-* nationalgrid
The Honorable Jaclyn A. Brilling Secretary, New York Public Service Commission 3 Empire State Plaza Albany, NY 12223-1350
RE: CASE 06-M-0878 -Joint Petition of National Grid PLC and KeySpan Corporation for Approval of Stock Acquisition and other Regulatory Authorizations.
CASE 06-G-1185 -Proceeding on Motion of the Commission as to the Rates, Charges, Rules and Regulations of The Brooklyn Union Gas Company d/b/a KeySpan Energy Delivery New York for Gas Service.
CASE 06-G-1186 -Proceeding on Motion of the Commission as Charges, Rules and Regulations of KeySpan Gas East Energy Delivery Long Island for Gas Service.
Statement of National Grid plc and KeySpan Corporation in Support of the Merger & Gas Revenue Reauirement Joint Provosal
Dear Secretary Brilling:
Enclosed for filing pursuant to Judge's Lynch's Ruling of July 5,2007 in the above-captioned proceedings please find enclosed an original and fifteen copies of the Statement of National Grid plc and KeySpan Corporation in Support of Merger Joint Proposal.
We have also enclosed a copy of this cover letter and would please ask that you date stamp the service copy and return it to me in the enclosed prepaid, pre-addressed envelope.
Respectfully s mitte OA,&~L, STATE OF NEW YORK PUBLIC SERVICE COMMISSION
Case 06-M-0878 Joint Petition of National Grid plc and KeySpan Corporation for Approval of Stock Acquisition and Other Regulatory Authorizations.
Case 06-6-1185 Proceeding on Motion of the Commission as to the Rates, Charges, Rules and Regulations of The Brooklyn Union Gas Company for Gas Sewice
Case 06-G-1186 Proceeding on Motion of the Commission as to the Rates, Charges, Rules and Regulations of KeySpan Gas East Corp. d/b/a Brooklyn Union of Long Island for Gas Sewice
STATEMENT OF NATIONAL GRID, plc AND KEYSPAN CORPORATION IN SUPPORT OF MERGER JOINT PROPOSAL
Catherine L. Nesser, Esq. Thomas G. Robinson KeySpan Corporation Robert Hoaglund One MetroTech Center National Grid Brooklyn, N.Y. 11201 25 Research Drive Ph: (7 18) 403-3073 Westborough, MA 01582 Fax: (718) 403-2698 Ph: (508) 389-2877 cnesser@kevs~anenerw.com Fax: (508) 389-2463 thomas.robinsonOus.ngrid.com [email protected]~d.com
Kenneth T. Maloney Cullen and Dykman LLP 11nl Ii'mtrtc--nth '2trec-t N W TABLE OF CONTENTS
I . Requested Approvals...... 2
11 . Procedural Background ...... 4
I11 . The Merger Joint Proposal Is Consistent With The Commission's Guidelines Governing Settlements. Fully Supported By The Record And Otherwise In The Public Interest ...... 7
A . Standard of Review and Issues Raised ...... 7
B . The Merger Joint Proposal provides significant economic benefits to customers ...... 9
1 . The Merger Joint Proposal provides for rate plans that are. from KEDNY's and KEDLI's customers' perspective. superior to the rate plans that likely would have resulted from a Commission decision on KEDNY's and KEDLI's stand-alone rate plans ...... 9
2 . The Merger Rate Plans Are Consistent With or Compare Favorably to the Merger Rate Plans Proposed by the Signatory Parties ...... 15
a . Synergy Savings ...... 16
b . Capital Structure...... 18
c . Cost Deferrals And Other Provisions ...... 19
d . Gas Cost Savings...... 20
3 . Benefits To Niagara Mohawk Customers ...... 21
4 . Benefits To LIPA Customers ...... 22
C . The Financial Protections in the Merger Joint Proposal Assure that +I.. +I.. P.., D...G +. .$+I.. k~ ..... A.. xi-& n~..+ D .. r ...... A P..A. , E. The Merger Joint Proposal Together With the Joint Proposal in the Stand-Alone Rate Cases Assure that Service Quality and Safety Will Not Be Compromised...... 25
F. The Merger Joint Proposal Assures that the Combined Entity Will Be Fully Responsive to the Commission...... 27
Conclusion...... 29 STATE OF NEW YORK PUBLIC SERVICE COMMISSION
Case06-M-0878 Joint Petition of National Grid plc and KeySpan Corporation for Approval of Stock Acquisition and Other Regulatory Authorizations.
Case 06-G-1185 Proceeding on Motion of the Commission as to the Rates, Charges, Rules and Regulations of The Brooklyn Union Gas Company for Gas Sewice
Case 06-6-1186 Proceeding on Motion of the Commission as to the Rates, Charges, .Rules and Regulations of KeySpan Gas East Corp. d/b/a Brooklyn Union of Long Island for Gas Service
STATEMENT OF NATIONAL GRID, plc AND KEYSPAN CORPORATION IN SUPPORT OF MERGER JOINT PROPOSAL
In accordance with the procedural schedule established in the above-captioned
proceedings, National Grid plc ("National Grid") and KeySpan Corporation ("KeySpan")
(collectively "the Petitioners") hereby submit this statement in support of the Merger and Gas
Revenue Requirement Joint Proposal dated July 6, 2007 (hereinafter "Merger Joint Proposal").
The Merger Joint Proposal was filed with the Commission in these proceedings on July 6, 2007.
The signatories to the Merger Joint Proposal include National Grid, and its affiliate Niagara
Mohawk Power Corporation ("Niagara Mohawk"), KeySpan, and its fully regulated jurisdictional affiliates,' the Staff of the New York State Department of Public Service ("Staff'),
the New York State Consumer Protection Board ("CPB"), the City of New York, the Public ! 5
1381 As discussed more hlly below, Petitioners respectfully request that the Commission take
action at its August 22,2007 session to approve this Merger Joint Proposal and to issue an order
setting forth such approval no later than August 23, 2007. Prompt Commission approval will
ensure that the significant public interest benefits arising from this Merger Joint Proposal will be
realized by affected New York State consumers.
1. Requested Approvals
By adopting the Merger Joint Proposal, the Commission would provide regulatory
approvals necessary to permit:
(a) the acquisition of KeySpan by National rid;*
(b) KEDNY and KEDLI to adopt fiscal years ending March 3 1;3
(c) National Grid to implement a consolidated corporate service structure following
the merger and adopt cost allocation methods similar to those currently followed by ~e~~~an;~
(d) KEDNY and KEDLI to transfer or lease personal or real property under Sections
69 and 70 of the Public Service Law if the transfer or lease is for $3 million or less;
(e) KEDNY and KEDLI to participate in a regulated money pool in which those
entities, other regulated affiliates of National Grid, and National Grid's Service Company could
participate as lenders or borrowers and National Grid's United States holding company could
participate as a lender only;6
(f) a five-year rate plan for KEDNY that would take effect January 1, 2008,
nrcnlminn rnmnletinn nf the merrier inA xumalrl inrlllrle the fnllnnrinn termr. (i) There would be no increases in gas delivery service rates during each of the five years. However, certain costs that are now recovered through gas delivery service rates would be transferred from those rates and instead recovered through KEDNY's Gas Adjustment
Clause ("GAC") andlor Transportation Adjustment Clause ("TAC"), including the Return
Requirement Associated With Gas In Storage, the Return on Gas Purchase-Related Working
Capital, the Uncollectible Expense Associated With Gas Costs, the Gas Cost-Related Portion of
Sales Promotion Expense, Gas Procurement Expenses and Gas-Cost-Related Credit and
Collection ~x~enses.'Offsetting these expenses to some degree, certain revenues would now be credited to the GAC, including certain margins derived from services provided to power generation customers and the increased portion of Temperature Controlled customer rates that represents a payment of pipeline demand charges. In addition, state income tax expense, which is currently surcharged to customers, will be reflected in gas delivery service rates. The net effect of these adjustments in Rate Year One is forecast to be an increase of $26.7 million annually, or 1.3% of total revenues;
(ii) KEDNY would be permitted to defer for future recovery certain costs above the levels reflected in its gas delivery service rates including (a) pension and other post- employment benefits ("P&OPEB costs"), (b) real property and special franchise taxes, (c) site investigation and remediation ("SIR") expenses, (d) costs associated with citylstate construction, and (e) exogenous costs.8 (iii) Earnings in excess of certain earnings thresholds would be subject to sharing.9
(g) a five-year rate plan for KEDLI that would take effect January 1, 2008, assuming completion of the merger, and would include the following terms:
(i) A $60 million annual increase in gas delivery service rates in Rate Year
One. There would be no further increase in such rates for the remainder of the rate
(ii) The same transfers of cost recovery responsibility between gas delivery service rates and the GAC/TAC/surcharges as described above for KEDNY. The net effect of these adjustments in Rate Year One is forecast to be an increase of $12.5 million annually;"
(iii) KEDLI would be afforded the same deferral rights as KEDNY. In addition, KEDLI would be permitted to defer the incremental revenue requirement impact associated with the Islander East pipeline project if that project proceeds;'2 and
(iv) earnings in excess of certain earnings thresholds would be subject to sharing."
11. Procedural Background
On July 20, 2006, National Grid and KeySpan filed with the Commission a joint petition in Case 06-M-0878 for approval of the proposed acquisition of the stock of KeySpan by National
Grid and other associated regulatory approvals. On October 3, 2006, Petitioners filed the testimony and exhibits of six witnesses/witness panels in support of their petition. Petitioners I
further supplemented their testimony and exhibits on October 27, 2006, and submitted ftuther
updates to their testimony on December 14,2006 and May 30,2007.
After extensive discovery, testimony concerning various aspects of Petitioners' filing was
filed by Staff, the CPB, the City of New York, Suffolk County and other parties.'4 Petitioners
filed rebuttal testimony on March 7, 2007. Petitioners subsequently updated their rebuttal
testimony on May 30,2007.
On October 3,2006, KEDNY filed with the Commission revised tariff leaves in Case 06-
G-1185 intended to increase revenues by approximately $213 million annually for the twelve
month period ending March 31,2008. KEDNY subsequently updated its rate filing on January
10, 2007, revising its revenue request to approximately $21 1 million. Testimony concerning
KEDNY's rate filing was submitted by Staff, the CPB, New York City and Suffolk County on
January 29, 2007. KEDNY submitted rebuttal testimony on February 21, 2007. KEDNY's
revised tariff leaves are currently suspended through December 21,2007.
Also on October 3, 2006, KEDLI filed with the Commission revised tariff leaves in Case
06-G-1186 intended to increase revenues by approximately $159 million for the twelve month
period ending March 3 1,2008. KEDLl subsequently updated its rate filing on January 10,2007,
revising its revenue request to approximately $164 million. Testimony concerning KEDLI's rate
filing was submitted by Staff, the CPB, New York City and Suffolk County. KEDLI submitted
rebuttal testimony on February 21, 2007. KEDLI's revised tariff leaves are currently suspended
thm~~ohneeemher 71 7nn7 order concerning the merger filing and adopting a negative declaration pursuant to the State
Environmental Quality Review ~ct.'~As a consequence, no environmental impact statement concerning the proposed merger will be prepared.
