11(b)(1) of the
Act and the relevant precedents place upon the non-utility investments of
registered system companies.(107) All additional investments made by RGS in
energy-related companies subsequent to the effective date of the Merger would,
of course, be included in the 15% test.
--------------------------------
(104) 1995 Report at 81-87, 91-92. In the CMP Order, supra note 5, the
Commission granted Energy East's request that the Commission reserve
jurisdiction for nine months, pending completion of the record, over the
retainability of Union Water-Power Company's ownership of certain real estate,
pursuant to Section 11(b) of the Act. Subsequently, on July 12, 2001, the
Commission extended from May 31, 2001, to November 30, 2001, the deadline for
Energy East to comply with its commitment to complete the record on this issue.
On November 27, 2001, in File No. 70-09569, Energy East submitted its
Post-Effective Amendment No. 4 to its Form U-1, seeking Commission authorization
of the retention of certain real estate. That request is currently pending
before the Commission.
(105) Energy East Corporation, et al., HCAR No. 27224 (Aug. 31, 2000).
(106) HCAR No. 27284 (Nov. 27, 2000). See also SCANA Corp., HCAR No. 27133 (Feb.
9, 2000); Conectiv, Inc., HCAR No. 26832 (Feb. 25, 1998).
(107) Id.
51
This filing is also subject to Rules 53 and 54.(108) Under Rule 53(a), the
Commission shall not make certain specified findings under Sections 7 and 12 in
connection with a proposal by a holding company to issue securities for the
purpose of financing the acquisition of an EWG, or to guaranty the securities of
an EWG, if each of the conditions in paragraphs (a)(1) through (a)(4) thereof
are met, provided that none of the conditions specified in paragraphs (b)(1)
through ((b)(3) of Rule 53 exists. Rule 54 provides that the Commission shall
not consider the effect of the capitalization or earnings of subsidiaries of a
registered holding company that are EWGs or FUCOs in determining whether to
approve other transactions if Rule 53(a), (b) and (c) are satisfied. These
standards are met here.
First, Rule 53(a)(1) limits a registered holding company's financing of
investments in EWGs if that holding company's "aggregate investment" in EWGs and
FUCOs exceeds 50% of its "consolidated retained earnings." Immediately following
the Merger, Energy East's "aggregate investment" in EWGs and FUCOs will be
approximately $29 million, or approximately 3% of Energy East's "consolidated
retained earnings" at December 31, 2001 (approximately $998 million).
Second, Energy East has complied and will continue to comply with the
record-keeping requirements of Rule 53(a)(2) concerning affiliated EWGs and
FUCOs. Specifically, Energy East will maintain books and records enabling it to
identify investments in and earnings from each EWG and FUCO in which it directly
or indirectly acquires and holds an interest. Energy East will cause each
domestic EWG in which it acquires and holds an interest, and each foreign EWG
and FUCO that is a majority-owned subsidiary, to maintain its books and records
and prepare its financial statements in conformity with U.S. generally accepted
accounting principles ("GAAP"). All of such books and records and financial
statements will be made available to the Commission, in English, upon request.
Third, as required by Rule 53(a)(3), no more than 2% of the employees of
the Energy East Utility Subsidiaries and RG&E will, at any one time, directly or
indirectly, render services to EWGs and FUCOs.
Finally, Energy East states that the provisions of Rule 53(a) are not made
inapplicable to the authorization herein requested by reason of the occurrence
or continuance of any of the circumstances specified in Rule 53(b). Rule 53(c)
is inapplicable by its terms.
D. SECTION 10(F)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an application
is made under this section unless it appears to the satisfaction of the
Commission that such State laws as may apply in respect to such acquisition
have been
--------------------------------
(108) 17 C.F.R. Sec. 250.53 and Sec. 250.54.
52
complied with, except where the Commission finds that compliance with such
State laws would be detrimental to the carrying out of the provisions of
section 11.
As described in Item 4 of this Application/Declaration, and as evidenced by the
petition to the NYPSC requesting authorization to carry out the Merger, and the
NYPSC Order, Energy East intends to comply with all applicable state laws
related to the proposed transaction.
