Appendix — Securities & Exchange Commission v. New England Electric System
Supreme Court brief1966
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INDEX
VouumE |
Relevant Docket Entries Below
Notice and Order for Hearing .
Joint Answer of All Respondents*
Schedule A—Correction of Notice and Order |.
Respondents’ Motion to Dismiss
Findings and Opinion |
Order Dismissing Pesevsiting 1 in Respect of Certain
Issues
Order Reconvetiiie Nesting
Notice of Appearance and Answer of The Common-
wealth of Massachusetts, Department of Public
Utilities .
Stenographic Pranetrgt of Seovis
Testimony of:
William Webster, Direct .
Robert S. Quig, - eos...
Harold L. Dalbeck, . _.. Direet
Leigh FitzGerald, . Direct ....
R. F. Krause, Direct
Harry Hanson,...__.. Direct .
Cross
Elmer H. Lother, _ Direct
C. W. Pearson . cn
Robert Ross Cahal, Jr., nT oe
Thomas J. Johnson, Jr., . Direct ...
Cross. .
Robert S. Quig (Recalled), | Direct .
56
94
136
. 274
.. 304
.. 333
. 381
.. 392
.. 457
.. 497
.. 921
.. 907
.. 363
. 576
*References to “Respondents” are to the Petitioners herein who were
Respondents before the Commission.
Index
Page
Francis X. Lang, Direct . .. 580
Cross. 594
James F. Simes, Direct 600
VouumeE IIL
C. W. Pearson (Recalled), ... Direct ... 657
Robert S. Quig (Recalled), aera ee 667
Cross... 725
Harold L. Dalbeck (Recalled), Direct. ........ 730
Cross . 741
Harry Hanson (Recalled), Direct .. 445
Cross..... 750
William Webster (Recalled), Direct . 152
Cross. . .. toe
Harry Hanson (Recalled), Direct ay
Cross 777
(,. W. Pearson (Reealled), Direct 778
Cross... 813
Thomas Johnson (Recalled), © Cross _. 838
Samuel Gishman (Recalled), Direct... . 872
Cross _ 873
Thomas Johnson (Resumed), Cross. _. 874
Redirect . 930
Robert Cahal (Recalled), Cross .. 930
Samuel Gishman (Resumed) Direct... 940
Robert Ross Cahal, Jr.
(Resumed), . t . Cross... _. 946
James F. Simes (Recalled), Cross. 961
Direct __. 976
Cross (cont.).... 979
Robert S. Quig (Recalled), Cross . oe
Harry Hanson (Recalled), . Cross. 1144
Robert F. Krause (Resumed), Cross... _. 1164
Harold L. Dalbeck (Recalled), Cross. ........ 1195
Samuel Gishman .. _ Cross (cont.) .. 1238
Index iii
Page
Findings and Opinion of the Commission... 1254
Application of Respondents for stay pending judicial
wey ......... PPE, on 1283
Order Granting Stay __
Sark isdy ain arte oar ae 1284
Proceedings in Court of Appeals:
Petition to Review and Set Aside. —™ 1286
Stipulation as to Record to be Printed —_ ... 1294
Votume III ,
Respondents’ Exhibit:
No. 3 . . AP Pee ee . 1297
_ So Seeing tCmeyertner i eta 1299
a ae OLE TEE LUE eT Uae V2 8 1301
ae SOR settee ears teeth 1303
ek cda ies tyne eto ee 1305
oat, a A EE a Iya 1307
EE ice oa rk in eas oa ee 1308
No. 56 . iid eae meat ne eee 1309
No. 57 ei ay Teta on he FS Aceate et 1310
No. 59 . Shales e S Sie onion eee 1311
FL, SRA eure ps eS 1313
No. 62 . . ak ae ‘in 9 5 Piee ya
No. 63 erigicianies i595 ct 320 ois
No. 64 .. MURS re, . 1317
BR. SE AR eee he ee te 1318
DRM icine t jee a 1337
soni, ORR RATER eS 1338
con, ee ee eek 1339
RE 86.22. ce ay scale ae oe eee ee 1340
MM. cay. ey 2 ae 1341
RO Lice SA pee ae 1342
PS es ee hPa is See Ae eee ee 1343
iv
Index
92A
94
. 104
. 104A
. 105
. 106
. 107
. 108
. 109
. 1 ..
. 111
. 112
. 113
. 113A
. 114
. 116
No.
No.
No.
117
118 |
119
Division Exhibit:
3.
2
3A
3B
. 1345
1347
. 1349
1350
_ 1351
1352
1353
1355
_ 1365
1367
1369
1371
_ 1372
1373
1377
_ 1379
_ 1893
1395
1397
1397
_ 1405
1408
1411
1423
1426
1431
1432
1436
1437
1438
1439
1443
_ 1444
_ 1445
ADDITION TO VOLUME III
Proceedings in the United States Court of Appeals for the
nea st icmudtinaniitanded ede eo letens aes
Original Print
1455
1455
1476
1477
1479
1455
1455
1471
1472
1472
Table of Contents Vv
Page
Page
No. 3C . ies eS re ne 1446
No. 3D a has: Weve Farha @ ale cleat: eernoeees .. 1447
No. 4A eee Th ee Pe ee .... 1449
teh ore OO RT 5. = 1450
No. 4C ee rerae. Pees i Pata oan oe
No. 4D Yer eee EMOTO Ie .. 1452
No. 5 ery ee Oe ¢2 es as
Votume IV
Respondents’ Exhibit 58A—First Volume of Ebasco Report
VoLtumME V
Respondents’ Exhibit 58B—Second Volume of Ebasco Re-
port
Votume VI
Respondents’ Exhibit 91—Third (Supplemental) Volume
of Ebaseo Report
RELEVANT DOCKET EN"RIES BELOW
1. Notice and order of the Commision dated August 5,
1957 for hearing pursuant to ection 11(b)(1) of the
Public Utility Holding Compaty Act of 1935.
2. Joint Answer of all Respondeits filed September 30,
1957.*
Respondents’ Motion to Dismis, filed January 2, 1958.
4. Findings and Opinion and Orter of the Commission
dated February 20, 1958 disnissing proceedings in
respect of certain issues.
5. Order of the Commission date; February 8, 1960 re-
convening hearing.
6. Notice of Appearance and Antywer of The Common-
wealth of Massachusetts, Department of Public Util-
ities.
7. Findings and Opinion and Orter of the Commission
dated March 19, 1964.
8. Application of Respondents for stay of order pending
judicial review.
9. Order of Commission dated Jane 25, 1964 granting
stay.
a
* References to “Respondents” are to he Petitioners herein who
vere Respondents before the Commission.
2
Unirep States oF AMERICA
BEFORE THE
Securities AND EXCHANGE ComMISssION
August 5, 1957
In the Matter of
New Encuanp Exvecrric SysteM
AND
Irs Sussrprary COMPANIES
RESPONDENTS
File No. 59-102
(Public Utility Holding Company Act of 1939)
NOTICE OF AND ORDER FOR HEARING
PURSUANT TO SECTION 11(b)(1) OF THE
PUBLIC UTILITY HOLDING COMPANY
ACT OF 1935
The Commission having been advised by its Division of
Corporate Regulation (** Division’’) that the Division, pur-
suant to Sections 11(a), 18(a) and 18(b) of the Public
Utility Holding Company Act of 1935 (‘‘Act’’), has exam-
ined the corporate structure of New England Electric
System, the corporate structure of its subsidiary companies,
the relationships among the companies in the holding com-
pany system, the character of the interests thereof and
the properties owned or controlled thereby; and it appear-
ing to the Division from such examination that:
I
1. New England Electric System (““‘NEES’’), a volun-
tary association created in 1926 in Massachusetts by Agree-
ment‘and Declaration of Trust, is solely a holding company
and is registered as such under Section 5 of the Act. It
maintains its principal offices in the city of Boston, Massa-
chusetts.
3
2. As of December 31, 1956, NEES had 32 subsidiaries,
of which 16 were engaged exclusively in the electric busi-
ness, one was engaged in the electric and gas business, one
was in the process of constructing a nuclear power plant,
eight were engaged exclusively in the gas business, one
owns land, four were inactive and one was engaged in the
business of rendering services for system companies. Taken
together these subsidiaries conduct their businesses in the
States of Connecticut, Massachusetts, New Hampshire,
Rhode Island and Vermont, comprising an area of about
4,500 square miles and having a total population in excess
of 2,200,000 persons.
3. (a) The names of the subsidiary companies em-
braced in the holding company system of NEES as of De-
cember 31, 1956, their relationships being indicated by
indentation, the states of organization and operation, the
nature of their business and the percentage of voting
securities owned by system companies are shown in the
following table:
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The above tabulation of subsidiaries does not inelude
Lynn Gas and Electrie Company (‘‘Lynn’’), a Massachu-
setts corporation which is engaged in the electric and gas
business in that State. NEES has, subsequent to Decem-
ber 31, 1956, acquired approximately 94% of the voting
securities of Lynn pursuant to an order of this Commission
issued April 22, 1957 (Holding Company Act Release No.
13456).
(b) As indicated above, New England Power Com-
pany (‘‘Nepco’’) is an electric utility company and also a
holding company by virtue of its ownership of 30% of the
voting securities of Yankee Atomic Electrie Company
(‘‘Yankee’’), which was organized in 1954 for the purpose
of constructing and operating an atomic nuclear power
plant of approximately 134,000 Kw capacity. The plant is
to be located in western Massachusetts, is scheduled for
completion in 1960 and the output of the plant will be sold
to 12 New England utility companies which are stock-
holders of Yankee, Nepco’s acquisition of shares of Yan-
kee’s stock was effected pursuant to an order of this Com-
mission dated December 18, 1956 (Holding Company Act
Release No. 13339). Concurrently therewith Nepco’s ap-
plication for an exemption as a holding company was
granted but Nepco as a subsidiary of NEES and Yankee
as a subsidiary of Nepeo remain subject to various provi-
sions of the Act as subsidiaries of a registered holding
company.
