20180925Avita to Staff Attachment_039B.pdf

STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
CASE 12-M-0192 -Joint Peti tion of Fortis Inc., Fortis OS Inc .,
Cascade Acquisition Sub Inc., CH Energy Gr oup,
Inc., and Central Hudson Gas & Electric
Corporation for Approval of the Acquisition of
CH Energy Group, Inc. by Fortis Inc. and
Related Transactions.
NOTICE OF SCHEDULE FOR FILING EXCEPTIONS
(Issued May 3, 2013)
Attached is the Recommended Decision of Administ rative
Law Judges Rafael A. Epstein and David L. Prestemon in this
proceeding . Bri efs on exceptions are due electronically to the
Secretary at secretary@dp s .ny .gov and to all active parties by
4:00 p.m . on May 17, 2013 .
Briefs opposing exceptions are due by 4:00 p .m. on
May 24, 2013 , followi ng the same procedures . The parties'
briefs should adhere to the guidelines for filing documents with
the Secretary (www .d ps .ny.gov).
(SIGNED) JEFFREY C. COHEN
Acting Secretary
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STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
CASE 12-M-0192 -Joint Petition of Fortis Inc.1 Fortis OS Inc .,
Cascade Acquisition Sub Inc., CH Energy Group,
Inc., and Central Hudson Gas & Electric
Corporation for Approval of the Acquisition of
CH Energy Group, Inc . by Fortis Inc . and
Related Transactions.
RECOMMENDED DECISION
BY
ADMINISTRATIVE LAW JUDGES
RAFAEL A. EPSTEIN AND DAVID L. PRESTEMON
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Table of Contents
BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PUBLIC COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
DESCRIPTION OF JOINT PROPOSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
A. Risk Mitigation ......................................... 12
1. Corporate Structure, Governance and Financial
Protections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
a. Goodwill and Acquisition Costs ..................... 12
b. Credit Quality and Dividend Restrictions ........... 13
c . Money Pooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
d. Special Class of Preferred Stock ................... 17
e. Financial Transparency and Reporting ............... 17
f. Affiliate Standards ................................ 18
g . Follow-On Merger Savings ........................... 19
h . Corporate Governance and Operational Provisions .... 19
2. Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
a . Performance Mechanisms ............................. 21
i . Service Quality ................................. 21
ii.Electric Reliability ............................ 22
iii. Gas Safety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
iv .Leak-Prone Pipe ................................. 23
b. Expenditure Requirements ........................... 23
i. Right-of-Way Tree Trimming ...................... 23
ii.Stray Voltage Testing ........................... 23
iii . Infrastructure Investment ..................... 24
B. Incremental Benefits .................................... 24
1 . Rate Freeze .......................................... 24
2 . Earnings Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
3 . Synergy Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
4 . Deferral Write -Offs and Future Rate Mitigation ....... 26
5. Community Benefit Fund ............................... 26
a . Low Income Program Enhancements .................... 26
b . Economic Development ............................... 27
6 . State Infrastructure Enhancements .................... 28
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7 . Gas Expansion Pi lo t Program .......................... 28
8. Retail Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
PARTY OPPOSITION TO THE JOINT PROPOSAL ........................ 29
A. RESA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 9
B. IBEW Local 320 .......................................... 32
C. PULP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3
D. Athens .................................................. 38
ASSESSMENT OF OBJECTIONS TO THE JOINT PROPOSAL ................ 39
A. Quality of the Economic Benefits ........................ 39
B. Labor Issues ............................................ 41
C. NAFTA Threat ............................................ 43
D. Provisions for Low Income Customers ..................... 47
E. Foreign Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
F. Loss of Local Focus and Involvement ..................... 51
G. Financial Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
H. Environmental Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
I . Expansion of Gas Service ................................ 55
J . Retail Access Provisions ................................ 56
DISCUSSION .................................................... 57
A. Standard of Review ...................................... 57
B. Benefits Intrinsic to the Merger ........................ 60
C. Benefits from the Joint Proposal 's Terms ................ 63
D. Risks and Mitigation .................................... 64
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
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STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
CASE 12-M-0192 -Joint Petition of Fortis Inc., Fortis US Inc.,
Cascade Acquisition Sub Inc., CH Energy Group,
Inc., and Central Hudson Gas & Electric
Corporation for Approval of the Acquisition of
CH Energy Group, Inc. by Fortis Inc . and
Related Transactions .
RECOMMENDED DECISION
RAFAEL A. EPSTEIN and DAVID L. PRESTEMON,
Administrative Law Judges:
BACKGROUND
On February 20, 2012, CH Energy Group, Inc . (CHEG),
the parent company of Central Hudson Gas & Electric Corporation
(Central Hudson), entered into an Agreement and Plan of Merger
(Merger Agreement) with Fortis Inc. (Fortis), a Canadian holding
company; FortisUS Inc. (FortisUS), a wholly-owned subsidiary of
Fortis; and Cascade Acquisition Sub Inc. (Cascade), a wholly­
owned subsidiary of FortisUS. Under the terms of the Merger
Agreement, CHEG would merge with Cascade, with CHEG as the
surviving entity. As a result, Central Hudson, a regulated New
York electric and gas corporation, would become indirectly a
wholly-owned subsidiary of Fortis.
Under §70 of the Public Service Law (PSL), the
transfer of ownership of all or any part of the franchise, works
or system of any gas or electric corporation is prohibited
without the consent of the Commission. That consent may be
given only if the Commission determines that the proposed
acquisition, with such terms and conditions as the Commission
may fix and impose, "is in the public interest." Consequently,
on April 20, 2012, Fortis, FortisUS, Cascade, CHEG and Central
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Hudson (collectively , "Petitioners") sought such consent by
filing the petition that is the subject of t his proceeding.
Subsequent to the filing , the matter was assigned t o
Administrative Law Judges, and a Notice of Proposed Rulernaking
was publ ished .1 On May 16, 2012 the Judges conducted an initial
procedural conference . Participants at t he conference in
addition to Petitioners and staff of the Department of Public
Service (Staff) were the Utility Intervention Unit of the New
York Department of State;s Division of Consumer Protection
(UIU); the International Brotherhood of Electrical Workers
Local 320 (IBEW Local 32 0 ); the Retail Energy Supply Association
(RESA); Multiple I ntervenors (MI); Empire State Development
Corporation; and the County of Dutchess . All were admitted as
parties to the proceeding, as were Hess Corporation, the County
of Orange, the County of Ulster , the Joint Task Force of the
Town and Village of Athens (Athens Joint Task Force), the Public
Uti l ity Law Pro j ect of New York, Inc. (PULP), and, as a group,
Accent Energy Midwest Gas, LLC, Accent Energy Midwest II , LLC,
IGS Energy, Inc ., and Interstate Gas Supply, Inc .
Following a s t at us conference on June 27, 2012, and
upon reconsideration of a n initial ruling, the J udges adopted a
schedul e for the proceeding calling for the filing of initial
comments or testimony (at the option of the party) by
October 12, 2012, and reply comments or rebuttal testimony by
November 2, 2012. Ul timately, initia l testimony was fi led by
Staff and PULP , and initi al comments were submitted by Athens,
Dutchess County, ESD, I BEW Loca l 320, MI, and UIU. Reply
comments were received from Athens, and rebuttal testimony was
filed by Pe t itioners. Staff was subsequently authorized to
submit surrebuttal testimony in response to Petitioners, and did
so on December 4, 2012.
1 New York State Register, May 23 , 2012 , p . 15 .
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CASE 12-M-0192
On December 12, 2012, Petitioners filed a Notice of
Settlement pursuant to which all parties , except PULP, actively
participated in negotiations that lasted approximately ten
business days, and resulted in the Joint Proposal that we are
addressing in this Recommended Decision.2 The Joint Proposal was
filed with the Secretary on January 28, 2013 , and was signed by
Petitioners, Staff, MI, UIU and the Counties of Dutchess, Orange
and Ulster.3 It states the conclusion of the signatories that
the proposed merger , with the terms and conditions set forth in
the proposal, meets the public interest standard of PSL §70 and
should be approved.
Statements expressing general support for the Joint
Proposal were filed on February 8, 2013, by Petitioners, Staff,
MI and UIU . The Counties reiterated their limited support.
Statements opposing adoption of the Joint Proposal in its
present form were filed by PULP, RESA, the New York State Energy
Marketers Coalition (NYSEMC), and IBEW Local 320 . Replies were
2
3
PULP explains in its comments in opposition to the Joint
Proposal that it was unable to participate due to a lack of
available resources caused by a delay in the receipt of
funding . Initial Corrunents of Public Utility Law Project of
New York, Inc. (PULP) in Opposition to Joint Proposal (PULP
Initial Comments), pp . 1-2 .
The signatures of the Counties are accompanied by disclaimers
stating that they are affixed f or the purpose of expressing
support for specific provisions of the Joint Proposal, and
that the Counties take no position on the balance of the
document . In general, the Counties stated support for
provisions calling for a rate freeze , the crediting of synergy
savings, and the payment of positive benefits including the
Community Benefit Fund and write-down of regulatory assets.
The Count i es participated as parties, and signed the Joint
Proposal, through their county executives. Subsequent to
execution of the Joint Proposal, the Ulster County
legislature, by resolution, and a majority of the members of
the Dutchess County legislature, by letter, opposed approval
of the proposal, while Orange County Executive Edward Diana
submitted comments supporting ic fully.
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filed on February 15, 2013, by Petitioners, Staff, IBEW
Local 320, MI, PULP, and RESA.
In a January 29, 2013 ruling establishing a schedule
for statements in support of, or opposition to, the Joint
Proposal, the Judges specified that any party advocating an
evidentiary hearing on the Joint Proposal must specify in its
initial comments (due February 8, 2013) a material issue of fact
that could not be resolved without the cross-examination of
witnesses. No party's initial comments attempted to make such a
showing.
On May 1 , 2013, two additional parties were admitted:
Citizens for Local Power (CLP) and the Consortium in Opposition
to the Acquisition (Consortium). Although some members of these
groups had previously submitted corrunents, the organizations
themselves had not participated in the proceeding prior to their
admission.
By motion dated May 1, 2013, CLP and the Consortium
have requested an evidentiary hearing. Although the time for
opposing responses has not yet expired, we recommend on the
basis of the present record that the Corrunission deny the motion.4
Regardless of what any responses might assert, we find that the
motion is contrary to the principle in Rule 4.3(c) (2) that late
intervention is permitted only subject to the_ new party's
acceptance of the record as of the intervention date; and, more
substantively, that the motion fails to satisfy the requirement
in the January 29, 2013 ruling that any request for hearings be
supported by issues that require cross-examination.
We agree with CLP and the Consortium that this case is
as important as others where hearings have been held. In our
4 At Petitioners' request, without opposition from any other
party, the due date for responses to the motion has been
accelerated to May 6, 2013 .
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view, however , the determ ining factor is that an evident iar y
hearing would serve no legitimate function because t h e
controversies in the p roceeding, notably including t h ose rai sed
by CLP and the Cons ortium in comments filed simu ltaneously with
the motion, present no factual questions that could be clarified
by confrontation of witnesses and could materiall y affect the
Commission 's decision. Moreover , while we a l so agree that the
prefiled e vidence should be available in the record as a
potential basis for the Commission's decisi on , a hearing is not
necessary to accomplish that result.
PUBLI C COMMENTS
On rebruary 21 , 2013, publ ic statement hearings
concerning the Joint Proposal wer e held in Kingston and
Poughkeepsie . Approximately 40 pe ople attended the hearings, 17
of whom provided comment s on the record . Commenters included
Central Hudson c ustomer s from throughout the utility's service
territory , as well as New York State Assembly Member Kevin
Cahill and Town of Ros endale Council Member Manna Jo Greene.
The original notice of public statement hearings
called for all comments to be submitted by March 21 , 2013.
After recei ving numerous requests for additional time from
publ ic officials and others , the Secretary extended the deadline
through May 1, 2013. During the extension period , additional
publi c s tatement hearings were held on Apr il 17 , 2013, in
Poughkeepsie and April 18 , 2013 in Kingston. Approximately 130
people attended the hearings and 47 provided comments . Speakers
included Assembly Member crank Skartados , Dutchess County
Legislators Richard Perkins and Joel Tyner, Rosendale Council
Member Greene , Rosenda l e Super visor Jeanne Walsh, Woodstock Town
Council Member Jay Wenk , and a representative from the office of
State Senator Cecilia Tka czyk . All speakers at all of the
public statement hear ings opposed the merger . Through May 1 ,
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2013, another approximately 316 comments opposing the merger
were received by the Commission by mail, e-mail, telephone, and
posting to the Commission's websi te. In addition , 896
individuals had signed a petition posted on the SignOn .org
website expressing opposition to the merger .5
Cornmenters opposed to the merger included Senator
Tkaczyk and Senator Terry Gipson; Assembly Members Cahill, Didi
Barrett, and James Skoufis; City of Beacon Mayor Randy Casale;
Town of Woodstock Supervisor Jeremy Wilber; 13 members of the
Dutchess County Legislature, by joint letter; Dutchess County
Legislature Assistant Majority Leader Angela Flesland,
individually; and former Member of Congress Maurice o_ Hinchey.