In accordance with the Commission's regulations, on November 28, 2006, Petitioners filed a notice to the Secretary of the Commission, the Presiding Officer and all active parties of settlement discussions occurring on December 7 and 8, 2006 concerning energy efficiency programs, rate design and revenue decoupling. Subsequently, all parties were duly notified by electronic mail of settlement discussions that commenced on March 12, 2007 and subsequently continued on numerous dates throughout April, May, June and July of 2007. During the settlement process, Petitioners provided the parties with a considerable amount of additional information, including forecasts of costs, investments, and revenues through 2012.
On May 11, 2007, a number of parties to these proceedings announced that they had reached an agreement in principle on most of the terns of three-year rate plans for KEDNY and
KEDLI that would take effect absent the proposed merger. This agreement in principle also reflects changes in KEDNY and KEDLI's existing incentives governing safety and reliability and customer service quality. As of yet, a joint proposal setting forth the terms of that agreement in principle has not been executed. On May 31, 2007 a Joint Proposal for interim energy efficiency programs was executed by many of the parties and filed with the Commission. 111. The Merger Joint Proposal Is Consistent With The Commission's Guidelines Governing Settlements, Fully Supported By The Record And Otherwise In The Public Interest.
A. Standard of Review and Issues Raised
The Merger Joint Proposal is the product of lengthy, complex and difficult negotiations between normally adversarial parties that fully complied with the Commission's rules and offered all parties the opportunity to participate. The Commission's "Procedural Guidelines for
~ettlements"'~set forth the following criteria for determining whether a joint proposal is in the public interest:
(1) A desirable settlement should strive for a balance among (ii) protection of the ratepayers, (ii) fairness to investors, and (iii) the long term viability of the utility; should be consistent with sound environmental, social and economic policies of the Agency and the State; and should produce results that were within the range of reasonable results that would likely have arisen from a Commission decision in a litigated proceeding.
(2) In judging a settlement, the Commission shall give weight to the fact that a settlement reflects the agreement by normally adversarial parties.
Applying these principles, it is clear that the Merger Joint Proposal meets the public interest standard. The Merger Joint Proposal is the product of months of negotiations that took place among parties with diverse interests such as the Petitioners, Staff, the CPB, various public interest groups, the Petitioners' various unions and some of Petitioners' largest customers.
Under the circumstances, the Commission should afford substantial weight to the fact that the
Merger Joint Proposal is supported by parties having diverse and normally adverse interests.
The Meroer hint Pmnn~nlnrnxrirlec I frcamexunrk thnt ndrlrercer the mnrem./i<~ller In this regard, the Signatory Parties that submitted testimony opposing or requesting that significant conditions be imposed on the proposed merger raised five principal issues:
(1) Does the proposed merger provide adequate cost saving benefits to New York
State utility consumers?"
(2) . Do the cost savings benefits offset the risks that could be borne by New York
State consumers as a result of the merger? Are there ways to isolate KEDNY and KEDLI's operations from the financial risks created by the proposed merger? l8
(3) Does the proposed merger raise or give rise to vertical market power concerns that are inconsistent with Commission policy and, if so, how can these concerns be addressed before the merger can be found to be in the public interest?I9
(4) Would the proposed merger create a likelihood of a decline in service quality or safety and reliability?20
(5) Would the proposed merger somehow reduce the influence that the Commission would have over the holding company such that the Commission's ability to regulate KEDNY and KEDLI could be adversely affected?*'
As discussed below, the Merger Joint Proposal fully and effectively addresses each of these concerns in a manner supported by the Signatory
17 See Prepared Testimony of the Merger Policy Panel, dated February 2007 at p. 86, line 2 to p. 88, line 3; Direct Testimony and Exhibit of Dr. Douglas W. Elfner, dated February 20,2007 at p. 3, lines 15-18; p. 5 at lines l- 34... B. The Merger Joint Proposal provides significant economic benefits to customers.
The Merger Joint Proposal would establish five-year rate plans for KEDNY and KEDLI and procedures under which applicable synergy savings will be flowed through to Niagara
Mohawk. These provisions ensure that all New York utility customers of National Grid will realize significant financial benefits from the proposed merger. Under the five-year rate plans established in the Merger Joint Proposal, KEDNY and KEDLI customers would realize approximately $602 million of benefits as a result of the merger.
1. The Merger Joint Proposal provides for rate plans that are, from KEDNY's and KEDLI's customers' perspective, superior to the rate plans that likely would have resulted from a Commission decision on KEDNY's and KEDLI's stand-alone rate plans.
The Merger Joint Proposal's five-year rate plans for KEDNY and KEDLI provide the core benefits that support a finding that the proposed merger is in the public interest. KEDNY's last gas delivery rate increase took effect October 1, 1993, while KEDLI's last base rate increase took effect December 1, 1995.~' Since then, KEDNY and KEDLI have each decreased base rates twice.24 The record shows that one of the principal factors that has enabled KEDNY and
KEDLI to achieve these results has been their ability to control growth in expenses through the attainment of efficiencies from Keyspan's past mergers and acquisitions.25
While KEDNY and KEDLI have been able to provide their customers with a decade or more of rate stability and/or decreases in gas delivery service rates, the record shows that in the absence of the merger with National Grid, this period of rate stability had ended.I6 The rate cases filed in Cases 06-G-1185 and 06-G-1186 by KEDNY and KEDLI, which assumed they remained as stand-alone companies, documented revenue deficiencies of approximately $213 and $159 million, respectively. Even as these rate cases were filed, the Petitioners recognized that approval of the proposed merger could both postpone and reduce the need for the requested rate relief. The Merger Joint Proposal achieves this result in a manner that is overwhelmingly favorable to customers of KEDNY and KEDLI.
The proposed revenue requirement increases of $213 million and $159 million for
KEDNY and KEDLI, respectively, were broken down between costs that would be recovered through gas delivery service rates and costs that would be transferred from those rates and instead recovered through the GAC and/or TAC. No party opposed KEDNY and KEDLI's proposals to recover certain gas-related costs through the GAC andlor TAC?' and thus the increases associated with the proposed shifts between gas delivery service rate and GACITAC rates, as properly updated, are reflected in the Merger Joint Proposal in the same manner as they would have been reflected in either the single year stand-alone rate proceedings or the three-year stand-alone rate plans.
With respect to the portion of the revenue requirements recovered through gas delivery service rates, Staff, the only party other than KEDNY and KEDLI that prepared comprehensive
26 This result is not unique to KeySpan. As discussed by Mr. Catell in his March 7,2007 Rebuttal Testimony, it is generally the case throughout the utility industry that an era of stable prices is being followed by upward nressure on rates resultine from the need to invest in new and renlacement infrastructures and the fact that cost of service studies, recommended in its testimony that KEDNY's base rates be increased by
$8.729 million and that KEDLI's base rates be increased by $61.137 million, both on a one-year basis2* Accordingly, the rate plans provided in the Merger Joint Proposal provide a better result to customers -- even in the first rate year -- than the litigation positions of both KEDNY and
KEDLI and Staff in the stand-alone rate cases.
During the extensive settlement process, KEDNY and KEDLI provided rate case quality forecasts of expenses, investments and revenues supporting their three-year rate proposals and, at the request of the parties, for two additional rate years. Based upon these forecasts, as well as the other information presented in testimony and discovery, a number of active parties, including
KEDNY and KEDLI and Staff, were able to agree in principle to the following gas delivery service rate increases29on a stand-alone basis:
KEDNY KEDLI YEAR ($000) ($000) 2008 $30.300 $88.300
The five-year rate plans set forth in the Merger Joint Proposal are derived from the three- year rate plans that have been agreed to in principle in the stand-alone rate proceedings for
KEDNY and KEDLI. The three-year plans are in turn derived from consideration of the record in the stand-alone rate cases filed by KEDNY and KEDLI and reflect reasonable compromises of the major issues raised in those cases. testimony by Staff, the CPB and New York city?' The three-year stand-alone revenue requirement as set forth in Appendices 2 and 3 to the Merger Joint Proposal reflects significant compromises of positions taken by the various adversarial parties in testimony, which are well within the range of litigation results, on the following material issues:
1. Return on Equity - KEDNY and KEDLI sought returns on equity of 11%. Staff recommended 8.9%, while CPB supported a return of 9.27% and New York City recommended
9.55%.3' The stand-alone agreement in principle includes returns of 9.6% for KEDLI and 9.7% for KEDNY~~-a reasonable compromise, especially in view of the 3 year stay-out commitment.
2. Capital Structure - KEDLI and KEDNY utilized equity components of 50% for ratemaking purposes, while Staff recommended a 43.6% equity component and New York City utilized a 40% equity component.33 The stand-alone agreement in principle reflects a reasonable compromise of 47.00%:~
3. KEDNY Special Franchise Taxes - For KEDNY, the Staff proposed a disallowance of approximately $38 million of property taxes as of March 31, 2007 plus interest.j5 The stand-alone agreement in principle resolves this issue?6
4. O&M Adjustments - For KEDNY and KEDLI, various parties proposed to (i) update test-year 0&M, (ii) adjust inflation percentages, (iii) apply productivity adjustments to both labor and non-labor O&M, and (iv) disallow a portion of incentive compensation expenses.)' The stand-alone agreement in principle reflects a reasonable compromise of those adjustments."
5. Program Changes - New York City proposed that KEDNY and KEDLI defer making program changes that would increase O&M expense.39 The stand-alone agreement reflects a significant compromise on this issue.40
6. Pension & Other Post-Employment Benefits ("P&OPEB) - Staff and other parties proposed a number of adjustments to KEDNY and KEDLI's proposals with respect to the recovery of P&OPEB cost^.^' The stand-alone agreement in principle reflects a reasonable compromise on these, issues with KEDNY remaining off of the Commission's Statement of
Policy issued in Case 91-~-0890.~*
7. Amortization of Deferred Debits - Staff and other parties proposed significant changes to KEDNY and KEDLI's proposals to recover both the return on and return of various deferred debits4' The stand-alone agreement in principle reflects certain adjustments to these proposals.44
8. Revenues - Staff and the Company supported divergent forecasts of firm revenues4' The stand-alone agreement in principle reflects significant compromises on the part of both parties.46
See Appendix B at pp. 2-3 and C at pp. 2-3 and p. 7. "~ ~ The five-year merger rate plans for KEDNY and KEDLI reflect further reasonable compromises. Specifically, as detailed at page 8 of Appendices 2 and 3 to the Merger Joint
Proposal, the five-year rate plans set forth in the Merger Joint Proposal are reconciled to the agreed-upon three-year stand-alone revenue requirements by adjusting for (i) synergy savings and other margin adjustments, (ii) the use of a 45% equity component and 9.8% return on equity,
(iii) for KEDNY, an agreement to reduce rates in order to return to the PLOPEB policy statement, (iv) for KEDNY, the imputation of additional margins from the Temperature
Controlled service classification, (v) for KEDLI, an agreement to assume the risk of obtaining a property tax refund from Nassau County, (vi) for KEDLI, an agreement to forego implementing higher depreciation rates, and (vii) other miscellaneous adjustments. All of these compromises fall within the range of reasonable outcomes that could have arisen from litigation in these proceedings and achieve a result that significantly benefits consumers in New York.
