DF 98-040
NORTHERN UTILITIES, INC.
Merger of Northern Utilities, Inc., NIPSCO Industries, Inc.,
and Northern Indiana Public Service Company
Approval of Merger and Related Transactions
O R D E R N O. 22,983
July 20, 1998
APPEARANCES: LeBoeuf, Lamb, Greene & MacRae by Meabh
Purcell, Esq. and Paul B. Dexter, Esq. for Northern Utilities,
Inc.; Day, Berry & Howard by Robert Knickerbocker, Esq. for
NIPSCO Industries, Inc. and Northern Indiana Public Service
Company; and Eugene F. Sullivan, III, Esq. for the Staff of the
New Hampshire Public Utilities Commission.
I. PROCEDURAL HISTORY
On March 20, 1998, Northern Utilities, Inc. (Northern),
NIPSCO Industries, Inc. (NIPSCO) and Northern Indiana Public
Service Company (Northern Indiana) jointly filed with the New
Hampshire Public Utilities Commission (Commission) a petition for
Approval of a Merger and Related Transactions. The petition
requested permission for NIPSCO or its affiliate, Northern
Indiana, to acquire Northern, or its parent, Bay State Gas
Company, Inc. (Bay State) under two alternative acquisition
plans. The petition specified a preferred and an alternative
plan of merger.
Under the preferred plan of merger, Bay State would
merge into a newly created wholly-owned subsidiary of NIPSCO,
formed for purposes of the merger. Sometime after the merger,
Northern's stock would be transferred from Bay State to NIPSCO
and Northern would operate as a direct subsidiary of NIPSCO. The
preferred merger, however, requires an exemption from the
provisions of the Public Utility Holding Company Act of 1935 by
the Securities and Exchange Commission (SEC).
The alternate merger would have Bay State and Northern
merged into NIPSCO's public utility subsidiary, Northern Indiana.
Subsequently, Northern and Bay State would operate as divisions
of Northern Indiana with no independent corporate identity. Both
the preferred and alternate mergers require the approval of the
Maine and New Hampshire Public Utilities Commissions because
Northern provides service in both States.
On April 9, 1998, the Commission issued an Order of
Notice setting a prehearing conference for April 28, 1998. No
Motions to Intervene were filed; the Office of the Consumer
Advocate (OCA) is a statutorily recognized intervenor. On April
22, 1998, Staff submitted a letter to the Commission stating that
Northern, NIPSCO and Northern Indiana, the Maine Public Utilities
Commission (MPUC), the Maine Public Advocate Office (Public
Advocate) the OCA and Staff had agreed, for purposes of
administrative efficiency, to hold two joint technical sessions
in Portsmouth, New Hampshire to review the essentially identical
petitions filed in Maine and New Hampshire and to allow Northern
to provide any amendments or updates to the filings.
Following the prehearing conference, the Commission
issued Order No. 22,930 (May 13, 1998) approving a procedural
schedule to govern its investigation into the petition. In
accordance with the procedural schedule, the parties and Staff
engaged in formal discovery and the joint technical sessions with
the State of Maine in Portsmouth.
On June 12, 1998, the MPUC issued an order approving
the proposed merger under either the preferred or alternative
structures. In addition, on June 16, 1998, the MPUC submitted a
letter to the SEC supporting the merger and recommending the SEC
grant the necessary exemptions to permit the preferred structure. On June 8, 1998, Northern, NIPSCO, OCA and Staff
entered into a Stipulation and Agreement (Stipulation) resolving
or leaving to subsequent proceedings all of the issues in this
proceeding. The Stipulation was substantially the same as a
Stipulation and Agreement executed among Northern, NIPSCO, the
Maine Public Advocate and the Staff of the MPUC. A hearing on
the merits was held on July 1, 1998 at which the parties
presented the Stipulation and supporting testimony.
II. STIPULATION AND AGREEMENT
Pursuant to the Stipulation, Northern, NIPSCO, OCA and
Staff agreed that the merger is consistent with the public
interest standard of RSA 374:33 under either the Preferred or the
Alternate structures proposed in the March 20, 1998 petition, and
should be approved subject to the following provisions:
1. Commission Jurisdiction. The jurisdiction of the
Commission over Northern's operations will not be changed
under either the Preferred or the Alternate Merger structure
or form of merger.
2. Support Preferred Structure. Northern, NIPSCO, OCA and
Staff agree that the Commission should express its support
for the Preferred Merger structure because it simplifies
accounting for the subsidiary's operations and regulation of
those operations.
3. Alternate Merger. Northern, NIPSCO, OCA and Staff agree
that if the Preferred Merger structure is not possible, the
Alternate Merger structure is in the public good.
4. Recovery of Acquisition Premium. Northern, NIPSCO, OCA and
Staff agree that Northern may request recovery of the
amortization of the acquisition premium in future ratemaking
proceedings to the extent that Northern can demonstrate that
the benefits of the merger to customers equal or exceed the
amount of the premium being sought to be amortized.
