The Commonwealth of Massachusetts
DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY
November 5, 1998
D.T.E. 98-61/87
Petition of The Berkshire Gas Company and Berkshire Gas Mergeco Gas Company,
Inc. for approvals related to a reorganization merger to establish a Holding
Company pursuant to G.L. c. 164, [Section Sign] 96.
Petition of The Berkshire Gas Company to the Department of
Telecommunications and Energy pursuant to G.L. c. 164, [Section Sign] 14 for
approval and authorization to issue and sell not more than 200,000
additional shares of common stock.
APPEARANCES: James M. Avery, Esq.
Emmett E. Lyne, Esq.
K. Jill Rizzotti, Esq.
Rich, May, Bilodeau & Flaherty, P.C.
The Old South Building
294 Washington Street
Boston, MA 02108-4675
FOR: THE BERKSHIRE GAS COMPANY and
BERKSHIRE GAS MERGECO GAS COMPANY, INC.
Petitioners
Scott Harshbarger, Attorney General
By: James W. Stetson
Assistant Attorney General
200 Portland Street
Boston, Massachusetts 02114
Intervenor
Timothy A. Clark, General Counsel
Colonial Gas Company
40 Market Street
Lowell, MA 01852
-and-
Jeffrey F. Jones, Esq.
Constantine Athanas, Esq.
Palmer & Dodge, LLP
One Beacon Street
Boston, MA 02108
FOR: COLONIAL GAS COMPANY
Limited Participant
TABLE OF CONTENTS
I. INTRODUCTION Page 1
II. PROCEDURAL HISTORY Page 2
III. COMPANIES' PROPOSAL Page 2
A. Merger Page 2
B. DRIP Petition Page 5
C. Exemption Request Page 6
IV. CONSISTENCY OF HOLDING COMPANY PROPOSAL WITH THE
PUBLIC INTEREST Page 6
A. Introduction Page 6
B. Standard of Review Page 7
C. Specific Considerations Page 9
1. Impact on Rates Page 9
2. Impact on Quality of Service Page 11
3. Impact on Competition Page 12
4. The Financial Integrity of the
Post-Merger Entity Page 13
5. Societal Costs Page 14
6. Impact on Economic Development Page 14
7. Alternatives to the Merger Page 15
D. Conclusion Page 16
V. CONDITIONS OF APPROVAL Page 16
A. Dividend Policy Page 16
1. Introduction Page 16
2. Analysis and Findings Page 17
B. Cost of Capital Page 18
C. Asset Transfers Page 19
1. Description of Company Proposal Page 19
2. Analysis and Findings Page 19
VI. MANAGEMENT AGREEMENT Page 20
A. Description Page 20
B. Analysis and Findings Page 22
VII. TAX SHARING AGREEMENT Page 24
A. Description Page 24
B. Analysis and Findings Page 24
VIII. STOCK ISSUANCE Page 26
A. Standard of Review Page 26
B. Mergeco Page 28
1. Description of Proposal Page 28
2. Analysis and Findings Page 28
C. Dividend Reinvestment Plan Stock Issuance Page 29
1. Description of the Proposed Financing Page 29
2. Capital Structure of the Company Page 31
3. Analysis and Findings Page 32
IX. EXEMPTION FROM SEPARATION REQUIREMENTS OF THE
STANDARDS OF CONDUCT Page 33
A. Introduction Page 33
B. Analysis and Findings Page 34
X. ORDER Page 36
I. INTRODUCTION
On June 23, 1998, Berkshire Gas Company ("Berkshire" or "Company") and
Berkshire Gas Mergeco Gas Company, Inc. ("Mergeco") (together, the
"Companies") filed a petition for approval ("Restructuring Petition")
pursuant to G.L. c. 164, [Section Sign] 96, of an Agreement and Plan of
Merger ("Reorganization Plan") with the Department of Telecommunications and
Energy ("Department"). In its Reorganization Plan, Berkshire proposes to
create a holding company, Berkshire Energy Resources ("BER"), to directly
own the common stock of Berkshire. The Companies have requested Department
approval of their Reorganization Plan.
On August 14, 1998, Berkshire also requested Department approval and
authorization, pursuant to G.L. 164, [Section Sign] 14, for the issuance and
sale of an additional 200,000 shares of common stock, $2.50 par value,
pursuant to Berkshire's Share Owner Dividend Reinvestment and Stock Purchase
Plan (the "DRIP") ("DRIP Petition"). The Department granted the Companies'
motion to review these petitions on a consolidated basis.
On October 7, 1998, Berkshire filed a request pursuant to 220 C.M.R.
[Section Sign] 12.03(17) for a limited exemption from the separation
requirements of 220 C.M.R. [Section Sign] 12.03(15) ("Exemption Request"),
with respect to certain employees who will serve in management positions for
Berkshire, and the non-regulated affiliates of Berkshire.
This Order approves the Companies' petitions to (1) create a holding
company to directly hold the common stock of Berkshire and (2) issue and
sell an additional 200,000 shares of common stock, $2.50 par value, pursuant
to Berkshire's DRIP. This Order denies, without prejudice, the Companies'
Exemption Request. This Order also sets forth certain ratepayer
protections. The Companies must implement the protections as a condition of
their corporate restructuring, in order to safeguard the public interest.
II. PROCEDURAL HISTORY
On July 30, 1998, the Department held a public hearing in its offices
regarding the Restructuring Petition, docketed as D.T.E. 98-61. The
Department granted limited participant status to Colonial Gas Company
("Colonial"). The Attorney General intervened pursuant to G.L. c. 12,
[Section Sign] 11E, on August 14, 1998.
On September 29, 1998, the Department held a public hearing in its
offices regarding the DRIP Petition, docketed as D.T.E. 98-87. On the same
day, the Department held a combined evidentiary hearing in D.T.E. 98-61 and
D.T.E. 98-87. The Companies presented two witnesses: Michael J. Marrone,
vice president, treasurer and chief financial officer of Berkshire; and
John J. Reed, president of Reed Consulting Group. The evidentiary record
consists of 53 exhibits. On October 8, 1998, the Companies filed a brief in
support of their petitions.
III. COMPANIES' PROPOSAL
A. Merger
Currently, Berkshire is an investor-owned public utility that serves
19 communities in western Massachusetts. Berkshire also operates a retail
propane business as a division and has entered into a strategic marketing
alliance with Conectiv/CNE, LLC, a joint venture formed by a subsidiary of
Connecticut Energy Corporation and a subsidiary of Delmarva Power & Light
Company.
The Companies request Department approval of their Reorganization Plan
to create a holding company that will directly hold the common stock of
Berkshire (Exh. BG-MJM-1, at 2). Pursuant to the Reorganization Plan,
Berkshire has formed BER,(1) a Massachusetts business trust, and Mergeco,
BER's wholly-owned subsidiary and a Massachusetts gas utility corporation
that has no present business or assets of its own (id. at 11). Under the
Reorganization Plan, Berkshire will become a subsidiary of BER through the
merger of Berkshire with and into Mergeco, with Berkshire being the
surviving entity (id. at 12). The Companies assert that their proposal is
essentially identical to the corporate restructuring approved by the
Department in Boston Edison Company, D.P.U./D.T.E. 97-63 (1998) (id. at 2).
