DE 98-123 Keene Gas Corporation/New york state Electric and Gas Corporation/New Hampshire Gas Corporation Joint Petition for Approval of the Transfer by Keene Gas Corporation of its Gas Utility Franchise and Distribution Properties to New Hampshire Gas Corporation Order Approving Transfer O R D E R N O. 23,017 September 14, 1998 APPEARANCES: Devine, Millimet & Branch, Professional Association by Frederick J. Coolbroth, Esq. for Keene Gas Corporation; Ransmeier & Spellman, Professional Corporation by Dom S. D'Ambruoso, Esq. for New York State Electric and Gas Corporation and New Hampshire Gas Corporation; McLane, Graf, Raulerson & Middleton, Professional Association by Steven V. Camerino, Esq., for EnergyNorth Natural Gas, Inc.; the Office of the Consumer Advocate by Kenneth Traum for residential ratepayers; and Eugene F. Sullivan, III, Esq. for the Staff of the New Hampshire Public Utilities Commission. I. PROCEDURAL HISTORY On July 7, 1998, Keene Gas Corporation (KGC) and New York State Electric & Gas Corporation (NYSEG) filed with the New Hampshire Public Utilities Commission (Commission) a joint petition seeking approval pursuant to RSA 374:30 to transfer KGC's utility franchise and distribution properties to New Hampshire Gas Corporation (NHGC) and, effective upon such transfer, authorization for KGC to discontinue operations as a public utility. NYSEG and KGC have entered into an asset purchase agreement dated as of April 30, 1998, pursuant to which KGC has agreed, subject to the approval of this Commission, to transfer its regulated propane-air distribution business, assets and franchise to NYSEG. NYSEG has designated its newly-formed affiliate New Hampshire Gas Corporation (NHGC), a New Hampshire corporation, to be the purchaser of the utility franchise and distribution properties. NHGC is an affiliate of NYSEG, both of which are wholly owned subsidiaries of Energy East Enterprises, Inc. NHGC seeks authority to commence business as a gas utility serving the franchise and customers now served by KGC. NHGC proposes to retain the tariffs, rates and charges currently in effect for KGC until such time as they may be amended by NHGC with the approval of the Commission. NHGC also seeks this Commission's approval pursuant to RSA 369 to issue securities with respect to its initial capitalization. Pursuant to the asset purchase agreement, KGC proposes to retain its propane-air manufacturing operations and property located at Emerald Street in Keene and enter into an Operating and Propane-air Sales Supply Agreement with NHGC. Under this arrangement, KGC will continue to manufacture the propane-air product which NHGC will purchase for distribution and resale at retail to utility customers. KGC's propane-air manufacturing operations will cease at such time as NHGC builds its own propane-air plant or liquefied natural gas plant, or the distribution system is interconnected to a natural gas pipeline within the vicinity of Keene. On July 10, 1998, the Commission issued an Order of Notice scheduling the matter for a pre-hearing conference on August 4, 1998. On July 30, 1998, EnergyNorth Natural Gas, Inc. (ENGI) filed a Petition to Intervene. In the Petition to Intervene, ENGI stated that it supported the transfer of KGC's assets to NHGC but that it wished to participate in this proceeding in order to assert certain issues regarding responsibility for potential environmental investigation and remediation expenses associated with the KGC gas manufacturing plant site on Emerald Street in Keene. The Commission granted ENGI's Petition to Intervene over the objection of KGC, NYSEG and NHGC. Following the pre-hearing conference, the parties and Staff engaged in discussions which resulted in a stipulation executed by NYSEG, NHGC, KGC, the Office of Consumer Advocate and Staff dated August 17, 1998 (Stipulation). ENGI did not join in the Stipulation. A hearing on the merits was held on August 19, 1998. At the hearing, NYSEG and NHGC presented the testimony of George E. Bonner, Vice President of Gas Operations and Marketing, who described the Stipulation in detail. Mr. Bonner and Harry B. Sheldon, Jr., President of KGC, answered questions posed by the Commissioners regarding the Stipulation and the proposed transaction. The Commission also heard oral argument on the environmental remediation concerns raised by ENGI. II. TERMS OF THE STIPULATION The Stipulation provides the recommendations of the signatories for the resolution of all issues of this docket other than the issue raised by ENGI concerning any potential financial responsibility of NHGC or its customers for environmental costs at the Emerald street site. Moreover, since the consummation of the transfer to NHGC on the terms set forth in the Stipulation will resolve the outstanding issues in the investigation in DE 97-149 and render moot the special contract approval requested by KGC in DR 97-236, the Stipulation contemplates the closing of those two dockets. The specific matters covered by the Stipulation are as follows: 1. KGC has agreed to install new propane tanks and to reconfigure the piping at the gas manufacturing plant site to completely separate the propane supplies of KGC and Cornerstone Propane, L.P. (Cornerstone). Following these installations, no product (liquefied propane, propane vapor or propane-air) will be supplied to Cornerstone from tanks which provide service to utility customers. 