That the Merger Joint Proposal provides for a further extension of a rate moratorium in
Years 4 and 5 enhances the benefits of the Merger Joint Proposal. During the discovery/settlement process, Petitioners provided the parties information indicating a need for modest additional base rate relief in Rate Years 4 and 5. Based on this information, the
Signatory Parties agreed that, absent the merger, during the five-year period 2008-2012, KEDNY and KEDLl would likely require annual gas delivery service rate relief as follows:
KEDNY KEDLI YEAR ($000) ($000) ?nn~ c1n 7.nn PQQ ?nn As a result of the Merger Joint Proposal, this level of gas delivery service rate relief will be reduced to the levels set forth below:
KEDNY KEDLl YEAR (SOOO) (SOOO) 2008 $0 $60,000 2009 $0 $0 2010 $0 $0 201 1 $0 $0 2012 $0 $0
See Appendices 2 and 3 of the Merger Joint Proposal at p. 8.
The cumulative impact of these ratemaking adjustments over the five-year term of the merger rate plans is a reduction in rates of $277.1 million for KEDNY's customers and $325.7 million for KEDLI's customers, for a total of $602.8 million in reduced revenue requirements.
2. The Merger Rate Plans Are Consistent With or Compare Favorably to the Merger Rate Plans Proposed by the Signatory Parties.
In their petition filed July 20, 2006, Petitioners originally proposed a ten-year rate plan that applied allocated net synergy savings to KEDNY and KEDLI and provided for postponed and staggered rate increases for KEDNY and KEDLI. This proposal was withdrawn and substituted with a three-year merger rate plan in March 2007. Under the three-year merger rate plan, National Grid agreed to accept the settled or litigated outcome of KEDNY's and KEDLI's rate proceedings and to apply the allocations of net synergies to those rates4'
The only other parties to offer recommendations in filed testimony concerning the components of a merger rate plan were Staff, CPB, and the City of New York. City of New would freeze KEDNY's base rates for five years, it exceeds the relief recommended in New
York City's litigation position. Staff and CPB offered qualitative recommendations on the appropriate aspects of a merger rate plan that would serve the public interest. Many of these recommendations are incorporated in the rate plans provided in the Merger Joint Proposal. The five-year duration of the merger rate plans conforms generally to Staffs and CPB's recommendations. Staff stated that it would negotiate three-year rate plans that included the elements, including deferrals, typically allowed by the Commission in multi-year rate plans
(Merger Policy Panel at p. 188, lines 15-19; p. 189, lines 19-23) and that sharing of synergy savings between the companies and customers should occur over five years (Merger Policy Panel at p. 191, lines 4-5). Similarly, CPB witness Elfner testified that the proposed ten-year rate plan be shortened to three years, and that the need to share synergy savings and cost to achieve be addressed through other mechanisms (Elfner February 20, 2007 at p. 19, lines 8-14). As discussed below, the merger rate plans provided in the Merger Joint Proposal reflects other key recommendations of Staff and CPB as well.
a Synergy Savings
Petitioners have consistently estimated total net synergy savings (including efficiency gains) of approximately $200 million annually across the National Grid system as a result of the merger with ~e~~~an.~'No other party offered a competing estimate of synergy savings or cost to achieve from the merger. In its testimony, Staff expressed its assumption that Petitioners'
--&:--A- 2:a --A :-..1..2- -ma..: :--- .L-. I2 L L--- ....L: 2 -L"--& &L- ----A- ..-A allocation of synergies to KEDNY and KEDLI based on revenues as proposed by Petitioners resulted in an inadequate allocation given these companies' likely role in generating the synergy savings. (Merger Policy Panel at p. 191, lines 6-18). Staff also expressed concern that the estimate of synergy savings was not yet final (Merger Policy Panel at p. 193, lines 16-21), and that the estimated cost to achieve needed to be locked in so it did not erode the earned return on equity during the period when net synergy savings were being shared between the companies and customers (Merger Policy Panel at p. 103, lines 7-15). CPB also noted its concern as to the tentative nature of Petitioners' estimate of synergy savings, but recommended that the $200 million in synergy savings was inadequate to support a determination that the merger was in the public interest. (Elfner testimony dated February 20, 2007, p. 37, lines 7-9; p. 38, lines 4-10).
Dr. Elfner also expressed concern over the preliminary nature of Petitioners' estimate of cost to achieve, and recommended that the cost to achieve be fixed and recovered over a ten-year period. (Elfner at p. 47, lines 6-20, p. 48, lines 1-2).
The rate plans established by the Merger Joint Proposal reflect the flow through of
KEDNY and KEDLI's allocated share of fifty percent of $156 million of estimated annual net synergy savings to KeySpan and National Grid over the first five years after the merger.50
Petitioners' estimate of $200 million in synergy savings across the National Grid system was reduced by $44 million to reflect efficiency savings that could have been achieved absent the merger. These savings were applied directly to reduce KEDNY's and KEDLI's revenue
"a"..:---..*" ma ..-+ "....-- ,... ""..:.."" ...I.:,.I. *-+la,.+ ,.A:...+--..* $,." - ha.. -7-"- a...,.4:,....:-.. ,.Ca credits of approximately $5.7 million to KEDNY's customers and $3.3 million to KEDLI's customers.52 In addition, under the Merger Joint Proposal, following the conclusion of the five- year rate plans, KEDNY and KEDLI's costs of service will be based on their actual costs,
meaning that 100 percent of KEDNY and KEDLI's respective shares of any synergy savings
arising from the merger will be reflected in the cost of ~ervice.~'
When viewed in the context of the total cost saving benefits of the five-year rate plans,
the resolution of the synergy savings issues reflected in the Merger Joint Proposal represents a
reasonable result within the range of likely outcomes from a Commission decision in a litigated
proceeding. While a number of parties challenged Petitioners' synergy savings estimate^,'^ there
is nonetheless substantial evidence that supports the Petitioners' estimates of synergy savings
and costs to achieve, as well as the allocation and sharing of those net synergy savings.55 More
importantly, however, the cost saving benefits of the five-year rate plans are not limited to the
flow through of net synergy savings, but as noted throughout this document, the Merger Joint
Proposal includes substantial additional beneficial ratemaking adjustments.
b. Capital Structure
Petitioners proposed to use the capital structures established in KEDNY's and KEDLI's
stand-alone rate plans for the merger rate plan. The Staff Merger Policy Panel posited that it was
not fair to customers to have them finance an equity return on assets financed by debt and
proposed a consolidated capital structure approach, unless ring-fencing provisions were
:.--I .-A .- ---.--.VE~XTV~- --A VE~T ---A:& 2-1. m." n-t:--. n*--l -a - tnn I
lines 3-9). As a reasonable compromise, the earnings-sharing provisions of the Merger Joint
Proposal assume a 45% equity c~mponent?~as compared to the assumption in the stand-alone
rate plans of an equity oomponent of 47%." Moreover, the Merger Joint Proposal provides for
extensive ring-fencing provisions, as discussed below.
G Cost Deferrals And Other Provisions
It should be noted that the revenue requirement benefits reflected in the five-year rate
plans were not obtained through the use of an unusual number of deferrals. The deferrals of
pension and other post-employment benefit costs, SIR costs, excess property taxes, capital costs
and exogenous costs provided for in the five-year rate plans Merger Joint Proposal are consistent
with StafPs recommendations and consistent with other multi-year rate plans.s8 Rather than
making extensive use of deferrals, the five-year rate plans set forth in the Merger Joint Proposal
reflect the flow through of real cost savings over the next five years. Other provisions of the
merger rate plans are also consistent with Commission policy and precedent. For example, the
KEDNY rate plan provides for KEDNY's return to the Commission's Policy Statement on
Pensions and Other Post-Employment Benefits.
In its testimony, Staff asserted that an appropriate rate plan would likely contain deferred
provisions for various items but place limits on these items once certain earnings thresholds are
e~ceeded.'~Moreover, Staff asserted that such plans would include rate of return and earnings cap provisions "consistent with levels recently considered and approved by the ~ornmission."~~
The five-year rate plans in the Merger Joint Proposal fulfill both of these assertion^.^'
d. Gas Cost Savings
In addition to the synergy savings, one hundred percent of the net savings that KEDNY,
KEDLI and Niagara Mohawk will attain from the ability to manage a combined gas resource portfolio following the merger will flow to the benefit of their customers under the Merger Joint
~ro~osal.~~In their filing herein, Petitioners estimated that these savings would total $146 million over a ten-year period.63 While the record does not reflect agreement on the level of gas costs savings that is likely to be achieved as a result of the merger, there is no meaningfi~l evidence that suggests that gas costs savings will not be realized as a result of the eventual combination of the KEDNY, KEDLI and Niagara Mohawk gas supply portfolios. These benefits provide additional support for the conclusion that the merger is in the public interest.
Thus, the five-year rate plans under the Merger Joint Proposal provide significant, tangible, and immediate benefits for KEDNY and KEDLI customers that represent a favorable compromise of the parties' varying positions on the issues and that justify approval of the merger. During the past decade, the Commission has approved a number of mergers involving
New York State distributors of electricity and natural gas including (i) Consolidated Edison
Company of New York, Inc. and Orange and Rockland ~tilities,~~(ii) The Brooklyn Union Gas ! Company and the Long Island Lighting ~om~an~,~~(iii) National Grid and Niagara ~ohawlc,~~
and (iv) Energy East Corporation and Rochester Gas and Electric ~orporation.~'Petitioners'
submit that the $602.8 million of rate offset benefits being provided under the five-year rate
plans for KEDNY and KEDLI under the Merger Joint Proposal represents a level of benefits that
is comparable to or exceeds the level of rate benefits provided in the context of these other
business combination^.^' Under these circumstances, the level of benefits provided in the five-
year rate plan should support a finding that the Merger Joint Proposal is in the public interest.
Accordingly, the resolution of these issues reached in the Merger Joint Proposal is a reasonable
compromise of the Signatory Parties' various positions on this issue.