5. Capital Structure. Northern, NIPSCO, OCA and Staff agree
that no Party will be bound in any future ratemaking
proceedings to utilize the capital structure of Northern
that results from entries to account for the merger.
III. COMMISSION ANALYSIS
After careful review of the Stipulation and Agreement
and the testimony and exhibits offered at the July 1, 1998
hearing, we find that the Stipulation is reasonable and that the
proposed acquisitions are lawful, proper and in the public
interest. RSA 374:33
Under the public interest standard to be applied by the
Commission where a utility or public utility holding company
seeks to acquire, directly or indirectly, a jurisdictional
utility, the Commission must determine that the proposed
transaction will not harm ratepayers. Grafton County Electric
Light and Power Co. v. State, 77 N.H. 539 (1915); Id., Eastern
Utilities Associates, 76 N.H.P.U.C. 236, 252 (1991); Re Hampton
Water Works Company, Inc., 80 N.H.P.U.C. 468, 473 (1995) and
Cf., Parker-Young Co. v. State, 83 N.H. 551 (1929)(application of
"net benefits" test where there are competing offers to acquire).
As was noted above, there are two different acquisition
scenarios proposed in this petition, the preferred and alternate
plans. The primary difference between the preferred and
alternate plans is that Northern remains a corporate entity with
its own Board of Directors under the preferred merger.
In testimony, NIPSCO/Northern Indiana represented that if the
alternate merger was required by the SEC, an Advisory Board could
be established for Northern to provide local input into decisions
affecting Northern's customers.
At this time, we express our support and preference for
the "preferred acquisition scenario" because it provides for the
continued corporate existence of Northern and the attendant
corporate formalities that we believe will provide greater
protection or representation of Northern's interests in the new
corporate structure, such as a corporate Board of Directors.
The preferred merger would also impose a legal requirement that
Northern maintain separate books and records which will
facilitate our continued review and oversight of Northern and its
operations in New Hampshire.
In order to ensure that there is no harm to Northern
ratepayers, we direct that should the alternate merger be
implemented, such an Advisory Board be established. The Advisory
Board should be comprised of members involved in the New
Hampshire community and it should have real authority to ensure
that New Hampshire customers receive the full benefits of this
merger and that the Northern Division and its customers'
interests are not neglected in the merged company. We expect
more than token representation of Northern's interests on either
the Board of Directors or the Advisory Board.
Under either of the acquisition plans, there is no
evidence that ratepayers will be harmed. Under both the
preferred and alternative acquisition scenarios Northern's
operations are to remain unchanged or will improve as the new
Company seeks to expand its area of service. Moreover, separate
books and records will be maintained under both the preferred and
alternate acquisition scenarios, facilitating the Commission's
continued review and oversight of Northern and its operations in
New Hampshire.
We note, however, that the inclusion of the acquisition
premium in ratebase and the effect of the acquisition premium on
the capital structure of Northern would in all likelihood lead us
to the conclusion that Northern ratepayers would be harmed by the
acquisition without the conditions contained in the Stipulation.
Those conditions require Northern to substantiate any savings to
ratepayers that have resulted from the merger before Northern may
include any part of the acquisition premium in ratebase for
ratemaking purposes. The same condition applies to the effect of
the acquisition premium on the capital structure of the resultant
entity.
For the purpose of SEC approvals, we note that we have
the necessary authority and responsibility to protect Northern's
New Hampshire ratepayers and the preferred merger will facilitate
our continued exercise of that authority. Accordingly, we will
notify the SEC of our support for the preferred merger for
consideration in its review of NIPSCO, Inc.'s merger application.
As noted above, the provisions in the Stipulation which
defer consideration of the capital structure and ratemaking
issues for a subsequent proceeding are appropriate. Northern
will have the right to request recovery of an acquisition premium
in a future proceeding to the extent it can substantiate the
reasonableness of that action, just as all parties are free to
argue in support of or opposition to such recovery as they see
fit. Likewise, in a future rate recovery proceeding, any party
may argue that a hypothetical capital structure may be more
appropriate in determining a rate of return. We will consider
such requests and related arguments when filed.
Before such a proceeding, however, Northern shall file
its annual reports in a form that allows for an analysis of its
earnings with and without the effects of the acquisition premium,
both from the perspective of ratebase and the weighted cost of
capital.
Based upon the foregoing, it is hereby
ORDERED, that the Stipulation and Agreement is APPROVED
subject to the forgoing analysis; and it is
FURTHER ORDERED, that this Order, which indicates our
support for the preferred merger, shall be submitted to the
Securities and Exchange Commission for consideration in its
review of NIPSCO, Inc.'s merger application; and it is
FURTHER ORDERED, that if the alternate merger is
implemented, a Northern Advisory Board shall be established.
By order of the Public Utilities Commission of New
Hampshire this twentieth day of July, 1998.
Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger
Chairman Commissioner Commissioner
Attested by:
Thomas B. Getz
Executive Director and Secretary