___________________
(1) By Order dated January 30, 1998, the Department approved the
investment in BER of such amounts required to submit the
Reorganization Plan to Berkshire's shareholders and regulatory
authorities having jurisdiction. The Berkshire Gas Company, D.T.E.
97-107 (1998).
The Companies represent that the following events will occur
simultaneously at the time of the merger: (1) each share of Mergeco common
stock issued and outstanding immediately prior to the merger will be changed
and converted into one share of Berkshire common stock, $2.50 par value; (2)
each share of Berkshire's common stock issued and outstanding immediately
prior to the merger will be changed and converted into one common share of
BER; and (3) each share of BER issued and outstanding immediately prior to
the merger will be cancelled (id. at 12). The Companies further represent
that Berkshire cumulative preferred stock will not be affected by the merger
(id. at 15). The Companies also claim that their long-term debt securities,
assuming the negotiation of acceptable consents or amendments, will be
similarly unaffected (id.). The Companies state that, as a result of the
merger, (1) Berkshire will become a wholly-owned subsidiary of BER, (2) all
of BER's common shares outstanding immediately after the merger will be
owned by the holders of Berkshire's common stock outstanding immediately
prior to the merger, and (3) Mergeco will cease to exist as a separate legal
entity (id.). The Companies explain that the retail propane operations and
energy marketing activities of Berkshire, currently performed through
divisions of Berkshire, will be transferred to new subsidiaries after the
merger (Exh. BG-MJM-1, at 5).
In its Proxy Statement/Prospectus dated March 17, 1998, Berkshire
proposes the following corporate structure (Exh. BG-MJM-5, at 22-23). The
Companies state that the current board of directors of Berkshire will become
the board of trustees of BER (id. at 22). The Company also reports that
Berkshire's current officers will continue to serve as officers for
Berkshire and also will serve in comparable senior positions for non-
regulated affiliates of Berkshire (id. at 23). The Companies report that
Berkshire also will perform certain services for its affiliates pursuant to
the terms of a Management Services Agreement ("Management Agreement") (Exhs.
BG-MJM-1, at 13; BG-MJM-6, at 1; RR-DTE-4(a)).
B. DRIP Petition
Berkshire proposes to issue and sell from time to time up to 200,000
additional shares of common stock through the Company's DRIP (DRIP Petition
at 2). Berkshire explains that the DRIP allows the common stock cash
dividends to be automatically reinvested in additional, original issue
shares of common stock of the Company (id. at 3). Berkshire notes that
participation in the DRIP is optional and is available to holders of ten or
more shares of common stock, or to any Berkshire employee who owns one or
more shares of common stock (id.).
Berkshire seeks approval of the DRIP Petition concurrently with the
Restructuring Petition because Berkshire anticipates that the merger
probably will not be completed before the end of 1998 and that it will not
have an adequate number of shares available for issuance pursuant to the
DRIP for the interim period prior to the proposed corporate restructuring
(id. at 4; Exh. BG-MJM-10, at 4). Therefore, Berkshire determined that it
was necessary to increase the number of shares authorized for issuance
pursuant to the DRIP rather than suspend the DRIP pending completion of the
merger (DRIP Petition at 4; Exh. BG-MJM-10, at 4).
Berkshire states that, upon approval of the Reorganization Plan by the
Department, the DRIP will be assumed by BER (Exh. BG-MJM-10, at 3-4).
Berkshire reports that participants in the DRIP will continue to be able to
invest their dividends in BER's common shares, as well as purchase
additional common shares and make optional payments to acquire such shares
(id. at 4). The Company represents that it will take appropriate action to
achieve compliance with applicable federal securities laws upon approval of
the DRIP Petition (id. at 6-7).
C. Exemption Request
During the course of the evidentiary hearing, the Department raised
the issue of whether the overlap of management between Berkshire's regulated
and non-regulated entities was consonant with the Department's Standards of
Conduct, 220 C.M.R [Section Sign] 12.00, et seq. (Tr. at 37-45).
Therefore, Berkshire filed the Exemption Request with respect to certain
senior executives that would serve Berkshire as well as its non-regulated
affiliates, including its competitive energy affiliate (id. at 46).
IV. CONSISTENCY OF HOLDING COMPANY PROPOSAL WITH THE PUBLIC INTEREST
A. Introduction
Through the merger, Berkshire would be transformed from a publicly
traded stock corporation to a corporation whose equity would be entirely
owned by a holding company. Of the commonwealth's ten investor-owned local
gas distribution companies ("LDCs"),(2) five are currently affiliates of
holding companies(3) (Exh. BG-JR-1, at 4). In addition to Berkshire, two of
the other remaining LDCs that are not affiliates of holding companies, Bay
State Gas Company ("Bay State") and Colonial, are currently involved in
transactions that, if completed, will result in their becoming affiliates of
holding companies(4) (id. at 4). It should be noted that, with the
Department's Order in D.P.U./D.T.E. 97-63, all investor-owned electric
utility companies in Massachusetts now operate within a holding company
structure (id. at 3).
___________________
(2) The ten LDCs are: Berkshire, Bay State Gas Company, Blackstone Gas
Company, Boston Gas Company, Colonial, Commonwealth Gas Company, Essex
County Gas Company, Fall River Gas Company, North Attleboro Gas
Company and Unitil/Fitchburg Gas and Electric Company.
(3) The five LDCs that already are affiliates of holding companies are:
Boston Gas Company, Commonwealth Gas Company, Unitil/Fitchburg Gas and
Electric Company, North Attleboro Gas Company, and Essex County Gas
Company (Exh. BG-JR-1, at 4).
(4) The Department is currently reviewing these transactions in
proceedings docketed as D.T.E. 98-31 for Bay State and D.T.E. 98-71
for Colonial.
B. Standard of Review
The Department's authority to review and approve mergers and
acquisitions is found at G.L. c. 164, [Section Sign] 96, which, as a
condition for approval, requires the Department to find that mergers and
acquisitions are "consistent with the public interest." In Boston Edison
Company, D.P.U. 850, at 6-8 (1983), the Department construed [Section Sign]
96's standard of consistency with the public interest as requiring a
balancing of the costs and benefits attendant on any proposed merger or
acquisition. The Department stated that the core of the consistency
standard was "avoidance of harm to the public." D.P.U. 850, at 5.
Therefore, under the terms of D.P.U. 850, a proposed merger or acquisition
is allowed to go forward upon a finding by the Department that the public
interest would be at least as well served by approval of a proposal as by
its denial. D.P.U. 850, at 5-8; Eastern-Essex Acquisition, D.T.E. 98-27, at
8 (1998).(5) The Department has reaffirmed that it would consider the
potential gains and losses of a proposed merger to determine whether the
proposed transaction satisfies the [Section Sign] 96 standard. D.T.E. 98-
27, at 8; D.P.U./D.T.E. 97-63, at 7; Mergers and Acquisitions, D.T.E. 93-
167-A at 6, 7, 9 (1994). The public interest standard, as elucidated in
D.P.U. 850, must be understood as a "no net harm," rather than a "net
benefit" test.(6) D.T.E. 98-27, at 8. The Department considers the special
factors of an individual proposal to determine whether it is consistent with
the public interest. Id.; D.P.U./D.T.E. 97-63, at 7; Mergers and
Acquisitions at 7-9. To meet this standard, costs or disadvantages of a
proposed merger must be accompanied by offsetting benefits that warrant
their allowance. D.T.E. 98-27, at 8; D.P.U./D.T.E. 97-63, at 7; D.T.E. 93-
167-A at 18-19.
