PUBLIC UTILITY COMMISSION
Harrisburg, PA 17105-3265
Public Meeting held November 19, 2009
James H. Cawley, Chairman
Tyrone J. Christy, Vice Chairman, Joint Statement
Robert F. Powelson, Joint Statement
Joint Application for Approval of A-2008-2063737
the Transfer of the Issued and Outstanding
Shares of Capital Stock of the Peoples Natural
Gas Company, d/b/a Dominion Peoples,
currently owned by Dominion Resources, Inc.,
to Peoples Hope Gas Companies, LLC, and to
Approve the Resulting Change in Control
of The Peoples Natural Gas Company,
d/b/a Dominion Peoples
Petition for Interlocutory Review,
Answer to Material Question and Certification
of the Record
OPINION AND ORDER
BY THE COMMISSION:
Before the Pennsylvania Public Utility Commission (Commission) for consideration and disposition is a Petition for Interlocutory Review, Answer to a Material Question and Certification of the Record (Petition) filed on October 20, 2009, by The Peoples Natural Gas Company d/b/a Dominion Peoples (PNGC) and its parent company, Dominion Resources, Inc. (Dominion). The Petition seeks interlocutory Commission review and answer to the following material question:
Should the Settlement, and therefore the Application [for approval of the transfer of stock of PNGC], be approved, on the basis that they provide substantial benefits to Peoples’ ratepayers and employees, and to the general public of Pennsylvania?
Petition at 2.
The Petition also advances the request that the Commission certify the record in this proceeding to permit a final decision on the Joint Petition for Approval of Settlement filed on September 4, 2009, by PNGC, Dominion, the Peoples Hope Gas Companies LLC (PHGC), the Office of Consumer Advocate (OCA) and the Office of Small Business Advocate (OSBA) (Settlement).
PNGC, Dominion, the OCA, the OSBA and PHGC request that the Commission answer the material question in the affirmative, certify the record and issue a final decision that approves the Application for Transfer filed on September 16, 2008 (Application), by PNGC and PHGC (jointly referred to as Joint Applicants) as further modified and conditioned by the Settlement. The Office of Trial Staff (OTS) requests that the Commission answer the material question in the negative and return the proceeding to the presiding Administrative Law Judge (ALJ) for resumption of a litigation schedule.
For the reasons more fully discussed below, we will grant the Petition.
History of the Proceeding
On September 16, 2008, the Joint Applicants filed the Application seeking certificates of public convenience from the Commission, pursuant to 66 Pa. C.S. §§ 1102 and 1103, authorizing PHGC1 to acquire all the outstanding stock of PNGC from Dominion. The proposed stock transfer constitutes a change of control according to the Commission's guidelines and policy statement at 52 Pa. Code § 69.901. On October 2, 2008, the OTS filed its Notice of Appearance. On October 7, 2008, the OCA filed a protest to the Application. On October 14, 2008, the OSBA filed a protest against the Application. On October 14, 2008, Hess Corporation (Hess) filed a Petition to Intervene. No other protests or petitions to intervene were filed.
On October 16, 2008, the Joint Applicants filed their direct testimony. A prehearing conference was held on November 13, 2008, which resulted in the development of the procedural schedule for the case. On February 6, 2009, the Parties jointly requested a suspension of the previously established litigation schedule. The litigation schedule, which included dates for service of additional testimony, the evidentiary hearing and the filing of briefs, was re-established at prehearing conferences held on May 3, 2009 and May 29, 2009.
The hearing was held on August 12, 2009. At the hearing, the Parties moved into evidence their respective testimonies and exhibits, and witnesses were cross-examined. The Joint Applicants and Hess entered into a Joint Stipulation which was entered into the evidentiary record. Before the date set for the filing of main briefs, an informal telephone conference was held among the presiding ALJ, the Joint Applicants, the OTS, the OCA, and the OSBA. At that time the ALJ was informed that a Settlement had been reached among all parties, except the OTS which intended to continue litigation. During that conference, the Parties agreed to file the Settlement on or before September 4, 2009, and that the previously established briefing schedule would remain in place, with the OTS addressing the Settlement as part of its main brief.
The Settlement among the Joint Applicants, Dominion, the OCA and the OSBA (collectively, Joint Petitioners) was filed on September 4, 2009. Hess did not sign the Settlement, but did not oppose it. The OTS opposed the Settlement. The Joint Petitioners filed their respective Statements in Support of the Settlement on September 11, 2009. Main and reply briefs were filed in this case by PHGC and the OTS. PNGC/Dominion did not file a main brief, but did file a reply brief.
By Interim Order dated October 16, 2009, the ALJ denied the Settlement, finding that it failed to produce affirmative, substantial benefits. On October 20, 2009, PGNC and Dominion filed their Petition. By Secretarial Letter dated October 23, 2009, the Parties were advised that briefs in support of or in opposition to the Petition could expand the normal page limitations and be up to twenty-five pages. Any such briefs would be due on October 30, 2009. By that same Secretarial Letter, the Parties were advised that reply briefs up to fifteen pages would be permitted and must be filed no later than November 4, 2009. Briefs in Support of the Petition were filed by PNGC and Dominion, the OCA, the OSBA and PHGC on October 30, 2009. A Brief in Opposition was filed on October 30, 2009, by the OTS. Reply Briefs were filed on November 4, 2009, by PNGC, PHGC and the OTS.2
Initially, we note that any issue or argument that we do not specifically address has been duly considered and will be denied without further discussion. It is well settled that we are not required to consider, expressly or at length, each contention or argument raised by the parties. Wheeling & Lake Erie Railway Co. v. Pennsylvania Public Utility Commission, 778 A.2d 785, 794 (Pa. Cmwlth. 2001), see also, generally, Univ. of Pennsylvania v. Pennsylvania Public Utility Commission, 485 A.2d 1217 (Pa. Cmwlth. 1984).