All of these past and present public officials urged the
Commission to disapprove the proposed merger transaction, as did
resolutions adopted by the Ulster County Legis l ature; the City
of Newburgh; the Towns of Esopus, Marbletown, Newburgh, New
Paltz, Olive, Rosendale, and Woodstock; the Village of Red Hook,
and the Rosendale Environmental Commission. The Economic
Development Committee of the Town of Red Hook also opposed the
merger, as did AARP, the Sierra Club, the Dutchess County
Central Labor Council, and the Hudson Valley Area Labor
Federation.
Opponents of the merger expressed varying degrees of
concern about the potential for long-run negative consequences
not only for Central Hudson ratepayers, but also for the
economic well-being of the utility's Mid-Hudson service
territory i .f the transaction were consummated. The themes
evoked most frequently in the comments deri ved from the
perception that the transaction would replace a well-regarded,
5 The SignOn.Org website allows petition signers to cause
e-mails to be sent to the Secretary memorializing their
signatur es, and many individuals availed themselves of that
option . The numbers cited above do not include those e-mails .
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highly capable and l ocally engaged utility with a foreign entity
of unproven quality having no inherent ties to the ser vice
territory and f i nancial objectives that may conflict with the
interests of ratepayers. These concerns are epitomized by t he
comments of Jennifer Metzger, Chair of the Town of Rosendale
Environmental Commission, who s t ated that "Central Hudson's
community involvement has benefited Rosendale tremendously," and
warned that:
t h is level of involvement wi l l decrease or
perhaps end in the future i f the company is
acquired by Fortis Inc. -a foreign company with
multiple holdings outs i de the region and country
that has an inherent incentive to cut costs and
operational expenses in its subsidiar ies to
improve its own profitability.
This perceived potential for a divergence of i nterests
between a distant holding company and the local community served
by i ts utility subsidiary was a source of concern for nearly all
of the commenters, many of whom expressed a general uneasiness
with the prospect of foreign ownership of crit i cal
infrastructure necessary to provide essential electric and gas
services . Some saw this as a continuation of a disturbing trend
toward more and more foreign ownership of U.S. businesses , and
expressed concern that domestic control over v i tal industries
was bei ng l ost.
Others had more specific concerns . Many corrunenters
descri bed Central Hudson as havi ng been very pr oactive i n
promoting energy efficiency and renewable energy . They
suggested that there was no language i n the Joint Proposal that
would ensure a comparable environmental responsiveness f rom t he
merged companies . I n a similar vein, many commenters not ed
Central Hudson's record of community involvement and support for
local economic development . They questioned whether t hat level
of commi t ment would extend beyond the funding expressl y provided
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i n the Joint Proposal , wh i ch they characterized as a purel y
short-term benefit.
For other comment er s , the issue was primarily
economic. They viewed the putative financial benefits of the
Joint Proposal for ratepayers as meager and transitory, while
the financial risks would be substantia l and persi s tent .
Assembly Member Cahill, for example, argued that the proposed
merger transaction makes no financial sense . Fortis , he
suggested, could not make a profit and still maintain current
levels of service for Central Hudson ratepayers. Ultimately, he
contended, customers would be forced t o provide that profit
through either increased rates or decreased service reliability
and safety.
Prior to the i ssuance on Apr i l 24, 2013 , of the notice
announcing the preparation of this recommended decisi on , the
Commission had not received a s i ngle public comment supporting
the merger . The first such comment, posted on April 24, came
from Charles S. North, President and CEO of the Dutchess Count y
Regional Chamber of Commerce . Mr . North stated that after
meeting with Central Hudson officials and learning the facts of
the transaction, he strongly supported it. Fortis's commitments
to provide $50 million in benefits and to maintain Central
Hudson as a standal one entity are a wi n/win for customers, he
said. In Mr . North 's opinion , Central Hudson will benefit from
the resources of a larger organization and has done right by its
customers i n agreeing to the merger.
Subsequently, through May 1, 2013, the Commission has
received approximately 274 comments urging that the merger be
approved . About 133 of those comments came from Central Hudson
employees. Many others came from Central Hudson customers and
from busi nesses and business organizations including the Edi son
Electric Institute, the Hudson Valley Economic Development
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Corporation, the Putnam County Economic Development Corporation,
the Westchester County Office of Economic Development, the
Dutchess Co unty Economic Development Corporation, the Councii of
Industry of Southeastern New York, the New Paltz Regional
Chamber of Commerce, the Sullivan County Partnership for
Economic Development, the Greater Newburgh Partnership, the
Orange County Industrial Development Authority, and the Orange
County Partnership~ Supporters of the merger emphasize the
value of the positive benefits provided for in the Joint
Proposal and the commitments of Fortis to operate Central Hudson
as a stand-alone entity, maintaining local jobs and keeping its
headquarters in the community. The economic development
organizations stress particularly the importance of the proposed
$5 million Community Benefit Fund (described below).
Supplemental corrunents were filed on May 1, 2013 by
five parties: CLP and the Consortium, jointly; Joint Proposal
signatory MI; opponent IBEW Local 320; and Petitioners. CLP and
the Consortium expounded in detail on the benefits and
detriments of the merger as proposed, to show that it not only
would fail the pertinent Commission's positive net benefits test
but would be affirmatively harmful and, in that respect,
compares unfavorably with all the major energy company mergers
the Commission has approved since 1999. They said the Joint
Proposal satisfies neither the statutory public interest
standard, nor the criteria in the Settlement Guidelines such as
conformity with state policies and consensus among adversarial
parties. They charged Fortis with disingenuousness or
indifference regarding values the Commission should uphold in
the pursuit of objectives such as environmental protection,
economic development, utility infrastructure improvements, and
development of sustainable energy resources.
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For the most part, MI's comments repeated its
criticism of previously raised objections to the Joint Proposal
and emphasized the potential loss of $49.5 million in positive
benefits to ratepayers if the proposal were rejected . MI also
argued that less weight should be given to comments from
entities that did not participate fully in the process leading
to the Joint Proposal, particularly those of the legislatures of
Dutchess and Ulster Counties whose county executives were
signatories t o the proposal .
IBEW Local 320 repeated its previously stated concerns
about Central Hudson's outsourcing policies and their impact on
union jobs and service quality, and contends that they have not
been alleviated. The Joint Proposal should not be approved, it
said, unless provision is made fer a needed infusion of internal
workers. The union also submitted a copy of an e-mail sent by a
Central Hudson Vice President to employees urging them to submit
comments to the Commission supporting the merger and providing
templates for that purpose . The e-mail states that, "The number
of posted comments matters -even if form letters are used
[emphasis in original]." IBEW Local 320 states that the "vast
majority" of employees who have responded with comments are not
represented by the union.
Petitioners' additional comments contended that the
record demonstrates that the Joint Proposal will produce
benefits that greatly exceed any risks presented by the merger.
They cited comments by Staff in support of the Joint Proposal
stating Staff's view that the criteria for approval of the
merger under PSL §70, as established in previous Commission
decisions, have been met or exceeded, and that the transaction
compares favorably with those previously approved.
Petitioners also argued that comments received in
opposition to the merger, mainly from non-parties, have
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generally been misinformed, are contradicted by the terms of the
Joint Proposal and/or the comments of the signatories, and have
added nothing of significance to the record . For many of the
most frequently raised criticisms of the merger , Petitioners
provided information tending to refute the allegations , for
example, with respect to concerns about foreign ownership of
Central Hudson, NAFTA , environmental issues , infrastructure
investment, financial risks, and so forth_ Petitioners
concluded that the Joint Proposal:
is a compelling path forward that assures the
continuation and enhancement of Central Hudson
consistent with its past performance as a well­
r un, low-cost utility that is extraordinarily
sensitive to local needs and Commission
requirements .6
All of the comments received have been included in the
official record and have been ful ly reviewed and considered in
the preparation of this recommended decision.
DESCRIPTION OF JOINT PROPOSAL
The Joint Proposal expresses the agreement of the
signatory parties that the proposed acquisition of Centra l
Hudson by Fortis is in the public interest for purposes of
PSL §70 , and should be approved, subject to the terms described
in the proposal. Broadly speaking, those terms are intended to
perform two functions : the mitigation of any potential risks
that might arise from consummation of the merger transaction ,
and the securing of incremental publ ic benefits to ensure a net
positive outcome from the transaction . In this section, we
describe the provisions of the Joint Proposal and the statements
supporting and opposing their adoption.
6 Additional Comments of Petitioners , p. 47.
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A. Risk Mitigation
1 . Corporate Struc ture, Governance and Financial
Protections
Petiti oners state that although their original
petition voluntarily included provisions intended to address
concerns that were identified in prior Commission orders
addressing the acquisition of distribution utilities, the Joint
Proposal signatories have agreed to even more comprehensive and
stringent requirements for corporate structure, corporate
governance and financial protections . Staff agrees, arguing
that the Joint Proposal incorporates ~a myriad of customer
protections" addressing such matters as goodwill and acquisition
costs ; credit quality and dividend restrictions; money pooling;
a special class of preferred stock to be issued in the event of
the bankruptcy of Fortis (the ~golden share"); financial
transparency and continued financial reporting requirements ;
updated affiliate transaction and cost allocations, as well as,
Code of Conduct rules and standards; follow-on merger savings;
and corporate governance and operational protection provisions.7
Similarly , MI states that although Petitioners ' original
proposal "did a commendable job of advancing reasonable customer
protect ions, t he Joint Proposal provides additional and/or
strengthened financial and operational protections for
customers ."8
a . Goodwill and Acquisition Costs
To the extent that the consideration paid by Fortis
for the stock of CHEG e~ceeds the book value of CHEG's assets ,
an accounting asset, goodwill, will be created. As the
7
8
Department of Public Service Staff Statement in Support of
Joint Proposal (Staff Statement), p. 10,
Initial Comments of Multiple Intervenors in Support of Joi nt
Proposal (MI Comments), p . 12 .
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Commi ssion has made clear in previous orders , neither the cost
of acquiring, nor the cost of carrying, that asset should be
borne by utility customers , and the exi8Lence of goodwill should
not adversely affect ratepayers. The Joint Proposal includes
provisions intended to ensure t hat this will be the case for
Central Hudson customers . It bars goodwill associated with the
merger transaction from being recorded on the books of Central
Hudson, to the extent permitted by U.S. Generally Accepted
Accounting Principles (U.S. GAAP). If those accounting rules
requi r e goodwill to be "pushed downh to Central Hudson for
financia l reporting purposes, the Joint Pr oposal precludes it
from being reflected in the regulated accounts of Central Hudson
on which rates are based . In addition, if either Fortis or
FortisUS is obligated to record an impairment of the goodwill
created by the transaction , the Commission must be notified
within five days . Staff argues t hat this provision wi l l afford
it and the Commission adequate time to take steps to ensure that
the i mpairment does not adversely affect Central Hudson
customers . Finally, the Joint Proposal requires Central Hudson
to submit to Staff a schedule of all external legal, financi al
advisory and similar coses incurred to achieve the merger in
order to permit the Commission to ensure that they cannot be
recovered in rates.
b. Credit Quality and Dividend Restrictions
Staff identified the possibility of Central Hudson's
credit standing being adversely affected by the finances of
Fortis as a significant risk of the proposed merger.
Accordingl y , the Joint Proposal incorporates an array of
conditions designed to prot ect the credit quality of the
utility.
First, to permit the Commission to adequately monitor
the impact of the transaction on Central Hudson's finances, the
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Joint Proposal establishes a continuing requirement that copies
of all presentations made by Central Hudson, Fortis or any
Fortis affiliate be provided to Staff within ten business days .
Both Fortis and Central Hudson are required to be registered
with at least two maj or nationally and internationally
recognized rating agencies, to maintain separate debt
instruments, and to be separately rated by at least two rating
agencies. In addition, neither Fortis nor Central Hudson will
be permitted to enter into any debt instrument containing cross­
default provisions that could affect Central Hudson .9
To mitigate the risk of an increase in Central
Hudson's financing costs, the Joint Proposal requires that
Fortis and Central Hudson support the objective of maintaining
an ''A" credit rating for the uti lity, unless the Commission
modifies its financial integ rity policies. Also, to ensure that
Central Hudson maintains the common equity capitalization on
which rates are based, the Joint Proposal would bar Central
Hudson from paying dividends if its average common equity ratio
for the 13 months prior to the proposed dividend were more than
200 basis points below the ratio used in setting rates .10 Staff
states that this is an additional ratepayer financial protection
9 A cross-default provision is one that can trigger defau:t on a
debt obligation based on a default on a different debt
obligation. For example, a provision in a Central Hudson debt
instrument permitting acceleration of the due date for
repayment in the event of a default by Fortis on one of its
bonds would be a cross-default provision prohibited under the
terms of the Joint Pr~posal.