4. (a) The consolidated gross operating revenues of
the NEES system for the twelve months ended December
31, 1956 (excluding Lynn) amounted to $142,385,041, in-
cluding $125,294,786 from the sale of electric energy, and
$16,521,875 from the sale of gas. Other revenues, consisting
principally of rentals, aggregated $568,380,
(b) As at December 31, 1956, the system’s property
account, excluding the properties of Lynn, was as follows:
|
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Property, plant and equipment
including intangibles: (a)
Electric plant $475,914,408
Gas plant 44,320,843
Construction work in progress 52,411,921
Other 1,195,096
Total $573,842,268
Less reserves for depreciation 102,296,664
Net property, plant and equipment,
including intangibles $471,545,604
(a) $457,788,400 of the gross property account is
stated at original cost.
I]
Do. (a) The electric utility operations in the NEES
system (including those of Lynn and reflecting the Essex
merger) are conducted by 14 electric utility subsidiaries,
two of which are also engaged in gas utility operations.
These subsidiaries render retail electric service in 198
municipalities of which 146 are in Massachusetts, 27 in
Rhode Island, 21 in New Hampshire and 4 in Connecticut.
The total area served is in excess of 4500 square miles and
the total population is about 2,350,000 persons. In addition,
some of the subsidiary companies sell electric energy at
wholesale for resale to various non-affiliated utilities and
municipalities. Many of these municipalities purchase their
entire electric energy requirements, and utilities serving a
large portion of Vermont purchase substantial portions of
their requirements from system companies.
(b) The electric energy requirements of the system
companies (excluding Lynn) for 1956 were supplied largely
by 12 steam-electrie and 22 hydro-electric generating sta-
tions owned and operated by system companies, 76% being
8
generated by system companies and 24% being purchased
at a cost of $14,057,032. The principal source of purchased
power from non-affiliated companies is Boston Edison Com-
pany which during 1956 delivered 746.5 million Kwh at an
aggregate cost of $9,059,297. Of the total energy generated
by the system companies, about 98% was produced by
Nepeo, The Narragansett Electric Company and Worcester
County Electrie Company.
6. The nature and locale of the electric operations of
the subsidiaries in the NEES system are as follows:
(a) Nepeo is an exempt holding company and an elee-
trie utility company engaged in the generation, purchase,
transmission and sale of electric energy in wholesale quan-
tities to associate and other electric utility companies doing
a retail distribution business and to large industrial cus-
tomers. Nepco operates in the States of Massachusetts,
New Hampshire and Vermont but has no residential
or commercial customers. During 1956 Nepco generated
2,299,222,565 Kwh of which about 53.6% was produced by
steam-electric stations and 46.4% by hydro-electric stations.
It purchased 1,751,867,850 Kwh of which about 48.6% was
obtained from associates and 51.4% from non-affiliates,
principally from Boston Edison Company and Niagara
Mohawk Power Corporation. Nepco’s gross plant at De-
cember 31, 1956 amounted to $190,818,000 and its gross
operating revenues from the sale of electric energy, for
the 12 months ended December 31, 1956, amounted to
$49,762,800 of which $36,172,800 was derived from sales to
affiliates, $7,190,000 from sales to non-system utilities and
$6,400,000 from direct sales to large industrial users.
(b) Narragansett Electric Company (‘‘Narragan-
sett’?) owns and operates facilities for the generation,
trarsmission, distribution and sale of electric energy and
the production, transmission and distribution of gas. Its
business is conducted in the larger part of Rhode Island
OO OD OES
9
where, in 1956, electric service was provided to 196,300
customers in 27 cities and towns, including Providence,
within an area of about 870 square miles having an aggre-
gate population of about 544,000 persons, Its electric en-
ergy requirements are supplied almost entirely by its own
generating facilities and electric energy is sold for resale
to three associate companies in the NEES system and to
three non-affiliated utility companies. During 1956 Narra-
gansett generated 1,881,215,278 Kwh and sold 686,887,630
to associate companies in the NEES system and 69,223,675
to non-affiliated companies. At December 31, 1956 Narra-
gansett’s gross electric utility plant amounted to $138,-
653,556 and for the calendar year ended that date its gross
operating revenues from electric sales amounted to $34,-
633,174.
(c) Worcester County Electric Company (‘*Worces-
ter’’) owns and operates facilities for the generation,
transmission and distribution of electric energy to about
200,000 customers in 77 cities and towns located in central
Massachusetts, covering an area of about 1900 square miles
and having a population of about 544,000 persons. During
1956 Worcester generated about 22% of its electric energy
requirements and purchased about 77% from Nepco and a
minor amount from another associate (Lowell) and non-
affiliates. Its gross operating revenues in the 12 months
ending December 31, 1956 amounted to $31,441,512 and at
that date the company had gross electric utility plant of
$78,285,869.
(d) Suburban Electric Company (‘‘Suburban’’) owns
and operates facilities for the distribution of electric en-
ergy to about 79,300 customers in six suburban cities and
towns north of Boston within an area of 29 square miles
with an aggregate population of about 257,000 persons, In
1956 Suburban purchased substantially all of its electric
requirements from Nepeo and sold comparatively minor
10
amounts of electricity to Boston Edison Company, a non-
affiliate. For the twelve months ended December 31, 1956
Suburban had gross operating revenues of $10,661,493 and
at that date its gross electric utility plant amounted to
$21,387,610,
(e) Essex County Electrie Company (‘‘Essex’’) will
be the survivor by merger of five electric utility companies.
Taken together these five companies, in 1956, owned and
operated facilities for the generation, transmission, dis-
tribution and sale of electric energy. In 1956 they provided
electric service to 161,600 customers in 26 cities and towns
in northeastern Massachusetts, within an area of 460 square
miles, having an aggregate population of about 464,000
persons. The five constituent companies have their own
generating plants and, during 1956, produced 75,473,813
Kwh. With the excention of Amesbury, the entire net out-
put of electric energy of these companies was sold to Nepeo
and substantially all their individual requirements were
purchased from Nepco. The energy generated by Ames-
bury is used in its own operating area and additional
requirements are purchased from one of the constituent
companies (Haverhill). Amesbury also has an agreement
with Nepco for standby and emergency service over a tie
line with a non-affiliated company, i.e., Public Service Com-
pany of New Hampshire. During 1956 the five companies
had combined gross operating revenues of $27,400,000,
Their combined gross fixed property, at December 31, 1956,
amounted to $60,198,060,
(f) Attleboro Electric Company (‘‘Attleboro’’) owns
and operates facilities for the distribution of electric energy
1 Essex County Electric Company, Amesbury Electric Light Com-
pany, Haverhill Electric Company, Lawrence Electric Company and
The Lowell Electric Light Corporation. Upon consummation of the
merger, it is expected that Essex will change its name to Merrimack-
Essex Electric Company.
11
in Attleboro, Massachusetts and Vicinity. During 1956 the
company purchased approximately 97%
of its energy re-
quirements from Nepeo, less than 3%
from Narragansett,
and a minor amount from non-affiliates. During the calen-
dar year 1956, Attleboro served an average of 14,689
customers with electricity and derived gross operating
revenues of $2,552,416 from such service, The company’s
gross electric utility plant at December 31, 1956 amounted
to $4,792,263,
(¢) Granite State Electric Company (**Granite’’)
owns and operates facilities for the production, transmis-
sion and distribution of electric energy in western New
Hampshire. During 1956, it produced approximately 13.1%
of its energy requirements, and purchased 20.2% of its
energy from Lawrence and 66.7% from Nepeo. Granite
served an average of 12,062 customers during the year,
Its gross operating revenues for the twelve months ended
December 31, 1956 amounted to $1,611,834 and gross electrie
utility plant at that date totaled $4,459,996.
(h) Lynn Gas and Electric Company is a gas and
electrie utility providing services in the northeastern por-
tion of Massachusetts. It also sells electric and gas appli-
ances. In 1956 electrie service at retail was provided to
about 47,000 customers in four communities. Lynn also
supplies at wholesale about 99% of the electricity require-
ments of the town of Marblehead. During 1956 Lynn
generated approximately 86% of its electric energy require-
ments, the balance being purchased from Nepco. The area
served with electricity lies between the areas served by
two associate electric utility companies in the NEES sys-
tem. The electric property of Lynn at December 31, 1956
amounted to $19,303,619 and its total electric operating
revenues for the twelve months ended December 31, 1956
amounted to $6,309,564.
(i) The Mystie Power Company (‘Mystic Power’’)
12
owns and operates facilities for the transmission and dis-
tribution of electric energy to about 7,200 customers in
Stonington and Groton, Connecticut. The company pur-
chases all of its energy requirements from Narragansett.
Gross electric utility plant at December 31, 1956 amounted
to $1,889,296 and gross operating revenues for the twelve
months then ended aggregated $1,057,059.
(j) Northampton Electric Lighting Company (‘‘North-
ampton’’) owns and operates facilities for the transmission
and distribution of electric energy in Northampton, Massa-
chusetts and vicinity. The company purchases substantially
all of its energy requirements from Nepeo. During the
calendar year 1956, the company provided electric service
to an average of 9,283 customers and derived gross operat-
ing revenues of $1,520,944. As at December 31, 1956, North-
ampton’s gross electric utility plant amounted to $2,312,741,
(k) Northern Berkshire Electric Company (‘‘ Northern
Berkshire’’) owns and operates facilities for the trans-
mission and distribution of electric energy in Adams and
North Adams, Massachusetts and vicinity. During 1956
the company purchased over 99% of its energy require-
ments from Nepco, served an average of 16,126 customers
and derived gross operating revenues of $2,602,381. As at
December 31, 1956, the company’s gross electric utility
plant amounted to $4,427,617.
(1) Quiney Electric Company (‘‘Quiney’’) owns and
operated facilities for the distribution of electric energy
in Quincey, Massachusetts. During 1956, the company pur-
chased its entire energy requirements from Boston Edison
Company, a non-affiliate and, in turn, provided Weymouth
Light and Power Company, an associate, with substantially
all of its energy requirements. During 1956 Quincy served
an average of 28,317 customers and derived gross operating
revenues of $5,737,262. As at December 31, 1956, Quincy’s
gross electric utility plant amounted to $6,374,791.