___________________
(5) The Department issued its Order in Eastern-Essex Acquisition, D.T.E.
98-27 (1998) on September 17, 1998, which was after hearings were
completed and briefs had been filed in this case.
(6) The Department notes that a finding that a proposed merger or
acquisition would probably yield a net benefit does not mean that such
a transaction must yield a net benefit to satisfy G.L. c. 164,
[Section Sign] 96 and Boston Edison, D.P.U. 850.
Various factors may be considered in determining whether a proposed
merger or acquisition is consistent with the public interest pursuant to
G.L. c. 164, [Section Sign] 96. These factors were set forth in Mergers and
Acquisitions: (1) effect on rates; (2) effect on the quality of service;
(3) resulting net savings; (4) effect on competition; (5) financial
integrity of the post-merger entity; (6) fairness of the distribution of
resulting benefits between shareholders and ratepayers; (7) societal costs,
such as job loss; (8) effect on economic development; and (9) alternatives
to the merger or acquisition. D.T.E. 98-27, at 8-9; D.P.U./D.T.E. 97-63, at
7-8; D.T.E. 93-167-A at 7-9. This list is illustrative and not exhaustive,
and the Department may consider other factors when evaluating a [Section
Sign] 96 proposal. D.T.E. 98-27, at 9; D.T.E. 93-167-A at 9.
C. Specific Considerations
As described above, the Department has developed a nine-factor test to
examine the benefits and costs of a proposed merger of utility companies.
D.P.U. 93-167-A at 7-9. Because the standard of review was designed to
apply to mergers between operating companies or acquisitions by one company
of another, not all of the factors are relevant to or determinative of the
issues raised by this holding company proposal. In considering the special
circumstances of this proposal, the Department's analysis focuses on the
following factors: (1) impact on rates; (2) impact on the quality of
service; (3) impact on competition; (4) the financial integrity of the post-
merger entity; (5) societal costs; (6) impact on economic development; and
(7) alternatives to the merger or acquisition. D.P.U./D.T.E. 97-63, at 12-
13. These are the factors that we use in our analysis. However, the result
of the analysis on any single factor is not controlling. Our review and
judgment under G.L. c. 164, [Section Sign] 96, and in D.P. U. 850, is of the
proposal taken as a whole and of the consistency of the proposal with the
public interest.
1. Impact on Rates
Berkshire states that it is not proposing any changes in its rates
(Ex. BG-MJM-1, at 7; Tr. at 20). The Department may find that a proposal is
consistent with the public interest if, upon consideration of its
significant aspects viewed as a whole, the public interest is at least as
well served by approval of the proposal as by its denial. D.P.U. 850, at 8.
Thus, the Companies need not demonstrate that Berkshire's rates will
decrease upon the formation of the holding company.
The formation of a holding company, assuming the adoption of
appropriate safeguards by the Department, likely will have no adverse impact
on Berkshire's rates because the Company will continue to operate and be
regulated in virtually the same manner as under the current structure (Tr.
at 20). The Companies' proposal is not a merger whereby two entities seek
enhanced efficiency through the elimination of duplicate services and
departments. In the instant case, the regulated business of Berkshire will
operate in the same manner before and after the formation of the holding
company. The Company's current rates are established pursuant to the terms
of the Department's Order in The Berkshire Gas Company, D.P.U. 92-10 (1993),
and, more recently, with respect to the unbundling of such rates, a
settlement approved by the Department in The Berkshire Gas Company, D.T.E.
98-65 (1998). Any future adjustments to the Company's rates will be subject
to the same regulatory scrutiny applied today. See G.L. c. 164, [Section
Sign] 94. Therefore, the public will be held harmless in accordance with
the standard set forth in D.P.U. 850, at 8, i.e., that the public interest
is at least as well served by approval of the proposal as by its denial. In
addition, as discussed below, the Department will ensure through appropriate
safeguards that ratepayers will not pay increased rates due to cross-
subsidization or excessive dividend payments. The Department notes that our
ability to ensure compliance with these safeguards is, in fact, enhanced
under a holding company structure.
2. Impact on Quality of Service
Berkshire claims that the regulated utility operations will be central
to the proposed holding company and that the Company will continue its
commitment to customer service and relevant operating and safety
requirements (Exh. BG-MJM-1, at 8). Berkshire claims that the quality of
service will not be negatively affected and that, if there is any effect, it
will be to encourage Berkshire to maintain its high standards (id.; Tr. at
20).
The Company has stated that its desire to enter other business
ventures is driving, at least in part, the present proposal to restructure
its corporate organization (Exh. BG-MJM-1, at 6). The Department recognizes
that as a regulated utility enters new areas of unregulated business, the
potential exists for the diversion of the regulated utility's resources to
the unregulated business, resulting in degradation of service quality.
Likewise, potential exists that the less profitable resources of an
affiliated unregulated company may be transferred to the regulated business,
leading to poor service quality in the regulated business. Berkshire notes
three incentives to maintain high standards in its service quality:
continued rate regulation, revised service quality standards if it withdraws
from the merchant function and is subject to the requirements of
performance-based rates, and potential to increase efficiency as a result of
a more appropriate corporate structure (Exh. BG-MJM-1, at 8). In the
present situation, the Department determines that, pursuant to G.L. 164
[Section Sign] 93, its authority to investigate service quality problems
pursuant to a petition from elected officials or groups of twenty or more
affected customers provides adequate protection from degradation in the
quality of service of Berkshire. In addition, the Department expects that
in the future, the quality of service monitoring under performance-based
ratemaking will protect customers from a degradation in the quality of
service. Therefore, the Department concludes that the formation of a
holding company need not, and likely will not, have an adverse effect on
quality of service.
3. Impact on Competition
Berkshire states that few competitors are currently in western
Massachusetts and that few competitors are likely to enter the region's
natural gas market initially (Exh. BG-MJM-1, at 9). The Company states that
the proposed merger will have a positive effect on competition by opening
this regional market to greater competition and helping to develop the
region's economy (id.; Exh. DTE-1-4; Tr. at 21-22). The Department has
encouraged a holding company corporate structure to maintain clear lines
between and among competitive and non-competitive business ventures and to
encourage the growth of competition. D.P.U. 96-100, at 74-79; D.P.U./D.T.E.
97-63, at 12; D.T.E. 97-24, at 24-25. Further, the Companies state that the
proposed corporate separation of Berkshire's energy marketing operation in a
marketing affiliate separated from its regulated business will eliminate
significant barriers to entry in the natural gas market (Exh. BG-MJM-1, at
4). The Department finds that the implementation of the holding company
structure most likely will have a positive effect upon competition in the
natural gas industry by removing potential barriers to market entry for
Berkshire, and by separating Berkshire's regulated and unregulated
operations.