E. POST-MERGER CORPORATE STRUCTURE: INTERMEDIATE HOLDING COMPANY
Section 11(b)(2) of the Act requires the Commission to ensure that "the
corporate structure or continued existence of any company in the holding company
system does not unduly or unnecessarily complicate the structure, or unfairly or
inequitably distribute voting power among security holders, of the holding
company system." Section 11(b)(2) also directs the Commission to require each
registered system company "to take such action as the Commission shall find
necessary in order that such holding company shall cease to be a holding company
with respect to each of its subsidiary companies which itself has a subsidiary
company which is a holding company." Section 11(b)(2) was directed at abuses
facilitated by the pyramiding of holding company groups that involved the
diffusion of control and creation of different classes of debt or stock with
unequal voting rights.(109)
In this Application/Declaration, Energy East proposes to retain RGS as a
direct subsidiary of Energy East. RGS would own all of the voting securities of
NYSEG and RG&E, Energy East's two New York utilities, as well as the non-utility
subsidiaries currently owned by RGS.(110) The continued existence of RGS as an
intermediate holding company will not unduly complicate Energy East's capital
structure or implicate the abuses that Section 11(b)(2) of the Act was intended
to prevent. Energy East management believes that providing a corporate
organization that puts the New York utility operations under one corporate roof
will provide for management focus on the issues that are unique to that state,
thus enabling better integration and efficient development of the business. In
addition, their continued existence will preserve certain structural and
financial benefits that have already been achieved by RGS, and will help to
preserve favorable tax attributes that would be lost if such continued existence
were eliminated.(111) Also, as discussed below, the Companies request that the
Commission find that RGS is exempt from regulation as a holding company under
Section 3(a)(1) of the Act, although it will be subject to regulation under the
Act as a subsidiary of a registered holding company.
In its prior approval of Energy East's acquisitions of CMP Group,
Connecticut Energy, and Berkshire Energy, for the same reasons as those set
forth above, the Commission permitted
--------------------------------
(109) See, e.g., National Grid Group plc, HCAR No. 27154 (Mar. 15, 2000)
("National Grid").
(110) These include Energetix, Inc. and RGS Development Corporation. See
Exhibit H-2.
(111) See Memorandum Analyzing Potential Holding Company Tax benefits, filed
confidentially as Exhibit K-1 hereto.
53
Energy East to retain these companies, as well as CTG Resources and Energy East
Enterprises as intermediate holding companies. The Commission found that the
continued existence of these intermediate holding companies will not serve as a
means by which Energy East seeks to diffuse control; rather, they will be
maintained to help Energy East capture economic efficiencies that might
otherwise be lost.(112) Citing its prior holding in National Grid, plc.,(113)
the Commission further found it appropriate to "look through" these intermediate
holding companies for purposes of the analysis under Section 11(b)(2) of the Act
and concluded that it was not necessary to ensure that the corporate structure
of the post-merger system or continued existence of any system company "does not
unduly or unnecessarily complicate the structure of the Energy East system." For
those same reasons, the Companies request that the Commission so find with
respect to the retention of RGS as an intermediate holding company.
The Companies further note that in the Commission's recent decision
approving Exelon Corporation's ("Exelon") acquisition of PECO Energy Company
("PECO"), Exelon requested, among other things, Commission authorization for the
formation of two intermediate holding companies. One, Exelon Ventures Company
("Ventures"), would own Exelon Enterprises Company, LLC ("Enterprises").
Enterprises would hold the non-utility investments of the merging companies, as
well as the voting interests in Exelon Generation Company, LLC ("Genco"), which
would own the generating assets of the merging companies. The other intermediate
holding company, Exelon Energy Delivery Company ("Delivery"), would own all of
the voting securities of PECO and Commonwealth Edison Company ("ComEd"); these
utilities would own only transmission and distribution assets.
The Commission found that the formation of Ventures was necessary to
achieve a simple corporate structure while minimizing federal and state income
effects of combining the nonutility businesses of Unicom and PECO. While there
were no similar tax concerns relating to Delivery, the Commission cited the
"desirability of [applicant's] separating its regulated 'wires' business from
its non-state-regulated utility (Genco) and its nonutility businesses
(Enterprises)"(114) and permitted Exelon to establish Delivery as an
intermediate holding company.