The first issue to be determined is whether the Petition is properly before this Commission. The standards for interlocutory review are well established. Section 5.302 of our Regulations, 52 Pa. Code § 5.302, requires that a petition “state . . . the compelling reasons why interlocutory review will prevent substantial prejudice or expedite the conduct of the proceeding.” The pertinent consideration is whether interlocutory review is necessary in order to prevent substantial prejudice – that is, the error and any prejudice flowing therefrom could not be satisfactorily cured during the normal Commission review process. Pennsylvania Public Utility Commission v. CS Water and Sewer Associates, 74 Pa. P.U.C. 716 (1991); Re Knights Limousine Services, Inc., 59 Pa. P.U.C. 538 (1985).
During the course of a proceeding and pursuant to the provisions of 52 Pa. Code § 5.302, a party may seek interlocutory review and answer to a material question which has arisen or is likely to arise. Petitioners seeking Commission interlocutory review under 52 Pa. Code § 5.302, must show compelling reasons as to why interlocutory review is necessary to prevent substantial prejudice or expedite the conduct of the proceeding.
Pursuant to 52 Pa. Code § 5.303, the Commission may take one of the following courses of action on requests for interlocutory review and answer to a material question:
(1) Continue, revoke or grant a stay of proceedings if necessary to protect the substantial rights of the participants.
(2) Determine that the petition was improper and return the matter to the presiding officer.
(3) Decline to answer the question.
(4) Answer the question.
In the present action, the ALJ issued an Interim Order dated October 16, 2009, in which he denied the Settlement and directed the Parties to appear at a further prehearing conference “to reset the procedural schedule for this case.” Interim Order at 26. Having denied the Settlement, it was clearly the ALJ’s intention to proceed to full litigation of the Application. Id. An important consequence of the ALJ’s Interim Order is that the Joint Petitioners are not permitted to obtain direct Commission review of the denial of the Settlement through exceptions because the ALJ’s Interim Order is deemed interlocutory. 52 Pa. Code § 5.533(a).
In their joint Brief in Support, PNGC and Dominion argue that “the evidentiary record in this proceeding is complete and was closed following the August 12, 2009 hearing. Thus, there is nothing more to be done before the ALJ in these proceedings.” Joint Brief in Support at 4 (emphasis added). Against this backdrop, PNGC and Dominion assert that absent a Commission Order which approves the Application in time to permit closing on or before December 31, 2009, either PNGC or PHGC have the unilateral option to terminate the transaction, “thereby eliminating the substantial benefits of the Settlement to [PNGC’s] ratepayers and employees and to the general public within the Commonwealth. Thus, the PUC’s immediate review of this matter is needed to ‘prevent substantial prejudice.’” Id. PNGC and Dominion state that certification of the record will permit this Commission to review the entire record which includes “the Joint Application, testimony, Settlement, Statements in Support and briefs.” Joint Brief in Support at 4-5.
PHGC makes arguments similar to those advanced by PNGC and Dominion. PHGC unequivocally states that: “Failure to grant interlocutory review and decide the case on the merits would effectively terminate the $910 million transaction because the transaction expires under Section 9.1 of the Stock Purchase Agreement (SPA) on December 31, 2009.” PHGC Brief in Support at 2. Neither the OCA nor the OSBA address the merits of interlocutory review.
The OTS opposes interlocutory review. The OTS argues that grant of interlocutory review here will effectively remove the case from the ALJ before an initial decision is rendered and “set a terrible precedent going forward.” OTS Brief in Opposition at 5. The OTS argues that the December 31, 2009 closing deadline is “entirely self-imposed and should not be used as a basis to circumvent a thorough review by the presiding officer and the Commission.” Id. The OTS also points out that the Joint Applicants themselves were responsible for a six-month delay in the proceeding because of a change in PHGC’s ultimate parent’s managing partner. Id.
The OTS also argues that the Application and Settlement present highly complex issues for the Commission’s consideration. According to the OTS, the Petition seeks to compress the Commission’s time for consideration of these issues into a matter of weeks. OTS Brief in Opposition at 6. The OTS argues that there is no need for expeditious review because (a) the Joint Applicants need not terminate the transaction if they do not wish to; and, (b) the Commission will have the opportunity to review the proposed settlement when the ALJ issues an Initial Decision in this proceeding. Id. at 6 7.
We find that interlocutory review is appropriate in this instance. While the OTS is correct that we are generally reluctant to remove a case from a presiding ALJ prior to the issuance of an Initial Decision, the present case arrives before us in an unusual posture. The Joint Applicants have convincingly argued that the record is complete and that nothing further remains to be done in support of the Settlement. In our view, the Joint Applicants are arguing that they wish to rest at this point in time and take their chances with the record as it now stands. Conversely, the OTS has not suggested that it wishes to add anything to the record.
The OTS suggests that interlocutory review would circumvent the ALJ and that we should permit the process to move forward and receive the benefit of the ALJ’s determination of the issues presented. OTS Brief in Opposition at 6. However, we already have the benefit of the ALJ’s analysis by way of the Interim Order. In addition, through certification of the record, we will have the benefit of the record established below. 52 Pa. Code § 5.531(a).