10 In response to a question posed by the Judges, the signator y
parties clarified their intention that this provision would
bar a dividend not only when Central Hudson's trailing 13-
month average equity ratio was already below the 200 basis
point t h reshold , but also when the payment of the dividend
would itself cause the average to drop below the threshold.
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beyond those that the Commission has required in prior
transactions .
The Joint Proposal would also continue dividend
restrictions originally imposed as part of a Restructuring
Settlement Agreement (RSA) approved by the Commission in 1998 .11
Among other things , the RSA stipulates that if Central Hudson's
senior debt rating is downgraded below 'BBB+' by more than one
credit rating agency and the downgrade is because of the
performance of , or concerns-about, the financial condit.ion of
its parent or an affiliate , di vidends will be l imited to a rate
of not more than 75% of the average annual income available for
dividends; on a "Cwo-year rolling average basis. In the event
that the debt rating is placed on 'Credit Watch' for a rating
below 'BBB' by more than one credit rating agency, dividends are
l i mited to 50% of the average net incom~, and if there is a
downgrade below 'BBB-' by more than one credit rating agency , no
d i vidends are allowed to be paid until such time as the rating
has been restored to 'BBB-' or higher.
In addition to continuing the RSA limitations, the
Joint Proposal includes a new provision that would insulate
Central Hudson ratepayers from the effects of a downgrade to
Fortis 's credit rating . If wi thin three years of the merger
Central Hudson 's credit rating were downgraded as a direct
result of a Fortis downgrade, the higher debt cost resulting
from the downgrade would not be reflected in Central Hudson's
cost of capi tal used to set rates. Ratepayers would be held
harmless for the financial impact of the Fortis downgrade.
The Joint Proposal also would bar Central Hudson from
providing financial support to Fortis or its other affiliates
11 Case 96-E-0909, Central Hudson Gas & Electric Corporation , Or de r
Adopting Terms of Settlement Subject to Modifications and
Conditions (issued February 19, 1998).
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CASE 12-M-0192
except as permitted by the Joint Proposal, the RSA or a
Commission order. It would also require that Central Hudson's
banking and other financial arrangements be kept separate from
those of other Fortis affiliates.
Finally , the Joint Proposal would authorize Central
Hudson to deregister from the United States Securities and
Exchange Commission (SEC) and rely more on the private market
under SEC Rule 144A to issue debt.1 2 The Commission's order
issued last year in Case 12-M-0172 would be amended ~o permit
such private financing.13 It is expected that the availability
of this option will enhance Central Hudson's pricing position,
loweri ng its debt costs, and benefiting ratepayers.
c. Money Pooling
Money pools enable affiliated companies to make their
excess cash on hand available as a quick, low-cost source of
short-term funding for other pool participants. The Joint
Proposal would permit Central Hudson to participate in such
pooling arrangements , but only with Fortis , FortisUS and other
entities that are regulated utilities operating in the United
States, provided that Fortis and FortisUS may participate only
as lenders and may not receive loans or fund transfers, directly
or indirectly. Cross-default provisions affecting Central
Hudson would be prohibited.
12 Rule 144A is a safe harbor exemption from the registration
requirements of the Securities Act of 1933 that allows
companies to sell securities in the private market to
qualified institutional buyers in a more timely fashion with
fewer disclosures and filing requirements.
13 Case 12-M-0172, Central Hudson Gas & Electric Corporation,
Order Authorizing Issuance of Securities (issued September 14,
2012) .
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d. Special Class of Preferred Stock
The Joint Proposal would require the creation of
special class of Central Hudson preferred sto ck to be held by a
trustee approved by the Commission . Without the consent of the
holder of this '~golden share," Central Hudson would be precluded
from entering into voluntary bankruptcy . This is ident i cal to a
provision incl uded in the Commission's order approving the
acquisition of New York State Electric and Gas Corporation and
Rochester Gas & Electric Corporation by Iberdrola.14
With the golden share in place, Central Hudson would
be permitted to demonstrate in future rate cases that its stand­
alone capital structure should be used for setting rates. That
demonstration would be made by submitting current written
evaluations from at least two rating agencies supporting the
evaluation of Central Hudson as a separate company, without
material adjustments based on risks related to the capital
structure and ratings of Fortis . If such evaluations were not
available, Central Hudson would have the burden of providing
comparabl e eviden ce to support the stand-alone assumption.
e. Financial Transparency a nd Reporting
The Joint Proposal incorporates a number of provisions
inten ded to ensure that the Commission and its Staff have ready
access to the financial data and other information necessary to
continue our regulatory oversight of Centra l Hudson . It
provides that Central Hudson will conti nue to use the standards
of GAAP for its f i nancial accounting and fin ancial reports. If
that accounting method were replaced for publicl y-traded
entities, the change would apply to Cen tral Hudson. Central
Hudson would also be required to contin ue to satisfy all of the
14 Case 07-M-0906, Iberdrola, S.A . et al . -Acquisition Petition,
Order Authorizing Acquisition Subject to Conditions (issued
January 6 , 2009) (I berdrola order), pp. 43-44 .
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Commission1 s reporting requirements for jurisdictional companies
of its size and nature .
Central Hudson would also continue to comply with the
provisions of sections 302 through 404 of the Sarbanes-Oxley Act
(SOX ) as if Central Hudson were still bound direct l y by the
provisions of SOX, even though it would be a subsidiary of a
foreign holding company. This would include annual attestation
audits by independent auditors with respect to Central Hudson's
financial statements and internal controls over financial
reporting .
The Joint Proposal would also require that Staff be
given ready access to any books and records of Fortis and its
affiliates that Staff might deem necessary to determine whether
the rates and charges of Central Hudson are just and reasonable.
That access must include, but is not limited to, all information
supporting the underlying costs and the basis for any factor
that determines the allocation of those costs. Central Hudson
would also be required annually to file the financial
statements, including balance sheets, income statements, and
cash flow statements of Fortis and its major regulated and
unregulated energy company subsidiaries in the United States,
and to provide, to the extent available from a recognized
financial reporting information service, the "as reported''
quarterly and annual balance sheets, income statements and
statements of cash flows of Fortis in U.S. dollars with the
underlying currency translation assumptions . All required
financial £ilings would be jn English and in U.S. dollars or, if
that were not practicable, with the underlying currency
translation assumptions.
f . Affiliate Standards
The RSA approved by the Commission when Central Hudson
was reorganized as a subsidiary of CHEG included a set of
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CASE 12-M-0192
standards addressing transactions, conflicts of interest, cost
allocations, and information sharing among Central Hudson and
its affiliates. The Joi nt Proposal would update and revise
those standards and apply them to Fortis . Central Hudson would
be barred from entering into transactions with affiliates that
were not in compliance with the transaction standards; would be
prohibited from sharing operating (i .e., non-management)
employees with affiliates, and would be required to give 180
days' prior notice and obtain Commission approval prior to the
start of any material shared services initiatives or the
establishment of a shared services organization that would
provide material services to Central Hudson.15 Current cost
allocation guidelines would be continued, but would be subject
to revision if intercompany transactions grew beyond a defined
level. Staff contends that, collectively, these provisions
ensure that the Commission will have adequate advance notice of
any change in Fortis's expressed philosophy of allowing its
subsidiary utilities to operate on a stand-alone basis .
g. Follow-On Merger Savings
-----1
The Joint Proposal includes a condition that would
ensure Central Hudson customers an appropriate share of any
savings resulting from future mergers or acquisitions by Fortis
until new rates are set. This condition, Staff says, is
identical to follow-on merger savings provisions that have been
adopted as a condition to the approval of other recent mergers.
h. Corporate Governance and Operational Provisions
The Joint Proposal contains a number of provisions
intended to address concerns that the responsiveness of Central
Hudson to the community it serves might be diminished as a
15 "Materialn is defined as services individually or collectively
having a value greater than 5% of Central Hudson's net income
on an after tax basis.
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CASE 12-M-0192
subsidiary of a foreign holding company. The provisions specify
that the headquarters of the utility would remain within the
service territory .16 A new board of directors would be appointed
within one year with a majority of directors who are
independent, and at least one independent director would be
required to live within the service territory .17 At least 50% of
Central Hudson 's officers would also be required to live within
the territory . These requirements , Staff says, go beyond what
is currently required for CHEG .
In addition, the Joint Proposal specifies that Central
Hudson is to be governed , managed and operated on a stand-alone
basis post-merger. Local management would continue to make
decisions concerning staffing levels, and current employees,
both management and non-management, would be retained for two
years after closing of the merger. Within 30 days after each of
the first two anniversary dates of the merger closing , Central
Hudson would be required to file a report with the Secretary
comparing the level of union and management employees on that
date to the levels on the merger closing date . The collective
bargaining process would be continued. The Central Hudson Board
would continue to be responsible for management oversight,
including capital and operating budgets , dividend policy, debt,
and equity requirements. The Board would also have an audit
16 In response to a question from the Judges , the signatory
parties clarified that "headquarters" means the place where
all senior officers and their support staff, legal ,
administrative, accounting, operating supervision, and other
head office functions are located .
17 The signatory parties agreed in response to a question from
the Judges that an independent director is one who receives no
consulting , advisory or other compensation from Central Hudson
or an affiliate or subsidiary of Central Hudson. A director
who is an officer, employee or consultant of Central Hudson,
FortisUS , Fortis, or any other Fortis affiliate would not be
considered independent.
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CASE 12-M-0192
committee, with a majority of members who are independent, and
it would continue to be responsible for the financial integrity
and effectiveness of internal controls . Finally, to maintain an
active corporate and charitable presence in the service
territory , Central Hudson would agree to maintain its 2011 level
of community involvement through 2017 .
2. Performance
A common theme throughout the testimony and comments
in this case has been the concern that pressure to demonstrate
the profitability of the merger transaction might lead to
deferred investment in utility plant, reduced maintenance levels
and other cost-cutting measures that could eventually have a
negative impact on Central Hudson's provision of safe and
reliable service . To reduce this risk, the Joint Proposal
includes a broad range of performance-related mechanisms, some
of which are more stringent than those currently applicable to
Central Hudson. All of these performance mechanisms would
continue until modified by the Commission in a subsequent
proceeding . The Joint Proposal also incorporates provisions
mandating specific levels of expenditures for important safety,
maintenance and infrastructure development activities.
a. Performance Mechanisms
i. Service Quality
Under the terms of the Joint Proposal, the Service
Quality Performance Mechanism included in Central Hudson's
current rate plan would be continued with two changes . First,
the maximum negative revenue adjustment (NRA) imposed as a
result of failure to meet defined targets would be doubled from
$1 .9 million annually to $3 .8 million . Second , the target for
the PSC complaint rate would be lowered, from 1.7 per year per
100,000 customers to 1 .1 . In addition, during a period of
dividend restriction under the financial provisions of the Joint
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CASE 12-M-0192
Proposal, the maximum NRA would increase to $5.7 million, and it
would rise further, to $7.6 million, if performance targets were
missed thr ee times in any five-year period .18
ii. Electric Reliability
The Joint Proposal would maintain the electric
reliability standards included in Central Hudson's current rate
plan. As with the service quality performance mechanism,
potential NRAs would be doubled immediately, tripled in the
event of a dividend restriction, and quadrupled if targets were
missed in three of any five calendar years. In addition,
Attachment II to the Joint Proposal defines uniform reporting
requirements that Staff says will aid its monitoring of Central
Hudson's performance and will contribute to consistency of
reporting among utilities.
iii . Gas Safety
As with electric reliability, the gas safety
performance targets in Central Hudson's current rate plan would
be continued, with potential NRAs immediately doubled, tripled
in the event of a dividend restriction and quadrupled if targets
are missed in three of five calendar years. In addition, the
Joint Proposal would establish a new metric for compliance with
certain pipeline safety regulations set forth in 17 NYCRR
Parts 255 and 261, with potential NRAs of up to 100 basis
18 In response to a question from the Judges, the signatories
clarified this was what was intended by the phrase "if targets
are missed for three years within the next five year period,"
in section IV.B.2 of the Joint Proposal.
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points. The provision is essentially the same as ones the
Commission adopted for Corning Natural Gas and National Grid.19
iv . Leak-Prone Pipe
The Joint Proposal would increase required annual
expenditures for the replacement of leak-prone pipe, as
determined through a risk-based analysis, from $6.0 million to
$7.7 million, as recommended by Staff . Staff says the increase
can be expected to drive down active leaks, reduce leakage rates
on the distribution system and lower overtime and operating and
maintenance costs . If Central Hudson fails to expend the
required amount, one-half of the revenue requirement equivalent
of the shortfall would be deferred for ratepayer benefit .
b. Expenditure Requirements
i. Right-of-Way Tree Trimming
The Joint Proposal would continue to budget
expenditures for right-of-way tree trimming through June 30,
2014 at the level established in Central Hudson's current rate
plan for the year ending June 30 , 2013. At the end of the one­
year extension , actual expenditures would be compared to the
budget. Any shortfall would be deferred for the benefit of
ratepayers with carrying charges at the pre-tax rate of return.
ii . Stray Voltage Testing
The Joint Proposal would establish targeted
expenditures for the year ending June 30, 2014, of $2 .023
million for stray voltage testing and $350,000 for stray voltage
mitigation. If Central Hudson 's expenditures fell short of
19 Case 11-G-0280, Corning Natural Gas Corporation, Order
Adopting Terms of Joint Proposal and Establishing a Multi-Year
Rate Plan (issued April 20, 2012), p. 21; Cases 12-E-0201 and
12-G-0202, Niagara Mohawk Power Corporation d/b/a National
Grid -Electric and Gas Rates, Order Approving Electric and
Gas Rate Plans in Accord with Joint Proposal (issued March 15,
2013), pp. 13-14.