4. The Financial Integrity of the Post-Merger Entity
The major difference between the current structure of Berkshire and
the proposed holding company structure will be the accounting treatment of
the utility. The Department recognizes that there can be additional risks
to ratepayers upon the formation of the holding company. Diversification,
without appropriate ratepayer protections, could result in an increase to
the overall risk profile of Berkshire. The Department finds that the risks
of increased diversification into energy and other related businesses should
be borne by the shareholders, not ratepayers. D.P.U./D.T.E. 97-63, at 18.
Furthermore, Berkshire has agreed to be governed by safeguards comparable to
those imposed with respect to BECo's corporate restructuring to establish a
holding company corporate structure (Exhs. DTE-1-19; DTE-1-20).(7) Thus,
the formation of a holding company will not affect the financial stability
of the post-merger utility as long as appropriate safeguards are established
to protect ratepayers from the risks inherent in increased diversification.
These safeguards are discussed in Section V, below.
___________________
(7) The safeguards include (1) monitoring of dividend payments by
Berkshire to BER, (2) determining the cost of capital on a stand-alone
basis, (3) pricing of the transfer of rate-base assets consistent with
the Standards of Conduct, and (4) maintaining a log of all
transactions with affiliated companies.
5. Societal Costs
The Department's analysis of societal costs focuses on the public
benefits and costs that may be caused by the Companies' proposal, and
specifically looks at the impact on employment. D.P.U. 93-167-A, at 8;
D.P.U./D.T.E. 97-63, at 19. According to the Companies, although a merger
or acquisition typically results in some loss of jobs where two companies
possess redundant capacities, the proposed formation of a holding company
may create employment opportunities (Exh. BG-MJM-1, at 9; Tr. at 22-23). In
fact, Berkshire notes a modest increase in its own hiring as a result of the
Company's restructuring efforts (Exh. DTE-1-5; Tr. at 22-23). Accordingly,
we find that the Reorganization Plan will impose no societal costs and may,
in fact, help create jobs in western Massachusetts.
6. Impact on Economic Development
The Companies claim that one of the most significant public benefits
of their holding company proposal is its impact on economic development in
western Massachusetts (Exh. BG-MJM-1, at 10). The Companies assert that the
anticipated increase in competition in the energy market will enhance
economic development in the area (id. at 10).
Although forecasts of economic development resulting from any action
can never be certain, the Department recognizes that economic development is
affected by, among other things, changes in employment opportunities, levels
of wages, and the price and quality of goods and services offered. The
Department has determined, in Section IV(C)(5), above, that the Companies'
proposal is not likely to have a negative effect on employment. Moreover,
the Department has determined that the quality of the Companies' service
would not suffer as a result of implementing this proposal. Given these
findings, the Department determines that there likely would be no negative
effect on economic development as a result of the formation of the holding
company.
7. Alternatives to the Merger
When a utility requests approval for a traditional merger or
acquisition, the Department may review alternatives, including other
acquisition or merger partners, creation of affiliates and reorganization of
existing assets. Berkshire considered "several" potential corporate
structures when analyzing how to respond to the changing regulatory
environment (Exhs. BG-MJM-1, at 10; DTE-1-6). Among these were (1)
maintaining its existing corporate structure and (2) establishing separate
corporate subsidiaries wholly owned by Berkshire. The Company states that
the first alternative did not provide the degree of separation consistent
with the principles articulated in the Department's Standards of Conduct,
220 C.M.R. [Section Sign] 12.00 et. seq. (Exh. DTE-1-6). An evaluation of
the second alternative led the Company to conclude that it would frustrate
its ability to participate in the market (Exh. DTE-1-6). The Companies
contend that formation of a holding company would allow them to adjust to
and compete in the evolving energy marketplace (id.).
The Department finds that the other alternatives to the holding
company structure would not provide the complete separation that the
Department requires in regulating utility versus non-utility businesses and
would frustrate Berkshire's ability to pursue opportunities in competitive
markets and. With the holding company structure, BER will be able to
participate in the competitive energy market through Berkshire Energy
Marketing, thereby increasing the number of participants in the energy
services market. Therefore, the Department finds the corporate
restructuring is in the public interest.
D. Conclusion
Based on the foregoing analyses, the Department determines that the
holding company structure is appropriate for the Company. However, the
Department has several specific concerns given the potential for abuse
inherent in this structure that the Department addresses by the imposition
of certain conditions on the Companies' formation of a holding company. We
find that, with these appropriate conditions, the public interest standard
of [Section Sign] 96 is met by the approval of the Companies' proposal. We
address these conditions in Section V, below.
V. CONDITIONS OF APPROVAL
A. Dividend Policy
1. Introduction
Under the current corporate structure, Berkshire pays dividends to its
shareholders and may not, without Department approval, reinvest its earnings
in its unregulated businesses that might be established as separate
corporate entities. Berkshire is similarly limited in its ability to make
investments in joint ventures with third parties in competitive markets.
However, under the proposed holding company structure, Berkshire would pay
dividends to BER, which may choose to (1) invest some or all of the dividend
income received from Berkshire into its non-utility subsidiaries without
Department approval, (2) retain the income, or (3) disburse the income to
its own shareholders as dividends (Companies Brief at 22). The issue is
whether the Department should condition the approval of the holding company
proposal on the Company's adopting a particular dividend policy.
2. Analysis and Findings
The Department has previously analyzed the issues involved in a
dividend policy for corporate restructuring resulting in a holding company
and found that restrictions on dividend payments are necessary only under
extraordinary circumstances, for example, when the financial health of the
company is in question. D.P.U./D.T.E. 97-63, at 25-27. A review of the
Company's Annual Report to Shareholders for 1997 shows that over the last
ten years, Berkshire has had reasonable earnings and a reasonable dividend
payout policy, and that the Company has maintained a reasonable level of
equity in its total capitalization (Exh. BG-MJM-11, Annual Report at 14-15).
The Company's financial health is not in jeopardy and there is no evidence
that the Company's actions with respect to the dividend policy would harm
Berkshire. Therefore, in this case, we find restrictions on Berkshire's
dividend payments are not necessary.
The Department recognized, in D.T.E. 97-63, the concerns about the
overlap of the officers of the holding company and the regulated utility
raised by intervenors in that case. D.T.E. 97-63, at 26. This overlap does
not diminish the obligation of the officers of Berkshire to give first
priority to the capital needs of the regulated utility and to protect its
financial integrity. The Department will monitor the dividend payments of
Berkshire and BER, and therefore directs the Company to report the level of
payments to the Department whenever dividends are declared. In fact,
Berkshire has already indicated its willingness to comply with such
directives (Exh. DTE-1-19). If a pattern of inappropriate levels of
dividend payments threatens to emerge, the Department will investigate and
could impose restrictions at that time, if necessary. The Department also
finds that restrictions on dividend payments unique to Berkshire are not
necessary at this time.
B. Cost of Capital
Berkshire proposes that its cost of capital continue to be established
on a "stand-alone" basis after the formation of the holding company (Exh.
DTE-1-2). The Company proposes to continue the rate-setting approach that
it has followed in determining its cost of capital (id.). The utility's
own capital structure will be used to calculate the weighted average cost of
capital and the utility's embedded cost of long-term debt and preferred
stock will be employed with the capital structure (id.). The cost of equity
will continue to be developed from a proxy group of gas distribution
companies (id.).
The Company's proposal for determining the cost of capital is
consistent with the Department's policy of determining an operating
utility's cost of capital on a stand-alone basis, and not on the basis of
the holding company's cost of capital. Therefore, the Companies' proposal
is approved.