3. Benefi to Niagara Mohawk Customers
The proposed merger would also provide significant synergy savings benefits to Niagara
Mohawk's customers. Under Niagara Mohawk's rate plan, Niagara Mohawk customers are
entitled to 50% of follow-on synergy savings from other National Grid acquisitions. Under the
Proposal, in a separate filing, Niagara Mohawk will propose to accelerate this credit and provide
business combination was projected to produce $218.5 million of gross savings in five years that were offset by $36.9 million of costs to achieve. See Order at pp. 4, 11-12. 65 Case 97-M-0567, Joint Petition of Long island Lighting Company ond The Brooklyn Union Gas Company for Authorization Under Section 70 of the Public Service Low to Transfer Ownership to an Unregulated Holding Company and Other Related Approvals, "Opinion and Order Adopting Terms of Settlement Subject to Conditions and Changes," Opin. No. 98-9 (Apr. 14, 1998) (hereinafter "Case 97-M-0567 Settlement"). Over a five year period, this transaction created approximately $436.3 million of benefits for Brooklyn Union and LILCO gas customers and LILCO electric customers. See Order at Appendix A -Appendices G, K and 0. 66 Case 01-M-0075, Joint Petition of Niagara Mohmvk Holdings. inc.. Niagara Mohawk Power Corporation, National Grid Group pic and National Grid USA for Approval of merger and Stock Acquisition, "Opinion and Order Aanthnri7ino Merorr inA Adnntino Rntr Plnn " nnin Nn 01-6 (ner t 7001) Over I five vrar nerind an electric its customers in one month the present value of the net synergy savings for the remainder of the
Niagara Mohawk rate plan period.69 in subsequent years, 100% of Niagara Mohawk's share of net synergy savings will flow to the benefit of customers, an amount exceeding $200 million in the first five years after the end of the Niagara Mohawk rate plan period.70
4. Benefits to LZPA Customers
In addition to the benefits the Merger Joint Proposal provides to KEDLI's Long Island gas customers, the proposed merger would also create significant benefits for customers of the
Long Island Power Authority ("LIPA"). According to LIPA, the amended agreements National
Grid has entered with LlPA will generate significant financial benefits for Long Island electric customers, which includes application of synergy savings and other items. In addition, the agreements provide for a joint National GridnIPA energy efficiency effort, the installation of equipment to reduce NOx emissions and improve efficiency at the Northport and Port Jefferson power stations and a commitment for a detailed, joint National GridnIPA engineering and economic repowering study for the Northport and Port Jefferson ~lants.~'These substantial economic and environmental benefits for Long Island customers also support the Commission's determination that the merger is in the public interest.
C. The Financial Protections in the Merger Joint Proposal Assure that the Cost Benefits of the Merger Are Not Offset By Increased Credit Risk
Both Staff and CPB raised the issue of protecting KEDNY's and KEDLI's credit risk from the business risk associated with National Grid's other businesses. Staff voiced concerns about whether a decline in National Grid's credit rating could adversely affect KEDNY's and
KEDLI's ability to attract capital at reasonable rates. (Merger Policy Panel at p. 24, lines 1-14; p.
33, lines 14-21; p. 42, lines 13-20). CPB raised concerns about an adverse change in KEDNY's and KEDLI's credit risk as a result of the merger and noted that any increase in the cost of capital as a result of the merger should not be reflected in rates. (Elfner 2/20/07 at p. 12, lines
14-20, p. 13, lines 1-14).
The financial protections provided at Appendix 5 of the Merger Joint Proposal fully address these concerns and assure that the cost benefits of the merger rate plans are not offset by any financial risks associated with the proposed merger. The dividend restrictions and the requirement that National Grid maintain investment grade ratings for KEDNY and KEDLI, together with the commitments not to reflect goodwill or any debt from the merger transaction on KEDNY's and KEDLI's regulatory books and accounts, effectively insulate KEDNY and
KEDLI ratepayers from adverse rate impacts in the event there is a deterioration in National
Grid's credit quality. These financial protections, the structure of the proposed regulated and unregulated money pools and the corporate structure and affiliate rules provided at Appendix 4 assure the separation of KEDNY and KEDLI From the obligations of National Grid's other affiliates and from appearing to speak for such other affiliates or acting on their behalf.
D. Any Vertical Market Power Concerns That May Arise From the Merger Are Fully Addressed in the Merger Joint Proposal.
A number of parties, including CPB and the City of New York, raised concerns over the with a long-term contract that removed any financial incentive to exercise market power. Id.
The most detailed analysis of this issue is in Staffs Merger Policy Panel testimony, at p. 103, line 20 - p. 160, line 11. In this testimony, Staff expresses its preference that National Grid divest the Ravenswood Station, but states that it would accept as alternatives the return of
Ravenswood to cost-of-service regulation or a long-term contract for the output of Ravenswood if these alternatives could be structured to remove incentives to manipulate electricity prices. Id at p. 157, line 20 - p. 158, line 7.
The Merger Joint Proposal contains provisions reflecting each of Staffs and CPB's recommendations to ensure that vertical market power will not be exercised by the combined entity. Specifically, National Grid agrees to the goal of divesting the Ravenswood Station following the merger and commits to pursuing a sale of Ravenswood or, in the alternative, a bilateral physical or financial contract having a term of at least 15 years for all of the products of the Ravenswood tat ion.'^ Until either of these is accomplished, National Grid will take steps to ensure that it is financially indifferent to the price of energy in Zone J with respect to the output of the Ravenswood Station by entering into, by January 1, 2008, a single forward financial sale of all the energy output from the Ravenswood Station for a term of up to three years.73 In the event that National Grid has not divested Ravenswood or entered a long-term bilateral contract by the end of the short-term financial sale, then the Ravenswood Station will be subject to a cost- of-service cap whereby the revenues from the output of the Ravenswood Station that exceed the
rnm+ nf ia-,:ra :ml..rl:rn rr nlln..rarl rah.rr nr :r.r--+mart md h.r +h- Pnmm:rr:r\n ..r:ll ha manner determined by the omm mission?^ Thus, the Merger Joint Proposal's resolution of the vertical market power issue draws heavily from the recommendations of Staff and CPB to strike a compromise that assures compliance with the Commission's Market Power Policy Statement and permits National Grid to conduct its business in a commercially reasonable manner.
In addition, the Merger Joint Proposal contains provisions that assure that National Grid will continue to plan and operate its transmission system in the best interest of its electric transmission and distribution customers, without regard to the financial impacts that such actions may have on the profitability of the Ravenswood ~tation.7~Responding to another concern raised by the Merger Policy Panel, National Grid further agrees that it will not own or develop new generation facilities except in special circumstances, such as where requested by the LIPA or the New York Power Authority ("NYPA") under a long-term ~ontract.'~
Taken together, these commitments achieve a result that adopts the recommendations of
Staff and CPB in a manner that is consistent with the Commission's policies. Moreover, this is an outcome that is within the range of likely outcomes from a Commission decision in a litigated case. As such, these commitments support a finding that the Merger Joint Proposal is in the public interest.
E. The Merger Joint Proposal Together With the Joint Proposal in the Stand- Alone Rate Cases Assure that Service Quality and Safety Will Not Be Compromised.
CPB and Staff both raise general concerns that the proposed merger will cause KEDNY's Elfner dated February 20, 2007 at 25, lines 6-17; Merger Policy Panel at 10, lines 9-23). CPB and Staff also raise concerns about degradation of service quality at Niagara Mohawk. (Elfner at
26-28; Testimony of David F. Reulet dated January 2007). This issue is addressed through a combination of the Merger Joint Proposal and the agreement in principle on the stand-alone rate plans.
Currently, KEDNY and KEDLI are subject to customer service quality and safety and reliability standards that were approved in Case 97-~-0567.~~These standards continue until they are changed by the Commission. At the same time, in Cases 06-G-1185 and 06-G-1186, the settling parties have agreed in principle to revise these standards, and such revisions will be reflected in the joint proposal that will be filed in those cases when it is fina~ized.'~These standards were agreed upon for KEDNY and KEDLI regardless of whether the merger occurs and are designed to assure that KEDNY's and KEDLl's existing levels of customer service quality and safety and reliability will be maintained or enhanced.
The Merger Joint Proposal reflects KEDLI's commitment to spend approximately $28 million annually on programmatic replacement of bare steel mains and se~ices.'~This replacement program was developed to address concems raised by Staff in the stand-alone
KEDLI rate case.*' Under the Merger Joint Proposal, KEDLI will have every incentive to complete this plan because if it fails to spend the non-growth related capital expenditure amounts reflected in the rate plan, it will be required to defer the revenue requirement associated with such expenditure amounts for the benefit of its customer^.^' Thus, KEDLI will have a strong incentive to complete this incremental reliability-enhancement program following the merger.
In addition, the Merger Joint Proposal reflects commitments:
(1) that KeySpan has made to LIPA to maintain existing customer service and operation centers on Long Island and maintain current storm restoration staffing levels;
(2) by Niagara Mohawk to increase the number of in-house line mechanics in its distribution group and to create a new work unit in its transmission group that would also be staffed with in-house line mechanics;82and
(3) by Niagara Mohawk to improve the preparation and processing of Article VII and
Part 102 proceedings.
These commitments address issues raised by various parties83in these proceedings in a manner that reflects reasonable compromises that will further the Commission's policy goals of improving utility service to customers in New York State. Other issues, such as the reliability issues on the Niagara Mohawk system raised by Staff witness Reulet, will be addressed by
National Grid in the context of a Niagara Mohawk proceeding."
F. The Merger Joint Proposal Assures that the Combined Entity Will Be Fully Responsive to the Commission.
Finally, the Merger Joint Proposal, taken as a whole, fully addresses Staffs and CPB's concerns that National Grid will somehow be less responsive than KeySpan would be to the Commission's influence and policy directives." As discussed in the Petitioners' rebuttal testimony, it has always been Petitioners' position that this concern was and the
Merger Joint Proposal demonstrates Petitioners' firm commitment to manage their New York
State operations in a manner that comports with Commission policy and ensures that New York
State customers will continue to receive safe and reliable service at the lowest reasonable cost.
The combined entity will maintain a strong presence in New York and the Merger Joint Proposal
assures that Commission Staff will have access to the books and records for the purpose of
verifying compliance with the Commission's rules and policies. Under these circumstances, the
Merger Joint Proposal achieves a result that is consistent with the public interest and should be
approved expeditiously. Conclusion
For the reasons set forth above, and as set forth in the Joint Petition and sworn testimony submitted in this proceeding, the Merger Joint Proposal should be approved expeditiously and without modification.
Respectfully submitted,
Catherine L. Nesser, Esq. Keyspan Corporation Robert Hoaglund One MetroTech Center National Grid Brooklyn, N.Y. 11201 25 Research Drive Ph: (71 8) 403-3073 Westborough, MA 01582 Fax: (7 18) 403-2698 Ph: (508) 389-2877 cnesser(iikevspanenere;v.com Fax: (508) 389-2463 thomas.robinson@,us.n~rid.com [email protected]
Kenneth T. Maloney Cullen and Dykman LLP 1101 Fourteenth Street, N.W. Suite 550 Washington, DC 20005 Ph: (202) 423-8890 Fax: (202) 457-1405 kmalonev~culldvk.com
Dated: July 1 1,2007 cc: Active Parties Appendix A
STATE OF NEW YORK PUBLIC SERVICE COMMISSION
Case OCM-0878 Joint Petition of National Grid plc and KeySpan Corporation for Approval of Stock Acquisition and Other Regulatory Authorizations.
MERGER PROCEEDING DRAFT ISSUES LIST (Revised Mav 30.2007)
I. Is the proposed acquisition of KeySpan Corporation ("KeySpan") by National Grid plc and the resulting change in control over Keyspan's jurisdictional subsidiaries in the public interest?
Positions on the Record: Petitionem requested approval of the merger as consistent with the public interest under Sections 70, 99 and 100 of the Public Service Law (Reilly Zelkowib Testimony, 1013, pp.16-17). Staff opposed the merger as currently configured (Merger Policy Panel, 2/20, pp. 5- 11); and suggested minimum conditions suggested for merger approval (id at pp. 183-94). Staffs specific issues and conditions are discussed below. CPB opposed the merger and rate plans as filed (Elfner Testimony, 2/20, p. 3); and suggested conditions that would make the transaction acceptable (summarized at id, pp. 4-7). NYC objected to the proposed rate plan without expressly taking a position on the merger (Gorman Testimony, 2/20, pp. 2-3). Suffolk County believed that merger should not be approved based on the small allocation of synergy savings (Radigan Testimony, 2/20, p. 4).