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CASE 12-M-0192
either of the targets, the shortfall would be deferred for the
benefit of ratepayers with carrying charges at the pre-tax rate
of return.
iii. Infrastructure Investment
The Joint Proposal would continue the net plant
reconciliation mechanism included in Central Hudson's current
rate plan with new targets established for the year ending
June 30, 2014. Actual net plant in service as of that date
would be compared to the targets and the revenue requirement
impact of any difference would be calculated using the
methodology described in Attachment IV to the Joint Proposal.20
If the difference were negative, Central ~udson would be
required to defer the revenue requirement impact for the benefit
of ratepayers with carrying charges at the pre-tax rate of
return . If the difference were positive, no deferral would be
permitted.
B. Incremental Benefits
While the provisions of the Joint Proposal discussed
above are intended to be beneficial to ratepayers, their primary
purpose is to reduce the potential for negative impacts fr~m the
merger. Consequently, in an effort to ensure a net positive
outcome for ratepayers if the merger transaction is approved,
the Joint Proposal includes a number of provisions that are
designed to generate incremental benefits that would not be
realized in the absence of the merger.
1. Rate Freeze
Under the terms of the Joint Proposal, Central Hudson
rates currently scheduled to remain in effect through June 30,
20 The signatory parties confirmed that references to
"Attachment III" on page 34 of the Joint Proposal should read
"Attachment IV."
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CASE 12-M-0192
2013, would continue through June 30, 2014. Staff calculates
that this "rate freezen would provide a small, but positive
benefit to ratepayers.
2. Earnings Sharing
Central Hudson 's current rate plan specifies that when
the utility's earned return on equity exceeds 10 .5%, ratepayers
receive 50% of the excess up to an earned return of 11.0%; 80%
of the excess between 11.0% and 11.5%; and 90% of the excess
over 11.5%. Under the terms of the Joint Proposal, the 50% and
90% sharing thresholds would be lowered , and the 80% sharing
level would be eliminated . Ratepayers would be credited with
50% of earnings between 10 .0% and 10.5%, and 90% in excess of
10 .5%. In addition, Central Hudson would be required to apply
50% of its share of earnings exceeding 10.5% to write down
certain deferred expenses that would otherwise be recovered in
rates, provided that doing so would not reduce the actual earned
return below 10.5%. Through this revised sharing mechanism,
Staff says , ratepayers would gain if any unexpected savings
materialize as a result of the merger, but Staff rates the
likelihood as small given the earnings impact of the other
positive benefits required by the Joint Proposal.
3 . Synergy Savings
The signatories to the Joint Proposal agree that the
merger transaction will generate synergy savings of at least
$1.85 million, and Central Hudson would guarantee this amount
for five years, for a total of $9 .25 million. The savings would
begin to accrue in the month following closing of the merger
transaction and would be available for rate mitigation at the
start of the first rate year in the next rate case filed by
Central Hudson.
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CASE 12-M-0192
4. Deferral Write-Offs and Future Rate Mitigation
The Joint Proposal specifies that upon closing of the
merger, Fortis will provide Central Hudson $35 million which
will be recorded as a regulatory liability, to be used to write
down storm restoration expenses for which deferral and recovery
from ratepayers has been requested in three pending petitions to
the Commission, including most notably one for Superstorm Sandy.
To the extent the total expense recovery ultimately authorized
by the Corrunission is less than $35 million, the balance would be
reserved as a regulatory liability with carrying charges at the
pre-tax rate of return, subject to future disposition by the
Commission.
5. Community Benefit Fund
In addition to the $35 million for deferral write-offs
and rate mitigati on, Fortis would be required to provide Central
Hudson $5 million for a Community Benefit Fund to be used for
low income customer and economic development programs .
a. Low Income Program Enhancements
The Joint Proposal specifies that $500,000 from the
Community Benefit Fund would be used to supplement funds
currently provided in rates for programs targeted to low income
customers . Currently, Central Hudson provides a bill credit of
$11.00 per month for all customers who are Home Energy
Assistance Program (HEAP) recipients . Under the Joint Proposal,
within 30 days after an order in this case , Central Hudson would
implement a new schedule of discounts providing credits of
$17 .50 per month for HEAP-participant heating customers
receiving only electric or only gas service, and $23.00 for
those receiving both . Non-heating customers would receive
credits of $5.50 for one servicer or $11 .00 for both, provided
that customers currently receiving an $11 .00 credit for a single
service would continue to receive that amount. Central Hudson
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CASE 12-M-0192
would also be required to waive reconnection fees for
participants in its low i ncome programs up to a total of
$50 ,000. I£ the total cost of the programs exceeded the amount
allowed in rates pl us t he $500,000 from the Community Benefit
Fund, the shortfall would be made up from funds previously
deferred for the benefit of the low income programs, with any
excess deferr ed as a regulatory asset. Central Hudson would be
required to continue to refer participants in its low income
programs to the New York Energy Research and Development
Authori ty 's EmPower New York program for energy efficiency
services . Finally, the Joint Proposal establishes a schedule
for quarterly reporting on low income programs to the
Commission, and specifies the data to be provided.
b. Economic Development
The Joint Proposal provides for $5 million dollars to
be allocated by Central Hudson for the support of economic
development programs. The $5 million would consist of $4 .5
million from the Community Benefit Fund and $500 ,000 from
Central Hudson 's existing Competition Education Fund. Within 15
days after an order in this case, Central Hudson would file a
proposal with the Commission for modification of its existing
economic development programs and would request expedited
consideration . The modifications would provide for Central
Hudson to continue to administer its programs pursuant to
existing Commission authorizations with input from the counties
in its service territory . They would also establish a criterion
that applicants for project funding that do not have
participation from Empire State Development, a county industrial
development agency, a county community college, or a local
municipal resolution would seek a letter of support from the
county where the project would be located. Central Hudson would
also agree to seek county participation in economic development
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CASE 12-M-0192
grant award notifications and announcements, and would meet
twice a year with representatives of all the counties in its
service territory.
6. State Infrastructure Enhancements
The Joint Proposal would commit Central Hudson to
continue to support the New York State Transmission Assessment
and Reliability Study, the Energy Highway, and economically
justified gas expansion. Fortis would agree to provide equity
support to the extent required by Central Hudson for projects
that receive regulatory approval and proceed to construction.
7 . Gas Expansion Pilot Program
Central Hudson would commit to continue its existing
gas marketing expansion campaign during the rate freeze period
and would continue to provide information and assistance to
customers who are seeking or considering gas service. Where
adequate financial commicments and reasonable franchise
conditions can be secured, it would pursue expansion of gas
facilities to areas not currently served and would seek
expedited Commission approval for such expansion. Within 90
days of an order in this case, Central Hudson would initiate a
modified gas service request tracking system retaining
sufficient data to demonstrate why service was or was not
initiated. In addition, by July 1, 2013, Central Hudson would
propose a limited pilot expansion program designed to test a
number of innovative measures to facilitate gas service
expansion.
8. Retail Access
For the stated purpose of supporting the Commission's
retail market development initiatives, the Joint Proposal would
require Central Hudson within 90 days following the closing of
the merger transaction to include a total bill comparison on all
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CASE 12-M-0192
retail access residential bills using consolidated billing. The
comparison would be generated using an existing Central Hudson
program that has already been implemented. In addition, within
60 days after the issuance of an order in this case, Central
Hudson would be required to file a proposal to provide payment­
troubled customers--those subject to service termination--with
similar bill comparison information. The cost of implementing
these initiatives would be paid ·from Central Hudson's existing
Competition Education Fund. If the balance in the fund were
inadequate, Central Hudson would be permitted to defer the
excess cost. Central Hudson would report quarterly to Staff on
the progress of its bill comparison efforts.
PARTY OPPOSITION TO THE JOINT PROPOSAL
Three parties, RESA , IBEW Local 320, and PULP,
submitted statements in opposition to the Joint Proposal. In
addition, the Town Board of the Town of Athens, while not
expressly opposing the Joint Proposal, has expressed concern
that the proposal does not designate a portion of the Community
Benefit Fund to be used for expansion of gas service within the
town, as was requested in comments submitted by the Athens Joint
Task Force before the Joint Proposal was filed .
A. RESA
RESA takes exception to the retail access sectio~ of
the Joint Proposal, and , in particular, the requirement that
Central Hudson include a "total bill comparison" on residential
retail access consolidated bills within 90 days following the
closing of the merger transaction . It makes, essentially, two
points.
First, RESA argues that the implementation of a bill
comparison requirement is premature given that the merits of
such an initiative are currently being debated in the Retail
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Energy Markets case, a separate generic proceeding initiated by
the Commission to consider this and various other retail access
issues.21 RESA points out that Central Hudson originally took
the position that the Retail Energy Markets case would be a more
appropriate forum for consideri ng inclusion of bill comparisons
in customer bills, a position with which RESA agreed.
Furthermore, RESA says, ~he Joint Proposal itself states that
the signatory parties "anticipate that modifications" to the
billing initiative "may become appropriate based on
developments" in the Retail Energy Markets case. Therefore,
RESA argues, it would be logical and reasbnable to await the
outcome of that case before deciding on implementation of a
monthly price comparison by Central Hudson .
RESA's second point is that the requirements of the
Joint Proposal with respect to bill comparisons are vague and
ill-defined. It notes that the Joint Proposal calls for the
comparisons to be performed "using the existing Central Hudson
computer program that had been previously implemented ." There
is no further information about that program in the Joint
Proposal or in the record , and no meaningful description or
discussion of the details of how the bill comparison methodology
is designed or how it will operate in practice. Given that
energy service companies (ESCOs) have significant concerns that
such comparisons may be misleading, RESA says , additional review
and analysis should be undertaken before this bill comparison
requirement is implemented .
Staff responds that the Commission , in initiating the
Retail Energy Markets proceeding, expressly specified that
questions concerning the inclusion of bill comparisons on
21 Cases 12-M-0476, et al., Proceeding on Motion of the
Commission to Assess Certain Aspects of the Residential and
Small Non-residential Retail Energy Markets in New York State
(Retail Energy Markets).
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customer bills, and the provision of bill comparison information
to payment-troubled customers, were ~being addressed for Central
Hudson's operations in the context of [this merger
proceeding] ."22 It says RESA did not object to this approach in
the Retail Energy Markets case and did no~ provide any position
on the bill comparison issues in this case prior to its comments
on the Joint Proposal. The details of the bill comparison,
Staff says , are adequately described when the Joint Proposal is
read in conjunction with the ques tion s posed by the Commission
in Case 12-M-0476.
With respect to concerns about misleading comparisons ,
Staff argues that it is the ESCOs' responsibility to ensure that
their customers understand what services they receive for the
price they pay, and that a total bill comparison merely gives
customers purchasing such services a clearer picture of any
premium they are paying or cost savings they are realizing.
Staff concludes that RESA's opposition should not cause
rejection of the Joint Proposal because, if the Commission
agrees t hat the retail access proposals in this case should be
deferred pending the results of the Retail Energy Marke ts case,
it should simply modify the Joint Proposal t o so provide .
According to Petitioners , not only does the bill
comparison deserve to be implemented here regardless of the
pendency of the Retail Energy Markets case, but indeed t he
experience gained now by implementing it for Central Hudson
might very well inform and assist the ongoing efforts in the
generic case. A month of real-world experience with bill
comparison publication might be worth a year of hearings, they
suggest .
22 Case 12-M-0476, et al ., Retail Energy Markets, Order Instituting
Proceeding and Seeking Comments Regarding the Ope ration of the
Retail Energy Markets in New York State (issued October 19,
2012), Appendix, note 1.
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CASE 12-M-0192
B. IBEW Local 320
The union's concern, expressed in its conunents and
reiterated in its opposition co the Joint Proposal, is that, in
its view , Central Hudson has a history of inappropriately
relying on outside contractors while allowing its internal
workforce to decline through attrition. This , it argues, has
eviscerated the company's operational knowledge base, leading to
shoddy and possibly unsafe work, increasing operating costs , and
creating the potential for graft in relations with contractors.
It points out that Fortis has expressed its intention to allow
Central Hudson to operate as a stand-alone entity, does not have
a policy regarding the outsourcing of work, and has no plans to
encourage or discourage reductions in non-management employees .