Just as Exelon relied on an intermediate holding company to hold its PECO
and ComEd interests, the Companies similarly have determined that management of
Energy East's New York operations will be accomplished most efficiently by
maintaining RGS as an intermediate holding company over NYSEG and RG&E. The
costs associated with maintaining RGS as an intermediate holding company are
minimal, and it is not contemplated that RGS will have any operational function.
As in Exelon, the Commission should approve the continued existence of RGS.
--------------------------------
(112) Energy East, slip op. at 36.
(113) National Grid, supra.
(114) Exelon Corporation, HCAR No. 35-27256 (Oct. 19, 2000) ("Exelon").
54
Additionally, the Companies seek an order from the Commission under Section
3(a)(1) of the Act granting RGS an exemption from regulation as a holding
company under the Act. RGS now owns all of the outstanding voting securities of
RG&E. Section 3(a)(1) of the Act establishes an exemption from registration as a
holding company for holding companies that are predominantly intrastate in
character and carry on their business substantially in a single state. All of
RG&E's utility business is carried on in the State of New York, the same state
in which NYSEG carries out all of its utility business. At such time as Energy
East transfers all of NYSEG's common stock to RGS, the combined utility
operations will all take place in the State of New York, making the 3(a)(1)
exemption for RGS applicable. Notwithstanding its status as an exempt holding
company pursuant to Section 3(a)(1) of the Act, RGS will be subject to
regulation under the Act as a subsidiary of Energy East, a registered holding
company.
ITEM 4. REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that Energy East
has obtained in connection with the Merger.
A. ANTITRUST
The HSR Act and the rules and regulations thereunder provide that certain
transactions (including the Merger) may not be consummated until certain
information has been submitted to the DOJ and FTC and the specified HSR Act
waiting period requirements have been satisfied. Energy East and RGS have
submitted the necessary Notification and Report Forms and all required
information to the DOJ and FTC, and the waiting period expired at 11:59 p.m. on
October 15, 2001.
If the Merger is not consummated within twelve months after the expiration
of the HSR Act waiting period, Energy East and RGS would be required to submit
new information to the DOJ and the FTC, and a new HSR Act waiting period would
have to expire or be earlier terminated before the Merger could be consummated.
B. FEDERAL POWER ACT
Section 203 of the Federal Power Act as amended provides that no public
utility shall sell or otherwise dispose of its jurisdictional facilities or
directly or indirectly merge or consolidate such facilities with those of any
other person or acquire any security of any other public utility, without first
having obtained authorization from the FERC. Energy East and RGS submitted a
joint application for approval of the Merger to the FERC on May 9, 2001, see
Exhibit D-1, and the FERC approved the Merger on September 26, 2001, see Exhibit
D-2.
C. ATOMIC ENERGY ACT
RG&E holds an NRC non-operating license with respect to its ownership of
the Ginna nuclear plant and its interest in Nine Mile Point Nuclear Plant Unit
No. 2. The Atomic Energy Act currently provides that a license may not be
transferred or in any manner disposed of, directly or indirectly, to any person
unless the NRC finds that such transfer is in accordance with the Atomic Energy
Act and consents to the transfer. RG&E submitted an application for the
55
necessary consent of the NRC, see Exhibit D-5, and the NRC granted its approval
on December 10, 2001. See Exhibit D-6.
D. TELECOMMUNICATIONS ACT
RGS has filed with the FCC for approval of the transfers of certain radio
and microwave licenses. See Exhibit D-7. The FCC has approved these transfers.
See Exhibit D-8.
E. STATE PUBLIC UTILITY REGULATION
NYSEG and RG&E are subject to the jurisdiction of the NYPSC. On March 23,
2001, the Companies filed a petition with the NYPSC requesting approval of the
Merger, a copy of which is included in Exhibit D-3 to this
Application/Declaration. On February 27, 2002, the NYSPC issued an order
approving the Merger. "Order Adopting Provisions of Joint Proposal With
Modifications," Case Nos. 01-M-0404 and 01-E-0359. A copy of this order is
included as Exhibit D-4.