* ve es wears is “3 7 b Le = wot" -
13
(m) Southern Berkshire Power & Electrie Company
(‘Southern Berkshire’’) owns and operates facilities for
the production, transmission and distribution of electric
energy in southwestern Massachusetts. During the year
1956, the company served an average of 7,775 customers
and derived $1,184,461 in gross operating revenues. The
company produced less than 10% of its energy require-
ments and purchased substantially all of the balance from
Nepeo. As at December 31, 1956, Southern Berkshire had
gross electric utility plant amounting to $3,386,490.
(n) Weymouth Light and Power Company (‘‘Wey-
mouth’’) owns ‘and operates facilities for the production,
transmission and distribution of electric energy in Hing-
ham, Randolph and Weymouth, Massachusetts. The com-
pany purchases substantially all of its energy requirements
from Quiney. During the calendar year 1956, the company
served an average of 19,988 customers, and derived gross
operating revenues of $3,158,735. Its gross electric utility
plant at December 31, 1956 amounted to $6,565,775,
III
7. (a) The gas business of the NEES system is con-
ducted by eight gas utility subsidiaries and two combination
gas and electric utility subsidiaries (Lynn and Narragan-
sett). As of December 31, 1956 the gas plant of these ten
subsidiaries amounted to $52,462,139 and the consolidated
gross operating revenues from the sale of gas, for the
twelve months period ending December 31, 1956, amounted
to $19,667,944. In general, the gas operations of these sub-
sidiaries are carried on in parts of the same, or adjacent
territory to that of the retail electric operations in the
NEES system. In 1956 gas service was provided in 52
municipalities, of which 48 were in Massachusetts, 3 in
Rhode Island, and 1 in Connecticut. The total area served
with gas is in excess of 700 square miles having a total
14
population of about 1,070,000 persons. During 1956 an
average of about 240,000 customers were served over ap-
prox.mately 2,300 miles of gas mains.
(b) Natural gas is distributed by the gas subsidiaries
(including Lynn) with manufactured gas used for peak
shaving and standby purposes. The natural gas is pur-
chased from two non-affiliated natural gas pipe line com-
panies, i.e., Tennessee Gas Transmission Company (‘‘Ten-
nessee’’) and Algonquin Gas Transmission Company
(‘‘Algonquin’’). Orders of the Federal Power Commission
authorize daily deliveries of natural gas up to 75,695 Mef
by Tennessee and up to 4,450 Mef by Algonquin. The
manufactured gas facilities of the subsidiaries of NEES,
available for peak shaving and standby purposes have
a total rated capacity of 50,800 Mcf per day. Storage
holder capacity totaled 23,977 Mef.
(c) During 1952 NEES established an independent gas
division to provide the Massachusetts gas subsidiaries with
separate management and sales personnel. Earnings of
these properties in 1956 contributed $1,614,516 to consoli-
dated net income as compared with $255,504 in 1951. Sales
of appliances also increased with total appliance sales by
this division, in 1956, aggregating $2,167,000 including
about 6,000 heating installations. This division also has
installed more than 10,700 automatic water heaters under
a rental program started in January 1955.
8. A summary description of the electric business of the
two combination gas and electric utility companies, i.e.,
Narragansett and Lynn has been set forth in subparagraphs
(b) afd (h) of paragraph 6 above. The gas business of
these two subsidiaries and the other eight gas utility com-
panies are briefly described as follows:
(a) Lynn owns and operates facilities for the pro-
duction, transmission and distribution of gas. It purchases
natural gas from Tennessee and distributes such gas at
15
retail to about 40,000 custome:s in communities supplied
by Lynn with electric service jn northeastern Massachu-
setts and, in addition, in Lynnield, Marblehead and small
areas of Peabody and Revere. Gas appliances are also sold
by Lynn. Lynn’s gas propertie; consist of a manufactured
gas plant and two storage lolders to supplement the
natural gas supply and 357 miles of gas mains. At De-
cember 31, 1956 its gas properies amounted to $8,141,296
and gross operating revenues for the twelve months ended
December 31, 1956 from the séle of gas amounted to $3,-
159,628.
(b) Narragansett owns and operates facilities for the
production, transmission and distribution of gas in Warren,
Bristol and Westerly, Rhode (sland to about 6,700 cus-
tomers. It purchases more then 99% of its gas require-
ments from Algonquin. In addition to the gas sold to gen-
eral customers, Narragansett has a contractual arrange-
ment to supply standby service to its associate gas utility
The Pequot Gas Company. At December 31, 1956 Narra-
gansett’s gas properties amounted to $1,975,989 and its
gross operating revenues derived from the sale of gas
during the calendar year 1956 amounted to $446,553.
(ec) Central Massachusetts Gas Company (‘Central
Massachusetts’’) owns and overates facilities for the
transmission and distribution of natural gas to about 9,500
customers in 10 communities anc surrounding area in south
central Massachusetts. The conpany purchases all of its
gas requirements from Tennessee. As at December 31,
1956 its gross gas utility plaat amounted to $2,104,640
and gross operating revenues for the twelve months then
ended aggregated $794,961.
(d) Lawrence Gas Company (‘‘Lawrence’’) owns and
operates facilities for the preduction, transmission and
distribution of gas in Lawrence, Massachusetts and three
nearby communities in the nortieastern part of the State.
16
The company serves approximately 33,000 customers. Dur-
ing the year 1956, Lawrence produced less than 1% of its
gas requirements and purchased the remainder from Ten-
nessee. The company’s plant account totalled $5,238,030
at December 31, 1956 and operating revenues aggregated
$2,480,960 for the twelve months ended that date.
(e) Mystic Valley Gas Company (‘‘Mystie Valley’’)
owns and operates facilities for the production, transmis-
sion and distribution of gas to 16 communities in eastern
Massachusetts, including Arlington, Everett, Malden and
Medford. During the twelve months ended December 31,
1956, the company served approximately 98,000 customers
and derived $8,136,035 in gross operating revenues from
such operations. Mystic Valley produced less than 1%
of its gas requirements, purchased a minor amount of gas
from a nearby non-affiliate, and obtained the balance of its
requirements from Tennessee, The company’s property
account amounted to $21,967,385 at December 31, 1956.
(f) Northampton Gas Light Company (‘‘Northamp-
ton’’) owns and operates facilities for the production,
transmission and distribution of gas to approximately 8,000
customers in Northampton and Easthampton, Massachu-
setts. Gross operating revenues during the year 1956
amounted to $675,322. Northampton produced less than
1% of its gas requirements and purchased the balance
from Tennessee. The company’s plant account amounted
to $1,749,615 at December 31, 1956.
(g) North Shore Gas Company (‘‘North Shore’’)
owns and operates facilities for the production, transmis-
sion and distribution of gas to approximately 33,000 cus-
tomers in six communities located in northeastern Massa-
chusetts, including Beverly, Gloucester and Salem. The
company produces less than 1% of its gas requirements and
purchases the remainder from Tennessee. Gross operating
revenues for the twelve months ended December 31, 1956
17
aggregated $2,900,012 and gas utility plant at that date
totalled $9,023,246.
(h) Norwood Gas Company (‘‘Norwood’’) owns and
operates facilities for the distribution of natural gas to
about 4,200 customers in Norwood, Massachusetts. The
company purchases its entire supply of natural gas from
Algonquin. Its gross operating revenues for the twelve
months ended December 31, 1956 amounted to $381,993 and
gas utility plant at that date aggregated $953,213.
(i) The Pequot Gas Company (‘‘Pequot’’) owns and
operates facilities for the transmission and distribution of
gas to approximately 1,200 customers in Stonington, Con-
necticut. Pequot purchased its entire supply of natural gas
from Algonquin during the calendar year 1956 and paid
Narragansett a charge for the transportation of gas and a
_demand charge for manufactured gas, although no manu-
factured gas was received into the system during the year.
The company’s gross operating revenues for the twelve
months ended December 31, 1956 aggregated $101,860 and
its total utility plant at that date amounted to $204,383.
(j) Wachusett Gas Company (‘‘Wachusett’’) owns
and operates facilities for the production, transmission
and distribution of gas in north central Massachusetts.
During 1956, the company produced less than 1% of its
gas requirements and purchased the balance from Ten-
nessee. Gas was sold to approximately 8,100 customers
from which the company derived revenues of $682,105.
Wachusett’s total utility plant account at December 31,
1956 amounted to $1,551,146.
IV
9. The Division avers that the foregoing allegations,
and the facts otherwise disclosed in the course of. its
examination of the NEES system, indicate or tend to in-
dicate that:
18
(a) The holding company system of NEES is not con-
fined in its operations to those of a single integrated public-
utility system, and to such other businesses as are reason-
ably incidental, or economically necessary or appropriate
to the operations of such integrated public-utility system;
(b) The various gas utility assets and the electric
utility assets owned or controlled, directly or indirectly,
by NEES and other respondents cannot continue to be
controlled by NEES under the standards of Section 11(b)
(1), particularly clauses (A), (B) and (C) thereof; and
(c) The various businesses of some of the subsidiaries
of NEES, other than the business of a public-utility com-
pany as such, may not be retainable as reasonably in-
cidental or economically necessary or appropriate to the
operations of either the electric or gas public-utility sys-
tems.
V
It appearing to the Commission, on the basis of the above
allegations of the Division of Corporate Regulation, that
a proceeding should be instituted under Section 11(b) (1)
of the Act with respect to the New England Electric Sys-
tem holding company system:
Ir Is Orperep that proceedings be and the same hereby
are instituted under Section 11(b)(1) of the Act with re-
spect to the New England Electric System and each of its
subsidiary companies hereinbefore named, all of which are
made respondents herein.
Ir Is FurtHer Orperep, pursuant to the applicable pro-
visions of the Act, that a hearing be held at the offices of
the Securities and Exchange Commission, 425 Second
Street, N. W., Washington 25, D. C. on November 12, 1957,
at 10:30 A. M. On such day the hearing room clerk in
Room 193 will advise as to the room where such hearing
will be held. At such time respondents and any other
19
interested persons will be heard with respect to the matters
and questions hereinafter set forth.