This, the union argues, suggests that Central Hudson 's current
practices concerning the use of outside contracLors are likely
to persist. It contends that unless the Joint Proposal is
modified to include provisions that will curtail the "continued
escalating use of third party contractors and diminishing
internal company labor ," it should be rejected. 23
Petitioners respond that IBEW Local 320 has failed to
supply any factual support for its claims and that they are
unjustified. Petitioners say all of the incidents the union
cites as examples of improper workmanship resulting from the use
of outside contractors have been unrelated to each other and
have been fully analyzed in consultation with Staff . The
union's contentions that a declining internal workforce will
lead to poorer service or higher costs are vague and
speculative, Petitioners say, and fail to take into account
productivity improvements and technology enhancements which tend
to require less labor but reduce costs and improve reliability.
Most fundamentally , Petitioners argue, Local 320's demand for
23 IBEW Initial Comments, p. 6.
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the inclusion in the Joint Proposal of rules concerning the use
of outside contractors and the size of t he internal workforce
amounts to an attempt to obtain job advantages for union
employees that should be considered, if at all , in the context
of collective bargaining.
Staff, similarly, argues that the unionrs claims are
speculative and lack factual support. It notes that nothing in
the record of this case or in the recent management audit of
Central Hudson suggests that the use of outside contractors has
had a detrimental effect on service or reliability . In fact,
Staff notes , the audit found that Central Hudson performs some
work in-house that is customarily outsourced by other utilities,
and recommended that the company implement a work management
system covering both outside contractors and the internal
workforce, which Central Hudson is doing. Claims of increased
costs, Staff says, have no basis in the record, and warnings
about potential graft are derived from incidents at a much
larger and different utility and are purely speculative with
respect to Central Hudson. The legitimate concerns of !BEW
Local 320 have been reasonably addressed in the Joint Proposalr
Staff contends , through provisions requiring adherence to the
current collective bargaining agreement, maintenance of constant
staffing levels for the next two years, regular reporting of
union and non-union employee levels, and Commission approval for
any shared services initiative .
C. PULP
PULP's opposition to the Joint Proposal raises several
issues . Initially, PULP implies that the proposal does not
represent a reasonably balanced compromise of disputed issues
because it lacks the support of "any independent organization
representing the interests of residential or low-income
customers." PULP contends that UIU lacks the "indicia" of
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independence required of consumer utility advocates. According
to PULP, UIU 's support for the Joint Proposa l cannot be deemed
to represent the best interests of residential consumers because
UIU is part of a state agency with a direct line of
accountabi lity to the Governor .
Next, PULP argues that in applying a standard as
"amorphous and debatable" as "in the public interest," the
Commission should consider the unequal power dynamics within
society. Low and fixed income customers, it contends , have much
less influence in the decision-making process, and yet are much
more likely to be adversel y affected by a flawed outcome.
Therefore , PULP says , the Commission should focus on minimizing
the risk to these customer classes and should give greater
weight to proposals that will help protect their interests . A
mere rate freez e as offered by the Joint Proposal is of little
benefit, PULP says, when thousands of Central Hudson customers
have had service terminated or are in arrears on their bills
under the current rate structure. The portion of the economic
benefits of the merger transaction t hat are earmarked
specifically for low income programs is insignificant, PULP
argues . This, it says, is unsurprising because the parties
nominally representing the public are mostly local and state
government entities having parochial interests that should "not
be confused with the interest of residential ratepayers, and the
public at large."24 Therefore, PULP concludes, the Commission
should require that additional positive benefits be provided for
low income customers if the merger trans a ction is to be
approved .
The alleged benefits of the transaction, PULP
contends , are illusory and paltry in comparison with the
potential risks. The rate freeze, it says, is of little or no
2~ PULP Initial Comments, p. 15 .
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CASE 12-M-0192
value because Central Hudson could not now raise rates much
earlier that July 1, 20 14 in any case, given the statutory
suspension period for rate filings. Furthermore , in PULP's
view, the rate plan that would be extended under the Joint
Proposal is flawed and may have promoted poor performance
l eading to inflated storm restoration costs. The Joint
Proposal, PULP alleges, mistakenly allows Petitioners to count a
write-off of those possibly unjustified storm cost claims as a
positive benefit of the transaction. The promised synergy
savings are insignificant in relation to the total revenues of
Central Hudson , PULP says , and do not even guarantee a rate
reduction because they may be offset by increases in other
categories of revenue requirement . The $35 million in deferral
write-offs is illusory, according to PULP, because it is merely
an accounting adjustment that may be traded away in future rate
case negotiations over new demands for higher rates. The $5
million Community Benefit Fund is really only $4.5 million, PULP
contends, because $500,000 would be taken from the existing ,
ratepayer-funded Competition Education Fund, and the provisions
for low income customer programs are inadequate.
This particular merger transaction creaces unusual
risk, PULP argues, because Fortis, as a Canadian company
investing in a U.S. enterprise, would be entitled to the
protections afforded to foreign investors of the signatory
nations by the North American Free Trade Agreement (NAFTA).
Under Chapter 11 of NAFTA, Canadian, U.S. and Mexican invest ors
may de~and binding arbitration of claims for damages based on
foreign governmental action that is "tantamount to
expropriation" of the investors' interests. The availability of
this forum, PULP argues, could threaten the Commission's ability
to regulate Central Hudson. A NAFTA tribunal, it suggests,
might overturn a Commission rate determination or rejection of a
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CASE 12-M-0192
capital project if it found the decision incidentally diminished
the value of Fortis's property, even if that claim would not be
valid under New York or federal constitutional law .
Furthermore, PULP says, the Commission would have to rely on the
federal government to defend its interests, and derivatively
those of Central Hudson ratepayers, before the arbitration
panel. This Qpotential grave risk," PULP argues, is not
addressed at all in the Joint Proposal and warrants a finding
that the merger transaction is not in the public interest.25
Staff, Petitioners, and MI all respond that PULP's
arguments are unsupported, speculative or misinformed and should
be rejected entirely. With respect to the extent to which the
interests of residential customers, generally, and low income
customers, specifically, were adequately ~epresented in the
negotiations leading to the Joint Proposal, all point out that
PULP, albeit involuntarily, refrained from participating in the
discussions and has no direct knowledge of them. MI describes
PULP 's derogation of UIU's efforts as "uninformed and not at all
reflective of what transpired during settlement negotiations."26
MI says UIU represented the interests of low income customers
competently and aggressively, and adds that Staff, despite its
broader concerns, also was very active on low income customer
issues .
As to PULP's assertion that the benefits of the Joint
Proposal for low income customers are inadequate and should be
enhanced, Staff points out that funding for low income programs
would be increased by $1 million during the rate freeze year ,
permitting monthly bill credits for low income heating customers
to be more than doubled, and ensuring that no credits are
reduced; and that service reconnection fees for many low income
25 PULP Initial Comments , p. 14.
26 MI Reply Comments, p. 5.
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CASE 12-M-0192
customers would be eliminated .27 Staff, Petitioners, and MI also
note that in addition to the benefits specifically targeted to
them, low income customers would share in the other posi tive
benefits provided by the Joint Proposal, including the synergy
savings, deferral write-offs and Community Benefit Fund, to the
same extent as other customers in the same service
classificati ons . MI further argues that PULP's position is
completel y lacking in context . It notes t hat low income
customers are the only group of customers receiving immediate
rate r e l ief under the Joint Proposal. Moreover, it says, PULP
i gnores the fact that expenditures for Central Hudson's low
income programs, which are subsidized by all customers , have
more than tripled over the last seven years, not counting the
cost of low income targeted energy efficiency programs.
PULP 's assertions that the positive benefits afforded
by the Joint Proposal are intangible or illusory reflect a
"disdain for arithmetic,u according to Petitioners, and in some
cases are simply wrong .28 The guaranteed synergy savings, for
example, will reduce real revenue requirement , Petitioners
argue; they are not merely what PULP calls a "notionalu credit .
PULP 's assertion that Fortis will be providing only $4.5 million
for the Community Benefit Fund is wrong, Petitioners point out.
Fortis will provide $5 million in total, $500,000 of which will
be used for low income programs , and $4 .5 million for economic
development. An additional $500,000 for economic development
will come from the existing Competition Education Fund.
MI and Petitioners both point out that PULP is wrong
in its contention that the Joint Proposal "allows Petitioners to
27 In addition to the $500 ,000 from the Community Benefit Fund,
low income program funds available but unexpended in previous
years would be used to provide the total funding required for
the expanded program .
28 Petitioners' Reply Statement , p. 9.
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CASE 12-M-0192
count the write-down of its unaudited and possibly unjustified
claims for blanket customer responsibility for all storm costs
as merger benefits."29 Rather, they say, the Joint Proposal
expressly states that the write-offs will be applied only to
costs allowed following ful l review by the Corrunission. Without
the deferral write-off, those costs would be recovered in rates .
MI concurs with PULP's view that Central Hudson 's pending
petitions for deferral of storm restoration costs should be
closely scrutinized by the Commission, but: says those petitions
have no bearing on whether the Joint Proposal should be
approved .
Finally, Staff, Petitioners and MI all argue that
concerns about NAFTA are unpersuasive. According to MI, PULP's
theory that the merger might impair the Corrunission's authority
to regulate Central Hudson in the future is "no more than
speculation piled upon supposition. "30 To its knowledge, MI
says, NAFTA has never been interpreted in a manner detrimental
to utility customers, and it notes that PULP 's arguments are
devoid of any citations to court cases or regulatory decisions
that would suggest such a detriment. Staff agrees , noting that
PULP has identified no ~AFTA provision that preempts Corrunission
jurisdiction.
D. Athens
By resolution dated February 19, 2013, the Town Board
of the Town of Athens expressed concern that the Joint Proposal
did not adopt the request of the Athens Joint Task Force to set
aside a significant portion of the Corrununity Benefit Fund to be
used for gas service expansion in the town. The task force, in
corrunents submitted in October and December 2012 , pointed out
29 PULP Initial Corrunents, p. 10.
30 MI Reply Statement, p . 10 .
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CASE 12-M-0192
that a Central Hudson gas main traverses the town, and that gas
distribution service is provided by the utility to towns both
north and south of Athens . In Athens itself, however , only one
business , and none of the town's 4,000 full-time residents,
receives gas service. Using some of the Conununity Benefit Fund
to expand gas service within the town, the task force argued,
would meet the needs of the town and village and would provide
Fortis the benefit of an expanded customer base for Central
1-iudson .
ASSESSMENT OF OBJECTIONS TO THE JOINT PROPOSAL
A. Quality of the Economic Benefits
PULP and many comrnenters suggest t hat the economic
benefits promised by the Joint Proposal may be illusory; that
they may never r esult in savings to ratepayers. With respect to
the promised one-year rate freeze , we generally agree . Although
potentially a benefit at the time it was offered, the rate
freeze, at this point, is largely symbolic, given the
unlikelihood that Central Hudson would, or could, file a new
rate case within the next two months, as would be necessary to
increase rates before July 1, 2014.
On the other hand, modifications to the earnings
sharing mechanism that would apply during the period of the
freeze could provide value to ratepayers , as they would ensure
that a larger share of any overearnings Central Hudson may
realize during the freeze year would be credited to customers .
This benefit may, in fact , be illusory , however . Given t he
additional obligations imposed on Central Hudson by the
provisions of the Joint Proposal that would have to be funded
during the freeze year without additi onal revenue from rates,
overearnings appear unlikely.
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The $9.25 million i n synergy savings over five years
are guaranteed to be c r edited to ratepayers even if they are not
realized by Central Hudson . The $35 mil lion payment by Fortis
will be used to e stablish a regulatory liabili t y aga ins t which
certain of Cent r a l Hudson's regulatory assets may be written
down. Thes e benef i ts are real . The contention that some
amounts might be credited against the $35 million for storm
restoration expenses that were never actually deferred by
Centra l Hudson is simpl y incorrect. The Joi nt Proposal provides
that th e funds may be used only to off s e t costs that have been
a pproved by the Commission for deferral and subsequent recovery
fr om ratepayers. If the identified storm restoration deferrals
p rove to be less than $35 million, the joint proposal prov i des
that the balance of the fund will continue to be recorded as a
regulatory liability for subsequent disposition by t he
Commission for the benefit of ratepayers .
The Community Benefi t Fund is also real. This is an
incremental $5 million that will be contributed by Fortis and
will be used to enha nce Central Hudson's low income customer
programs an d to support economic development projects within the
service te rritory. Absent che fund , t hese program enhancements
would either not be made or would be funded through rates .
The Joint Proposal's provision of an immediate credit
to customers for cost savings realized by Central Hudson as a
r esult of subsequent utility acquisit i ons by Fortis could also
gene r ate additional ratepayer benefit. The present value of any
such benefit is entirely speculative , however, and cannot be
given much weight in assessing the overal l value of the merger
transaction to ratepayers.