ITEM 5. PROCEDURE
The Commission is respectfully requested to issue and publish the requisite
notice under Rule 23 with respect to the filing of this Application/Declaration
as soon as possible.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Merger. The Division of Investment Management may assist in the preparation of
the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
A-1 Restated Certificate of Incorporation of Energy East filed in the Office of
the Secretary of State of the State of New York on April 23, 1998 (filed as
Exhibit 4.1 to Energy East's Post-effective Amendment No. 1 to Registration
No. 033-54155, and incorporated herein by reference).
A-2 Certificate of Amendment of the Certificate of Incorporation of Energy East
filed in the Office of the Secretary of State of the State of New York on
April 26, 1999 (filed as Exhibit 3.3 to Energy East's Form 10-Q for the
quarter ended March 31, 1999, File No. 1-14766 and incorporated herein by
reference).
A-3 By-Laws of Energy East as amended April 12, 2001, (filed as Exhibit 3-4 to
Energy East's Form 10-Q for the quarter ended March 31, 2001, File No.
1-14766, and incorporated herein by reference).
56
A-4 Amended and Restated Certificate of Incorporation of RGS (filed as Exhibit
3 to the Registration Statement on Form S-4, Registration No. 333-59300,
and incorporated herein by reference).
B-1 Agreement and Plan of Merger between Energy East and RGS (filed as Appendix
A-1 to the Registration Statement on Form S-4, Registration No. 333-59300,
and incorporated herein by reference).
C-1 Registration Statement of Energy East on Form S-4, including Joint Proxy
Statement/Prospectus of Energy East and RGS (filed with the Commission on
April 20, 2001, Registration No. 333-59300, and incorporated herein by
reference).
D-1 Application of Energy East Corporation and RGS to the FERC under Section
203 of the FPA, FERC Docket No. EC01-97, dated May 9, 2001 (previously
filed).
D-2 Order of the FERC in Docket No. EC01-97, dated September 26, 2001
(previously filed).
D-3 Petition of Energy East and RGS, et al. to NYPSC (previously filed).
D-4 NYPSC Order, dated December 10, 2001 (previously filed).
D-5 Application of RGS to the NRC (previously filed).
D-6 NRC Order (previously filed).
D-7 Application of RGS to the FCC for indirect transfer of radio and microwave
licenses relating to certain communications equipment (previously filed).
D-8 FCC Order relating to transfer of radio and microwave licenses (previously
filed).
E-1 Maps for Energy East and RGS: Franchise Areas of Major Utilities in the
northeast; Energy East Electric Franchise Areas (post-Merger) (previously
filed).
E-2 Energy East corporate chart (previously filed).
E-3 RGS corporate chart (previously filed).
E-4 Energy East (post-Merger) corporate chart (previously filed).
E-5 Electric and Natural Gas Statistics (previously filed).
F-1 Preliminary opinion of Huber Lawrence & Abell, counsel to Energy East
(previously filed).
F-2 Past-tense opinion of Huber Lawrence & Abell, counsel to Energy East (to be
filed by amendment).
57
G-1 Fairness Opinion of UBS Warburg LLC (filed as Appendix C-1 to Joint Proxy
Statement/Prospectus included in Registration No. 333-59300, and
incorporated herein by reference).
G-2 Fairness Opinion of Morgan Stanley & Co., Incorporated (filed as Appendix
B-1 to Joint Proxy Statement/Prospectus included in Registration No.
333-59300, and incorporated herein by reference).
H-1 Energy East's Non-Utility Subsidiaries (previously filed).
H-2 Retention of Non-Utility Subsidiaries (filed herewith).
I-1 Proposed Form of Notice (previously filed).
J-1 Analysis of the Economic Impact of a Divestiture of the Gas Operations of
Rochester Gas and Electric Corporation (previously filed).
K-1 Memorandum Analyzing Potential Intermediate Holding Company Tax Benefits
(previously filed confidentially pursuant to Rule 104 of the Act).