We also note that while the OTS suggests that it would be relatively easy for the Joint Applicants to extend the transaction closing date, at least one of the credit facilities now in place to support the transaction ends on December 31, 2009. PHGC states that reestablishment of the necessary credit facilities could alter the financial underpinnings of the transaction to such an extent that one or both of the Joint Applicants would be unwilling or even unable to continue. PHGC Reply Brief in Support at 4.
Based upon the foregoing, we find that approval of interlocutory review is necessary to expedite the conduct of this proceeding. 52 Pa. Code 5.302(a). As noted, the Joint Applicants have convincingly argued that there is simply nothing left to be done before the ALJ with regard to ruling on the Settlement. We have the benefit of the ALJ’s Interim Order and, due to our decision to certify the record without an Initial Decision, we will have the benefit of the record established to date. It should be noted that given the posture of this proceeding, we may approve or reject the Joint Application, we may approve or reject the Joint Application as modified by the Settlement, or we may remand the case to the ALJ for such further proceedings as he deems necessary. Accordingly, while we will take the unusual step of granting interlocutory review, our action in no way limits the manner in which we may dispose of this proceeding.
Joint Application and Settlement
The Joint Application seeks a grant of certificates of public convenience which authorize PHGC to acquire all the outstanding stock of PNGC from Dominion. Both the OCA and the OSBA assert that the Joint Application, as originally filed, would not meet the standards governing this transaction. See, e.g., OCA Brief in Support at 5; OSBA Brief in Support at 8. However, the Joint Petitioners argue that the Joint Application, as further conditioned and modified by the Settlement, will meet the applicable standards. Accordingly, our review of this transaction will be of the Application as further conditioned and modified by the Settlement.
The ALJ, the Joint Petitioners and the OTS all agree on the standards which apply to this transaction. Clearly, those proposing adoption of the Settlement bear the burden of proof to show that the Settlement meets the tests set forth in Sections 1102 and 1103 of the Public Utility Code (Code), 66 Pa. C.S. §§ 1102 and 1103. Those Code sections have been further amplified by case law. Our starting point is City of York v. Pennsylvania Public Utility Commission, 295 A.2d 825 (Pa. 1972). City of York stands for the proposition that proponents of a merger or acquisition must show, by a preponderance of the evidence, that the transaction “will affirmatively promote the ‘service, accommodation, convenience, or safety of the public’ in some substantial way.” 295 A.2d at 828.
The City of York standard was further refined in Popowsky v. Pennsylvania Public Utility Commission, 937 A.2d 1040 (Pa. 2007). In Popowsky, the Pennsylvania Supreme Court explained the City of York standard as follows:
In summary, as indicated in City of York, the appropriate legal framework requires a reviewing court to determine whether substantial evidence supports the Commission's finding that a merger will affirmatively promote the service, accommodation, convenience, or safety of the public in some substantial way. In conducting the underlying inquiry, the Commission is not required to secure legally binding commitments or to quantify benefits where this may be impractical, burdensome, or impossible; rather, the PUC properly applies a preponderance of the evidence standard to make factually-based determinations (including predictive ones informed by expert judgment) concerning certification matters.
937 A.2d at 1057.
We also agree with the ALJ that the application of our criteria announced in Application of Penn Estates Utilities, Inc., A-210072F0003 (Order entered March 31, 2006), is appropriate given the corporate structure of PHGC and its parents. In Penn Estates, we stated that the following criteria should be examined in transactions involving equity buyers:
(1) The capital to be allocated to ongoing operating and maintenance expenses;
(2) Corporate governance/Sarbanes Oxley compliance;
(3) The expected term of ownership;
(4) The buyer’s experience as an owner and an operator of water and wastewater utilities;
(5) The community presence of the buyer;
(6) The complex nature and objectives of the various affiliated relationships involved;
(7) The fees paid to and service performed by affiliates;
(8) The use of leverage to eliminate or maximize income tax liabilities;
(9) The transparency on corporate structure issues; and
(10) Entity creditworthiness.
Penn Estates at 2.
The purchaser in this transaction is PHGC, a wholly-owned direct subsidiary of LDC Holdings LLC. PHGC was formed to acquire the shares of PNGC from Dominion and to hold equity interests in PH Services LLC (PH Services), a company designed to provide services to PNGC at cost. PHGC M.B. at 4. PHGC is an indirect wholly owned subsidiary of SteelRiver Infrastructure Fund North America LP (SteelRiver). Id.
PNGC is a natural gas utility providing regulated service in Pennsylvania to approximately 360,000 customers, 328,939 of which are residential customers. PNGC was acquired by Dominion in 2000. In late 2005, Dominion determined that it wished to sell PNGC. After one failed attempt to sell PNGC to an existing utility, Dominion reached the agreement with PHGC now under review. PNGC M.B. at 6-7.
Once the transaction is complete, the following organizational structure will be in place. LDC Funding LLC is an indirect wholly owned subsidiary of SteelRiver, formed to hold the equity interests in LDC Holdings LLC. LDC Holdings LLC is a wholly-owned direct subsidiary of LDC Funding LLC, formed to hold equity interests in PHGC. PHGC is a wholly owned direct subsidiary of LDC Funding LLC, formed to acquire the shares of PNGC from Dominion and hold the equity interests in PH Services. PH Services is a wholly-owned direct subsidiary of PHGC, a sister company of PNGC, formed to provide services to PNGC at cost which would be more expensive if PNGC were to perform them itself. This is similar to the current provision of services from Dominion to PNGC. PHGC M.B. at 8-9.