2. KGC agrees to withdraw its request for approval of the special contract with Cornerstone sought in DR 97-236. 3. The parties and Staff stipulate to the entry by the Commission of an order (a) determining that all issues pending in DE 97-149 are deemed resolved, (b) terminating the investigation in that docket, and (c) closing DE 97-149. 4. Effective as of the sale of the utility distribution assets by KGC to NHGC, KGC's status as a public utility shall terminate. Notwithstanding such termination, KGC shall remain subject to safety regulation by the Commission under applicable law, including the Natural Gas Pipeline Safety Act (See 49 U.S.C. 60101 et. seq. and RSA 362:4-b). 5. The service territory covered by the utility franchise granted to NHGC shall be within the municipal boundaries of the City of Keene. 6. The proposed NHGC tariff is recommended to be approved subject to specified changes in the cost-of-gas adjustment mechanism and elimination of discounts for present and retired employees. 7. With respect to propane purchased by NHGC from KGC, KGC is required to make available to NHGC copies of all invoices from suppliers. NHGC is required to make such copies available to the Commission and the Commission Staff upon request. NHGC shall only pay reasonable costs for propane purchased from KGC. 8. The Stipulation proposes that NHGC receive a waiver of Rule Puc 507.07, (which requires NHGC to maintain its accounts and records in conformity with the Commission's uniform system of accounts for gas utilities). Instead, the Stipulation provides for NHGC to keep records and furnish reports using the Federal Energy Regulatory System Uniform System of Accounts. 9. The initial capitalization of NHGC ($700,000, fifty percent (50%) debt and fifty percent (50%) equity) is recommended to be approved. The Stipulation contains no provisions relating to the environmental remediation issue raised by ENGI. III. ENVIRONMENTAL REMEDIATION For several decades until some time prior to its acquisition by KGC, the Emerald Street gas manufacturing site was occupied by a coal gasification plant. A by-product of the coal gasification process was coal tar, which is classified as a hazardous material. Therefore, the possibility exists that some of this material has been deposited on the Emerald Street site. The extent of contamination, if any, at this site is not known. Coal tar contamination has, however, been found in other locations where coal gasification plants previously existed. These sites include at least three within the current franchise area served by ENGI. The costs of remediation at these sites have been significant. While KGC did not operate the coal gasification plant at Emerald Street, it may be held liable for any necessary remediation as the owner of a contaminated site under state and federal hazardous waste laws. Prior owners of this site which could be exposed to similar liability include ENGI (formerly known as Gas Service, Inc.) and Public Service Company of New Hampshire. IV. POSITIONS OF THE PARTIES ON THE STIPULATION AND REMEDIATION A. NYSEG/NHGC NYSEG/NHGC urged the Commission to approve the transaction as structured and the stipulation among the parties. NYSEG/NHGC argued that it would operate a competently managed and financially viable gas utility. Through the testimony of Mr. Bonner, NYSEG/NHGC took the position that this entire transaction had been specifically structured in a manner to avoid the type of financial responsibility that ENGI sought to place on current and future KGC/NHGC customers. NYSEG/NHGC took the position that it would withdraw from the transaction if the commission sought to place any financial responsibility upon KGC/NHGC customers. NYSEG/NHGC did, however, offer to contribute up to $42,000 toward any future remediation costs that may be incurred. NYSEG/NHGC made this offer in an attempt to resolve the issue. The $42,000 figure was derived using a $3 million remediation cost and dividing the financial responsibility over the current customer bases of ENGI and KGC. B. KGC KGC urged the Commission to approve the Stipulation and grant the approvals requested in the joint petition. KGC stated that it was having financial difficulties as a stand-alone company and that its utility ratepayers will be vastly better served through service provided by a company with the strength of NHGC and its affiliates. KGC has agreed to invest the funds necessary to segregate the utility and Cornerstone gas supplies at the gas plant as specified in the Stipulation. KGC asserted that the conditions requested by ENGI were unreasonable and unlawful. KGC argues that the Commission lacks jurisdiction to adjudicate environmental liability and that apportionment of environmental liability for the remediation of contaminated sites is governed by RSA 147-B:10 through Superior Court contribution proceedings. KGC further pointed out that granting ENGI's request would result in NHGC's refusal to go forward with the transaction. In that event, the Keene utility customers would continue to be served by a financially troubled utility. C. OCA The OCA recommended approval of the Stipulation and of the authorizations requested in the joint petition. The OCA stated that it believed that doing so would best serve the interests of residential ratepayers. The OCA stated that it was prudent for ENGI to have raised