Ir Is FurrHer Orperep that such respondents shall file
with the Secretary of the Commission on or before Sep-
tember 30, 1957, their joint or several answers in the form
prescribed by Rule U-25 under the Act admitting, denying,
or otherwise explaining their respective positions as to
each of the allegations of Parts I, I, III and IV hereof,
The answer should state which of the properties and facili-
ties of the New England Electric System holding company
system constitutes the retainable ‘single integrated public
utility system’’. Any such answer may include a statement
of the claim of the respondents, or any of them, as to ( a)
the action, if any, which is necessary and should be required
to be taken by any of the respondents (including the di-
vestment of control, securities or other assets), to limit
the operations of the system to a single integrated public-
utility system; (b) the extent to which the system should
be permitted to continue to control, in addition to its
claimed ‘‘single integrated public utility system’’, one or
more additional integrated public-utility systems as may
meet the requirements of Clauses (A), (B) and (C) of
Section 11(b)(1) of the Act; and (c) the extent to which
any of said respondents should be permitted to own, operate
or control any business (other than the business of a publiec-
utility company as such) as reasonably incidental or eco-
nomically necessary or appropriate to the operations of
such integrated public-utility system or systems. Any such
answer may, if such respondents so desire, state that they
propose and are prepared to take such action as will cause
them to comply with Section 11(b)(1) within the meaning
of the Act, together with a description of such action and
the time within which they propose to take action.
The Division of Corporate Regulation having advised
the Commission that, upon the basis of its preliminary
20
examination of the New England Electrie System holding
company system, the following matters and questions are
presented for consideration, without prejudice to its speci-
fying additional matters and questions upon further exam-
ination:
(a) Whether the electric utility assets of the New
England Electric System holding company system consti-
tute a single integrated electric utility system or more
than one such system;
(b): Whether the gas utility companies of the New
England Electric System holding company system consti-
tute a single integrated gas utility system or more than
one such system;
(c) The nature, extent and location of the ‘‘single
integrated public-utility system’’ of the New England
Electric System holding company system;
(d) Whether, in addition to the New England Electric
System holding company system’s ‘‘single integrated pub-
lic-utility system’’, any of its additional electric or gas
utility systems may be retained under common control
under the provisions of Section 11(b)(1) of the Act, speci-
fically Clauses (A), (B) and (C) thereof;
(e) Whether any of the non-utility businesses con-
ducted by the New England Electric System holding com-
pany system are reasonably incidental, or economically
necessary or appropriate to the operations of the inte-
grated public-utility system or systems retainable under
common control;
(f) What action is necessary to be taken by the New
England Electric System holding company system to limit
the operations of the system to those of a single integrated
public-utility system, together with such additional utility
cystems, and such other businesses, if any, as are retainable
under the standards of Section 11(b)(1) of the Act;
21
Ir Is FurrHer Orverep that at the aforesaid hearing,
attention be given to the foregoing matters and questions.
Ir Is Furruer Orpverep that William W. Swift or any
other hearing officer or hearing officers of the Commission
designated by it for that purpose shall preside at the hear-
ing in such matter. The hearing officer so designated to
preside at any such hearing is hereby authorized to exercise
all powers granted to the Commission under Section 18(¢)
of the Act and to a hearing officer under the Commission’s
Rules of Practice.
Ir Is FurrHer Orperep that jurisdiction be, and hereby
is, reserved to separate, either in whole or in part, or for
disposition in whole or in part, any of the issues or ques-
tions which may arise in these proceedings, or to consolidate
these proceedings, or any portion thereof, with any pro-
ceedings which may be instituted subsequently under other
provisions of said Act with respect to New England Electric
System and its subsidiaries, and to take such other action
as May appear conducive to an orderly, prompt and eco-
nomic disposition of the matters involved.
Ir Is Furruer Orverep that any person desiring to be
heard in connection with these proceedings or proposing to
intervene herein shall file with the Seeretary of the Com-
mission, not later than five days prior to the date herein-
before fixed as the date for said hearing, his request or
application therefore, as prescribed by Rule XVII of the
Rules of Practice of the Commission. Such request shall
set forth the nature of the applicant’s interest in the pro-
ceedings, his reasons for requesting to be heard or to inter-
vene, which of the allegations and issues, as hereinbefore
set forth, applicant proposes to controvert, together with
a statement of any additional issues which the applicant
proposes to raise with respect to the proceedings herein
instituted.
Ir Is Furruer Oxperep that the Seeretary of the Com-
22
mission shall serve notice of the hearing aforesaid by mail-
ing a copy of this Notice of and Order for Hearing by
registered mail not less than 30 days prior to the date
fixed therefor to each of the respondent companies, the
Federal Power Commission; the Connecticut Public Utili-
ties Commission; the Department of Public Utilities of
Massachusetts; the Public Utilities Commission of New
Hampshire; the Public Utility Administrator; Department
of Business Regulation of the State of Rhode Island; and
the Public Service Commission of Vermont; and that notice
of said hearing is hereby given to the aforesaid and to all
states, municipalities, and political subdivisions of states
within which are located any of the physical assets of the
respondent companies, to all state commissions, state
security commissions, and all agencies, authorities or in-
strumentalities of any state, municipality, or other political
subdivision having jurisdiction over any of the respondent
companies or any of the business affairs or operations of
any of them, and to all other interested persons, such
notice to be given by a general release of the Commission,
distributed to the press and mailed to the mailing list for
releases issued under the Act; and by publication of this
Notice and Order in the Federal Register not later than
30 days prior to the date hereinbefore fixed as the date of
hearing.
By the Commission.
(s) Orva, L. DuBots
Secretary
JOINT ANSWER OF ALL RESPONDENTS
Pursuant to Part V of the Commission’s Notice of and
Order for Hearing dated August 5, 1957 in the above en-
titled proceedings, the Respondents file this joint Answer.
The abbreviations contained in said Notice and Order are
adopted in this Answer.
23
I
In certain comparatively minor respects the allegations
in Parts I, II and III of said Notice and Order are not
accurate, Attached as a part of this Answer is a schedule
marked ‘‘A’’ correcting such inaccuracies. As so corrected
the Respondents admit said allegations.
II.
The Respondents deny the allegations of Part IV of
said Notice and Order,
III.
Further answering, the Respondents aver that:
1. The properties and facilities of such of the Respond-
ents as are electric utility companies (including the electric
assets of such of them as are also gas utility companies),
together with Nepco’s interest in Yankee Aton ic Electric
Company, constitute a single integrated public-atility sys-
tem retainable under the Act, and the properties, facilities
and businesses of New England Power Service Company
either are integral parts of said system or are retainable,
and the Respondents should be permitted to own and
Operate them, as reasonably incidental or economically
necessary or appropriate to the operations of said system;
and Respondents request that an interim order of the
Commission be entered to such effect as soon as may be
feasible.
2. In the event that any of the properties and facilities
referred to in paragraph 1 above are not retainable as
part of a single integrated public-utility system they are
retainable, and the Respondents should be permitted to
continue to control them, as one or more additional inte-
grated public-utility systems which meet the requirements
of clauses (A), (B) and (C) of Section 11(b)(1) of the
Act.
3. The properties and facilities of such of the Respond-
24
ents as are gas utility companies (including the gas assets
of such of them as are also electric utility companies) are
either retainable as parts of the single integrated public-
utility system referred to in paragraph 1 above, or are
retainable, and the Respondents should be permitted to
continue to control them, as one or more additional inte-
grated public utility systems which meet the requirements
of clauses (A), (B) and (C) of Section 11(b)(1) of the Act.
4. To the extent that the Respondents or any of them
are engaged in any business other than the business of a
public-utility company as such, such business is reasonably
incidental or economically necessary or appropriate to the
operations of the retainable integrated public-utility sys-
tem or systems, and the Respondents should be permitted
to continue to own, operate and control it as such.
New ENGLAND ELECTRIC
SysTEM .
By (s) Irwin L. Moore, Pres.
ATTLEBORO ELECTRIC COMPANY
By (s) Harry Hanson, Treas.
CENTRAL MASSACHUSETTS GAS
COMPANY
By (s) Apert E. Westwoopo,
Treas.
Connecticut River DEVELOP-
MENT COMPANY
By (s) Grorce R. ALLEN,
Pres.
GRANITE STATE ELECTRIC
COMPANY
By (s) Josern X. Corsett,
Secretary
LAWRENCE Gas COMPANY
By (s) Harry Hanson, Treas.
Lynn Gas AND ELECTRIC
CoMPANY
By (s) H. E. Aver, Vice-Pres.
MERRIMACK-EssEX ELECTRIC
COMPANY
By (s) Harry Hanson, Treas.
Tue Mystic Power COMPANY
By (s) Ratren E. Nock,
Vice-Pres.
Mystic VALLEY GAs COMPANY
By (s) Harry Hanson, Treas.
THE NARRAGANSETT COMPANY
By (s) T. Dexter CLARKE
Counsel
THE NARRAGANSETT ELECTRIC
LIGHTING COMPANY
By (s) T. Dexter CLARKE
Counsel
THE NARRAGANSETT ELECTRIC
COMPANY
By (s) Raupn E. Nock,
Vice-Pres.
New ENGLAND POWER
COMPANY
By (s) Irwin L. Moore, Pres.
YANKEE ATOMIC ELECTRIC
COMPANY
By (s) WILLIAM WEBSTER,
Pres.
New ENGLAND Power SERVICE
COMPANY
By (s) Roperr F. Krausr,
Pres.
NORTHAMPTON ELECTRIC
LIGHTING COMPANY
By (s) ALBERT E. Westwoop,
Treas.
NORTHAMPTON Gas LIGHT
COMPANY
By (s) ALBERT E, Westwoop,
Treas.
NORTHERN BERKSHIRE
ELectric Company
By (s) ALBerr E. Westwoop,
Treas.
NortH SHoreE Gas Company
By (s) Harry Hanson, Treas,
Norwoop Gas Company
By (s) ALBer’ E. Westwoon,
Treas.
THE Prquor Gas Company
By (s) Raupn E. Nock,
Vice Pres.
Quincy Evecrric Company
By (s) Harry Hanson, Treas.
SOUTHERN BERKSHIRE POWER
& ELectric Company
By (s) ALBERT E. WEstwoop,
Treas.