C. Asset Transfers
1. Description of Company Proposal
Under the Companies' proposal, they will not initially transfer any
rate-base assets to any new unregulated entity (Exh. BG-MJM-1, at 8). The
Company plans to transfer certain facilities used by its retail propane
operation to a new subsidiary of BER, Berkshire Propane, Inc. (id.).
Berkshire claims that these assets have never been rate-base assets and
that, therefore, this transfer would have no effect on Berkshire's cost of
service (id.). Berkshire states that these assets will be transferred to
the propane subsidiary at net book value (id.).
Berkshire proposes that all transfers of rate-base assets will be made
at the higher of net book value or fair market value in accordance with 220
C.M.R. [Section Sign]12.04(1) (Companies Brief at 23-24). Berkshire states
that its proposal maximizes the value of the asset and ensures that the
benefits from the sale or transfer are passed on appropriately to the
utility's ratepayers (id. at 24). Further, Berkshire proposes that any
asset transfers from an affiliate to Berkshire will be at a rate not higher
than the fair market value of the asset (id.). In addition, Berkshire has
indicated that it will provide, as part of its initial filing in future rate
case proceedings, detailed information concerning asset transfers made since
the end of the test year used in the Company's previous rate case filing
(Exh. DTE-1-20).
2. Analysis and Findings
Regarding the transfer of facilities associated with the propane
operation to the propane subsidiary at net book value, the Department
approves the transfer. In fact, the facilities were never included in
Berkshire's rate base. Further, we find that the asset transfer pricing
proposals put forth by Berkshire are consistent with the Department's
Standards of Conduct. 220 C.M.R. [Section Sign]12.04. Therefore, in
accordance with the Companies' proposal, the Department directs the
Companies to price any rate-base asset transfers from Berkshire to its
affiliates at the higher of net book value or fair market value, and to
price any asset transfers from an affiliate to Berkshire at no higher than
the market price for the asset. Further, we also expect Berkshire to comply
with the other requirements of 220 C.M.R. [Section Sign]12.04, including the
requirement to maintain a log of all transactions with affiliated companies.
VI. MANAGEMENT AGREEMENT
A. Description
The Companies state that BER will have no employees of its own, beyond
its three officers, for some time to come. However, it will be required to
maintain some corporate functions, such as shareholder relations, investor
relations, and accounting and legal operations (Exh. BG-MJM-1, at 13). In
order to provide BER with the requisite services, the Company entered into a
Management Agreement with BER (id.; Exh. BG-MJM-6). In response to a record
request from the Department, Berkshire provided a revised Management
Agreement(8) ("Revised Agreement") in order to reflect more clearly its
intent regarding the pricing of services by Berkshire for BER (RR-DTE-4(a)).
The Revised Agreement provides that Berkshire will furnish BER and its
affiliates specific services upon request, provided that the Company has
available personnel and resources (id. at 2). If, after consultation with
BER, the Company determines that third-party services are necessary,
Berkshire will arrange for the appropriate services on behalf of BER (id.).
___________________
(8) Berkshire provided revised language stating explicitly that as
compensation for services rendered by Berkshire, BER will pay the
higher of fully allocated costs or fair market value where a
measurable market exists for the service.
BER would request the desired services on an as-needed basis through
purchase orders, which may be amended from time to time through written
change orders (id. at 2-3). In return, BER would compensate Berkshire for
those services, based on direct labor, indirect labor, and capital
expenditures (id.). Berkshire proposes to charge BER the higher of (1) the
fully-allocated costs for the services provided or (2) a rate based on the
fair market value of those services provided to BER, as determined by
Berkshire, if there is a measurable market for such services (id. at 3). If
Berkshire's charges to BER are different from the Company's full embedded
costs, the Company will record reasonable third-party offers to provide like
services at market prices, and will maintain records comparing each rate to
Berkshire's own marginal costs of providing such services (id. at 4).
The Company states that it considered the merits of forming a service
company to provide services to BER and its subsidiaries instead of entering
into a management services agreement (Exh. DTE-1-12). The Company contends
that, initially, the proposed corporate structure would be relatively simple
and a service company is not warranted (id.). Berkshire states that if a
more complex corporate structure evolves with more than one regulated
utility, then the formation of a service company may be appropriate (id.).
Further, the Company asserts that the allocation factors established under
the Management Agreement address any potential concerns that would justify a
service company (id.). Therefore, the Company concludes, at this time, that
there would be no advantage gained by the formation of a service company
(id.). However, Berkshire stated that it will continue to evaluate the
merits of forming a service company (id.).
B. Analysis and Findings
Section 94B subjects contracts entered into by gas companies and an
affiliated company to Department review and approval. In evaluating
[Section Sign] 94B proposals, the Department requires utilities to
demonstrate that (1) the proposal provides a reasonable method of allocating
liabilities and benefits between a utility company and its affiliate, and
(2) the methods employed in structuring the proposal are sufficient to
protect the interests of a utility company's ratepayers. In addition, such
contracts are required to be consistent with the Standards of Conduct. 220
C.M.R. [Section Sign]12.00 et. seq.
The holding company structure we approve here is relatively simple and
only a very limited number of employees would be providing services to
Berkshire and its un-regulated affiliates. The Department has examined the
cost allocation method proposed by Berkshire, which applies allocation
factors specifically developed for the company in its most recent base rate
proceeding. The Berkshire Gas Company, D.P.U. 92-210 (1993). The
Department's Standards of Conduct state that a distribution company may
provide services to an affiliate provided that the price charged for such
services is equal to or greater than the distribution company's fully
allocated cost to provide the service. 220 C.M.R. [Section Sign] 12.04(2).
This pricing policy provides sufficient assurance that affiliates will not
gain competitive advantages at the expense of ratepayers. 220 C.M.R.
[Section Sign]12.00 et. seq.. Therefore, the Department approves the
Revised Agreement.(9)
___________________
(9) The Department notes that the actual implementation of the Management
Agreement must comply with all of the Standards of Conduct, including 220
C.M.R. [Section Sign] 12.03(4), related to non-discriminatory access to
certain products and services provided by the distribution company to a
competitive energy affiliate.
Regarding the formation of a service company, while a well-structured
service company may result in an allocation of common costs among multiple
affiliates that is more explicit than what may be offered through a
management services arrangement, the formation of a service company would be
a form of corporate separation, which the Department has previously
determined that we lack clear authority to mandate. D.P.U./D.T.E. 97-63, at
65. Further, the Department is persuaded by the Company's argument that
given the relatively simple holding company structure we approve here, at
this time a service company does not appear to be warranted. However,
future circumstances (for example, mergers, acquisitions, or further energy
diversification) might make a service company's creation beneficial to
ratepayers. Therefore, the Company is directed to continue to evaluate the
merits of a service company, as it has already indicated it intends to do.
VII. TAX SHARING AGREEMENT
A. Description
The proposed Tax Sharing Agreement provides that, each year, BER and
its subsidiaries, including Berkshire, would calculate their income tax
liability on a stand-alone basis (Exhs. BG-MJM-1, at 14; BG-MJM-7). In
turn, each subsidiary would make tax payments to BER based on the
calculation of its stand-alone tax liability, if any liability exists (Exh.