Resolution in Joint Proaosal: Merger approved (Joint Proposal, pp, 7-8) including conditions that addressed the concerns expressed by the Signatory Parties as discussed below. Appendix A
(ii) Is an adjustment to estimated synergy savings to reflect the treatment of efficiency gains in the KEDNY and KEDLI stand-alone costs of service appropriate and reasonable?
Positions on the Record (Issues A(il and (iib: Petitioners supported the $200 million estimate of synergy savings through a series of analyses that became more detailed as the integration teams began and completed its work. The analyses are included in the following testimonies: HoffmanrLevin Testimony (1013); Feibelmannevin (12114); Feibelmannevin (317); Feibelmannevin (5130) (final analysis). Petitioners also identified through discovery and in the May 30 Supplemental Testimony that the efficiency gains directly allocated to KEDNY and KEDLI in the stand-alone costs of service reduced that value to $156 million (Feibelmannevin, 5/30, pp. 4-6; Ex. AVFIRJL8S) Staff did not believe that the analysis was complete and final at the time of its February 20 testimony (Merger Policy Panel, 2/20, pp. 88-90). CPB believed that the synergy estimate was too low and performed inconsistently with an earlier analysis performed during due diligence (Elfner Testimony, 2/20, pp. 36-42). NYC believed that the synergy savings analysis was not sufiiciently detailed at the time it filed its testimony (Gorman Testimony, 2/20, pp. 4-5). Suffolk County believed the savings were too small (Radigan Testimony, 2/20, p. 7).
Resolution in the Joint Prowsal: The Rate Plans for both KEDNY and KEDLI are based on the allocation of $200 million of synergy savings, less efficiency gains as set forth in the Petitioners Supplemental Testimony (FeibelmanLevin, 5/30), producing the $156 million that is reflected in the Joint Proposal pp. 14-15,22-23.
(iii)ls the allocation methodology proposed by the petitioners based on delivery revenues appropriate for KEDNY and KEDLI?
Positions on the Record: Petitioners proposed an allocation based on T&D revenues of the operating companies (Molloy Testimony, 1013, pp. 8-15; 317, pp. 8-17). Petitioners also responded to the suggestions of others for different allocators in Mr. Molloy's rebuttal testimony (Molloy Testimony, 317, nn LlA\ and a-nrrerterl the analvsi. tn errlmnde 1.rPA'e Nine Mile Appendix A
Resolution in the Joint Proaoeal: The Merger Rate Plans in the Joint Proposal are based on the Petitioners' allocation methodology. Compare Appendix 6 of the Joint Proposal to Ex. No. -(Rates PanellR).
(iv) Is the proposed fifty-fifty sharing of synergy savings over ten years between customers and companies and one hundred percent to customers thereafter reasonable?
Positions on the Record: Petitioners proposed 50%/50% sharing over a ten year rate plans in their Joint Petition and October 3 Testimony, but in response to comments by others reduced the rate plans to three years in the March 7 rebuttal testimony. This proposal was then updated to reflect the agreement in principle for three year stand-alone rate plans for KEDNY and KEDLI. (Molloy Testimony, 317, pp. 3-5). However, the Petitioners continued to propose a ten year sharing of net synergy savings (id at pp. 7-8). Staff proposed a 90%110% sharing between customers and the Companies over a five year period (Merger Policy Panel, 2/20, pp. 9&100,190-91). CPB proposed a sharing of 50%150% for five years (Elfner Testimony, 2/20, pp. 50- 51). NYC proposed a three year rate freeze, under which the Company retained all synergy savings during the period of the freeze (Gorman Testimony, 2/20, p. 10).
Resolution in the Joint Prowsal: The Merger Rate Plans in the Joint Proposal share net synergy savings for five years at 50%/50% between customers and the Companies (pp. 14-15, 22-23, Appendix 6). The shortening of the sharing period to five years from the ten years proposed in Petitioners' rebuttal testimony provides KEDNY's and KEDLI's customers with additional value of $47 million and $27.8 million, respectively, over the Petitioners' proposal (App. 6 to Joint Proposal, p. 1, lines 9 and 22 summed over years 6-10). These savings will occur after the rate plan period and are therefore in addition to the savings projected over the first five years of the rate plans.
(v) Is the treatment of net synergy savings in KEDNY's and KEDLI's rates as set forth in Condition 11.3 and 11.4 of Duh:L:+ Xl- /l rDIC1 71D\ranr-lrhla9 Appendix A
1R); Ex. No. -(Rate Panel-2R)). They also proposed to levelii the costs to achieve over ten years.
Resolution in the Joint Prooosal: The Rate Plans for both KEDNY and KEDLI are based on the method set forth in Exhibit No. -(Rates Panel-2R) with costs to achieve levelized over ten years, but with synergy savings levelized over five years, producing annual credits of $5.5 million for KEDNY and $3.2 million for KEDLI as shown on Appendix 6, p. 1 of the Joint Proposal. Levelized costs to achieve shown on lines 5 and 18 of Appendix 6, page 1 are includable in the cost of service in years six through ten following the merger (Joint Proposal, pp. 15,23).
(v) Are the $400 million of costs to achieve estimated for the merger reasonable?
(vi) Is an adjustment to the estimated costs to achieve to reflect the treatment of efficiency gains and their associated costs to achieve in the KEDNY and KEDLI stand-alone costs of service appropriate and reasonable?
(vi) Is the allocation of the costs to achieve reasonable?
(vii) Is the proposed sharing of the costs to achieve between customers and KEDNY and KEDLI reasonable?
(viii) Is the proposal in Condition 11.2 of Exhibit No.-(LJRISLZ-IR) to amortize the costs to achieve over ten years with a return reasonable?
(ix) Should transaction costs and executive compensation costs be excluded from the cost to achieve, and, if so, is any further adjustment required to the costs to achieve allowance proposed by the Petitioners?
Positions ou the Record (Issues Alv) through A(ix)): Petitioners initially projected costs to achieve the synergy savings at two times the annual mature synergy savings produced by the merger or $400 million and to allocate them in the same fashion as synergy savings. HoffmanLevin Testimony (10B); Feibelmannenn (12114); Feihelrnnnfl~vin(317): l7eihelrnnnfl.evin (51311) (final nnnlnis\. As Appendix A
the emciency gains allocated directly to KEDNY and KEDLI in the cost of service (id). Other Parties' suggestions for the allocation and sharing of synergy savings also apply to costs to achieve. In addition, CPB criticized the Petitioners' estimate based on a prior analysis and suggested that transaction costs and executive benefits should be excluded from recovery. Mr. Elfner also suggested that the costs to achieve be limited to $276 million and recovered over ten years in his February testimony (Elfner Testimony, 2/20, pp. 44-48).
Resolution in the Joint Prooosal: The Rate Plans for both KEDNY and KEDLI are based on the allocation of $398 million of cost to achieve as set forth in the Joint Proposal pp. 15, 23, which excludes executive benefits. As shown on Appendix 6, page 6, the $398 million is $15 million less than the current estimate of costs to achieve excluding executive benefits, capitalized IT costs, and the costs to achieve associated with the efficiency gains that are reflected directly in the cost of service.
B. In determining whether the proposed transaction is in the public interest in this proceeding, is it appropriate for the Commission to consider an alternative transaction that was before the KeySpan Board of Directors at the time that the Board was considering the National Grid transaction? If so, what is the significance of this alternative transaction to the matters under consideration in this proceeding?
Positions on the Record: The evidence on this issue is confidential.
Resolution in the Joint Provosal: The Signatory Parties have agreed that the transaction is in the pnblic interest under the terms set forth in the Joint Proposal.
C. Will the proposed merger create gas supply savings to New York customers of KeySpan and National Grid that are in the public interest?
(i) Is the change in KeySpan reserve margin reasonable? (ii) Is the seasonal supply transaction proposed by the Petitioners reasonable? Appendix A
operation of the KEDNY, KEDLI, and Niagara Mohawk gas supply portfolios (Nairn/Klosowski, 1013, pp. 15-16; Ex. No. -(MNLK-I)). The petitioners also filed rebuttal testimony to the Staff and CPB (NairnlKlosowski, 317). Staff and CPB criticized the estimate and suggested that they may not be attributable to the merger (Wayand Testimony, 2/20, pp. 2-12); Elther Testimony, 2120, pp. 55-58).
Resolution in the Joint Pro~osal: The Rate Plans for both KEDNY and KEDLI reflect one hundred percent of the net savings (savings less cost to achieve) each company achieves in its combined gas resources portfolio as a reduction to the Gas Adjustment Clause as set forth in the Joint Proposal pp. 14,22.
D. Are the concerns raised regarding electric reliability, electric line workforce, and the maintenance backlog of Niagara Mohawk Power Corporation reasonable and should such concerns affect a decision to approve the merger of National Grid and KeySpan?
(i) Should National Grid be required, as part of the merger approval, to spend a certain level on Niagara Mohawk reliability related programs?
(ii) Should Niagara Mohawk be required to modify the current electric rate plan to increase the financial consequences for the failure to meet certain reliability standards?
(iii) Should National Grid be required to address Niagara Mohawk's "B" maintenance backlog?
(iv) Should National Grid's electric lineworker staffing levels be augmented?
(v) Will the proposed synergy savings and efficiency gains impact service quality at Niagara Mohawk Power Corporation? Have petitioners provided enough information regarding personnel reductions?
(vi) Does Condition IV.2 in Exhibit No.-(LJWSLZ-IR) provide sufficient assurance of additional capital in.rnrh.ran+ rr\ arlrlrarr thn rnli-hilikr mnrnmr in hTirn~- Appendix A
The International Brotherhood of Electrical Workers, Local 97 also raised issues, which were resolved in an agreement with the Local, and Local 97 withdrew its testimony. Sewice quality issues were also presented in testimony by the Utility Workers Union of America, which was subsequently withdrawn. Petitioners responded to these concerns in rebuttal testimony on March 7 (Reliability Panel, 317).
Resolution in the Joint Prowsal: National Grid committed to increase internal staffing in the transmission and distribution group and maintain customer service stafling as set forth on page 31 of the Joint Proposal, as was agreed with Local 97. The remaining service quality issues will he addressed separately by Niagara Mohawk in its own filings with the Commission.
E. Should customer service standards be modified for KEDNY and KEDLl following the merger?
(i) Will the changes in customer service operations proposed adversely affect the call centers?
Reserved Issue: KEDNY's and KEDLI's customer service standards are a resewed issue under the Joint Proposal (page 4). The Joint Proposal (pages 32-33) provides excerpts from the agreements with the Long Island Power Authority regarding staffing of on-island field force and storm support, which several Signatory Parties believe support the Commission's public interest determination in this proceeding.
F. Should the approval of the merger include requirements to repower generation plants on Long Island?
(i) Does the Commission have jurisdiction over the decision to repower the generating plants and the recovery of the resulting costs?
(ii) If so, are the repowering proposals by the parties cost- effective?