Commenters also argue that even if the economic
benefits ar e real , they represent transitory , one-time payments
that will have no lasting impact on customer rates . With regar d
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CASE 12-M-0192
to the Community Benefit Fund and the deferral offsets this is
generally true, although the write down of regulatory assets
does have the persistent benefit of avoiding carrying charges
that would continue to accrue as long as the accounts existed.
In addition, the synergy savings, to the extent they are
actually re alized by Central Hudson, would continue to reduce
Central Hudson's total revenue requirement beyond the term of
the five-year guarantee, and would, therefore, be a continuing
benefit to ratepayers . For the most part, though , these
benefits are one-time payments that will not be repeated .
In summary, then, we find that the $49 .25 million in
payments and guaranteed savings provided for in the Joint
Proposal are real, will inure to the benefit of ratepayers in
the short term, and may generate some additional small,
continuing savings . Whether this positive benefit is sufficient
to justify a finding that the merger is in the public interest
is a matter we will discuss further below.
B. Labor Issues
Local 320 opposition to the Joint Proposal is
primarily focused on Central Hudson's policies and practices
concerning the use of outside contractors and the shrinking of
the utility's internal union workforce . That concern was echoed
in comments by the Hudson Valley Area Labor Federation and
numerous comrnenters.
On the one hand, it could be argued that this labor
issue has no real bearing on the decision whether the proposed
merger is in the public interest. Local 320 acknowledges that
both Fortis and Central Hudson say they have no plans to change
their labor policies if the transaction is approved . Whether
the Commission approves or disapproves the transaction, the
policies would remain in place .
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CASE 12-M-0192
On the other hand, plans can change. When the stock
premium, transaction costs and positive benefit adjustments are
totaled, this merger will be an expensive undertaking. Under
the terms of the Joint Proposal, none of those costs can be
recovered directly from ratepayers . There will, therefore , be
considerable pressure on management to recover them in areas
over which they retain control. Recent experience with
substantial reductions in force following other utility mergers
in this State clearly demonstrates that labor is one of, and
perhaps the most important, of those areas.
Under the terms of the Joint Proposal, the labor
status quo would be maintained for two years. Many conunenters
in this case expressed concern that beyond that period, cost­
cutting efforts could result in the loss of many well-paying
jobs, with a negative ripple effect on the local economy. This
is a plausible concern.
It is very difficult, and generally undesirable, for
the Commission to inject itself into internal utility management
decision-making . There is no bright line distinguishing normal
labor productivity enhancement efforts from those driven by need
to compensate for extrinsic costs. Unwise cuts will generally
only become apparent when they have an adverse effect on
service. The Joint Proposal attempts to address this by
enhancing performance, service quality, and safety mechanisms,
but these mechanisms on~y set limits on the acceptable
degradation of specific measures of Central Hudson's operations .
They do not encompass the full range of functions that define
the quality of a utility's service . Overall, therefore, we
consider workforce uncertainty to be a residual risk of the
tran saction.
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CASE 12-M-0192
C. NAFTA Threat
PULP 's sugges tion that the anti-expropriation
provisions of NAFTA could be used by Fortis to undermine the
Commission's author ity to regulate Central Hudson or its
jurisdiction over a proposed future sale of the utility is
unsupported . None of the few legal authorities cited by PULP
suggests that a public utility regulatory agency acting within
the scope of its statutory authority might be at risk for a
cluim of nationalization or expropriation under NAFTA, and we ,
like MI , have been unable to find any that do raise such a
specter. In fact, PULP's cited authorities tend to point i n t he
opposite direction.
PULP 's citations include two cases, Metalclad
Corporation v . The United Mexican States and Methanex
Corporation v . United States of America , and a law review note
discussing the init iation of a case by a Canadian mining company
known as Glamis Gold.31 In the Metalclad case, a U.S . company
purchased the rights to construct and operate a hazardous waste
disposal site in the state of San Luis Potosi, Mexico, after
receiving assurances from the federal government that the
permits it would obtain through the purchase were all that were
required . Metalclad proceeded to fully construct the disposal
facili ty, but was blocked from initiating operations by the
local municipality , which claimed authority to require a local
construction permit and refused to grant one . The arbitration
31 Information concerning the Metalclad and Methanex cases,
including the documents cited in this order , are available on
the website of the U.S. Department of State ,
http ://www.state.gov/s/1 /c3439 .htm. The law review note is:
Judith Wallace, Note, Corpora te Nationality, Investment
Protection Agreements, and Challenges to Domestic Natural
Resources Law: The Implications of Glarois Gold 's NAFTA
Chapter 11 Claim, 17 Geo . Int'l Envtl . L. Rev . 365, 372
(2005).
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CASE 12-M-0192
panel in the NAFTA proceeding found that the federal government
had exclusive authority over construction permits for hazardous
waste sites in Mexico and that its failure to override the
illegal action of the mun icipality effectively reneged on the
assurances it had given , depriving Metalclad of the use of the
plant it had constructed .
The Methanex case involved a claim by a Canadian
company for lost profits resulting from the State of
California 's ban on the gasoline additive MTBE , for which
methanol, produced by Methanex, was used as a feedstock. The
arbitration panel 's f inal award dismissed all claims and ordered
Methanex to pay $4 million in legal fees and arbitral expenses
to the U.S . government. The facts of the case were complicated ,
but the essential conclusions of the arbiters were chat
California 's ban did not differentiate between foreign and
domestic producers, and that a non-discriminatory regulation for
a public purpose, which is enacted in accordance wich due
process and whi ch affects a foreign investor or investment, is
not deemed expropriatory and compensable unless specific
conunitments were given by the regulating government that it
would refrain from such regulation.32
Similarly, the Glamis Gold case involved a claim by a
Canadian mining company for the alleged lost value of its
proposed Imperial Project gold-mining operation due to the
adopti on by California of a regulation requiring the backfilling
and re-grading of open pit metallic mines. The regulations were
adopted while the U.S. Department of the Interior was
considering a permit for the operation, and Glamis contended
that this ac tion, combined with alleged undue delay by DOI in
reviewing the company's app lication, denied Glarnis fair
32 Methanex, Final Award of the Tribunal on Jurisdiction and
Merits (August 3, 2005), Part IV, Chapter D, page 4.
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treatment and amounted to uncompensated expropriatory action .
The arbitration panel dismissed the clai m in its entirety. On
the claim of expropriation, it did not have to address any legal
issues because it found that the cost of the reclamation
measures required was not as great as projected by the claimant
and did not have a sufficient economic impact to effect an
expropriation . On the question of whether Glamis had been
denied fair and equitable treatment, the panel concluded:
Claimant has not established that the acts
complained of fall short of the customary
international law minimum standard of treatment.
The complained-of acts were not egregious and
shocking, a gross denial of justice , manifest
arbitrariness, blatant unfairness , a complete
lack of due process, evident discrimination, or a
manifest lack of reasons . There was no specific
inducement of Claimant's expectations . There was
no causal focus on the nationality of the
investor . There was no corruption exhibited at
any level of government. The Imperial Project,
although certainly highlighted as a triggering
event for some of the measures, was not the
subject of discriminatory targeting . There is
simply not the egregiousness necessary to breach
the fair and equitable treatment standard of
[NAFTA] Article 1105 as it currently stands ...
[A] breach of Article 1105 still requires acts
that exhibit a high level of shock,
arbitrariness, unfairness or discrimination.33
In other words, even though passage of the California
reclamation statute may have been triggered by Glamis Gold 's
project, it was adopted properly, did not discriminate on the
basis of nationality, and did not renege on prior government
commitments . Therefore , there was no violation of NAFTA.
A number of commenters have cited the case of
Abitibi-Bowater Inc. v. Government of Canada, apparently to
33 Glamis Gold Ltd. v. United States of America, Award (June 8,
2009), p. 353 .
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suggest that Fortis has demonstrated its wi ll i ngness to use
NAFTA as a remedy for adverse government action . The suggestion
arises from the fact that Abitibi-Bowater , formerly a major
international pulp and paper products manufacturer, partnered
wi th Fortis to expand and operate hydroelectric plants providing
power to Abitibi-Bowater's mills. After a dispute concerning
the closure of a mill, Newfoundland and L3brador enacted broad
legislation in December 2008 expropriating all of Abitibi­
Bowater's property and water rights within the province,
sweeping up Fortis's hydroelectric plant interest in the
process. Abitibi-Bowater, which was incorporated in Delaware,
brought a claim under NAFTA , and the claim was settled by ~he
Government of Canada in December 2010. Fortis, however, was not
a party to the NAFTA proceeding, and did not benefit directly
from the settlement. According to Petitioners' Additional
Comments , Fortis has now been compensated by the Province of
Newfoundland-Labrador .
It is evident from the cases discussed above that a
state regulatory agency acting lawfully within its statutory
authority is not liable to a claim of damages under NAFTA unless
an entity covered by the treaty can demonstrate that it made its
investment in the state pursuant to express commitments made by
the agency which were subsequently broken . None of the
Petitioners in this proceeding has been assured of any
particular treatment by the Conunission. Accordingly, we find
that Fortis's status as an investor from a NAFTA member state
does not add any significant risk to the transaction .
Nevertheless, if the Commission decides to approve the merger
and it wishes to ensure that there is no doubt on this point, it
should require as a condition of the approval that Petitioners
certify that no express promises have been made, extrinsic to
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this proceeding, that any particular regulatory treatment will
be accorded Central Hudson or its parent company in the future .
D. Provisions for Low Income Customers
As described above, PULP says the Joint Proposal lacks
sufficient benefits for low income customers inasmuch as the low
income component of the Community Benefit Fund would be limited
to $500,000, and rate accommodations for low income customers
would be limited to adjustments in rate design rather than
allowed revenues, in the form of a prospective reduction for
non-heating customers and what PULP calls a ~small increase" in
the low income benefit for heating customers . PULP observes
that all such changes would be revenue neutral for Central
Hudson, and PULP unfavorably compares their estimated $1.6
million revenue allocation impact with Central Hudson's $700
million revenue allowance.
In response, Staff and Petitioners invoke their
rebuttal testimony that the Joint Proposal's allegedly
inadequate low income provisions are only the features designed
for the benefit of low income customers exclusively . As such,
those provisions supplement the economic benefits that the Joint
Proposal assertedly would confer on all customers. Staff also
argues that the low income provisions would offer relief more
substantial than PULP suggests and would better align low i ncome
credits with customer bills.
Aside from the above points, much of the argument over
the proposed low income provisions is devoted to PULP's
interpretation of the net benefits analysis established in the
Iberdrola decision . As discussed below, that analysis requires
consideration of benefits and countervailing risks or detriments
properly attributable to the proposed transaction . From that
basic premise , PULP proceeds to advocate what it describes as a
corollary that the Commission's determination of net benefits
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should err, if at all, in favor of low income customers because
they are the ones least able to bear the risk that the
~ransaction will fail to produce net benefits as anticipated.
The proponents object that the Iberdrola decision states no such
proviso.
The argument over customers' disparate risks seems to
introduce undue complexity. When the Commission assesses the
likelihood that the merger will produce net benefits despite its
offsetting risks, the risk that the benefits will not occur is a
given which need not be specifically measured and allocated
among customers. The Commission's judgment about the
transaction inevitably will be informed by its understanding of
what the benefits might mean for diverse customer groups. In
our view, the real gist of PULP's criticism is not that the
Joint Proposal misallocates risks but that it does not provide
sufficient benefits .
The Commission's decision in this case must not only
satisfy the positive net benefits test but also conform with the
other criteria normally relevant when reviewing a negotiated
joint proposal pursuant to the Commission's Settlement
Guidelines. For purposes of the low income benefits issue,
these criteria include, for example, whether adoption of the
proposed terms would reasonably balance shareholder and customer
interests and promote state policies .3G From that standpoint,
for the reasons cited by Staff and Petitioners, we do not find
the proposed amount of low income benefits inherently
unreasonable .
We also disagree with PULP's proposal to establish a
service quality measure that would limit the allowable number of
34 Cases 90-M-0255 et al ., Opinion, Order and Resolution Adopting
Settlement Procedures and Guidelines , Opinion No . 92-2 (issued
March 24, 1992), Appendix B, p. 8.
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CASE 12-M-0192
service terminations. Unpaid bills are a cost of the utility
business as they are for all businesses, and that cost is borne
by the customers who do pay their bills. Restricting
terminations does not promote equity; it simply increases the
burden of uncollectible bills for all customers .
Finally, we do not regard the proposed transaction as
a barrier to the Commission's future adoption of additional
benefits for low income customers; nor are the proposed benefits
properly attributabl e ~o the transaction, as they could also be
obtained in its absence . Thus , in summary, we find that the low
income provisions neither justify the Commission's rejection of
the Joint Proposal, nor deserve to be counted as benefits of the
merger.