SUBURBAN ELrectrric CoMpANY
By (s) Harry Hanson, Treas.
Wacuusetr Gas Company
By (s) Atsert E, Westwoon,
Treas.
WeyMouTtH LiGut AND Power
COMPANY
By (s) ALsert E, Westwoon,
Treas.
Worcester County Evecrric
Co,
By (s) Harry Hanson, Treas.
YreLttow Cap Company
By (s) T. Dexter CLarkr,
Counsel
2%
—_—___
Scuepute A
CORRECTION OF NOTICE AND ORDER
(References are to paragraphs of Notice and Order)
I,
Paragraph 3(a): The footnote in the bottom of the table
should be changed to read as follows: ‘These companies
were merged into Merrimack-Essex Electrie Company, a
company formerly named Essex County Electrie Company,
pursuant to an order issued by this Commission on May 23,
1957 (Holding Company Act Release No. 13480). As of
August 31, 1957, 80.59% of that company’s voting securities
were owned by NEES.”’
Paragraph 3(b): At the end of line 9 add ‘‘an order of
this Commission dated November 25, 1955 (Holding Com-
pany Act Release No, 13048) and’’, At the beginning of the
last sentence for ‘“‘Concurrently therewith,’’ substitute
“Concurrently with the November 25, 1955 order,’’,
26
IL.
Paragraph 6(b): In the second from the last sentence the
figure ‘‘1,881,215,278’’ should read ‘‘1,886,292,578’’.
Paragraph 6(c): At the end of the first sentence the figure
**544,000’’ should read ‘‘602,600’’.
Paragraph 6(e): At the beginning of the ninth line the
figure ‘75,473,813’ should read ‘‘75,938,565’’. In the last
line after th ord ‘‘property’’ the words ‘‘in service’’
should be adaca.
Paragraph 6(i): At the end of the first sentence after
‘*Connecticut’’ there should be added ‘‘and vicinity’’,
Paragraph 6(n): At the end of the first sentence after
‘*Massachusetts’’ there should be added ‘‘and vicinity’’,
With respect to paragraphs 6(a), 6(b), 6(c), 6(d), 6(f),
6(g), 6(i), 6(j), 6(k), 6(1), 6(m) and 6(n), the gross plant
figures set forth in the Notice and Order are exclusive of
Other Physical Property.
II.
Paragraph 7(a): In the second sentence, the figure
*¢$52,462,139’’ should read ‘‘$52,928,165’’.
Paragraph 8(a): In the last line, the figure ‘‘$3,159,628”’
should read ‘‘$3,146,069’’.
Paragraph 8(b): In the second sentence for the words
‘more than 99%’’, substitute ‘‘all’’.
MOTION TO DISMISS
The respondents by their attorneys move to dismiss so
much of the instant proceeding as relates to any of their
electric properties or operations on the ground that the
record in these proceedings clearly establishes that all such
properties and operations constitute a single integrated
LEME LE LY OT ETL TID MT RPL I IG OE EOE NT TER ae Dee Sree
27
pubiic-utility system as defined in the Public Utility Hold-
ing Company Act of 1935.
(s) Joun R. Quaries
(s) James VorENBERG
Rorrs, Gray, Best, Cootipce & Ruce
Attorneys for the Respondents
December 31, 1957
FINDINGS AND OPINION
InreGRaTIoN or Hotpina Company System
Definition of Integrated Electrie Utility System
Where electric utility assets operated by a registered
holding company system are either physically inter-
connected or capable of physical interconnection so
that, under normal conditions, they may be economi-
cally operated as a single interconnected and coordi-
nated system and where, in other respects, such assets
satisfy the definition of an integrated public-utility
system contained in Section 2(a)(29)(A) of the Pub-
lie Utility Holding Company Act of 1935, held, such
electric utility assets constitute a single integrated
public utility system.
APPEARANCES:
Joun R. Quaries and James VorEnBeERG, for New
England Electric System and its subsidiary compa-
nies, Respondents.
Rosert C. Barnarp, for Abacus Fund.
Wituiam R. Nowy, for the Division of Corporate
Regulation.
This proceeding concerns the determination of the extent
to which the electric, gas, and other business operations of
the holding company system of New England Electric Sys-
tem (‘‘NEES’’), a registered holding company, satisfy the
standards of Section 11(b)(1) of the Public Utility Holding
Ps
~ .
ahs y'2 Se lL i ha Por NEO OES Bee
28
Company Act of 1935 (‘‘Act’’). After appropriate notice,!
a public hearing was held. By agreement of counsel, the
hearing was initially devoted exclusively to the issue as to
whether or not the electrie operations of the NEES system
constitute those of a ‘‘single integrated public-utility sys-
tem’’ as permitted by Section 11(b) (1).
Following the completion of the testimony in respect of
that issue, NEES filed a formal motion and supporting
memorandum seeking dismissal of so much of the proceed-
ing as relates to the system’s electric operations on the
ground that the record establishes that all such properties
and operations constitute a single integrated public-utility
system.
Although there is no opposition to NEES’ motion, we
have examined the rather extensive record developed as to
this issue. On the basis of the following findings and
conclusions, we have determined to grant the motion.
Pertinent Sratutory Provisions
Section 11(b) of the Act provides in pertinent part:
‘‘Tt shall be the duty of the Commission, as soon as
practicable after January 1, 1938:
‘*(1) To require by order, after notice and
opportunity for hearing, that each registered hold-
ing company, and each subsidiary company there-
of, shall take such action as the Commission
shall find necessary to limit the operations of the
holding-company system of which such company
is a part to a single integrated public utility
system...’’
An ‘‘integrated public-utility system’’ is defined in Sec-
tion 2(a)(29) to mean
1 New England Electric System, et al., Holding Company Act Release
No. 13525 (August 5, 1957).
29
‘*(A) As applied to electric utility companies, a
system consisting of one or more units of generating
plants and/or transmission lines and/or distribution
facilities, whose utility assets, whether owned by one
or more electric utility companies, are physically inter-
connected or capable of physical interconnection and
which under normal conditions may be economically
operated as a single interconnected and coordinated
system confined in its operations to a single area or
region, in one or more States, not so large as to
impair (considering the state of the art and the area or
region affected) the advantages of localized manage-
ment, efficient operation, and the effec
lation.’’
tiveness of regu-
Tue NEES Hoxpine Company Sysrem
NEES is a voluntary association created in 1926 in
Massachusetts by Agreement and Declaration of Trust and
is solely a holding company registered as such under Sec-
tion 5 of the Act. It maintains its principal offices in the
City of Boston, Massachusetts. It has 28 subsidiary com-
panies, of which 12 are engaged exclusively in the electric
business, 8 exclusively in the gas business, 2 in a combined
electric and gas business, and 4 are inactive.
The names of the electric utility
the States in which the
business are as follows:
subsidiaries of NEES,
y operate and the nature of their
Attleboro Electric Company Mass.
Granite State Electric Company N.H.
Lynn Gas and Electric Company Mass.
Electric TD
Electric GTD
Electric GTD,
Gas PTD
Merrimack-Essex Electric Company Mass. Electric GTD
Mystic Power Company, The Conn. Electric TD
Narragansett Electric Company, The R.I. Electric GTD,
Gas PTD
RRO oe
Silt
30
New England Power Company . Os
Vt., N.H. Electric GT
Northampton Electric Lighting Company Mass. Electric TD
Northern Berkshire Electric Company Mass. Electric TD
Quincy Electric Company ; isis: SES Electric TD
Southern Berkshire Power &
Electric Company Mass. Electric TD
Suburban Electric Company _ Mass. Electric TD
Weymouth Light and Power Company Mass. Electric TD
Worcester County Electric Company Mass. Electric GTD
G—Generation T—Transmission D—Distribution P—Production
In addition, Yankee Atomic Electric Company (‘* Yan-
kee’’), 30% of the common stock of which is held by New
England Power Company (‘‘NEPCO’’), was organized in
1954 for the purpose of constructing and operating an
atomic nuclear power plant of approximately 134,000 Kw
capacity in Western Massachusetts. The plant is scheduled
for completion in 1960 and its output is to be sold to
12 New England utility companies. The acquisition by
NEPCO of its interest in Yankee was effected pursuant
to an order of this Commission in connection with which we
found that the acquisition would, inter alia, tend towards
the development of the integrated public utility system of
NEES. Another subsidiary of NEES, New England Power
Service Company (‘‘NEPSCO’’), is a service company
which provides technical services to the system’s public-
utility companies.
The electric utility subsidiaries of NEES conduct a
retail electric business in substantial portions of Rhode
Island and Massachusetts and in relatively small areas of
Connecticut and New Hampshire. Altogether, these com-
panies provide retail electric service to 810,000 customers
in an area of about 4,500 square miles with a total popula-
tion of about 2,300,000. In addition, they sell electricity
2 Yankee Atomic Electric Company et al., 36 S.E.C. 552, 564-66
(1955).
31
for resale to various non-affiliated utilities and municipali-
ties in Vermont, New Hampshire, Massachusetts and in a
small area in Rhode Island.
At December 31, 1956, the total electric plant investment
of NEES’ electric utility subsidiaries was $547,637,969.
The Kwh sales of such subsidiaries for the year 1956 were
5,434,013,000 and their electric operating revenues were
$131,615,000. The system peak load in 1956 was almost
1,200,000 Kw.
Attached hereto as Appendix A is a map of the NEES
electric system.
Description or ELECTRIC OPERATIONS
oF THE NEES System
For the year 1956, 76% of the electric energy require-
ments of the above electric utility companies ( excluding
Lynn Gas and Electric Company)* was generated by sys-
tem companies and the balance was purchased from non-
affiliates. The system owns and operates 12 steam-electric
and 22 hydro-electric generating stations. The important
hydro-electric stations are located on the upper Connecticut
River in New Hampshire, and on the Deerfield River in
northwestern Massachusetts and adjoining area in southern
Vermont. The system’s hydro-electric generating stations
have a capability of 593,000 Kw and are linked to its
extensive transmission system by high voltage lines almost
all of which are owned by NEPCO. Also connected to this
transmission system are the fuel-burning generating sta-
3 Pursuant to an exchange offer authorized by us, NEES acquired
93.76% of the common stock of Lynn Gas and Electric Company in
1957. In permitting the exchange to be made we found that the
acquisition of the common stock of Lynn Gas and Electric Company
would tend toward the economical and efficient development of the
32
tions having an aggregate capability of 767,930 Kw, the
more important plants being located at Providence, Rhode
Island, and in Worcester and Salem, Massachusetts. The
system’s transmission facilities are also connected with
those of several non-affiliates, the principal one being Bos-
ton Edison Company which serves the Boston metropolitan
area and with which the system has power interchange
arrangements.