Positions on the Record: Suffolk County suggested that repowering of generating plants on Long Island be mads=I mnditinn nf the meroer CRsdioan Teetimnnv nn h 71-74] Appendix A
Ravenswood Generating Station, particularly with regard to the feasibility of retiring Units 10 and 20 and replacing them with a new combined cycle facility.
G. Should the merger approval include any conditions associated with the remediation of MGP sites in KEDNY's and KEDLI's service territories?
(i) Has this issue been resolved in the context of the stand- alone rate proceedings for KEDNY and KEDLI?
(ii) If not, does the Commission have jurisdiction over site remediation plans?
(ii) If so, are the proposals by the parties reasonable and cost- effective?
(iii)Are the costs of implementing reasonable and cost- effective remediation plans recoverable in KEDNY's and KEDLI's rates?
Positions on the Record: Suffolk County raised the issue of the remediation of manafactured gas plant sites on Long Island (Radigan Testimony, 2/20, pp. 6, 24-34) and the issue was also discussed at several of the Commission's public hearings on Long Island.
Resolution in the Joint Pronosal: The Joint Proposal requires KEDNY (page 17) and KEDLl (page 25) to consult with Staff and any other interested party in order to establish a reasonable targeted cost level for each separate phase of the SIR Activity on any particular site. The Joint Proposal also includes SIR and potential incentive mechanisms as a Resewed Issue on page 3.
H. Should any approval of the merger include the discontinuance of certain property tax litigation against the County of Nassau?
(i) Does the Commission have jurisdiction to require KEDLI to discontinue such property tax litigation?
(ii) If so, is Nassau County's proposal for KEDLI to dicrontinno itc litiontion in tho nlthlic interpd? Appendix A
Resolution in tbe Joint Prowsal: The Nassau County tax issue is not waived in the Joint Proposal (pages 24-25), but an estimate of the proceeds from the claim is credited to the cost of service for KEDLI as part of the mitigation of KEDLl's rate increase. Under the Joint Proposal, KEDLI is authorized to retain any proceeds that it ultimately realizes from the claim. The resolution in the Joint Proposal is for rate making purposes only and is not intended to prejudice any party in the litigation between KEDLI and Nassau County.
2. Will National Grid's financing of the merger transaction negatively impact National Grid's creditworthiness or adversely affect KEDNY and KEDLI?
A. Will the proposed financing of the transaction with debt cause a negative impact on National Grid's creditworthiness and credit rating which would be detrimental to the financial strength of National Grid plc?
B. Will the financial integrity of KEDNY and KEDLI be adversely affected by such a financing transaction?
(i) Do the Conditions set forth in Section I of Exhibit No.-LJRISLZ-IR) reasonably protect KEDNY's and KEDLI's financial integrity following the merger?
(ii) Should KEDNY's and KEDLI's stand-alone capital structures be used for ratemaking purposes?
a. Is the use of KEDNY's and KEDLI's stand-alone capital structures appropriate as a matter of financial theory? b. Given the proposed ring-fencing proposals, is the use of KEDNY's and KEDLI's stand-alone capital structure reasonable?
(iii) Are the debt and capital ratios reflected in the stand-alone capital structures proposed for KEDNY and KEDLI reasonable? Appendix A
Petitioners in their direct testimony propose to finance the purchase of KeySpan by issuing debt at the parent company level and to implement various financial protections (Cochrane Testimony, 1013, pp. 6-9). In response to suggestions by the other parties in rebuttal testimony, Petitioners added more ring-fencing protections, and explained that the financing proposed for the acquisition would not undermine the financial integrity of National rid (ReillyIZelkowitz Testimony, 317, pp. 13-17; Ex. No. -(LJR/SLZ-1R); CochraneIRead Testimony, 3fl, pp. 3-27). Staff expressed concern about the issuance of debt, the treatment of goodwill, and their effects on KEDNY and KEDLI. Staff also suggested that the KEDNY's and KEDLI's rates be based on the consolidated National Grid capital structure, absent adequate ring-fencing provisions (Merger Policy Panel, 2/20, pp. 11-55,190). CPB also raised issues associated with goodwill and financial risk (Elfner Testimony, 2/20, pp. 4,7-13).
Resolution in the Joint Pro~osal:Appendix 5 of the Merger Joint Proposal provides various ring-fencing provisions to protect the financial integrity of KEDNY and KEDLI and to allow the use of their capital structures for rate making purposes. In addition, KEDNY's and KEDLI's capital structures for rate-making and earnings sharing purposes are based on an equity component equal to 45 percent, a level below that agreed to in the stand-alone rate plans. Goodwill is excluded from the regulatory accounts of the Companies and their rate making and earnings sharing calculations.
3. What are the effects of the proposed merger on rates, regulation, service, and competition?
A. Do the stand-alone three-year rate plans for KEDNY and KEDLI set forth in settlement in principle provide a reasonable benchmark for the net synergy savings adjustments proposed by the Petitioners in Condition 11.1 of Exhibit NO.-(LJWSLZ-I R)?
B. Are the proposed provisions set forth in Condition 11 for the treatment of net synergies in KEDNY's and KEDLl's costs of service reasonable and appropriate?
See the discussion under Section l.A above. Appendix A
Staff snggested that the National Grid consolidated capital structure should be used for rate making purposes unless adequate ring-fencing conditions were in place.
Resolution in the Joint Pro~osal:The Merger Joint Proposal provides for an eqnily component of 45 percent in the cost of sewice and for earnings sharing purposes (pages 2Oand 28; Appendix 2, p. 8; and Appendix 3, p. 8), which is lower than the level agreed to in the stand-alone rate cases (compare Appendix 2, p. 19; Appendix 3; p. 19). The return on equity was also adjusted, consistent with the Commission's policies for stayout premiums associated with a longer rate plan period.
D. Will the proposed merger have any adverse impacts on the Commission's ability to continue to regulate any jurisdictional subsidiary of KeySpan?
(i) If so, do the commitments in Mr. Catell's testimony and in Section 2.6 of Exhibit 11 to the Petition to maintain KEDNY's and KEDLl's corporate headquarters and books and records in New York, and to provide access to the books and records of the holding company to the Commission reasonably address these concerns?
Positions on the Record:
The Petitioners filed testimony reaMirming its commitments to New York (Cattell Testimony, 3/7, pp. 8-12). Staff suggested that the merger could rednce the Commission's influence (Merger Policy Panel, 2/20, pp. 10-11,160-63).
Resolntion in the Joint Prooosal: Appendix 4 to the Merger Joint Proposal provides a Corporate Structure and Affiliate Rnles to assure that the Commission and Staff will have access to the books and records of KEDNY and KEDLI and appropriate protections are in place for affiliate transactions.
4. Vertical Market Power Issues:
A. Does the proposed merger create the possibility that the combined entity will be able to exercise vertical market power in the electricity markets in a manner detrimental to the interests of consumers? Appendix A
comprehensive regulation by FERC and the Commission, eliminate or sufficiently mitigate the ability of Niagara Mohawk to exercise such vertical market power to overcome the rebuttable presumption set forth in the Commission's policy on vertical market power in Case 96- E-0900?
(iii)lf not, do the additional Conditions included in Section 111. of Exhibit No.-(LJRISLZ-IR) sufficiently mitigate any incentive or ability to exercise such vertical market power to overcome the rebuttable presumption in the Commission's vertical market power policy?
Positions on the Record: Petitioners suggested that the merger complied with the Commission's policies with regard to vertical market power policy established in Case 96-E-0900 or that its market power will be mitigated, even with continued ownership of the Ravenswood Station (July 17, 1998) (Reilly Testimony, 10127, pp. 5-6, 17-35, Schiavone Testimony, 10127, and Saidi Testimony, 10/27). In response to the other parties, the Petitioners made additional commitments and suggested conditions in their rebuttal testimony (ReillylZelkowitz, 317, pp. 5-6, 19-21; Ex. No.- (LJIUSLZlR, p. 3); Reilly Testimony, 317, pp. 6-23; Saidi Testimony, 317). Staff raised concerns about whether the transfer of ownership of the Ravenswood Station to National Grid, which owns transmission lines in New York State, was consistent with the Commission's vertical market power policy and Niagara Mohawk's prior commitments (Constraints Panel, 2120; Merger Policy Panel, 2/20, pp. 10, 103-35, 137-60). Staff suggested that divestiture of the Ravenswood Station should be a condition of the merger, as well as a commitment not to have any affiliate own generation in New York (other than generation used to serve LIPA) (Merger Policy Panel, pp. 185-88). CPB also expressed concern about the vertical market power issue (Elfner Testimony, 2/20, pp. 13-15).
Resolution in the Joint Promsal: The Joint Proposal addresses the vertical market power issue directly at pages 9-13 in a fashion that represents a compromise of the positions of the Staff and the Petitioners. Appendix A
B. Should the Petitioners' proposal to adopt Keyspan's cost allocation methodology for charges related to the service companies for the combined entity described in Sections 2.1.3 and 2.2 of Exhibit 11 to the Petition be adopted following the closing and when other regulatory approvals have been received and when appropriate systems are in place?
C. Should KEDNY and KEDLI be authorized to pay dividends from their unappropriated retained earnings, unappropriated distributed earnings, and accumulated other comprehensive income at the level that exists just prior to the consummation of the proposed merger?
D. Should the Petitioners' other proposals set forth in Exhibit I I to the Petition associated with Corporate structure and Affiliate Rules be approved?
(ii) Is the provision in Section 2.1.1 requiring separate operations and accounting for the Holding Company, regulated companies, and other affiliates reasonable?
(iii)Are the accounting requirements set forth in Section 2.1.2, other financial restrictions set forth in Section 2.5 of Exhibit 11 of the Petition as supplemented by the ring- fencing conditions in Section I of Exhibit No. -(LJR/SLZ- IR) reasonable to protect the financial integrity of KEDNY and KEDLI?
(iv) Are the provisions governing affiliate transactions set forth in Section 2.3 of Exhibit 11 to the Petition reasonable?
(v) Are the employment practices set forth in Section 2.4 of Exhibit 11 to the Petition reasonable?
(vi) Are the standards of competitive conduct set forth in Section 3 of Exhibit 11 to the Petition reasonable?
(vii) Are the provisions of Section 4.5 of Exhibit 11 to the Petition, which grant the approvals required under Section 69 and or Section 70 of the Public Service Law to pennit the transfers of property valued at $10 million or less hnkxrnnn ~fGli.+nr ."A t~ thirrl n~dinr.a-mnnhln anrl ch,-...lA Appendix A
(viii) Are the other provisions of Sections 4 and 5 of Exhibit 11 to the Petition reasonable and should they be adopted?
Positions on the Record: Petitioners filed its original petition in July of 2006 which included its proposed amliate rules and standards of conduct. These provisions were supported in the October 3 Testimony (ReillylZelkowitz, 1013, pp. 17- 19; Cochrane Testimony, 1013, pp. 12-16) None of the other parties took issue with these provisions.