BG-MJM-1, at 14). In the event that a subsidiary generates a tax loss or
other tax benefit that is available to BER in its consolidated income tax
return, BER would make payments to the subsidiary consistent with the value
of such tax benefits at the marginal tax rate (id.). According to the
Companies, because certain tax items must be treated on a consolidated
basis, to the extent that a particular subsidiary's specific tax benefits
are applied to the consolidated return, that subsidiary is allocated the
benefit of that tax item for purposes of determining its share of the
consolidated tax liability (Exh. BG-MJM-7). Payments of any amount due
under the tax sharing agreement may be made in cash or otherwise recognized
on the books of BER and its subsidiary (id.).
B. Analysis and Findings
The Tax Sharing Agreement requires Berkshire to potentially advance
funds to BER in connection with the filing of a consolidated tax return.
This payment could be considered an advance that would require Department
approval pursuant to G.L. c. 164, [Section Sign] 17A. Pursuant to G.L. c.
164, [Section Sign] 17A, a gas or electric company must obtain written
Department approval in order to "loan its funds to, guarantee or endorse the
indebtedness of, or invest its funds in the stock, bonds, certificates of
participation or other securities of, any corporation, association or
trust...." The Department has indicated that such proposals must be
"consistent with the public interest," that is, a [Section Sign] 17A
proposal will be approved if the public interest is at least as well served
by approval of the proposal as by its denial. The Bay State Gas Company,
D.P.U. 91-165, at 7 (1992).
The Department has stated that it will interpret the facts of each
[Section Sign] 17A case on its own merits. A determination that the
proposal is consistent with the public interest considers the overall
anticipated effect on ratepayers of the potential harms and benefits of the
proposal by weighing a number of factors, including, but not limited to:
the nature and complexity of the proposal; the relationship of the parties
involved in the underlying transaction; the use of funds associated with the
proposal; the risks and uncertainties associated with the proposal; the
extent of regulatory oversight on the parties involved in the underlying
transaction; and the existence of safeguards to ensure the financial
stability of the utility. D.P.U. 91-165, at 8. The Department finds that
the Tax Sharing Agreement provides a reasonable method of allocating
liabilities and benefits among the Company, BER, and its other affiliates.
The Department also finds that the methods employed in the Tax Sharing
Agreement are sufficient to protect the interests of the Company's
ratepayers. Accordingly, the Tax Sharing Agreement is approved.
VIII. STOCK ISSUANCE
A. Standard of Review
In order for the Department to approve the issuance of stock, bonds,
coupon notes, or other types of long-term indebtedness,(10) the Department
must determine that the proposed issuance meets two tests. First, the
Department must assess whether the proposed issuance is reasonably necessary
to accomplish some legitimate purpose in meeting a company's service
obligations, pursuant to G.L. c. 164, [Section Sign] 14. Fitchburg Gas &
Electric Light Company v. Department of Public Utilities, 395 Mass. 836, 842
(1985) ("Fitchburg II") citing Fitchburg Gas & Electric Light Company v.
Department of Public Utilities, 394 Mass. 671, 678 (1985) ("Fitchburg I")).
Second, the Department must determine whether the Company has met the net
plant test.(11) Colonial Gas Company, D.P.U. 84-96 (1984).
___________________
(10) Long-term refers to periods of more than one year after the date of
issuance. G.L. c. 164, [Section Sign] 15A.
(11) The net plant test is derived from G.L. c. 164, [Section Sign] 16.
The Court has found that, for the purposes of G.L. c. 164, [Section
Sign] 14, "reasonably necessary" means "reasonably necessary for the
accomplishment of some purpose having to do with the obligations of the
company to the public and its ability to carry out those obligations with
the greatest possible efficiency." Fitchburg II at 836, citing, Lowell Gas
Light Company v. Department of Public Utilities, 319 Mass. 46, 52 (1946).
In cases where no issue exists about the reasonableness of management
decisions regarding the requested financing, the Department limits its
[Section Sign] 14 review to the facial reasonableness of the purpose to
which the proceeds of the proposed issuance will be put. Canal Electric
Company, et al., D.P.U. 84-152, at 20 (1984); see, e.g., Colonial Gas
Company, D.P.U. 90-50, at 6 (1990). The Fitchburg I and II and Lowell Gas
cases also established that the burden of proving that an issuance is
reasonably necessary rests with the company proposing the issuance, and that
the Department's authority to review a proposed issuance "is not limited to
a 'perfunctory review'." Fitchburg I at 678; Fitchburg II at 842, citing
Lowell Gas at 52.
Where issues concerning the prudence of the Company's capital
financing have not been raised or adjudicated in a proceeding, the
Department's decision in such a case does not represent a determination that
any specific project is economically beneficial to a company or to its
customers. In such circumstances, the Department's determination in its
Order may not in any way be construed as ruling on the appropriate
ratemaking treatment to be accorded any costs associated with the proposed
financing. See, e.g., Boston Gas Company, D.P.U. 95-66, at 7 (1995).
Regarding the net plant test, a company is required to present
evidence that its net utility plant (original cost of capitalizable plant,
less accumulated depreciation) equals or exceeds its total capitalization
(the sum of its long-term debt and its preferred and common stock
outstanding) and will continue to do so following the proposed issuance.
Colonial Gas Company, D.P.U. 84-96, at 5 (1984). If the Department
determines at that time that the fair structural value of the net plant and
land and the fair value of gas inventories owned by such a utility are less
than its outstanding stock and debt, it may prescribe such conditions and
requirements as it deems best to make good within a reasonable time the
impairment of the capital stock. G.L. c. 164, [Section Sign] 16.
B. Mergeco
1. Description of Proposal
Mergeco has an authorized capitalization consisting of 200,000 shares
of common stock, $1 par value, of which 100 shares have been subscribed for
by BER, and which, subject to the approval of the Department, will be issued
and sold to BER at a price of $1 per share (Restructuring Petition at 2).
The Companies request that the Department authorize and approve the proposed
issuance of 100 shares of Mergeco common stock to BER (id. at 5). The
Companies claim the proposed issuance is reasonably necessary to effect the
holding company structure (id.).
2. Analysis and Findings
The Department finds that the issuance of 100 shares of common stock
by Mergeco, at a par value of $1.00, is a necessary mechanism for the
purpose of forming Mergeco and thus effecting the proposed merger.
Accordingly, the Department finds that the proposed stock issuance is
reasonably necessary and is in accordance with G.L. c. 164, [Section Sign]
14.
With regard to the net plant test of G.L. c. 164, [Section Sign] 16,
the record indicates that Mergeco has no assets and, thus, cannot meet the
net plant test. However, the Department notes that the intended purpose of
the stock issuance is to set up a transient framework of the consummation of
the merger and acquisition of Berkshire by BER. The merger would extinguish
the corporate existence of Mergeco, and consequently, remedy any net plant
deficiency of Mergeco. D.T.E. 98-27, at 74. The purpose of the net plant
test is to protect investors from hidden watering of stock. Id.
Application of the net plant test has no place in a transaction as patent
and transparent as the instant one. Id. No public protective purpose
would be served by applying the test here. It is sufficient to note that
the transaction is structured to prevent any adverse risk to the investing
public and immediately to correct any theoretical problems with Mergeco
shares. Id. Therefore, the Department finds it unnecessary to impose
further conditions on Mergeco under G.L. c. 164, [Section Sign] 16.