the environmental remediation issue but recommended, on balance, that the Commission consider issuing an order which is silent on the issue of environmental liability. D. ENGI Assuming environmental remediation is required at the Emerald Street site in the future and that ENGI was held liable for some portion of the cost of that remediation, ENGI took the position that such costs were a cost of doing business and that such costs should, therefore, be recovered from ratepayers. ENGI argued that it would be inequitable to recover these costs from its current customers while the current and future customers of KGC/NHGC were insulated from any such financial responsibility because of the structure of this transaction. Thus, ENGI sought a finding from the Commission that the customers of KGC/NHGC would bear some financial responsibility for any remediation that might occur. E. Staff Staff recommended approval of the transaction and the Stipulation. With regard to the issue of environmental remediation Staff argued that to the extent ENGI customers were held liable for remediation costs it was only equitable that current and future KGC/NHGC customers also be held liable. V. COMMISSION ANALYSIS The first issue for our consideration is whether the proposed transfer would be for the public good pursuant to RSA 374:30. Under the public interest or public good standard to be applied where an individual or entity seeks to acquire a jurisdictional utility, the Commission must determine that the proposed transaction will not harm ratepayers. Grafton County Electric Light and Power Co. v. State, 77 N.H. 539 (1915); Cf., Parker-Young Co. v. State, 83 N.H. 551 (1929)(application of "net benefits" test where there are competing offers to acquire). See also eg., Re Pennichuck Water Works, Inc., Order No. 22,843 (January 30, 1998). Under the petition, NYSEG/NHGC would acquire all the distribution properties, the trucks, and the equipment to operate and maintain the distribution system of KGC. NYSEG/NHGC will retain competent employees to operate the system and devote the necessary attention to the system to ensure the provision of safe and adequate service. The Stipulation also resolves all open proceedings involving KGC that concern its continuing ability to provide service to customers. We note that KGC has indicated that it is operating without sufficient funds to assure that it continues to provide safe and adequate service. Moreover, Staff has had continuing concerns that KGC may lose key personnel and may become unable to provide continuous service. NYSEG has assured the Commission that it will maintain a properly trained staff. We note that NYSEG is a nationally recognized, well-financed and well-operated company which should bring expanded economic opportunities to the City of Keene and its customers, opportunities that are beyond the capabilities of KGC. Furthermore, NYSEG/NHGC will provide customer service assistance and maintenance capabilities beyond those currently available through KGC. With regard to the issue of environmental remediation raised by ENGI, we do not believe it is necessary or appropriate to address the issue at this time. The issue of environmental remediation, and financial responsibility for that remediation, is entirely speculative. The Emerald Street site has never been identified as a site contaminated with hazardous waste that requires remediation. Moreover, the issue of financial responsibility for any remediation costs, if in fact remediation is required, must initially be addressed by the appropriate adjudicative body. Thus, this issue can not be addressed at this time by this Commission. Based upon the foregoing, it is hereby ORDERED, that the transfer by Keene Gas Corporation of its gas utility franchise and distribution properties to New Hampshire Gas Corporation upon terms specified in the Petition and as supplemented and modified in the Stipulation is consistent with the public good and is approved and authorized; and it is FURTHER ORDERED, that Keene Gas Corporation is authorized to cease business as a public utility effective upon the transfer of its distribution system to New Hampshire Gas Corporation provided, however, that Keene Gas Corporation shall remain subject to safety regulation pursuant to applicable law, including the Natural Gas Pipeline Safety Act (49 U.S.C. 60101, et seq.) and RSA 362:4-b; and it is FURTHER ORDERED, that the proposed capitalization of NHGC is consistent with the public good and is hereby approved; and it is FURTHER ORDERED, that New Hampshire Gas Corporation is authorized to commence business as a public utility providing gas service within the City of Keene under the same terms, conditions, tariffs and rates, as modified under the Stipulation, as currently in effect and authorized for Keene Gas Corporation; and it is FURTHER ORDERED, that the request by ENGI for the imposition of a condition requiring NHGC to assume environmental liabilities of KGC associated with the Emerald Street site is denied; and it is FURTHER ORDERED, that New Hampshire Gas Corporation shall file the necessary modifications to said tariffs. By order of the Public Utilities Commission of New Hampshire this fourteenth day of September, 1998. Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger Chairman Commissioner Commissioner Attested by: Thomas B. Getz Executive Director and Secretary