Resolution in the!Joint Prowsal: Appendix 4 and page 8 of the Merger Joint Proposal provide affiliate rules and standards of conduct in relation to the activities of National Grid post merger as generally set forth in the Petitioners' testimony. Appendix B Page 1 of 8 Record Justification For Revenue Requirement Adiustments - KevSvan Enelw Delivew New York
Set forth below are citations to the record evidence that discusses the Staff cost and revenue adjustments reflected on pp. 1 and 2 of Appendix 2 to the Merger Joint
Proposal. Also set forth below are citations to testimony addressing capital structure and return on equity issues and cost and revenue adjustments proposed by other parties. As can be seen from a review of the record, the compromises reflected in the three-year stand alone agreement in principle and the five-year plans set forth in the Merger Joint
Proposal reflect reasonable results that would likely have arisen from a Commission decision in a litigated proceeding.
Overatinp Revenues
Adjustment No. 1 - Revised Sales A&.s!men! - Direct Testimony of Jennifer
Feinstein dated October 3, 2007 at p.3, line 5 to p.7, line 20; Supplemental Direct
Testimony of Jennifer Feinstein dated January 10, 2007 at p. 1, line 7 to p.5, line 18;
Prepared Rebuttal Testimony of Jennifer Feinstein and Leo Silvestrini dated February 21,
2007 at p. 5, line 14 to p. 15, line 15; Prepared Testimony of the Staff Sales Panel dated
January 2007 at p. 15, line 12 to p.23, line 10.
Overation and Maintenance Expenses
Adjustment No. 2 - Elimi~~eprogramenhancement for leak response - Prepared
Testimony of Staff Safety Panel dated January 2007 at p. 38, line 18 to p. 44, line 11,
Fuhihit Nn (TFU-7\. R+hnW*l Tertimnnv nf Tnhn C Uaran dated Fehntarv 71 7007 nt Appendix B Page 2 of 8 Adjustment No. 4 - Eliminafe expense for sales promotion enhancement - Direct
Testimony of Robert P. Moore, errata dated January 10,2007 at p. 3, lines 4-9, p.6, lines
13-20, p. 7, lines 13-17, p. 8, lines 1-9; Prepared Testimony of Accounting Rates Panel
(KEDNY) dated January 2007 at p. 17, line 17 to p. 18, line 6; Prepared Testimony of
Staff Sales Panel dated January 2007 at p. 16, line 17 to p. 17, line 10. Direct Testimony of Dr. Douglas W. Elfner (CPB) dated January 29,2007 at p. 12, line 1 1 to p. 15, line 2.
Adjustment No. 5 - Reduce customer relations expense - Prepared Testimony of
Staff Plant & Depreciation Panel dated January 2007 at p. 33, line 1 to p. 34, line 11.
Adjustment No. 6 - Move gas supply expenses from delivery to commodiw recovery - Direct Testimony of Joseph F. Bodanza dated October 3,2006 at p. 25, line 1 to p. 26, line 2; Direct Testimony of Ronald Lukas dated October 3,2007 at p. 12, line 13 to p.13, line 13; Direct Testimony of Patrick J. McClellan dated October 3, 2006 at p. 16,
line 16 to p. 18, line 3; Rebuttal Testimony of Ronald Lukas dated February 21,2007 at
p. 22, line 17 to p. 23, line 8; Testimony of Staff Unbundling Panel dated January 2007 at p. l 1, lines 5-20.
Adjustment No. 7 -Adjust for updated cost and injlarion - Direct Testimony of
Patrick J. McClellan dated October 3, 2006 at p. 33, lines 4-14; Prepared Rebuttal
Testimony of Patrick J. McClellan dated February 21, 2007 at p. 2, line 9 to p.7, line 9;
Prepared Testimony of Staff Accounting Rates Panel (KEDNY) dated January 2007 at p.
21, line 1 top. 24, line 5. Appendix B Page 3 of 8 Accounting Rates Panel dated January 2007 at p. 27, line 19 to p. 30, lines 4. Testimony of Larkin and DeRonne (CPB) dated January 29,2007 at p. 7, line 12 to p. 9, line 16.
Adjustment No. 9 - Adjust non-labor related expense for I% producfiviy -
Testimony of Staff Accounting and Rates Panel (KEDNY) dated January 2007 at p. 30,
Line 5 to p. 31, line 10; Rebuttal Testimony of Joseph F. Bodanza dated February 21,
2007 at p. 17, line I to p. 18, line 2.
Adjustment No. 10 - Stafla'epreciation changes to historic year plant - Direct
Testimony of James H. Aikman dated October 3,2006 at pp. 3 to 21; Prepared Testimony
of Plant and Depreciation Panel dated January 2007 at p. 17, line 17 to p. 30, line 20;
Prepared Rebuttal Testimony of James H. Aikman dated February 21, 2007 at p. 1, line
11 top.6,line 15.
Adjustment No. 11 - Staff depreciation changes to rate year plant - See
Testimony cited in Adjustment No. 10.
Adjustment No. 12 -Eliminate Property Tax Amortization - Prepared Testimony
of Accounting Rates Panel (KEDNY) dated January 2007 at p. 10, line 7 to p. IS, line 16;
Rebuttal Testimony of Steven L. Zelkowik and Joseph F. Bodanza dated February 21,
2007 at p. 1, line 14 to p. 12, line 16; Direct Testimony of Patrick J. McClellan dated
October 3,2006 at p. 7, line 21 to p. 8, line 3.
Adjustment No. 13 - Reduce amortization of SIR costs - Direct Testimony of
Patrick J. McClellan dated October 3,2006 at p. 8, lines 3-6; Prepared Testimony of Staff Appendix B Page 4 of 8 Adjustment 14 - Include Medicare cash proceeds - Prepared Testimony of
Accounting Rates Panel dated January 2007 at p. 45, line 10 to p. 48, line 2.
Adjustment 15 -Adjust for change in depreciation rates and plant, Exhibit No. -
(APR-I), Schedule B at p. 1.
Adjustment No. 16 - Eliminate proper@ tax amortization - This adjustment follows Adjustment No. 12.
Adjustment No. 17 - Reduce amortization of SIR costs - This adjustment follows
Adjustment No. 13.
Adjustment No. 18 - Adjust tax depreciation for plant changes - Staff Exhibit No. - (APR-I), Schedule B at p. I.
Interest Deduction
Adjustment No. 19 - Adjust the interest deduction for rate base adjustmenrs -
Prepared Testimony of Staff Accounting Rates Panel (KEDNY) dated January 2007 at p.
50, lines 1-3.
Adjustment No. 20 - Include CWIP in the interest deduction - Prepared
Testimony of Staff Accounting Rates Panel (KEDNY) dated January 2007 at p. 50, lines
4-5.
Adjustment No. 21 -No adjustment presented.
Rate Base
Adjustment No. 22 - Decrease gas plant balance - Prepared Testimony of Staff Appendix B Page 5 of 8 Adjustment No. 24 - Eliminate deferred merger costs - Direct Testimony of
Patrick J. McClellan dated October 3,2006 at p. 23, lines 15-19; Prepared Testimony of
Staff Accounting Rates Panel (KEDNY) dated January 2007 at p. 51, line 1 to p. 52, line
7. Testimony of Larkin and DeRonne dated January 29,2007 at p. 24, line 10 to 26, line
15.
Adjustment No. 25 - Eliminate deferred SIR costs - Prepared Testimony of
Patrick J. McClellan dated October 3, 2006 at p. 23, line 20 to p. 24, line 3; Prepared
Testimony of Staff Accounting Rates Panel (KEDNY) dated January 2007 at p. 52, line 8 top. 53, line 18.
Adjustment No. 26 -Eliminate unamortizedproperly taxes - hepared Testimony of the Staff Accounting Rates Panel (KEDNY) dated January 2007 at p. 53, line 19 to p.
54, line 8.
Adjustment No. 27 -Adjust deferred taxes for SIR adjurtment - This adjustment follows Adjustment No. 25.
Adjustment No. 28 - Adjust deferred taxes for merger adjustment - This adjustment follows Adjustment No. 24.
Adjustment No. 29 - Adjust deferred taxes for properly tax adjustment - This adjustment follows Adjustment No. 26.
Adjustment No. 30 - Adjwt deferred tax for tax depreciation - Prepared
Testimony of Staff Accounting Rates Panel (KEDNY) dated January 2007 at p. 54, lines Appendix B Page 6 of 8 Testimony of Accounting Rates Panel (KEDNY) dated January 2007 at p. 42, line 16 to
p. 45, line 9; Rebuttal Testimony of Joseph F. Bodanza, Patrick J. McClellan and John E.
O'Shaughnessy dated February 21, 2007 at p. 8, line 17 to p. 9, line 13. Testimony of
Larkin and DeRonne dated January 29,2007 at p. 29, lines 9-1 1.
Adjustment No. 32 - Reduce M&S inventory balance - Prepared Testimony of
Plant and Depreciation Panel dated January 2007 at p. 31, line 1 to p. 32, line 16;
Rebuttal Testimony of Patrick J. McClellan dated February 21,2007 at p. 9, lines 6-17.
Earnings Base/ca~italiiationComvarison
Adjustment No. 33 - Reduce equity for pension earnings 1996 through 2003 -
Prepared Testimony of Accounting Rates Panel (KEDNY) dated January 2007 at p. 45,
lines 1-9.
Adjustment No. 34 - Eliminate intercompany accounts payable/receivable for fuel costs - Prepared Testimony of Accounting Rates Panel (KEDNY) dated January
2007 at p. 55, line 15 top. 56, line 13.
Earnin~sBase
Adjustment No. 35 - Eliminate prepaid pension expenses - This adjustment
follows Adjustment No. 3 1.
Adjustment No. 36 - Reduce earnings base for non-cash pension and OPEBs -
Prepared Testimony of Staff Accounting Rates Panel (KEDNY) dated January 2007 at p.
56, line 14 top. 57, line 6. Appendix B Page 7 of 8 Adjustment No. 37 - Eliminate pensions from working cash calculation -
Prepared Testimony of Staff Accounting Rates Panel (KEDNY) dated January 2007 at p.
54, line 20 top. 55, line 14.
Adjustment No. 38 - Eliminate OPEBs from working cash calculation - See
Adjustment No. 37.
Caaital Structure
See Direct Testimony of Joseph F. Bodanza dated October 3, 2006 at p. 14, line
16 to p. 18, line 5; Prepared Testimony of Patrick F. Barry (Staff) dated January 2007 at p. 5, line 15 to p. 21, line 1; Rebuttal Testimony of Joseph F. Bodanza dated February 21,
2007 at p. 3, line 10 to p. 15, line 9; Testimony of Michael Gorman (NYC) dated January
29,2007 at p. 5, line 1 top. 10, line 5.
Return on Eauity
Testimony of Robert G. Rosenberg dated October 3, 2006, pp. 2-45; Prepared
Testimony of Patrick F. Barry (Staff) dated January 2007 at p. 21, line 2 to p. 49, line 13;
Prepared Testimony of Tariq N. Niazi (CPB) dated January 29,2007 at p. 3, line 4 to p.
23, line 9; hepared Testimony of Michael Gorman (NYC) dated January 29, 2007 at p.
10, line 6 to p. 32, line 3; Rebuttal Testimony of Robert G. Rosenberg dated February 21,
2007 at p. 3, line 9 to p. 28, line 4.