In general, the stexm stations in the NEES system carry
the system’s base load; water is stored in reservoirs during
low load periods so as to have the hydro-electric capacity
available to meet peak loads. Purchased power is also used
to satisfy load requirements when economical. The system’s.
electric utility assets comprising generating stations, trans-
mission lines and distribution facilities are physically inter-
connected with each other over system owned and operated
facilities except as discussed below.
The service area of Northampton Electric Lighting Com-
pany (‘‘Northampton’’), which operates in the west central
portion of Massachusetts, is separated from the service
area of its closest associate company, Worcester County
Electric Company, by the service area of Western Massa-
chusetts Electric Company (‘‘Western Massachusetts’’),
a non-affiliate. At the nearest points, the service areas of
the two associate companies are 5 miles apart. The peak
load of Northampton in 1956 was some 14,000 Kw. The
service area of Southern Berkshire Power & Electric Com-
pany (‘Southern Berkshire’’), which operates in south-
western Massachusetts, is also separated from the service
area of its closest associate company, Northern Berkshire
Electric Company, by the service area of Western Massa-
chusetts. At the nearest points, the service areas of the
two associate companies are about 7 miles apart. The peak
loal of Southern Berkshire in 1956 was some 8,500 Kw.
Under an agreement between NEPCO and Western
LI EAE RAL NIE LOL SLI EET LE TN TI
33
Massachusetts the latter takes from NEPCO such elec-
tricity as may be required to service the energy require-
ments of Northampton and Southern Berkshire and in turn
delivers to Northampton and Southern Berkshire their
energy requirements at the points of interconnection be-
tween them and Western Massachusetts,* The deliveries of
energy from NEPCO to Western Massachusetts and from
the latter to Northampton and Southern Berkshire are
made as nearly as possible on a simultaneous basis. The
payment for the energy is made directly by Northampton
and Southern Berkshire to NEPCO in the same manner and
at the same rate as other system companies make payments
to NEPCO for purchased energy.
The service areas of Quincy Electric Company (‘‘Quin-
ey’’) and of Weymouth Light and Power Company (‘‘Wey-
mouth’’), which companies operate in the east central
portion of Massachusetts, adjoin each other, and the facili-
ties of these two companies are interconnected. Quincy’s
service area is approximately 8 miles from the nearest
points of the service areas of two other associate compa-
nies, Worcester County Electric Company and Lynn Gas
and Electric Company. The properties of Quincy are adja-
eent to the City of Boston and the properties of both
Quincy and Weymouth lie at the southeasterly portion of
a high voltage transmission loop cireling metropolitan
Boston. A number of subsidiaries of NEES, along with
Boston Edison Company, feed power into this loop.
Approximately two-thirds of the loop is owned by NEPCO
and one-third by Boston Edison Company. The power
requirements of Quincy and Weymouth are supplied by
Boston Edison Company pursuant to a contract which is
terminable by either party on one year’s notice, The peak
load for the Quincy-Weymouth area for 1956 was 68,850 Kw.
*A minor
portion of Southern Berkshire’s power requirements is
furnished by t
wo small hydro-electric stations owned and operated by it.
a cai sities a _ . ,
34
The Tiverton distribution area of the Narragansett
Electric Company (‘‘Narragansett’’) is located in the
southeastern portion of Rhode Island and its facilities are
not directly connected with those of Narragansett’s trans-
mission system. Tiverton’s power requirements (with a
peak demand in 1956 of some 4,000 Kw) are supplied by
a non-affiliate, Fall River Electric Light Company, whose
facilities are, in turn, connected with those of the NEES
system. In the event Fall River’s capacity to supply the
Tiverton load is impaired, the NEES system is in a position
to make up any deficiency in the supply.
CapaBILITy or INTERCONNECTION AND
CoorRDINATED OPERATION
Although the facilities of the four companies described
above and the Tiverton area of Narragansett are not at
present directly connected with the high voltage trans-
mission system of NEES, engineering studies and testi-
mony regarding the feasibility and costs of making such
direct interconnections were submitted by NEES. To make
such interconnections would require the construction of
16 miles of 69 Kv transmission line for Northampton,
13 miles of 115 Kv and 6 miles of 23 Kv transmission lines
for Southern Berkshire, 35 miles of 115 Kv and 6 miles
of 23 Kv transmission lines for Quiney-Weymouth and
8 miles of 23 Kv transmission line for the Tiverton area.
While the existing arrangements are merely those which,
at present, make the best economic sense, the necessary
interconnections would be constructed forthwith if the
present arrangements with the non-affiliate companies were
terminated.
The record indicates that the system’s electric business
is conducted on a unified basis. Construction of new gener-
ation, transmission and other facilities is planned with a
view to the requirements of the system as a whole as well
35
as of the constituent company or companies which may be
particularly affected. Daily coordination of the power
supply for the system is controlled by a central system
dispatcher, located at Millbury, Massachusetts, who sche-
dules and controls, principally through automatic elec-
tronic equipment, the use of the important generating
units in the system. He also arranges the daily purchases
and sales with neighboring companies.
The supplying of power for the Southern Berkshire and
Northampton areas, which are not directly connected with
the system’s high voltage transmission lines, is in im-
portant respects coordinated with that of the system as a
whole since the necessity of satisfying their daily require-
ments is the responsibility of the NEES system dispatcher.
As to the Quiney-Weymouth aréas, the automatie controls
in the NEES system instantly detect any power deficit
arising in the transmission loop surrounding the Boston
area, including the power requirements of the Quiney-
Weymouth areas, and under normal conditions the NEES
system is in a position to rectify automatically from its
generating facilities the power deficit. Similarly, in the
event the supply to the Tiverton area should be impaired,
the NEES system is in a position to supply the load
automatically.
Accordingly, we find that the electric utility assets in
the NEES system are physically interconnected or capable
of physical interconnection and may be economically oper-
ated as a coordinated system.®
Orner Statutory Stanparps
The electric operations of the NEES system are con-
ducted in a comparatively small and compact area in five
5 Cf. The North American Co., 11 S.E.C. 194, 241-243 (1942);
Cities Service Power & Light Co., 14 S.E.C. 28, 52-55 (1943);
Federal Light & Traction Co., 15 S.E.C. 675, 679-681 (1944).
36
contiguous States in New England. The distance between
the most northerly point and the most southerly point in
the system is approximately 200 miles; and the distance
between the most westerly point and the most easterly point
is approximately 150 miles.
Although the record indicates that most of the principal
executive and technical personnel who formulate system
policy and planning and control the affairs of the system
have their offices at the central headquarters in Boston,
it is noted that, by reason of the comparatively compact
area served, the central organization has ready access to
almost any part of the system and can maintain daily
contact with local needs and conditions. In this connection,
the local companies employ experienced local managers to
deal with local problems of operation, such as day-by-day
customer relationships, supervision of local employees and
public relations. The manager is a member of the local
company’s Board of Directors and in most instances other
local residents are also members of the Board.
The electric distribution properties of the NEES system
are subject to the regulatory jurisdiction of the State
commissions in the four States in which the system renders
retail service, namely the Connecticut Public Utilities Com-
mission, the Department of Public Utilities of Massachu-
setts, the Public Utilities Commission of New Hampshire,
and the Public Utility Administrator, Department of Busi-
ness Regulation of the State of Rhode Island. Each of these
commissions has extensive regulatory jurisdiction over the
operations of the respective companies located in their
respective States. The retention under common control of
the various electric properties does not appear to impair
the effectiveness of State regulation.
37
ConcLusIons
Upon consideration of the entire record, we are of the
opinion that the electric utility assets owned and operated
by subsidiaries in the NEES holding company system are
either physically interconnected or are capable of physical
interconnection so that, under normal conditions, they may
be economically operated as a single interconnected and
coordinated system and in other respects meet the definition
of an integrated public utility system as applied to electric
utility companies set forth in Section 2(a)(29)(A) of the
Act.
We shall, therefore, dismiss the proceeding insofar as it
relates to the issue of whether the electric utility assets of
the NEES holding company system constitute a single
integrated public utility system, and shall reconvene the
hearing at an appropriate time for the taking of evidence
with respect to the other issues in the proceeding.
An appropriate order will issue.
By the Commission
(Chairman Gapssy and Commissioners Orrick,
Patterson, Hastines and Sarcenrt).
(s) Orvat L. DuBots
[skaL] Secretary
35 = 13688
—
Appendiy
———
] ELECTRIC
MON TREC UE
Fuel-Electric Plant
a ee. PROPERTIES AND SERVICE AREAS
VT. a OF SUBSIDIARIES OF
} ¢ NEW ENGLAND ELECTRIC SYSTEK
\ +4 - LEGEND --
: ae
) 5 a ydro-Electric Plant
\iydro and Fuel Electric Plant
ee Principal Transmission Lines
———— Transmission Lines of Others
scssesesecceeees — Indicated Direct Interconnections
with System
Geo
ee a
co
“a
} : i Service Areas - Retail
} _ \ ME.