B. FINANCIAL STATEMENTS
FS-1 Pre-Merger and pro forma combined condensed balance sheet of Energy East as
of December 31, 2001, and pre-Merger and pro forma combined condensed
statement of income and statement of retained earnings of Energy East for
the twelve months ended December 31, 2001 (to be filed by amendment).
FS-2 Balance sheet of RGS as of December 31, 2001, and statement of income and
statement of retained earnings of RGS for the twelve months ended December
31, 2001, included in the balance sheet, statement of income and statement
of retained earnings of Energy East (previously filed as FS -1).
FS-3 Statements of income and surplus of RGS for the fiscal years ended December
31, 2001, 2000, and 1999 (included in RGS's Form 10-K for the referenced
years and incorporated herein by reference).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Merger neither involves a "major federal action" nor "significantly
affect[s] the quality of the human environment" as those terms are used in
Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4321
et seq. The only federal actions related to the Merger pertain to the
Commission's declaration of the effectiveness of the Joint Proxy
Statement/Prospectus, Energy East's Registration Statement on Form S-4, the
expiration of the applicable waiting period under the HSR Act, approval of the
application filed by Energy East and RGS with the FERC under the Federal Power
Act, approval of the application filed by RGS with the NRC under the Atomic
Energy Act, approval of the applications filed by RGS with the FCC, and this
Commission's approval of this Application/Declaration. Consummation of the
Merger will not result in changes in the operations of the Companies that would
have any impact
58
on the environment. No federal agency is preparing an environmental impact
statement with respect to this matter.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned Companies have duly caused this Amendment No. 4 to Form
U-1 Application/Declaration to be signed on their behalf by the undersigned
thereunto duly authorized.
Respectfully submitted,
----------------------------------
Kenneth M. Jasinski
Executive Vice President and
Chief Financial Officer
Energy East Corporation
Vice President, Secretary and
General Counsel
Eagle Merger Corp.
P.O. Box 12904
Albany, New York 12212-2904
Telephone: (518) 434-3049
/s/ Thomas S. Richards
----------------------------------
Thomas S. Richards
Chairman, President and
Chief Executive Officer
RGS Energy Group, Inc.
89 East Avenue
Rochester, New York 14649-0002
Telephone: (716) 546-2700
June 27, 2002
59
EXHIBIT H-2
Retention of Non-Utility Business
The following is a description of the specific bases under which the
non-utility investments of RGS may be retained in the post-Merger Energy East
holding company system:
A. BROKERING AND MARKETING OF ENERGY COMMODITIES:
The business activities of the following companies are energy-related
activities within the meaning of Rule 58(b)(1)(v), involving "the brokering and
marketing of energy commodities, including but not limited to electricity or
natural or manufactured gas or other combustible fuels." See also Exelon Corp.,
HCAR No. 27256 (Oct. 19, 2000); SEI Holdings, Inc., HCAR No. 26581 (Sept. 26,
1996); Northeast Utilities, HCAR No. 26654 (Aug. 13, 1996): UNITIL Corp., HCAR
No. 26257 (May 31, 1996); New England Electric System, HCAR No. 26520 (May 23,
1996). Accordingly, the following companies are retainable under Section
11(b)(1) of the Act:
1. Energetix, Inc. ("Energetix"), wholly-owned subsidiary of RGS, offers
electricity and natural gas services to retail customers throughout
New York State. Energetix has authorization from the FERC to engage in
sales for resale of electricity at market-based rates,(1) and is a
customer of NYISO. Energetix owns no generation, transmission or
distribution facilities. Energetix also holds a number of direct and
indirect subsidiaries that are either inactive or are engaged in a
variety of non-utility businesses, all of which are retainable as
described elsewhere in this Exhibit.
2. Griffith Oil Company ("Griffith"), a wholly-owned subsidiary of
Energetix, sells propane, heating oil and gasoline to approximately
123,000 customers in New York. Griffith does not own generation,
transmission or distribution facilities. With regard to gasoline
sales, Griffith is a branded distributor/seller, brokering gasoline
through a network of third-party service station dealers. Griffith
also owns, and leases out for operation by third parties, fourteen
service stations at which its branded gasoline is purchased at
wholesale from Griffith by the lessees and then sold to the public.