In a related matter , we reject PULP's suggestion that
UIU should not be considered a legitimate representati~e of the
interests of residential and low income customers.35 UIU retains
the consumer protection mandate of its predecessor agency, the
Consumer Protection Board . By all accounts, it was an active
and hard-working participant in this case and it achieved to a
substantial degree what it originally set out to accomplish on
behalf of low income customers . PULP, nevertheless, suggests
that the significance of UIU's signature on the Joint Proposal
should be discounted on the grounds that the organization is a
state agency reporting to the Governor and lacks the indicia of
independence that are required for membership in the National
Association of State Utility Consumer Advocates (NASUCA). PULP
neglects to point out, however, that UIU is, in fact, a member
35 Petitioners and staff propose that we disregard or discount
PULP's arguments because PULP admits that it participated only
intermittently in this proceeding , assertedly due to lack of
funds . Such a rule would give fewer rights to a party with a
hiatus in its participation than our Rules of Procedure accord
to a late-admitted party.
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CASE 12-M-0192
of NASUCA.36 We find the endorsement of UIU, along with those of
MI and the Counties, to be a valid indicator of the fact that
the Joint Proposal represents a compromise of interests that
often are, and were initially in this case, adverse.
E. Foreign Ownership
As noted above , many cornmenters conveyed a general
sense of unease about the transfer to foreign ownership of
facilities essential to the provision of electric and gas
services to the mid-Hudson region . Many expressed concern that
the merger might remove those facilities from domestic control;
that Fortis might ignore its obligation to make the investments
necessary to maintain safe and reliable service; or that this
Canadian company might someday sell Central Hudson to a buyer
from a country less friendly to the United States.
Insofar as they are based solely on Fortis's being a
business headquartered in a foreign country, we do not consider
these concerns to be justified. Central Hudson will remain
subject to the laws of New York and of t he United States, and
will continue to be regulated by the Commission and by the
Federal Energy Regulatory Commission with respect to its
electric transmission facilities. The Com.mission has the
authority and the responsibility not only to set rates, but also
to require necessary capital investments and to reject any
proposed transfer of ownership that it finds not to be in the
public interest . Ownership of Central Hudson by Fortis will not
diminish the Commission's regulatory role.
There are, however, legitimate issues presented by the
prospect of a distribution utility subject to the Commission's
jurisdiction being wholly owned by a parent company located
36 See http ://www.nasuca .org/archive/about/membdir.php for a
current directory of NASUCA members.
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CASE 12-M-0192
outside New York, whether in a foreign country or simply another
state. These issues have surfaced through experience with
previous mergers, and ge nerally ~hey involve ensuring that the
Commission will continue to have full and timely access to the
information it requires to carry out its regulatory functions.
The Joint Proposal recognizes and addresses this problem in
quite a few of its provisions . It would, for example, require
that Staff be given ready access to any books and records of
Forti s and its subsidiaries that Staff may deem necessary to
determine whether the rates and charges of Central Hudson are
just and reasonable; that Central Hudson annually file the
financial statements, including balance sheets, income
statements, and cash flow statements of Fortis and its major
regulated and unregulated energy company subsidiaries in the
United States ; and that Central Hudson provide, to the extent
available, quarterly and annual balance sheet , income statement
and statement of cash flows of Fortis in U.S. dollars with the
underlying currency translation assumptions.
The problem with these provisions is that they
complicate the regulatory process. To ensure their
effectiveness, they require monitoring and oversight, imposing
an extra burden on an already overburdened Commission Staff .
Furthermore, the provisions have no intrinsic value . It is only
the me rger that makes them necessary. There would be no need to
adopt or implement them otherwise . Consequently, we see the
potential for complications in communications and data
availability required for effective regulatory oversight to be
an additional residual risk of the merger transaction .
F. Loss of Local Focus and Involvement
Many commenters described Central Hudson as a part of
the fabric of its Mid-Hudson service territory, an effective,
trusted company engaged with and concerned about the community
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CASE 12-M-0192
in which it operates. They expressed concern that the merger
would destroy that relationship; that Fortis with its
multinational interests would have little concern about. Lhe
Hudson Valley; and that the focus of Central Hudson's attention
would be turned toward the interests of its owners in
Newfoundland .
The Joint Proposal reflects recognition of these
concerns in many of its provisions . It provides, for example,
that a majority of the Board of Direclors of Central Hudson must
be independent of Fortis and its affiliates other than Central
Hudson , and one member must be a resident of the service
territory . The headquarters of Central Hudson, including all
officers and support staff and operational managers, must remain
within the service territory, and at least one-half of the
officers must live within the service territory. Central Hudson
will be governed, managed, and operated as a stand-alone entity
with staffing decisions made by local management. Current
employees of Central Hudson will be retained for at least two
years . Through at least 2017, Central Hudson would continue its
community involvement efforts at no less than the level of its
expenditures ln 2011.
These provisions are important , but they ultimately do
not address the heart of citizens' concerns. Today, Central
Hudson is accountable to a parent company that is headquartered
in the same city and shares the same interest in the local
region . After the merger, it will be accountable to a distant
entity with far flung interests . While Fortis may accord
Central Hudson considerable operating autonomy as required by
the Joint Proposal, strategic decisions concerning the direction
of t he utility and its involvement with the community will come
from, or be strongly influenced by , Fortis. The relationship
between Central Hudson and its customers will inevitably be
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CASE 12-M-0192
altered. The breadth and depth of this concern among the
residents of Central Hudson's service territory and their
elected officials at the town, village, city, and state levels
is remarkable. Former Member of Congress Maurice Hinchey states
in his comments , "Surely, in a democratic society such as ours,
the decision as to what constitutes 'public benefit' is not
unrelated to the will of an informed public and its elected
representatives." We think it is, and we find lack of public
confidence in the putative future benefits of the Joint Proposal
to be a significant detriment of the transaction.
G. Financial Concerns
The Joint Proposal incorporates numerous provisions
intended to address the risk perceived by Staff that the
finances of Fortis could have an adverse impact on Central
Hudson's , to the detriment of ratepayers . These provisions
would require that goodwill and the costs of the transaction not
be recovered from ratepayers; impose restrictions on the payment
of dividends by Central Hudson if the utility's equity ratio
falls below prescribed levels; hold ratepayers harmless for
increased credit costs resulting from the impact on Central
Hudson of a Fortis credit downgrade; require both Central Hudson
and Fortis to be registered with at least two major nationally
and internationally recognized rating agencies, to maintain
separate debt instruments, and to be separately rated by at
least two rating agencies; bar debt instruments having cross­
default provisions affecting Central Hudson; bar Central Hudson
from participating as a lender to Fortis or FortisUS in money
pooling arrangements; and create a special class of preferred
stock that can be voted to prevent Central Hudson from entering
into bankruptcy voluntarily .
These provisions are reasonably designed to mitigate
the concerns to which they are addressed. Again, however , they
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have no inherent value in the absence of the merger. They exist
only to reduce risk . Only i f they are entirely successful will
the financial risk to Central Hudson be completely eliminated.
H. Environmental Concerns
Many commenters praised the efforts of Central Hudson
to promote alternative and green energyr particularly solar,
within its service territory . They express concern that Fortis
may reverse these policies. Some argue that Fortis has shown a
preference for natural gas and may be less inclined than Central
Hudson to obtain electricity supplies from green sources.
These concerns are fundamentally misplaced. Central
Hudson is a distribution util ity . With minor exceptions, it
does not own generating capacity, and it will not be building
additional capacity in the future . Like all New York utilities,
Central Hudson will continue to obtain its power from the New
York Independent System Operator. Fortis will not have the
ability to dictate the source of power sold to Central Hudson
customers.
Central Hudson is also not a gas exploration company.
It does, however, have an interest in expanding its customer
base for gas service, and it will undoubtedly continue to have
that objective under Fortis ownership. As noted below, that
goal is fully consistent with state policy.
Finally, all utilities in New York are bound to comply
with the Commission 's policies concerning the promotion and
accommodation of green energy alternatives. Even if Fortis were
hos tile to such technologies, and there is no credible evidence
in this record that it is, Central Hudson's compliance with
Commission policy would continue to be enforced. Accordingly,
we do not see any significant environmental risk arising from
the proposed transaction.
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I. Expansion of Gas Service
The economic expansion of gas service within the State
is a high priority fo r both the Governor and the Commission, as
evidenced by the pend ing proceeding in which the Commission is
examining existing barriers to such expansion a nd seeking ways
to reduce or e li mi nate them .37 The Joint Proposal in this case
reflects that priority. It requires Centr al Hudson to support
economically justified gas expansion and states that Fortis
agrees t o provide equity ·support to Central Hudson for those
projec ts that receive regulatory approval. It also commits
Cent ral Hudson to pursue economic expansion of its gas system
wit hin each of its operating distr icts and to seek expedited
approval of new franchises . To allow the Commission to monitor
those commitments, the Joint Proposal also requires that Central
Hudson maintain detailed records of all gas expansion requests
and how they were evaluated and resolved .
While the desire of Athens to obtain expanded gas
service for its citizens is commendable , we cannot recommend
that the Commission adopt the proposal to set aside, in advance,
a portion of the Community Benefit Fund to support such
expansion. Low income programs will receive $500,000 from that
fund . The remaining $4.5 million has been designated for
economic development efforts throughout the Central Hudson
service territory. If the Joint Proposal is adopted, there is
likely to be considerable competition for those funds , and we
cannot say on this record that the Athens request should be
given priority over all others that may be forthcoming .
37 Case 12-G-0297,. Proceeding on Motion of the Commission To
Examine Policies Regarding the Expansion of Natural Gas
Service .
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J. Retail Ac cess Provisions
RESA contends that the retail access provisions of the
Joint Proposal are ill-defined and premature. We agree . The
Joint Proposal calls for a "total bill comparison," which is
undefined, to be included on the bil l s of retail access
residential customers "using the existing Central Hudson
computer program," which likewise is undefined. That total bil l
comparison, the Joint Proposal says, ''is to provide information
to retail access customers that should be made available by the
utility as part of the Commission's retail energy markets
initiatives." What "should be made available" is unspecified,
and perhaps cannot be fully defined prior to the completion of
the generic Retail Energy Markets proceeding.
Significantly, the signatories recognize explicitly
that what ever they agree to in the Joint Proposal may have to be
modified based on the outcome of the Retail Energy Markets case .
That case is now in its final stages. We do not believe it
makes sense now to order the start of a process that may well
have to be redesigned before i t s introduction. The footnote
cited by Staff from the Appendix to the Commission's order
initiating the Retail Energy Markets proceeding recognized that
certain questions concerning the use of bill comparisons were
being considered in this case. As the signatories themselves
recognize, that footn ote cannot reasonably be construed as
requiring a final, full resolution of the issue here without
reference t o the results of the Retail Energy Markets case.
No-r:ably, RESA objects only to the manner and timing of
the impl ementation of bi l l comparisons, not to the signatories'
expression of support for their use. Central Hudson has
software that should give it a head s t art over some other
ut ilities in making bill comparisons available to its customers.
Therefore, if the Commission adopts the Joint Proposal 's terms,
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we recommend that it not delete the Retail Access section
(IV.F). Rather, the Commission should modify that section to
provide that Central Hudson must, within 30 days following a
relevant final order in the Retail Energy Markets proceeding,
file a plan for implementation of both the publication of bill
comparisons on the consolidated bills of residential retail
access customers and the provision of bill comparison
information to payment-troubled customers. The Commission
should require that the plan provide for implementation within
30 days after its filing. The cost recovery provisions
described in the Retail Access section of the Joint Proposal
should be adopted as currently written.
DISCUSSION
A. Standard of Review
Having set forth above our assessments of the Joint
Proposal's alleged benefits, risks, and detriments, we arrive at
the ultimate issue whether Petitioners have shown that approval
of Central Hudson's acquisition by Fortis subject to the Joint
Proposal's terms would serve "the public interest" as prescribed
by PSL §70(5). We find that the transaction as proposed would
not meet that test .
We reach this conclusion by applying the standard of
review developed in earlier merger proceedings and stated most
rigorously in the Iberdrola case. The Commission's order in
that case requires initially a three-part assessment addressing
the benefits and then any countervailing considerations, as
follows : "petitioners must show that the transaction would
provide customers positive net benefits after considering the
expected benefits offset by any risks or detriments that would
remain after applying reasonable mitigation measures. "38 To
38 Iberdrola order, p. 111.
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demonstrate an "expected" benefit for purposes of this exercise,
Petitioners must show that the benefit is a consequence of the
transaction and would not otherwise occur.39
Once the net benefits have been gauged by comparing
the trahsaction's intrinsic benefits and offsets, it becomes
possible to judge whether the achievement of net positive
benefits requires that the intrinsic benefits be supplemented
with monetized "positive benefit adjustments" (PBAs). 40 "Then
the final step in quantification is to establish a specific PBA
amount, necessarily as an exercise of informed judgment because
there is no mathematical formula on which to base such a
decision ."41
To a large extent, the criteria described above have
shaped the parties' arguments in this case and indeed the Joint
Proposal itself. None of the parties overtly challenges the
Iberdrola order's analysis. But, as discussed below, they
disagree about the weight to be accorded the various alleged
benefits and detriments, which inevitably entails a degree of
uncertainty and subjective evaluation . Our own evaluations of
the risks and benefits (set forth below) lead us to recommend
that the Commission decline to adopt the Joint Proposal's terms.