S
hes SCALE OF MILES
= S=_
wo % 2
bod
—
:
=
bs
z
SOUTHERN:
ae BERR Se TE
2 MASS.
Er
-
amt) onu
DECEMBER 2), |
SER INET ET CS a ee - wi hate Soa Nh
39
ORDER DISMISSING PROCEEDING
IN RESPECT OF CERTAIN ISSUES
The Commission having, on August 5, 1957, issued its
Notice of and Order for Hearing pursuant to Section
11(b)(1) of the Publie Utility Holding Company Act of
1935 (*‘Act’’) in respect of New England Electrie System
and its Subsidiary Companies, Respondents (Holding Com-
pany Act Release No. 13525), to determine what action, if
any, Shall be required to be taken to limit the operations
of the system to a single integrated public utility system
and to such additional systems and other businesses as are
retainable under the provisions of Section 11(b)(1) of
the Act; and
A public hearing having been held after appropriate
notice, at which evidence was adduced solely with respect
to the issue of whether the electric utility assets of New
England Electric System and its subsidiaries constitute a
single integrated public utility system; and
New England Electrie System having filed a motion and
supporting memorandum requesting dismissal of the pro-
ceeding insofar as it relates to said issue; and
The Commission having considered the record on said
issue; and having this day issued its Findings and Opinion
herein, on the basis of such Findings and Opinion:
Ir Is Orverep that the proceeding heretofore instituted
by the Commission’s Notice of and Order for hearing of
August 5, 1957, issued pursuant to Section 11(b)(1) of the
Act, in respect of New England Electrie System and its
Subsidiary Companies, Respondents, be, and hereby is,
dismissed insofar as such proceeding relates to the issue
of whether the electric utility assets embraced in the hold-
ing company system of New England Electrie System con-
stitute a single integrated public utility system.
Ir Is FurtHer Orperep that, in all other respects, said
proceeding is continued in full foree and effect. A further
— ETL Trad SS SMM Ne Sapna mar em bet tg
40
hearing will be held herein upon the remaining issues at
such time and place as may be ordered by the Commission
or fixed by the hearing examiner heretofore designated.
By the Commission.
(s) Orvat L. DuBois
[SEAL | OrvaL L. DuBois
Secretary
ORDER RECONVENING HEARING
The Commission having, on August 5, 1957, issued its
Notice of and Order for Hearing pursuant to Section
11(b)(1) of the Public Utility Holding Company Act of
1935 (**Act’’), in respect of New England Electric System
(‘“*NEES’’) and its Subsidiary Companies (Holding Com-
pany Act Release No. 13525), for the determination of what
action, if any, should be required to be taken to limit the
operations of the system to a single integrated public-
utility system and to such additional systems and other
businesses as are retainable under the standards of See-
tion 11(b)(1) of the Act; and
A public hearing having been held after appropriate
notice, at which evidence was adduced solely with respect
to the issue of whether the electric utility assets of NEES
and its Subsidiaries constitute a single integrated public-
utility system; and
The Commission having, on February 20, 1958, issued its
Findings and Opinion (Holding Company Act Release
No. 13688) concluding, among other things, that the elee-
tric utility assets owned and operated by the Subsidiaries
in the NEES system met the definition of an integrated
public-utility system as applied to electric utility compa-
nies set forth in Section 2(a)(29)(A) of the Act; and
having issued its Order wherein it dismissed the proceeding
insofar as it related to the issue of whether the electric
utility assets embraced in the holding company system of
i a EL a i ea ld a ila i a C2 COVED ALI DAR SOP AE EL IE
41
NEES constitute a single integrated public-utility system,
but in all other respects continued the proceeding in full
force and effect upon the remaining issues concerning which
a further hearing would be held at such time and place as
might be subsequently ordered by the Commission or fixed
by the hearing examiner; and
It appearing to the Commission that it is appropriate
and in the public interest and the interest of investors and
consumers that the hearing be reconvened:
Ir Is THerEerorr Orperep that the hearing in the above
entitled proceeding be reconvened on May 18, 1960 at
10:00 o’clock in the forenoon of that day, at the Head-
quarters Office of the Securities and Exchange Commission,
425 Second Street, N.W., Washington 25, D.C.
By the Commission.
(s) Orvau L. DuBois
Secretary
NOTICE OF APPEARANCE AND ANSWER
I.
The Department of Public Utilities of The Common-
wealth of Massachusetts hereby enters its appearance in
this proceeding, and files this written notice of appearance
pursuant to Rule XVII (a) of the Rules of Practice of
the Commission.
Il.
The position of the Department of Public Utilities of
The Commonwealth of Massachusetts with respect to the
matters set forth by the Securities and Exchange Commis-
sion in its Notice of and Order for Hearing dated August
5, 1957 is that the economies of joint operation of gas and
A EEG ION NT DIG: PY EA TIE NER ae EA ee
42
electric properties by the New England Electric System
holding company system are substantial, that a separation
of such joint operation would be adverse to the interests of
the residents of this Commonwealth and may necessitate
increased gas rates as a result of the apparent substantial
additional expenses flowing from the separation of such
joint operation and that, under the provisions of Section
11(b)(1) of the Public Utility Holding Company Act of
1935, specifically Clauses (A), (B) and (C) thereof, the
gas utility companies of the New England Electric System
holding company system may be retained under common
control with the system’s integrated electric-utility system.
THe CoMMONWEALTH OF MASSACHUSETTS
DeparRTMENT OF Pusuic UTILITIES
By: (s) Francis X. Lane
Chairman
Dated: May 9, 1960
hsp all alle pia ok EI ofan a SE at a nila ed Rech tote lel fanned a ates TG ae de nie ee Oe EIR *p2ae
43
STENOGRAPHIC TRANSCRIPT OF HEARING
* * -
[593 ] BerorEe THE
SECURITIES AND ExcHANGE CoMMISSION
In the Matter of :
New Encianp Evectric System
AND
Its Sussipiary CoMPaANtIEs
File No. 59-102
(Public Utility Holding
Company Act of 1935)
Room 292
Securities and Exchange Commission
425 2nd Street
Washington, D.C.
Wednesday, May 18, 1960
The above-entitled matter came on for further hearing,
pursuant to recess, at 10:00 o’clock a.m.
Before:
James G. Ewer, Hearing Examiner
Appearances:
Joun R. Quarces and James Vorenserc, Esqs., 50
Federal Street, Boston Massachusetts, RicHarp
B. Dunn, Esq. 441 Stuart Street, Boston, Mass.,
and Wiiuiam D, Anprews, Esq., 50 Federal Street,
Boston, Mass., for and on behalf of the Respon-
dents
Troy T. Murray, Esq., Department of Public Utili-
ties, Room 167, State House, Boston, Mass., for
and on behalf of the Department of Public Utili-
ties
Wim R. Now.iy, Esq., Counsel, Division of
Corporate Regulation, Securities and Exchange
Commission
EIRP SE RT ETS OL St LOTTI CRETE
44
[594] PROCEEDINGS
Hearing Examiner Ewell: The record will show that
the hearing is reconvened in the matter of New England
Electric System and its subsidiary companies, under the
Commission’s file No. 59-102, pursuant to the Commission’s
order of February 8, 1960, which stated, among other
things, that the proceeding involving the question of the
retention of the electric utilities has already been disposed
of by the Commission by its order of February 20, 1959,
and that the hearing should be reconvened for the purpose
of disposing of the remaining issues in the proceeding
under Section 11(b) 1 of the Publie Utility Holding Com-
pany Act of 1935.
The Commission’s order set the matter down for this
morning, May 18th, at 10:00 o’clock, and we are now ready
to proceed with the taking of testimony in pursuance of
that order.
First, I would like to call attention, though, to the fact
that I have received a notice of appearance on behalf of
the Commonwealth of Massachusetts, Department of Public
Utilities, by Francis K. Lang, Chairman.
This notice of appearance is rather brief, and I think
it might be appropriate to read it into the record.
First, I will ask if there is anyone here present repre-
senting the Department of Public Utilities.
[595] Mr. Murray: I am here representing the Massa-
chusetts Department of Public Utilities. My name is Troy
T. Murray, Member of the Massachusetts Bar.
Hearing Examiner Ewell: Under our rules any state
or political sub-division thereof may become a party upon
filing of a notice and application for that purpose.
Is there any objection? I think the motion will be granted,
and as indicated, I think I will read this paragraph into
the record.
PUES ISRAEL LAI MIE LIN ORME, GEILE OE EEE REINER SI PEED SLE ONE TONE PED
45
The second paragraph states:
‘‘The position of the Department of Public Utilities
of the Commonwealth of Massachusetts with respect
to the matter set forth by the Securities and Exchange
Commission in its notice and order for hearing dated
August 5, 1957 is that the economies of joint opera-
tion of gas and electric properties by the New England
Electric System holding company system are sub-
stantial, that a separation of such joint operation
would be adverse to the interests of the residents of
this Commonwealth and may necessitate increased gas
rates as a result of the apparent substantial additional
expenses flowing from the separation of such joint
operation, and that under the provisions of Section
11 (b) 1 of the Holding Company Act of 1935, speci-
fically clauses (a) (b) and (c) thereof, the gas utilities
of the New England Electric System holding company
system may be retained under common [596] control
with the system’s integrated electric utility system.’’
This letter is signed by the Commonwealth of Massa-
chusetts, Department of Public Utilities, as I indicated
before.
The motion to intervene in the proceeding is granted, and
I will ask if there is anyone else who wishes to enter an
appearance in this matter.
Mr. Quarles: Mr. Hearing Officer, on behalf of the re-
spondents, the appearances of Mr. Vorenberg and myself
were entered in the earlier sessions. I would like also to
have noted of record the appearance of Mr. Richard B.
Dunn, attorney of Boston, and Mr. William Andrews, also
an attorney of Boston, as counsel for the respondents.
Hearing Examiner Ewell: All right. Of course, Mr.
Nowlin appears for the Division.
Mr. Nowlin: Mr. Examiner, before we proceed with the
testimony, I would like to state for the record the Com-
ees a en ,
FE ee PR LS SIE ET PTE LG I IR RE NPY See ee Cee
46
mission’s order reconvening the hearing in this matter was
printed and published in the Federal Register February
16, 1960, in Volume 25, Number 382 at Page 1387.
Hearing Examiner Ewell: I want to ask again if there
is anyone else who wishes to enter an appearance in this
matter or be heard in connection with this proceeding.
The record will show no response.
So, I assume that we are ready to go forward now [597]
with the taking of testimony, if there are no other appear-
ances.
Mr. Quarles: As a preliminary to tat, I would like to
tie this hearing in with the preceding one, if I may.