C. Dividend Reinvestment Plan Stock Issuance
1. Description of the Proposed Financing
The Company requests approval by the Department of the issuance and
sale from time to time of up to 200,000 additional shares of authorized
common stock pursuant to the Company's Dividend Reinvestment and Stock
Purchase Plan (DRIP Petition at 1). According to the Company, the net
proceeds of such issuances and sales will be applied to repay short-term
bank loans incurred from time to time for the purpose of financing additions
to the Company's property, plant, and equipment and for such other uses as
the Department may authorize (id. at 4). The Company states that
participants in the DRIP may invest in additional shares of common stock by
(1) having cash dividends on all or a portion of their shares automatically
reinvested, (2) investing in additional common stock by making optional cash
payments at any time in any amount from a minimum $15.00 in any calendar
month to a maximum of $5,000 in any calendar quarter, and (3) investing both
their cash dividends and optional cash payments (Exh. DTE-2-1(c) at 1). The
price of shares purchased by participants in the DRIP is established at 97
percent of the average of the daily high and low sales price of the
Company's common stock in the over-the-counter market(12) during the five
consecutive trading days ending on and including the day of purchase (id.).
In the event that the discounted common share price falls below the book
value of the stock, the three percent discount will be suspended until such
time as the price exceeds the book value (id.). The Company also declares
that no shares will be available for purchase under the DRIP at less than
par value (id.). Participation in the DRIP is optional and is available to
holders of ten or more shares of common stock or to any employee of the
Company who owns one or more shares of common stock (id. at 4). The Company
states that the DRIP is administered externally by Boston EquiServe,
associated with State Street Bank and Trust Company (Exh. DTE-2-6). All
administrative fees for the DRIP are paid by the shareholders (id.; Tr. at
50).
___________________
(12) The price of the Company's common stock is currently quoted in the
NASDAQ National Market Stock tables.
The Company entered into evidence the certificate of vote taken by the
board of directors on August 29, 1998, which authorized the issue and sale
of 200,000 additional shares of common stock pursuant to the DRIP (Exh. BG-
MJM-12). As of June 30, 1998, 4,600,000 shares of common stock were
authorized by shareholders for issuance for proper corporate purposes,
including issuance pursuant to the DRIP. As of June 30, 1998, 2,315,914
authorized shares of common stock were actually issued and outstanding, and
69,307 authorized shares of common stock were still reserved for issuance
and sale under the DRIP (DRIP Petition at 2). Previously, the Department
has approved the issuance and sale by the Company of a number of shares
pursuant to the DRIP. See D.P.U. 40 (1980) (approving initial issuance of
common stock under the DRIP); D.P.U. 84-219 (1984); D.P.U. 89-59 (1989);
D.P.U. 90-83 (1990); D.P.U. 93-182 (1992); and D.P.U. 96-64 (1996).
2. Capital Structure of the Company
As of June 30, 1998, the Company's capitalization comprised
$40,000,000 long-term debt, consisting of senior notes of $24,000,000, first
mortgage bonds series P of $10,000,000, and a current portion of long-term
debt in the amount of $6,000,000 (Exhs. BG-MJM-10, at Sch. 4; BG-MJM-11, at
25 of the Annual Report to shareholders); 2,315,914 shares of common stock,
authorized and outstanding, having a par value of $2.50 per share and a
total par value of $5,789,785; 3,212 shares of preferred stock, authorized
and outstanding, having a par value of $100 per share and a total par value
of $321,200; and a premium on common stock of $18,835,026 (DRIP Petition at
1). The total capitalization of the Company, as of June 30, 1998, is
therefore equal to $64,946,011.(13)
___________________
(13) The total capitalization of $64,946,011 is equal to the sum of
$40,000,000 long-term debt, plus $5,789,785 total par value of common
stock, plus $321,200 total par value of preferred stock, plus
$18,835,026 premium on common stock.
3. Analysis and Findings
The Department, pursuant to G.L. c. 164 [Section Sign] 16, requires
any company requesting approval to issue new stock, bonds, or other
securities to demonstrate that its net utility plant supports the additional
amount of financing. Colonial Gas Company, D.P.U. 84-96, at 8 (1984).
Under the net plant test, a company must present evidence showing that its
net utility plant (utility plant less accumulated depreciation) is equal to
or greater than its total capitalization (the sum of long-term debt,
preferred stock and common stock outstanding). Id. at 5.
As of June 30, 1998, the Company's utility plant in service was
$106,057,000, with accumulated depreciation of $31,371,000 resulting in net
utility plant in service of $74,686,000 (Exh. BG-MJM-10, at Sch. 3). As of
June 30, 1998, the Company's total capitalization consisted of $64,946,011,
resulting in an excess of net utility plant in service over outstanding
capital of $9,739,989 (id.). The proposed issuance of 200,000 shares plus a
remaining balance of 69,307(14) shares authorized but not issued yet would
increase the total capitalization of $6,073,546,(15) resulting in an excess
of net utility plant over outstanding capital of $3,666,443. Therefore,
under the Department's precedent regarding the calculation of the net plant
test, the Department finds that the Company's proposed financing meets the
net plant test.
___________________
(14) The computation of the net plant test takes account of 69,307 shares
of common stock previously authorized by the Department in D.P.U. 96-
64 but that are still unissued.
(15) The amount of $6,073,546 is equal to the total value (total par value
plus premium on common stock) of 269,307 shares of common stock
computed at the price of $23.25 per share less the 3 percent discount
established in the Company's DRIP (Exh. BG-MJM-10, at Sch. 4).
The Department also finds that the evidence presented in this case
demonstrates that the Company intends to use the proceeds of the proposed
financing to reduce short-term debt(16) incurred to finance additions to the
Company's plant, property and equipment and to provide permanent financing
to such additions (Exhs. BG-MJM-10, at 5; DTE-2-2). Accordingly, the
Department finds that the Company's proposed issuance of an additional
200,000 shares of common stock is reasonably necessary for the purposes for
which it is proposed. Issues concerning the prudence of the Company's
financing have not been addressed in this proceeding, and the Department's
decision in this case does not represent a determination that any project is
economically beneficial to the Company or its customers. The Department
emphasizes that its determination in this Order shall not in any way be
construed as a ruling relative to the appropriate rate making to be accorded
any costs associated with the proposed financing.
___________________
(16) As of June 30, 1998, the Company recorded $7,085,000 as short-term
indebtedness (Exh. DTE-2-2; DRIP Petition at 2; Tr. at 12).
IX. EXEMPTION FROM SEPARATION REQUIREMENTS OF THE STANDARDS OF CONDUCT
A. Introduction
The Company states that initially, the employees of BER will consist
only of its three officers, Scott S. Robinson, Michael J. Marrone, and
Cheryl M. Clark (Exh. BG-MJM-8). The three BER officers are, and will
continue to be, along with Robert M. Allessio, officers of Berkshire (Exh.
BG-MJM-9). These four individuals will also serve as officers of the
proposed competitive affiliates, Berkshire Propane, Inc. and Berkshire
Energy Marketing, Inc., the latter of which the Company indicated would
constitute a "competitive energy affiliate" as defined at 220 C.M.R.