Consideration of the transfer for PNGC is $736 million, subject to adjustment pursuant to the provisions of the SPA. Transaction costs are estimated at $35 million.4 PHGC will pay cash and finance the transaction through a combination of capital from SteelRiver and third-party debt financing to replace similar levels of intra-company debt at PNGC currently provided by Dominion. PHGC states that the purchase price was determined by competitive bidding and arms-length negotiation. PHGC M.B. at 10. PHGC also states that SteelRiver has obtained fully underwritten commitments for the necessary debt facilities and comments that a Senior Term Loan Facility at PNGC is designed to replace the existing long-term debt provided to PNGC by Dominion in the form of intra-company debt. Id. at 11.
As noted by the ALJ, the substantive provisions of the Settlement are contained in Paragraphs 14 through 68. In addition, procedural terms and conditions of the Settlement are contained in Paragraphs 74 through 78. We will quote those provisions here:
The Substantive Terms of the Settlement
A. Financial Conditions
14. The existence of an acquisition premium for ratemaking purposes will be determined under the Uniform System of Accounts (Account 114).
15. Any acquisition premium recorded on PNGC's books will be permanently excluded from rate base in establishing future rates subject to the Commission's jurisdiction.
16. PNGC will not claim, in any future rate proceedings, Transaction and Transition costs to complete the transaction designated as unrecoverable as such items are identified and set forth in Appendix A and any related tax effect for such items shall also be excluded in setting rates.
17. PNGC's debt costs will be established in future rate proceedings. It will be PNGC's burden to demonstrate that its debt costs are reasonable. All parties reserve their right to review and challenge any debt cost claim.
18. PNGC will not defer any Transaction or Transition costs identified in Paragraph 16 above; such costs shall be borne exclusively by Peoples' shareholders.
19. On the closing date ("Closing Date"), Dominion will deposit an amount equal to $35 million in cash into an irrevocable trust ("Trust") exclusively for the benefit of the ratepayers of PNGC. The deposited amount, plus interest earned thereon, net of taxes and Trust expenses, will be flowed to ratepayers as a distribution rate credit.
The Trust will be established at a bank or trust institution selected by PH Gas and acceptable to the OCA, OTS and OSBA. The trustee ("Trustee") of the trust will manage the affairs of the Trust, including deposits into the Trust, withdrawals from the Trust, payment of Trust expenses, investment decisions and other Trust activities and the reporting thereof to the relevant parties pursuant to the terms of a trust agreement ("Trust Agreement"). The first $25,000 of costs and expenses of establishing and maintaining the Trust for its expected four year term will be an expense of the Trust and payable out of the Trust estate. The remainder of costs and expenses will be paid by PNGC and will not be recoverable from ratepayers. All interest earnings on investments in the Trust will inure to the benefit of the Trust estate; provided however that, to the extent that any party hereto is deemed to have earned taxable income on investment earnings of the Trust (but not its principal), then the Trustee shall pay to such party an amount equal to the tax due in respect of such earnings at such times as such taxes are payable.
The Trust Agreement shall set forth the parameters pursuant to which Trust funds shall be invested by the Trustee, provided that the overarching objective of the Trustee will be the preservation of principal. The Trust Agreement will also set forth the terms upon which the Trustee will release to PNGC amounts sufficient to permit PNGC to apply a ratepayer credit to customers of PNGC equal to the $35 million initial investment plus interest earned thereon net of (i) any expenses of the Trust and (ii) payments related to taxes described in the previous paragraph. To the extent funds are available in the Trust to do so, PNGC will apply a monthly ratepayer base rate credit for a period of approximately three years, until the funds in the trust have been exhausted, upon which the base rate credit will terminate. The credit shall be calculated on the assumption that funds will be available in the Trust to apply the credit for three years, but the credit will terminate when the funds have actually been exhausted. At the end of each month, the Trust will pay to PNGC amounts equal to the credits applied to customer bills during that month.
The credit will be allocated among the rate classes proportionate to any base rate revenue award in PNGC's next base rate proceeding. The base rate credit shall begin with the compliance filing following the final Commission Order in the next PNGC base rate proceeding. The base rate credit will apply to all classes of PNGC customers; however, the credit will not apply to any competitive customer receiving a discounted rate.
20. The existing base rates of Dominion Peoples, will be capped until January 1, 2011, unless there are substantial changes in regulation or federal tax rates or policy. This paragraph shall not prohibit changes in rates pursuant to the State Tax Adjustment Surcharge.
21. PNGC will not propose a charge for recovery of costs associated with post test year plant additions (DSIC mechanism) to become effective prior to January 1, 2011.
22. Costs for any non-regulated capital projects or costs that are not for purposes of providing service to PNGC's retail utility customers will be excluded from base rates and related financing costs will be excluded to establish the cost of capital for ratemaking purposes as will revenues from such services provided to entities other than retail utility customers. Revenues derived from the use of regulated assets shall be reflected in rates unless otherwise excluded by the Commission. This Settlement contains no determination of whether any Rager Mountain storage expansion is to be treated as a regulated or non-regulated asset.