As another preliminary comment on the standard of
review, a caveat is in order regarding Petitioners' argument
that the monetized PBAs in this Joint Proposal are proportional
to the PBAs the Commission has required in other cases, when
stated as a percentage of the respective companies' revenues .
39 See, ~' Iberdrola order, pp. 105-06 (whether above-book
proceeds from a post-merger sale of assets could be deemed a
result of the merger).
40 At one point in the Iberdrola order (p . 111) and in some of
the present pleadings, PBA is misstated as a ~public" benefit
adjustment."
41 Iberdrola order, p. 136.
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Any such comparison among cases should be viewed with great
caution because , again , the PBAs required in each case reflect a
judgment regarding the shortfall in net benefits after
considering a particular transaction's benefits versus its risks
or detriments. Such factors often defy quantitative assessment
and, more likely than not, are unique to the transaction under
consideration.
Thus an attempt to extrapolate from the dollar amount
of PBAs required in the Iberdrola decision to the amount
proposed in this case , based on a variable such as proportionate
corporate revenues, for example, poses a number of pitfalls.
Among the complications the Commission cited in reaching the
Iberdrola PBA determination were that much of the risk and
benefit was not quantifiable; the PBA amount was influenced by
whether synergy savings were expected sooner rather than later;
the decision there was assisted by a rate case quality
presentation of revenue requirements, not offered here; the
result in Iberdrola was derived from highly disputed decisions
that some earlier mergers were relevant in comparing PBAs while
others were less so; and, in its final analysis regarding PBAs,
all the Commission could firmly conclude was that the PBA amount
it prescribed represented the "middle of the range of
reasonableness .n42 Moreover , as we have described, the present
case involves an extraordinary degree of public opposition which
constitutes an inherent risk or detriment of the transaction ,
while no comparable element figured into the Commission's
analysis of the Iberdrola transaction. There is no simple
mathematical formula whereby a PBA amount derived from these
numerous considerations could confidently be used to detennine
the outcome in a different proceeding such as this .
42 Ibid ., p. 137 .
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Another obs tacle to direct comparisons among PBA
levels from one case to the next is that the Commission's
decision making is properly informed by past experience whicn
was not available when the Commission performed its risk
assessments in earlier merger cases . For example , in the
Iberdrola transaction, anticipat ed benefits in the form of
enhanced financial strength and wind generation investment may
not have materiali zed to the extent that the Commission
expected . Similarly, in the National Grid acquisition, the
challenges to regulatory oversight may have proved more
difficul t than anticipated . CLP and the Consortium put great
emphasis on those negative outcomes and argue that Fortis 's
superior financial resources 1 as compared with Central Hudson's,
would create new opportunities for management to escape
effective regul atory review.
Even if one presupposed that previous mergers have
failed to live up to expectations, this of course would not
preordain that Central Hudson's acquisition by Fortis would also
lead to disappointment . However, the intended relevance of
Petitioners' and Staff 's comparison between the proposed PBAs
and those in other mergers is presumably that, under the
Settlement Gu idelines, one criterion in evaluating the Joint
Proposal is whether it conforms with Commission policy.
Unfavorable experiences with the Iberdrola and National Grid
t ransactions make it difficult to assess whether the Commission
now believes that the balance of interests struck in those
cases , particularly the PBA levels, still represents sound
policy when gauging the adequacy of the benefits offered in the
Fortis transaction .
B. Benefits Intrinsic to the Merger
As noted, Petitioners must demonstrate that the
benefits unattainabl e absent the transaction, supplemented if
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necessary by PBAs or other enhancements, and offset by the
transaction's risks or detriments mitigated to the extent
possible, would yield a net positive benefit for customers . Of
course the mere recital of that test makes clear that it def ies
mathematical certitude, but calls for an exercise of informed
judgment regarding a combination of quantitative and qualitative
factors. With t hat disclaimer, we recommend that t he Commission
we igh the benefits and mitigated detriments as follows.
In appraising the transaction, t he first major
difficulty is to identify its intrinsic benefits, before even
starting to inquire whether they should be augmented with
monetized or incidental benefits and whether the attendant risks
are adequately mitigated . For all Petitioners' and opponents '
arguments about the adequacy o f the benefits and safeguards
negotiated in the Joint Proposal, the record provides little
basis for finding that the underlying transaction itself would
benefit customers or otherwise serve the public interest.
One of the only such rationales is that operational
synergies would save customers $9 .25 mil lion over five years .
Because the Joint Proposal guarantees these savings for
ratemaking purposes, the Commission s hould recognize them as a
tangible benefit of the transaction . However, before relying on
them as a material consideration, we believe the Commission also
should attach some weight to the opponents~ claims that they
would rather forgo the savings if that is the price they must
pay to stop the transaction and retain Central Hudson in its
present form. While these objections are more statements of
opinion than fact , such opinions themselves are direct evidence
that customers may not va lue the synergy savings as much as the
status quo .
A second benefit claimed on behal f of the transaction
is that it might enhance Central Hudson's operations insofar as
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that company's management would gain access to Fortis's
expertise and best practices . Doubtless it would be frivolous
for Central Hudson, or ahy company, to claim that that its
management is so excellent as to leave no room for improvement.
Nevertheless, given the "federal" model proposed here, such a
benefit is not likely to be significant; and in fact Staff has
testified that it has no adequate information as to the value of
Fortis's expertise for Central Hudson. Consequently, we
recommend that the Commission not count access to Fortis's
expertise as a material benefit of the transaction.
A third possible benefit of the transaction is that
Fortis's size and financial standing would provide Central
Hudson ready access to capital . This claim is intuitively
appealing because one naturally expects capital cost savings to
result from acquisition by a larger parent, all else equal. In
this instance, however, the Cornmission should approach it with
special caution. Petitioners have not gone so far as to claim
that Central Hudson as a Fortis affiliate could obtain capital
on more favorable terms than now, and Staff has testified that
it has no information sufficient to support such a theory.
Thus, in our view, the record does not support a conclusion that
Central Hudson's partaking in Fortis's financial strength should
be counted as a benefit of the transaction.
After taking into account the claims of benefits from
synergies, shared expertise, and financing at the parent level,
there seem to be no other fundamental justifications asserted as
contributing to the public interest. In search of other
possible rationales, on our own initiative, we have reflected on
the possible importance of messages to the investment and
business communities. Those dissatisfied with Commission
disapproval of a transfer of Central Hudson's ownership might
characterize it as a sign that New York is insensitive to values
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CASE 12-M-0192
such as the power of managerial transformation or the
marketability of utility company securities. However, we
conclude that such criticisms would be unfounded because Fortis
disavows any plans for managerial change and because those who
invest in New York utilities do so with at least constructive
knowledge that the transfer of utility company assets is subject
to the Commission's determination of the public interest
pursuant to statute.
C. Benefits from the Joint Proposal's Terms
Finding no public interest rationale inherent in the
basic merger transaction beyond the $9 .25 million guaranteed
synergy savings over five years, as discussed in the preceding
section , we believe any other customer benefits the Commission
might identify are those negotiated as part of the Joint
Proposal. As detailed above, we would quantify as $40 million
the combined benefit of the rate freeze (no tangible benefit),
excess earnings recalibration (no tangible benefit), regulatory
liability for storm recovery or other purposes ($35 million),
and Community Benefit Fund ($5 million), additional to the $9 .25
million of synergies, for a total customer benefit of $49.25
million.
We believe the Joint Proposal's remaining features
could be negotiated in other cases absent the merger or, failing
that , could be ordered in the routine exercise of the
Commission's authority. These comprise the Joint Proposal's
provisions £or structuring low income and economic deve lopment
programs (other than the use of the Community Benefit Fund),
maintaining and financing Central Hudson's commitments to
infrastructure improvements pursuant to state policy
initiatives, continuing Central Hudson's gas marketing
initiatives, and continued support of the Commission's evolving
retail energy access pol icies . While parties disagree about the
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CASE 12-M-0192
design of these efforts , particularly the measures for low
income customers and retail access , no party denies that they
would serve the public interest . Butr because the merger is not
a necessary precondition of achieving or pursuing the se
programs , their presence in the Joint Proposal does not provide
additional support for an inference that approval of the merger
itself would serve the public interest.
D. Risks and Mitigation
After identifying the proposed transaction's benefits,
the next step in the Iberdrola model is to consider the risks
and detriments remaining after they are mitigated to the extent
possible . Viewed in that context , risk mitigation measures are
more appropriately seen not as benefits but as whole or partial
solutions to problems that nrise only because of the
transaction. In fact, as CLP and the Consortium observe , they
are tell-tale evidence of possible conflicts between the
transaction and the public interest . If such safeguards
sufficiently minimize the transaction's risks, the most
favorable assessment one can adopt is that risks and mitigation
amount to a net zero impact.
For the most part, there seems to be a consensus that
adoption of the Joint Proposal's terms would mitigate the
transaction's risks to the fu l lest extent possible. This
assessment is supported by a review of the proposed safeguards,
exhaustive and generally uncriticized, regarding corporate
governance and financing, regulatory oversight, performance
standards , and related concerns. However , a critical issue
remains whether , despite these safeguards, there are residual
risks and detriments that cannot be mitigated and are serious
enough to outweigh the transaction's benefits . What the
Iberdrola analysis teaches , as do experiences with other mergers
in recent years , is that a transaction cannot be structured to
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CASE 12-M-0192
complet ely i mmunize customers against risks; indeed, that is
precisely why the Commission requires evidence of benefits in
addition to risk mitigation measures.
Two a lleged i nadequaci es in mitigation measures
relat i ve to risks are those asserted by PULP, namely the
purportedly unadulterated risks that Commission regulat i on would
be deemed unlawful under NAFTA; and that low income or
financially stressed customers are the least able to tolerate
rate burdens and present their interests in a case such as this.
But the supposed legal conflict between NAFTA and state
regu lati on i s overstated, for reasons we already h ave cited; and
we interpret any insuffici ency in the proposed treat ment of low
income customers not as a "risk" in the relevant sense but as an
alleged fail ure to provide cust omer benefits on a scal e that
PULP would prefer .
I n our v i ew, the primary risk that is no t sufficiently
miti gated here is the risk, unique to this case, that the loss
of l ocal ownership would end an arrangement in which cust omers
have dealt with Central Hudson as a local institution wi th long
established root s in their specific community . As a result, we
see this transaction as fundamental ly unli ke takeovers of
sprawling, diffuse service terri tories by I berdrola or Nati onal
Grid . Any doubt whether those cases materially differ from thi s
one should b e dispelled by the extraordinarily negati ve reaction
to the proposal among the general publi c, unprecedented to the
best of our knowledge in any other case involving only a
transfer of ownership. As we have explained, the risk is not
merely that approval of the transaction wil l generate i l l will
toward the new owners, but that this negative outlook itself
will compromise management's performance of its tasks for years
to come.
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CONCLUSION
We find it relatively easy to conclude that the
benefits of the merger transaction pursuant to the Joint
Proposal are outweighed by the detriments remaining after
mitigation. Our rationale is that the proposed transactiort has
generated an extraordinarily intense degree of public opposition
to a change of Central Hudson's ownership among customers, their
elected officials, and labor representatives and other public
organizations in the service territory . Indeed, quite a few
cornmenters made it clear that they would rather forgo the
monetized benefits offered in the Joint Proposal than see the
Fortis acquisition go forward .
To be clear, we emphatically do not view this case as
a plebiscite or, even more inappropriately, a popularity contest
between Central Hudson and Fortis. However, the Commission
should consider that a utility company's stock in trade, so to
speak, consists in large measure of good customer relations. In
our view, one of the proposed transaction's unquantifiable but
highly material risks or detriments is that the traditional
functions of a utility company, as well as emergent changes in
the nature of utility service, are likely to be managed more
successfully by Central Hudson in its present form as cont~asted
with a new corporate regime that already has produced the fierce
public hostility evidenced in hearings and comments . Moreover,
during most of the time that the petition has been pending,
Petitioners have made little as far as we can discern to
forestall or defuse public opposition, and that apparent
passivity itself lends credence to public objections that the
new parent company would not appreciate the importance of
maintaining customer satisfaction .
Alternatively, recognizing that much of our ana l ysis
involves exercises of judgment in which reasonable minds may
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differ, we recommend that the Commission consider adopting the
proposed terms subject to modifications that would alter the
transaction's balance of risks and benefits . The Commission
might conclude that t his could be accomplished by requi ring PBAs
additional to those offered in the Joint Proposal , should
Petitioners come forward with such a proposed modification.
Since any such possibility is speculative, we will not address
it except t o state our opinion that the proposed transaction's
flaws may be inherently unsusceptible to effective remediation
by means of supplemental PBAs .
May 3, 2013
RAE , OLP /seh
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