Rule 58(b)(1)(v) specifically allows the brokering and marketing of
"combustible fuels." While gasoline is not among the fuels
specifically identified in Rule 58, gasoline is a combustible fuel,
and the Commission has, in the past, recognized that gasoline
operations may be related to the utility operations of a holding
company.(2) With regard to Griffith's distribution activities, the
Commission has held as retainable similar distributor
--------------------------------
(1) Rochester Gas & Electric Corp. , 80 F.E.R.C. P. 61,284 (1997).
(2) See, e.g., Central Public Utility Corp., et al., HCAR No. 13970 (April 4,
1959) ("Central PUC") (authorizing retention of Southern Cities Oil Company, a
distributor of oil, gasoline and kerosene). See also Lone Star Gas Corp., 12
S.E.C. 286, 298-99 (1942) (finding gasoline, oil, butane and propane production
related to retainable natural gas production operations). Accord, Pennsylvania
Gas & Electric Corp., et al., HCAR No. 8490 (Sept. 7, 1948).
activities by the non-utility subsidiaries of other public utility
holding companies.(3) The Commission has also approved retention or
acquisition of interest in non-utility subsidiaries that own fueling
facilities.(4) Energy East requests the Commission to reserve its
jurisdiction over the retention of Griffith until September 30, 2002,
by which time Energy East will submit additional information regarding
Griffith's activities and the Commission's precedent relating thereto.
3. Avrimac Corporation ("Avrimac"), a wholly-owned subsidiary of
Griffith, through its subsidiaries (Seimax Gas, Burnwell Gas of Red
Creek, Burnwell Gas of Alden, Burnwell Gas Distributors, Burnwell Gas
of Franklinville, Burnwell Gas of Dansville and Burnwell Gas of
Newark), sells propane and a limited selection of electric and gas
appliances in Western and Central New York. The sale of electric and
gas appliances by Avrimac's Burnwell subsidiaries is a retainable
business pursuant to Rule 58(b)(1)(iv). Seimax Garage Corp., another
Avrimac subsidiary, provides repair services to the Burnwell
Companies' truck fleet. The Commission has authorized the retention of
non-utility subsidiaries providing such services.(5) Energy East
requests the Commission to reserve its jurisdiction over the retention
of Avrimac and Seimax Garage Corp until September 30, 2002, by which
time Energy East will submit additional information regarding these
companies' activities and the Commission's precedent relating thereto.
B. TECHNICAL, OPERATION AND MANAGEMENT SERVICES:
The business activities of the following companies, either directly or
through subsidiaries, are energy-related activities within the meaning of Rule
58(b)(1)(vii), involving "the sale of technical, operational, management, and
other similar kinds of services and expertise, developed in the course of
utility operations in such areas as power plant and transmission system
engineering, development, design and rehabilitation; construction; maintenance
and operation; fuel procurement, delivery and management; and environmental
--------------------------------
(3) See, e.g., Central PUC, supra; KeySpan Corporation, et al., HCAR 27271 (Nov.
7, 2000) (approving retention by registered holding company of Transgas, an
unregulated trucking company providing over-the-road transportation of liquefied
natural gas ("LNG"), propane and other commodities. Transgas is the nation's
largest over-the-road transporter of LNG).
(4) See, e.g., The Columbia Gas System, Inc., HCAR No. 26295 (May 23, 1995)
(authorizing non-utility subsidiary to design, construct, and/or install, own,
and/or operate, and to lease and/or sell natural gas fueling stations); Scana
Corp., HCAR No. 27133 (Feb. 9, 2000) (authorizing the operation of fueling
stations in North Carolina); New Century Energies, Inc., et al., HCAR No. 27116
(Dec. 22, 1999) (authorizing the ownership and operation of compressed natural
gas fueling facilities).
(5) See, e.g., Keyspan Corporation, HCAR No. 27271 (Nov. 7, 2000) (authorizing
retention of subsidiary company carrying out, among other activities, fleet
management and maintenance).