23. PNGC or PH Gas shall issue and maintain separately issued debt held by investors not affiliated with SteelRiver or its affiliates, unless the Commission determines that ratepayers will experience a net benefit from any other Company proposal.
24. PNGC will not request a capital structure for ratemaking purposes which is outside the range of capital structures employed by comparable gas distribution companies. All parties reserve their right to review and challenge any proposed capital structure.
25. For a three-year period following closing PNGC will provide thirty (30) day's prior notice to the Commission, the OCA, OTS, and OSBA if it intends to make a distribution to PH Gas which distribution will cause its actual debt ratio, excluding working capital facilities, to exceed 55% of total capitalization.
26. LDC Holdings' consolidated long term debt ratio as a percent of total capitalization shall not exceed 60% for any period longer than one year absent approval from the Commission. Any request for approval will be considered on an expedited basis, if so requested.
27. PNGC will be ring fenced from other companies owned by SteelRiver as described in the Joint Application and in the Response to Interrogatory OTS-8 (attached as Appendix B).
28. PNGC's dividends to PH Gas shall be limited to no more than 100% of retained earnings.
29. PNGC shall not do the following except as approved by the Commission upon a showing of net benefit to retail customers:
a. guarantee the debt or credit instruments of PH Gas, LDC Holdings, LDC Funding, SteelRiver or any affiliate not regulated by the Commission;
b. mortgage utility assets on behalf of PH Gas, LDC Holdings, LDC Funding, SteelRiver or such affiliates other than in conjunction with financing provided by PH Gas to PNGC; or
c. loan money or otherwise extend credit to PH Gas, LDC Holdings, LDC Funding, SteelRiver or such affiliates for a term of one year or more.
B. Books and Records
30. PNGC shall maintain reasonable accounting controls and pricing protocols to govern transactions with affiliates, and provide the Commission, OTS, OCA and OSBA reasonable access to the books, records and personnel of PNGC's affiliates where necessary for the Commission to adequately review PNGC's purchases of goods or services from those affiliates.
31. Upon written request, PH Gas and its subsidiaries will provide the Commission, the OTS, the OCA and the OSBA reasonable access to the books and records, officers and staff of PH Gas and its subsidiaries. However, nothing set forth herein shall constitute or be interpreted as a waiver by PH Gas or its subsidiaries of its right to raise traditional discovery objections to any such requests, including, but not limited to, objections on the basis of relevance and privilege. In addition, before responding to any such requests, PH Gas and its subsidiaries shall be permitted to require the imposition of protections they deem necessary to prohibit disclosure of proprietary or confidential information.
32. PNGC, and its parents (including SteelRiver), will provide, upon request, to the Commission, OTS, OCA and OSBA, in connection with rate proceedings and other proceedings before the Commission presentations given by SteelRiver or PNGC to common stock, bond, or bond rating analysts, that directly, or indirectly pertain to PNGC.
33. PNGC will seek Commission approval of all new or amended agreements with affiliates consistent with Chapter 21 of the Public Utility Code.
34. PH Gas and its subsidiaries shall provide the OTS, OCA and OSBA with a copy of any reports filed with the US Securities and Exchange Commission upon request.
35. For the five (5) calendar years following closing, PNGC will provide an annual report to the Commission as to the status of all material commitments made in any settlement.
C. Corporate Cost Allocations
36. PNGC's corporate cost allocations will include a rent charge for the percentage of space occupied by employees who provide services to an affiliate, and a supplies charge for supplies the employee may use in providing services to affiliates.
37. PNGC's corporate cost allocations will provide that all charges by PH Services to PNGC will be at cost, provided that nothing herein shall affect PNGC's burden of proof under 66 Pa. C.S. § 2106.
38. SteelRiver will not permit a change in ownership in PNGC, including as a consequence of termination of SteelRiver, without prior Commission approval if such change would result in a change in control under the then-applicable Commission standards.
39. The CEO of PNGC will be a member of the governing board of PH Gas.
40. SteelRiver will continue to maintain PNGC's corporate headquarters in PNGC's service area and in or near Pittsburgh, Pennsylvania. PNGC agrees not to move PNGC headquarters outside PNGC service territory for at least a ten year period and will only do so after that time upon Application to and approval by the Commission.
41. PNGC commits to maintain field offices in its service territory and staffing levels that are sufficient to provide safe and reliable service. PNGC will provide annual reports to the Commission, OTS, OSBA, and OCA regarding field offices and staffing levels in its service territory for a period of five years.
E. Reliability and Customer Service
42. PNGC commits to make customer service metrics a priority. To that end, PNGC commits to the specific quality of service metrics attached hereto as Appendix C, in accordance with paragraph 45 below.
43. For a maximum period of up to 18 months after the Closing, and pursuant to the terms (including, without limitation, the payment terms) of the Transition Services Agreement ("TSA"), PNGC will use Dominion for, and Dominion will provide, customer service arrangements. Prior to the end of such 18 month period, PH Gas shall (i) employ adequate staff and supervisory personnel to allow PNGC or its affiliates to succeed Dominion in performing the full customer service functions; or (ii) cause PNGC to execute (and obtain Commission approval in accordance with, and subject to, ¶ 44 below) a contract with one or more third parties to succeed Dominion in performing customer service functions that will not be provided by employees of PNGC or its affiliates. PNGC will conduct an RFP for customer service arrangements that will not be performed by PNGC, after consultation with OTS, OCA, OSBA and the Commission's Bureau of Consumer Services as to the specifications of the RFP. The RFP will be issued to prospective bidders within six months of the closing.