Other Parties Adiustments
CPB - Disallow a portion of incentive compensation expenses - Testimony of Appendix B Page 8 of 8 New York City - Eliminate Operation & Maintenance expense increases associated withprogram changes - Testimony of Michael Gorman (NYC) dated January
29,2007 at p. 2, line 28 to p. 3, line 3. Rebuttal Testimony of Joseph F. Bodanza at p. 18, lines 4-10. Appendix C Page 1 of 7
Record Justification For Revenue Requirement Adiustments - KevSaan Enerw Delivew Long Island
Set forth below are citations to the record evidence that discusses the Staff cost and revenue adjustments reflected on pp. 1 and 2 of Appendix 3 to the Merger Joint
Proposal. Also set forth below are citations to testimony addressing capital structure and return on equity issues and citations to testimony addressing major revenue/cost issues raised by other parties. As can be seen from a review of the record, the compromises reflected in the three-year stand alone agreement in principle and the five-year plans set forth in the Merger Joint Proposal reflect reasonable results that would likely have arisen from a Commission decision in a litigated proceeding.
O~eratineRevenues
Adjustment No. 1 - Revised Sales Adjustment - Direct Testimony of Jennifer
Feinstein dated October 3, 2007 at p. 3, line 5 to p.7, line 14; Supplemental Direct
Testimony of Jennifer Feinstein dated January 10, 2007 at p. 1, line 7 to p.4, line 20;
Prepared Rebuttal Testimony of Jennifer Feinstein and Leo Silvestrini dated February 21,
2007 at p. 5, line 14 to p. 15, line 15; Prepared Testimony of the Staff Sales Panel dated
January 2007 at p. 14, line 10 to p. 15, line 10.
Operation and Maintenance Exoenses
Adjustment No. 2 - Adjust uncollectible expense for staff adjustments - Staff
Exhibit No. -(APR-1) Schedule A at p. 2. Appendix C Page 2 of 7 (KEDLI) dated January 2007 at p. 12, lines 15 to 16; Prepared Testimony of Sales Panel dated January 2007 at p. 5, line 15 to p. 6, line 4. Direct Testimony of Dr. Douglas W.
Elfner dated January 29,2007 at p. 12, line 1 l to p. 15, line 2.
Adjustment No. 4 - Move gar supply expenses from delivey to commodity recovery - Direct Testimony of Joseph F. Bodanza dated October 3,2006 at p. 22, line 7 to p. 23, line 7; Direct Testimony of Ronald Lukas dated October 3,2007 at p. 13, line 3 to p.16, line 16; Direct Testimony of Patrick J. McClellan dated October 3,2006 at p. 31, line 10 to p. 32, line 18; Rebuttal Testimony of Ronald Lukas dated February 21,2007 at p. 22, line 17 to p. 23, line 8; Testimony of Staff Unbundling Panel dated January 2007 at p. 1 1, lines 5-20.
Adjustment No. 5 - A4ust for updated cost and infation - Direct Testimony of
Patrick J. McClellan dated October 3, 2006 at p. 32, line 19 to p. 39, line 9; Prepared
Rebuttal Testimony of Patrick J. McClellan dated February 21, 2007 at p. 2, line 9 to p.7, line 9; Prepared Testimony of Staff Accounting Rates Panel (KEDLI) dated January 2007 at p. 12, line 18 top. 14, line 5, and p. 15, line 12 top. 18, line 14.
Adjustment No. 6 - Aaust labor for 1% productivity - Direct testimony of Joseph
F. Bodanza dated October 3, 2006 at p. 15, lines 7 to 14; Direct testimony of Patrick J.
McClellan dated October 3, 2007 at p. 11, line 21 to p.12, line 8; Testimony of Staff
Accounting Rates Panel (KEDLI) dated January 2007 at p. 21, line 19 to p. 24, line4.
Testimony of Larkin and DeRonne (CPB) dated January 29,2007 at p. 7, line 12 to p. 9, Appendix C Page 3 of 7 Line 5 to p. 26, line 10; Rebuttal Testimony of Joseph F. Bodanza dated February 21,
2007 at p. 17, line I to p. 18, line 2. hreciation
Adjustment No. 8 - Stafldepreciation changes to historic year plant - Direct
Testimony of James H. Aikman dated October 3,2006 at pp. 2 to 18; Prepared Testimony of Staff Plant and Depreciation Panel dated January 2007 at p. 17, line 17 to p. 30, line
20; Prepared Rebuttal Testimony of James H. Aikman dated February 21, 2007 at p. I, line I1 to p. 6, line 15.
Adjustment No. 9 - Staffdepreciation changes to rate yearplant - See Testimony cited in Adjustment No. 10.
Amortizations
Adjustment No. 10 - Eliminate amortiralion of pension & OPEBs - Staff
Accounting Rates Panel (KEDLI) dated January 2007 at p. 28, line 3 to p. 33, line 3;
Rebuttal Testimony of Joseph F. Bodanza, Patrick J. McClellan and John E.
O'Shaughnessy dated February 21,2007 at p. 4, line 9 to p. 8, line 9.
Adjustment No. I I - Reduce amortization of SIR costs - Direct Testimony of
Patrick J. McClellan dated October 3, 2006 at p. 8, lines 11-15; Prepared Testimony of
Staff Accounting Rates Panel (KEDLI) dated January 2007 at p. 1I, line 1 to p. 12, line 4.
State And Federal Income Taxes
Adjustment No. 12 - Include Medicare cash proceeds - Prepared Testimony of Appendix C Page 4 of 7 Adjustment No. 14 -Adjust for change in depreciation rates andplant - Exhibit
No. - (APR-I), Schedule B at p. 1.
Adjustment No. 15 - Reduce amortization of SIR costs - This adjustment follows
Adjustment No. 11.
Adjustment No. 16 - Adjust tax depreciation for plant changes - Staff Exhibit No. - (APR-I), Schedule B at p. 1.
Interest Deduction
Adjustment No. 17 - Adjust the interest deduction for rate base adjustments -
Prepared Testimony of Staff Accounting Rates Panel (KEDLI) dated January 2007 at p.
43, lines 19-2 1.
Adjustment No. 18 - Include CWIP in the interest deduction - F'repared
Testimony of Staff Accounting Rates Panel (KEDLI) dated January 2007 at p. 43, lines
22-23.
Adjustment No. 19 -No adjustment present.
Rate Base
Adjustment No. 20 - Decrease gas plant balance - Prepared Testimony of Staff
Plant and Depreciation Panel dated January 2007 at p. 16, line 15 to p. 12, line 13.
Adjustment No. 21 - Decrease reserve for depreciation - See Staff Exhibit No.
- (PDP-2). Adjustment No. 22 - Eliminate deferred merger costs - Direct Testimony of Appendix C Page 5 of 7 2. Testimony of Larkin and DeRonne dated January 29, 2007 at p. 24, line I0 to 26, line
IS.
Adjustment No. 23 - Eliminate deferred SIR costs - Prepared Testimony of
Patrick J. McClellan dated October 3, 2006 at p. 28, lines 10 to 13; Prepared Testimony of Staff Accounting Rates Panel (KEDLI) dated January 2007 at p. 46, line 2 to p. 47, line 13.
Adjustment No. 24 - Eliminate deferred pension & OPEB expense - Prepared
Testimony of Staff Accounting Rates Panel (KEDLI) dated January 2007 at p. 34, lines
6-18. Adjustment No. 25 - Adjust deferred taxes for SIR adjustmenf - This adjustment follows Adjustment No. 23.
Adjustment No. 26 - Adjust deferred taxes for merger adjustment - This adjustment follows Adjustment No. 22.
Adjustment No. 27 - Adjust deferred taxes for pension & OPEB amtmenr -
This adjustment follows Adjustment No. 24.
Adjustment No. 28 - A@t deferred tax for tax depreciation - Prepared
Testimony of Staff Accounting Rates Panel (KEDLI) dated January 2007 at p. 47, line14, p. 48, line 2.
Adjustment No. 29 - Eliminate pre-paidpension expense - Direct Testimony of
Joseph F. Bodanza dated October 3, 2006 at p. 31, line 21 to p. 33, line 8; Prepared
Testimony of Accounting Rates Panel (KEDLI) dated January 2007 at p. 36, line 7 to p. Appendix C Page 6 of 7
Adjustment No. 30 - Reduce M&S inventory balance - Prepared Testimony of
Plant and Depreciation Panel dated January 2007 at p. 31, line 1 to p. 32, line 16;
Rebuttal Testimony of Patrick J. McClellan dated February 21,2007 at p. 9, lines 6-17.
Earnings BaseICaoitalization Com~arison
Adjustment No. 3 1 -Eliminate intercompany accounts payable/receivable forfuel costs - Prepared Testimony of Accounting Rates Panel (KEDLI) dated January 2007 at p.
48, line 21 to p. 49, line 21.
Earnings Base
Adjustment No. 32 - Eliminate deferredpension & OPEB balance, net of tax -
Prepared Testimony of Accounting Rates Panel (KEDLI) dated January 2007 at p. 33, line 5 top. 34, line 5.
Adjustment No. 33 - Eliminate prepaid pension expenses - This adjustment follows Adjustment No. 29.
Adjustment No. 34 - Reduce working capilal for non-cash pension and OPEB expense - Prepared Testimony of Staff Accounting Rates Panel (KEDLI) dated January
2007 at p. 50, lines 1-8.
Cash Working Caoital
Adjustment No. 35 - Eliminate pensions from working cash calculation -
Prepared Testimony of Staff Accounting Rates Panel (KEDLI) dated January 2007 at p. Appendix C Page 7 of 7 Ca~italStructure
See Direct Testimony of Joseph F. Bodanza dated October 3, 2006 at p. 15, line
16 to p. 18, line 16; Prepared Testimony of Patrick F. Bany (Staff) dated January 2007 at p. 5, line 15 to p. 21, line I; Rebuttal Testimony of Joseph F. Bodanza dated February 21,
2007 at p. 3, line 10 to p. 15, line 9; Testimony of Michael Gorman (NYC) dated January
29,2007 at p. 5, line I top. 10, line 5.
Return on &uity
Testimony of Robert G. Rosenberg dated October 3, 2006, pp. 2-45; Prepared
Testimony of Patrick F. Barry (Staff) dated January 2007 at p. 21, line 2 to p. 49, line 13;
Prepared Testimony of Tariq N. Niazi (CPB) dated January 29, 2007 at p. 3, line 4 to p.
23, line 9; Prepared Testimony of Michael Gorman (NYC) dated January 29,2007 at p.
10, line 6 to p. 32, line 3; Rebuttal Testimony of Robert G. Rosenberg dated February 21,
2007 at p. 3, line 9 top. 28, line 4.
Other Parties Adinstments
CPB - Disallow a portion of incentive compensation expenses - Testimony of
Larkin and DeRonne dated January 29, 2007 at p. 9, line 18 to p.13, line 7. Rebuttal
Testimony of Justin Orlando dated February 21,2007 at p. I, line 16 to p. 5, line 9.
New York City - Eliminate Operation & Maintenance expense increases associated with program changes - Testimony of Michael Gorman dated January 29,
2007 at p. 2, line 28 to p. 3, line 3. Rebuttal Testimony of Joseph F. Bodanza at p. 18,