2
licensing, testing and remediation." Accordingly, these interests are retainable
under Section 11(b)(1) of the Act:
1. RGS Development Corporation ("RGS Development"), is an unregulated,
wholly-owned subsidiary of RGS. RGS Development provides energy
systems development and management services. Energy East requests that
the Commission retain jurisdiction over the retention of RGS
Development until September 30, 2002, by which time Energy East will
submit additional information regarding the activities of RGS
Development.
C. NON-UTILITY HOLDING COMPANIES:
In the U-1 Application/Declaration, the Companies have requested
authorization to retain RGS as an exempt intermediate holding company in the
post-Merger Energy East system. Those arguments will not be repeated here.
D. INSURANCE:
The Commission has approved retention of captive insurance companies by
registered holding companies. See, e.g., NiSource Inc., HCAR No. 27263 (Oct.
30, 2000); Exelon Corp., HCAR No. 27256 (Oct. 19, 2000); Connectiv Inc., HCAR
No. 27135 (Feb. 10, 2000). The following company is thus retainable under
Commission precedent:
1. RG&E is a member of the Nuclear Electric Insurance Limited. RG&E's
account balance at Nuclear Electric Insurance Limited as of December
31, 1999 was $44,226,000. While RG&E is a member of this insurance
company, the company's by-laws do not recognize its members as having
an ownership interest in the company.
E. INTERNATIONAL SERVICES:
RGS has an indirect subsidiary that provides energy-related services
outside the United States. While this company would otherwise constitute an
"energy-related company" pursuant to Rule 58, as described in Paragraph A above,
the "activities permitted by [Rule 58] are limited to the United States." See
Rule 58, Exemption of Acquisition By Registered Public Utility Holding Companies
of Securities of Non-utility Companies, HCAR No. 26667, n. 146 (Feb. 14, 1997).
The Commission has nonetheless approved registered holding company ownership of
companies that provide energy-related services on an international basis. See,
e.g., Cinergy Corp., HCAR No. 26662 (Feb. 7, 1997) (approving Cinergy Solutions'
marketing of energy-related services on both a domestic and international
basis); Connectiv, Inc., HCAR No. 26832 (Feb. 25, 1998) (approving retention by
registered holding company of DCI II, Inc., a Virgin Islands corporation and
wholly-owned foreign sales subsidiary involved in equity investments in
leveraged leases). Accordingly, the following company is retainable under
Section 11(b)(1) of the Act:
1. Burnwell Gas Corporation of Canada ("Burnwell"), a wholly-owned
subsidiary of Griffith, located in Stevensville, Ontario, is an entity
through which the various Burnwell subsidiaries purchase propane.
Energy East requests that the Commission reserve jurisdiction over the
retention of Burnwell until September
3
30, 2002, by which time Energy East will submit additional information
regarding Burnwell's activities.
F. INACTIVE COMPANIES:
RGS has the following indirect non-utility subsidiaries that are not
currently active. In the event that post-Merger Energy East seeks to reactivate
any of the inactive companies listed below, Energy East will file a
post-effective amendment seeking authorization to engage in the proposed
activities if such authorization is required under the Act or the rules under
the Act, or, if applicable, inform the Commission of the activation of any of
the inactive companies on Form U-9C-3, or on any other applicable form or
report.
1. New York Nuclear Operating Company LLC ("NYNOC"), a partially-owned
subsidiary of RG&E, is an inactive company that was formed to
investigate the operation of nuclear power plants. RG&E holds a 20.24
percent interest in NYNOC.
2. Moore Brothers, a wholly-owned subsidiary of Griffith, is an inactive
company that was formed to import petroleum products into New Jersey.
3. McKee Road, a wholly-owned subsidiary of Griffith, is an inactive
company that was formed to hold terminal property and other real
property related to utility operations. McKee Road currently holds no
real property.
4. Griffith Energy, a wholly-owned subsidiary of Griffith, is an inactive
broker of natural gas.
5. Sugar Creek Corporation, a wholly-owned subsidiary of Energetix, is an
inactive company that was acquired in conjunction with RGS's 1998
acquisition of Griffith.
4