44. PNGC will submit a filing containing the proposed contract with the selected vendor (the "Selected Customer Service Vendor") for customer service arrangements to the Commission and the parties for consideration, review and approval by the Commission at a separately docketed proceeding. The parties shall be given the opportunity to provide written comments on the contract. The Commission shall approve or reject the contract within 90 days of filing. PNGC will arrange a back up supplier for provision of customer service functions that cannot be provided by PNGC in the event that the contract with the selected vendor is not approved in sufficient time to become operational at the end of the 18 month TSA period.
45. PNGC will provide a report to OCA, OTS, and OSBA each calendar year following commencement of service by the Selected Customer Service Vendor or assumption of such functions by the staff of PNGC or its affiliates regarding its achievement of the service quality metrics in Appendix C. Such reports shall continue for three calendar years after selection of the Selected Customer Service Vendor or assumption of such functions by the staff of PNGC or its affiliates. The report will outline the actual metrics achieved and additional actions expected to be taken in the following year to further improve customer service. If the Company has not achieved an identified metric (in Appendix C), the report will also include the reasons for the failure and the Company's detailed plan to reach the service quality metric and will follow the reporting procedures set forth in Paragraph 46. PNGC will then convene a collaborative with OCA, OTS and the OSBA to discuss such report. The Commission may, upon motion of any Party or upon its own motion, open a formal proceeding. If, following such a collaborative, OTS, OCA or OSBA request a proceeding before the Commission, PNGC will not oppose the initiation of such a proceeding.
46. PNGC will commit to assess and identify areas of necessary improvement and submit that analysis to the Commission, OCA, OTS and OSBA within 180 days of closing for their review and comment. This review will additionally outline cost effective systems for improvement of customer service and expected service improvements.
47. Nothing in this Settlement is intended to restrict the Company's right to request recovery of new systems to improve service, including as a consequence of an existing system's age, obsolescence or other requirements, as appropriate, in future rates. Any such request will be subject to review for reasonableness and prudence in accordance with rate making principles.
48. No party waives any right to request that the Commission order penalties in any proceeding convened to investigate the Company's noncompliance with the service metrics in Appendix C.
49. Nothing contained herein is intended to limit the authority of the Commission, the Bureau of Consumer Services, the Bureau of Safety and Compliance or other Bureaus of the Commission from performing their duties and making recommendations, including recommendations regarding fines, for failure of PNGC to perform in any of the areas contained in Appendix C.
F. Universal Service
50. PNGC will continue to fund its Customer Assistance Program ("CAP") consistent with its needs analysis approved in conjunction with the Dominion Peoples currently approved Universal Services Plan.
51. PNGC will manage its CAP program similar to that of Columbia Gas in that it will partner with an agency that: (a) can substantially increase the number of intake sites; (b) is an administrator of utility CAP programs for the EDCs or NGDCs in their territory; (c) recruits and partners with multi-service agencies; and, (d) uses a case management system to track and monitor referrals and enrollments into utility programs.
52. PNGC will be permitted to recover CAP costs under Dominion Peoples' existing recovery mechanism for CAP costs. PNGC may propose changes to the recovery mechanism, which any party to the Settlement may oppose, for review by the Commission. The provisions of Paragraph No. 20 shall not limit implementation of any change to PNGC's recovery mechanism. Nothing in this Settlement shall be construed to alter the settlement reached in Pennsylvania Public Utility Commission v. The Peoples Natural Gas Company d/b/a Dominion Peoples, Docket No. R 00051093.
53. PNGC will match customer contributions to its Hardship Fund with up to $300,000 of shareholder funds annually for three years commencing January 1, 2010. PNGC will provide up to $50,000 annually in administrative funds for a three-year period commencing January 1, 2010. PNGC will review possible ways to increase outreach to customers to attempt to increase customer contributions and will provide a report to the Commission and OCA.
54. PNGC will commit to an increase in LIURP funds to $768,000 per year with the amount above the current $610,000 per year to be borne by the Company until the end of the period in Paragraph 20. Any funds not used in one year will roll-over on into the next calendar year. Funding on this basis will continue until the effective date of rates set in the next base rate proceeding.
G. Community Commitment
55. For a period of not less than five years, PNGC will provide corporate contributions and community support in southwestern Pennsylvania in a total amount that is at least equivalent to the amount provided by PNGC in 2007 ($18,250).
56. Services that are currently performed for PNGC outside of Pennsylvania, such as call center support, customer billing and payment and customer relations, will be returned to Pennsylvania.
57. PNGC will continue to comply with the Commission's diversity policy, 52 Pa. Code §§ 69.801-69.809.
H. Gas Purchasing
58. PNGC will retain or designate an officer (the "Responsible Officer") with experience and qualifications in gas supply matters. The Responsible Officer will be responsible for the review and independent evaluation of all substantive changes in contracts for gas supply transportation, storage or procurement obligations ("Gas Supply Services"). Any such contract will remain a contract between PNGC and the provider of the gas supply service.
59. PNGC will retain adequate gas supply procurement oversight personnel on staff. PNGC will include these individuals among its expert witnesses in its 1307(f) proceedings.