[Section Sign]12.02(4) (Exemption Request at 2). Berkshire seeks an
exemption from the separation requirements of 220 C.M.R. [Section
Sign]12.03(15) for these individuals (Exemption Request at 4). Berkshire
asserts that as officers, these individuals will only be charged with senior
management or executive tasks and generally will not be involved in the day-
to-day operations of Berkshire Energy Marketing, Inc (id. at 3).
Currently, Berkshire does not have any affiliated entities.(17) After
the Department's approval of the proposed merger, BER expects to initially
operate two affiliates in non-regulated operations (Companies Brief at 20-
21). Berkshire states that it and its non-regulated affiliates will
maintain separate facilities, separate staffs (excepting the officers named
above), separate computer systems, and separate functions as required by 220
C.M.R. [Section Sign]12.00 et. seq. (Exemption Request at 3).
___________________
(17) As noted above, Berkshire Propane operates as a division of Berkshire.
B. Analysis and Findings
Pursuant to the Standards of Conduct, an exemption from the
prohibition of sharing employees may be granted upon a showing that the
shared employees would be in the best interests of the ratepayers, have
minimal anti-competitive effect, and that the costs can be fully allocated
between the distribution company and its affiliate. 220 C.M.R. [Section
Sign] 12.03(17).
The Companies state that, because Berkshire has a small executive
staff, its costs would increase and consequently rates for the regulated
utility would increase, if it is compelled to have separate directors and
officers for its distribution company (Exemption Request at 3; Tr. at 41-
42). The Companies state that the four officers who will be shared by
Berkshire and its unregulated affiliates will not be involved in the day-to-
day operations of the entities and will not provide any competitively
sensitive information to such affiliate (Exemption Request at 3). Further,
the Companies note that the non-regulated businesses will be conducted
separately from the regulated business at the operational level, with
separate operational staff, separate computer systems, and separate
facilities (id.). The Department recognizes that there may be separation of
the regulated company from the competitive energy affiliate at the
operational level, but there is no evidence in the record that assuages our
concern that the sharing of management employees between a distribution
company and a competitive energy affiliate would not result in the very
anti-competitive activity that 220 C.M.R. [Section Sign] 12.03(15) is meant
to eliminate. This competitive risk outweighs the prospect of savings for
ratepayers derived from having Berkshire share officers with its competitive
affiliates. Because the Companies have the burden of proof in seeking an
exemption pursuant to 220 C.M.R. [Section Sign] 12.03(17), the lack of
sufficient record evidence regarding competitive protections is fatal to
Berkshire's request, although the Companies may renew their request for an
exemption and proffer further evidence on this issue.
Based on the foregoing analysis, the Department finds that the
Companies have failed to meet their burden for seeking an exemption from the
separation requirements of 220 C.M.R. [Section Sign] 12.03(15), and
therefore the request is denied, without prejudice(18).
___________________
(18) COM/Energy has raised similar issues regarding the separation
requirements of the Standards of Conduct in a letter to the
Department, dated July 31, 1998. The Department will address these
issues.
X. ORDER
After due notice, hearing and consideration, the Department
VOTES: That pursuant to Section 14 of Chapter 164, the proposed
issuance of common stock of Berkshire Gas Mergeco Gas Company, Inc. to BER
is reasonably necessary to effect corporate restructuring; and
VOTES: That pursuant to Section 14 of Chapter 164, the proposed
issuance of common stock of Berkshire Gas Mergeco Gas Company, Inc. to BER
is in the public interest; and
VOTES: That the issuance and sale, from time to time, by Berkshire Gas
Company of not in excess of 200,000 shares of common stock, $2.50 par value,
pursuant to its Share Owner Dividend Reinvestment and Stock Purchase Plan,
is reasonably necessary for the purpose for which the Company has
petitioned; and it is
ORDERED: That pursuant to Section 14 of Chapter 164, the issuance by
Mergeco of 100 shares of its common stock to BER in consideration of payment
of $100 by BER is hereby approved and authorized; and it is
FURTHER ORDERED: That pursuant to Section 96 of Chapter 164, the
merger to form a holding company structure for Berkshire and the terms
thereof are consistent with the public interest; and it is
FURTHER ORDERED: That pursuant to Section 96 of Chapter 164, the
Agreement and Plan of Merger dated as of February 19, 1998, and the merger
of Mergeco into Berkshire pursuant thereto is hereby approved and
authorized; and it is
FURTHER ORDERED: That pursuant to Sections 17A and 94B of Chapter 164,
the Tax Sharing Agreement between Berkshire and BER is hereby approved and
authorized; and it is
FURTHER ORDERED: That pursuant to Section 94B of Chapter 164, the
Department approves the Management Services Agreement between Berkshire and
BER, and it is
FURTHER ORDERED: That the Department denies, without prejudice,
Berkshire's request for an exemption from any applicable restrictions within
220 C.M.R. [Section Sign]12.03(15) with respect to the four senior
executives that will serve Berkshire and its proposed non-regulated energy
marketing affiliate to be known as Berkshire Energy Marketing, Inc.; and it
is
FURTHER ORDERED: That the Department hereby approves and authorizes
the issuance and sale from time to time of not in excess of additional
200,000 Berkshire shares of common stock, $2.50, par value, pursuant to its
Share Owner Dividend Reinvestment and Stock Purchase Plan; and it is
FURTHER ORDERED: That the net proceeds from Berkshire's issuance and
sale of all such securities issued pursuant to its Share Owner Dividend
Reinvestment and Stock Purchase Plan shall be used for the purposes set
forth herein; and it is
FURTHER ORDERED: That the Secretary of the Department notify the
Secretary of State of the issuance of stock and deliver a certified copy of
this Order to the Secretary of State within five business days hereof; and
it is
FURTHER ORDERED: That Berkshire comply with all directives contained
in this Order.
By Order of the Department,
/s/ Janet Gail Besser
_____________________________
Janet Gail Besser, Chair
/s/ James Connelly
_____________________________
James Connelly, Commissioner
/s/ W. Robert Keating (jgb)
_____________________________
W. Robert Keating, Commissioner
/s/ Paul B. Vasington (jc)
_____________________________
Paul B. Vasington, Commissioner
/s/ Eugene J. Sullivan
_____________________________
Eugene J. Sullivan, Jr., Commissioner
A true copy
Attest
/s/ Mary L. Cottrell
_________________________________
Mary L. Cottrell, Secretary
Appeal as to matter of law from any final decision, order or ruling of the
Commission may be taken to the Supreme Judicial Court by an aggrieved party
in interest by the filing of a written petition praying that the Order of the
Commission be modified or set aside in whole or in part.
Such Petition for appeal shall be filed with the Secretary of the Commission
within twenty days after the date of service of the decision, order or filing
of the Commission, or within such further time as the Commission may allow
upon request filed prior to the expiration of twenty days after the date of
service of said decision, order or ruling. Within ten days after such petition
has been filed, the appealing party shall enter the appeal in the Supreme
Judicial Court siting in Suffolk County by filing a copy thereof with the
Clerk of said Court. (Sec. 5, Chapter 25, G.L. Ter. Ed., as most recently
amended by Chapter 485 of the Acts of 1971).