60. For a maximum period of up to 18 months after the Closing and pursuant to the terms (including, without limitation, the payment terms) of the TSA, PNGC will use Dominion for, and Dominion will provide, gas purchasing and supply arrangements after closing. In such 18 month period, PH Gas either (i) shall employ adequate staff and supervisory personnel to allow PNGC or its affiliates to succeed Dominion in performing the full gas procurement functions; or (ii) cause PNGC to execute (and obtain Commission approval in accordance with ¶ 61) a contract with a third party to succeed Dominion in performing procurement functions that will not be provided by employees of PNGC or its affiliates. PNGC will conduct an RFP for gas procurement that will not be performed by PNGC, after consultation with OTS, OCA, and the OSBA as to the specifications of the RFP. The RFP will be issued to prospective bidders within six months of the closing.
61. PNGC will submit a filing containing the proposed contract with the selected vendor (the "Selected Gas Procurement Vendor") for gas procurement functions to the Commission and the parties for consideration, review and approval by the Commission as a separately docketed proceeding. OTS, OCA and OSBA shall, commencing on the date of the filing, have full discovery rights with regard to the contract and PH Gas/PNGC will provide the parties with informal discovery as requested. The parties shall be given the opportunity to provide written comments on the contracts. The Commission shall approve or reject the contract within 90 days of filing. PNGC will arrange a back up supplier for the provision of gas procurement functions that cannot be provided by PNGC in the event that the contract with the selected vendor is not approved in sufficient time to become operational at the end of the 18 month TSA period.
62. PNGC must comply with the Commission approved 1307(f) plan current at the time of closing.
63. If PNGC outsources gas procurement functions, any contracts with its gas supply and procurement contractors for such service will include protective provisions. Three such provisions which must be included in these contracts, are as follows: (i) PNGC has the right to audit all the books and records associated with any buying, selling or other activities that may affect PNGC; (ii) Parties to any PNGC 1307(f) proceeding have full discovery rights as to any gas supply and procurement vendor, including, subject to confidentiality protections, the right to discovery about the vendor's transactions with its affiliates, and such vendor must comply with the procedural schedule established in each 1307(f) proceeding (regarding discovery); and, (iii) the Gas Supply and Procurement Vendor must present a witness to testify in PNGC 1307(f) proceedings.
64. Should PNGC contract with an external Procurement Services Provider ("PSP"), PNGC will include provisions in the contract with the PSP to provide all information to the Commission and Parties that would be required to be provided by PNGC if it were purchasing gas supplies subject to the Commission's discovery and confidentiality rules.
I. Retail Supply Competition
65. PNGC will convene a collaborative conference with interested parties, including the OCA, OTS, OSBA and interested natural gas suppliers, within 12 months of closing in order to develop a strategy to promote retail natural gas supply competition.
J. Lost and Unaccounted For Gas
66. Pursuant to the settlement in Dominion Peoples 2008 1307(f) proceeding, Dominion Peoples committed to the following:
Dominion Peoples will immediately initiate steps to begin monitoring Unaccounted for Gas (“UFG”) levels on its gathering system. Dominion Peoples will begin to quantify UFG levels as soon as possible once an initial detailed operational review of its gathering system is conducted. This review is needed in order to separately identify and segment, among other things:
a. all gas measurement points (and associated volumes) where gas is delivered from the gathering system into the transmission system;
b. all end use customers (and associated volumes) that are located on the gathering system; and
c. all gas used in the operation of compression and dehydration units located on the gathering system.
Dominion Peoples will provide available gathering system UFG data and report related findings in its 2009 1307(f) proceeding.5
Following the closing, PNGC will review Dominion Peoples' initial detailed operational review of the gathering system and the Commission's findings in Dominion Peoples' 2009 1307(f) proceeding and PNGC's 2010 1307(f) proceeding. It will conduct a review of Dominion Peoples' prior efforts to reduce UFG and examine alternative additional measures to reduce UFG - including costs to implement such measures and potential cost savings that might be derived from implementing additional measures to reduce UFG.
PNGC will present a report to OSBA, OTS and OCA with regard to the results of such investigation no later than the filing of PNGC's 2011 1307(f) proceeding. Nothing in this Settlement is intended to affect any obligations of PNGC to control UFG that may be ordered by the Commission in the proceeding at Pennsylvania Public Utility Commission v. The Peoples Natural Gas Company d/b/a Dominion Peoples, Docket No. R-2009-2088069.
67. The Parties stipulate that for ratemaking, deferred taxes will be per PNGC's books as calculated under federal normalization rules (and reflecting the appropriate deferred tax elements for ratemaking purposes such as taxes associated with CIAO) and no party will propose or support an adjustment to this treatment related to this acquisition.
68. This Settlement is conditioned upon the Commission granting all necessary approvals for the acquisition and all proposed changes in corporate structure including the conversion of PNGC to an LLC by merger into a new corporation under Pennsylvania law. The Parties agree that they will not oppose Security Certificate filings and related affiliate interest filings by PNGC necessary to refinance Dominion Peoples notes to Dominion as described in the Application.
* * *
The Procedural Terms and Conditions of the Settlement
74. The Settlement is conditioned upon the Commission's approval of the terms and conditions contained in this Joint Petition without modification. If the Commission modifies the Settlement, any Signatory Party to this Joint Petition may elect to withdraw from the Settlement and may proceed with litigation and, in such event, the Settlement shall be void and of no effect. Such election to withdraw must be made in writing, filed with the Secretary of the Commission and served upon all Parties within five business days after the entry of an Order modifying the Settlement.
75. This Settlement is proposed by the Signatory Parties to this Joint Petition to settle and forever resolve all issues in the instant proceeding. If the Commission does not approve the Settlement and the proceedings continue, the Signatory Parties reserve their respective procedural rights. The Settlement is made without any admission against, or prejudice to, any position which any Signatory Party may adopt in the event of any subsequent litigation of these proceedings, or in any other proceeding.
76. The Signatory Parties to this Joint Petition acknowledge that the Settlement reflects a compromise of competing positions and does not necessarily reflect any party's position with respect to any issues raised in this proceeding. The Signatory Parties agree that the Settlement shall not constitute or be cited as precedent in any other proceeding, except to the extent required to implement the Settlement.
77. The Signatory Parties to this Joint Petition agree to support this Settlement in any Statements in Support, briefs and other filings, including exceptions and replies to exceptions, that they may elect to file in this proceeding.
78. The Settlement may only be amended by a written document duly agreed to and executed by the Signatory Parties to this Joint Petition.
Settlement at 5-20, 21-22.
In the Interim Order, the ALJ determined that the Settlement does not provide affirmative, substantial benefits as required under York and Popowsky. Interim Order at 26. In reaching this determination, the ALJ examined several discrete elements of the Settlement. As the ALJ reviewed each element, he determined that the item was either too speculative in nature, failed to produce an affirmative commitment or simply maintained the status quo. One specific example occurs where the ALJ dismissed certain PHGC commitments as “a collection of generalities appearing to agree to everything while committing to nothing.” Interim Order at 17.
The ALJ was equally dismissive of the OCA’s support of the Application as modified by the Settlement. According to the ALJ, the only substantive benefit in the Settlement was the commitment by the Joint Applicants to provide for a $35 million trust which would be used to defray rate increases after PHGC’s first base rate case. In that instance, the ALJ adopts the OTS’ view that the $35 million may be overstated due to certain tax considerations that will be encountered in PHGC’s first base rate case. Interim Order at 26.
In our view, the ALJ has overlooked the nature of the commitments given and the over-all balance of the Settlement as he questioned specific elements. The discussion in the Interim Order simply does not fully embrace the Popowsky decision and its caution that:
In conducting the underlying inquiry, the Commission is not required to secure legally binding commitments or to quantify benefits where this may be impractical, burdensome, or impossible; rather, the PUC properly applies a preponderance of the evidence standard to make factually-based determinations (including predictive ones informed by expert judgment) concerning certification matters.
Popowsky, 594 Pa. at 611, 937 A.2d at 1057.
With regard to the Penn Estates considerations, the ALJ found the Settlement to be too general, present affiliated interest issues and raise questions regarding the length of ownership SteelRiver intends for PNGC. Interim Order at 16-18. The ALJ does not examine the specific financial conditions which were expressly designed to address some of those concerns.
Penn Estates Criteria
PHGC provides a summary of the financial conditions contained in the Settlement:
A requirement that PNGC or [PHGC] issue and maintain separately issued debt held by investors not affiliated with SteelRiver or its affiliates, unless the Commission determines that ratepayers will experience a net benefit from any other PNGC proposal;
A requirement of 30 days prior notice to the Commission and the Public Advocates if PNGC intends to make a distribution to [PHGC] which distribution will cause its actual debt ratio, excluding working capital facilities, to exceed 55% of total capitalization;
A restriction mandating that LDC Holdings’ consolidated long term debt as a percent of total capitalization shall not exceed 60% for any period longer than one year absent approval from the Commission;
A restriction limiting PNGC’s dividends to [PHGC] to not more than 100% of retained earnings;
A restriction on PNGC guaranteeing the debt or credit instruments of [PHGC], LDC Holdings, LDC Funding, SteelRiver or any affiliate not regulated by the Commission without Commission approval;
A restriction on PNGC mortgaging utility assets on behalf of [PHGC], LDC Holdings, LDC Funding, SteelRiver or such affiliates other than in conjunction with financing provided by [PHGC] to PNGC without prior Commission approval; and,
A restriction on PNGC loaning money or otherwise extending credit to [PHGC], LDC Holdings, LDC Funding, SteelRiver or such affiliates for a term of one year or more without prior Commission approval.
PHGC Reply Brief in Support at 15; citing, ¶¶ 23, 25, 26, 28 and 29 of the Settlement.
A review of the foregoing conditions, together with the commitment made in Settlement ¶ 66 relating to lost and unaccounted for gas and infrastructure, provide for substantial and ongoing commitments by the Joint Applicants to the capitalization of PNGC, affiliate relationships and ring fencing protections. This issue is further bolstered by the testimony of PHGC Witness Kinney at PHGC St. No. 1R (Proprietary Version) at 8-9. Witness Kinney specifically described the manner in which PHGC intends to ensure adequate capitalization of PNGC. We note that the Settlement condition restricting dividends to retained earnings is a substantial enhancement to Witness Kinney’s testimony.
Based upon the foregoing conditions and the record in this proceeding, in particular PHGC St. No. 1R, we find that the Settlement adequately accounts for the Penn Estates considerations. We are also persuaded by the arguments set forth in PHGC’s Statement in Support of the Settlement at Pages 13 through 20. There, PHGC presents a detailed discussion of each of the Penn Estates criteria. While some of the commitments made by PHGC could be fairly described as general in nature, we find that that the Joint Applicants have shown by a preponderance of the evidence that the Penn Estates criteria are met. Our review of the evidence on this point and our conclusion based thereon are fully in alignment with City of York and Popowsky.6