As you may recall, in my opening statement at the com-
mencement of these proceedings in November of 1957, I
pointed out that there were certain differences between the
issues concerning the retainability by NEES of its electric
utility assets and its gas utility assets, respectively; that
with respect to the former, the facts were relatively simple
and easy to establish, whereas the latter would require a
different and more comprehensive kind of treatment; and
that for practical reasons, including particularly those re-
lating to financing, it seemed desirable to separate the two
and deal first with the electric assets.
This proposal was adopted and in due course, after hear-
ings, as you have mentioned, the Commission issued its
findings and opinion determining that the electric assets
of the System constitute a single integrated public utility
system and are retainable as such. This is the principal
utility system of NEES.
[598] We come now to a consideration of the gas utility
assets. As indicated at a previous hearing, in view of the
position taken by the Commission in other cases, we do not
press the contention that these assets may be retained as
a part of our single utility system but will direct our
attention to demonstrating that they are retainable as an
EAE ALRITE IL ELIE LORY STINE LEA LE OST LOE ELLE OI LINE TOMES EN LIS SALES I
47
additional integrated system, or alternatively as more than
one such additional system, by reason of complying in
every respect with the so-called ABC tests of Section 11
(b)(1). A determination that they are so retainable will
not be inconsistent with any previous decision of the Com-
mission or the courts with which we are familiar.
In fact, we are satisfied that such a decision is required
by the express language of the statute as applied to the
facts of this case.
Recognizing that it is the policy of the Commission to
order segregation of electric and gas utility systems in the
absence of a clear showing to the contrary, and that if we
are to retain both we must prove our case by positive evi-
dence, we may possibly have gone further than necessary
to make sure of our facts, checking and rechecking our
conclusions, and procuring expert professional advice of
the highest standing on all questions of opinion or judg-
ment involved in our determinations. If this should appear
to be so, Mr. Hearing Officer, we ask your indulgence, and
[599] assure you that we will present our evidence as
expeditiously as the gravity of this case permits.
To fully appreciate the facts with respect to the gas
properties in the NEES system as they are today, it is
necessary to consider them in their historical context. The
reorganization of the NEES system to comply with Section
11(b)(2) of the Public Utility Holding Company Act was
consummated in 1947.
During the next few years the electric utility business
in New England experienced an unprecedented growth, but
the manufactured gas business failed to keep pace, and by
about 1950-1951 had reached a very low ebb.
The coming of natural gas was imminent and full of
promise, but the cost of conversion to it would be sub-
stantial. There was some uncertainty as to the retain-
ability by the NEES System under Section 11(b)(1) of the
48
Act of its gas business as it was then constituted. NEES.
was experiencing difficulty in the equity financing of its
business. In view of this total situation the NEES manage-
ment decided to explore the possibility of disposing of its
gas holdings, hoping that the prospect of natural gas would
enable it to get a satisfactory price. It invited bids and in
the fall of 1951 entered into an agreement of sale of sub-
stantially all its gas properties, conditional only on the
purchasers’ being «ble to arrange the necessary [600]
senior financing.
In February of 1952, NEES was notified that the finane-
ing efforts had failed and that the contract was terminated.
By that time natural gas in the area had become a reality
and it was essential to go forward without delay.
In view of all the circumstances, after careful considera-
tion NEES then decided to suspend all efforts to sell its
principal gas properties and set about developing the full
potential of its natural gas business. This has involved
substantial changes in management and personnel, corpor-
ate structure, and property holdings, all of which will be
explained in some detail by our witnesses.
Briefly summarized, a separate and independent gas divi-
sion was established and given full authority to operate the
gas properties independently of and in competition with
the electric properties and to promote aggressively the
development and extension of the gas service; the corpor-
ate organization has been substantially rearranged by suc-
cessive mergers, consolidations, transfers and the like to
effect complete separation of the gas properties from the
electric properties and to provide a simplified and practical
corporate structure appropriate to the needs of the gas
utility business; and by eliminating fringe properties, the
gas system has been reduced to a small compact group of
companies, all situated in the State of [601] Massachusetts
and all but one served by the same pipeline.
ES REO EEE R LIAL A ELR OE TET ET ALE Oa EMR RG CI LED NOSE ODO, LEE NEI, LLM FENG OBER
49
In brief, we will show that the effect of this program has
been to bring the gas properties of the System, while under
common ownership and operation, within the definition of a
single integrated gas utility system, and in any event,
whether technically one or more such systems, clearly
within the requirements of the Act for common control
and operation; and at the same time to develop an oper-
ating organization and program for the electric and gas
properties under common ownership which is functionally
an efficient and integrated system, even if technically under
the Act it is necessary to regard the total enterprise as
consisting of a principal clectrie system and one or more
secondary gas systems. We also expect to show that both
the electric companies and the gas companies and their
customers benefit by the combination; that separation
would inevitably result in substantial losses of economies
to both, especially the gas companies and their customers ;
and that, in view of the critical competitive situation of the
gas utility industry in New England by reason of distance
from the gas fields and absence of natural storage facilities,
the loss of economies that would result from such a separa-
tion would seriously threaten the future of these gas com-
panies, ~
Looking now at the specific provisions of the Statute, it
appears that there is only one substantive [602] issue
remaining in this case. The electric properties have been
cleared, and I assume there is no question about the service
company. This leaves merely the question of compliance
of the gas properties with the provisions of Clauses (A),
AB) and (C) of Section 11(b) (1) of the Act.
Since all of the properties are in a single state, the re-
quirement of Clause (B) is met.
In view of the small size of the total system and parti-
cularly of the gas system, it does not seem that any serious
question could be raised under Clause (C); and if there is
AN RESAEO TRAE IR WOE ase GN as
50
any theoretical doubt, it appears to be resolved by the facts
of actual experience, the details with respect to which will
be presented in the course of this hearing.
Finally, we have the question under Clause (A) whether
the several gas companies could be operated independently
without the loss of substantial economies now available to
them; and it is to this that we have principally addressed
our attention.
Even though by virtue of their present common owner-
ship and joint operation the several gas companies may be
regarded as a single integrated utility system, it appears
that, in segregation studies and in applying the ABC tests,
they must be examined individually and on the assumption
that if separated from the NEES system each of them
would be operated independently. If they were to be [603]
disposed of, it would be in whatever manner proved fea-
sible at the time, and there is no basis for assuming that
they would be kept together under new ownership. We
have accordingly made our studies of them separately.
But, by way of exploring all possible alternatives, although
we may not have the right to assume the possibility of
joint operation after severance, we have also examined the
extent to which the economies lost in separation could be
salvaged and retained if in any way a plan could be found
to operate all of the gas properties as a single independent
system.
Briefly stated, the position of the respondents in this pro-
ceeding is as follows:
One, the corporate structure and administrative organi-
zation of NEES as developed under the Holding Company
Act and now in effect are appropriate to the situation of
the System and provide the framework for efficient opera-
tion of all its utility properties and for good service to the
public. This has been amply demonstrated in actual prac-
tice.
DRYER I LENT EE PLE AT MERE SORE PS NE EAE SET OI ORNS Nee TET GAG PIL TORT
ah
ol
Two, the present clean-cut separation of gas and electric
management in independent departments facilitates aggres-
sive promotion and development of each without prejudice
or favor to either. In view of all the circumstances, the
record of the gas companies in the NEES Gas Division
compares favorably with the other gas companies through-
out New England.
[604] Three, the unique competitive handicap of the gas
industry in New England by reason of being further from
the source of supply of natural gas and having no natural
storage facilities for peak shaving and therefore having
higher costs for gas than any other area in the United
States, while the prices of competing fuels are as low here
as anywhere in the country, necessitates availing of every
possible advantage and makes the loss of any economy
critically serious.
Four, separation of the gas companies from the NEES
system would inevitably result in substantial losses of
economies which they now enjoy and without which their
future would be less secure, even if a way could be found
to keep them together and operate them jointly as a single
gas utility system.
Five, separation would also result in substantial losses
to the related electric companies, which is particularly
significant in this case as such losses would ultimately fall
principally on the same customers as the gas company
losses since, in large measure, the gas and electric cus-
tomers are the same individuals.
Six, having gas and electric properties under common
ownership and control is not in any way contrary to the
public policy of Massachusetts and does not in any way
interfere with but actually facilitates regulation by state
[605] authority.
Seven, continued ownership and control of its present
gas properties by NEES is entirely consistent with the
—
52
broad purpose and policy as well as the specific provisions
of the Holding Company Act.
Eight, in sum, this case is unique and differs in substan-
tial ways from any that has previously come before the
Commission, and on the facts, as they will be brought
out in the evidence, the Holding Company Act requires a
finding that the gas companies now in the NEES system
may be retained by it.
Although the relevant facts appear to be quite simple,
determining with the maximum degree of certainty and
accuracy the amount of the loss of economies that would
result from separation has required long and tedious work
and the application, at various points, of experience and
mature judgment. This work has been done by NEES
personnel with the aid of its regular professional advisors
and by Ebasco Services Incorporated, an independent engi-
neering and consulting organization. The two groups have
worked in collaboration in some areas and along parallel
lines in other areas, each exercising independent judgment
on all matters of opinion or judgment. Senior members of
the NEES organization and of Ebasco, as well as staff and
operating personnel who did the field work and assembled
the [606] statistics, are here for direct testimony and cross
examination.
In the interest of presenting the subject matter in logical
sequence and producing as clear a record as possible, we
would like the privilege, as in previous hearings, of having
certain witnesses testify in installments as different aspects
of the ease are developed, instead of being required to
complete their testimony and be cross examined before
being excused from the stand; and of course we will be
happy to have counsel for the staff defer cross examination
until all of our evidence is in and the staff has had an
opportunity to examine the transcript. |
Also, following the previous practice, if agreeable to Mr.
DRE GPL LEA EER LALO NET ETO TEBE CINE HE LS
o3
Nowlin, I suggest that we wait until the evidence is in
before we discuss post-hearing procedures, such as staff
participation in the preparation of the decision, the need
for any specific findings or a recommended decision by the
hearing officer, the thirty-day waiting period, briefing, oral
argument, ete., and that in the meantime all rights in these
respects be reserved.
I think it is implicit in what I have already said that the
respondents are taking this case seriously and regard it as
different from any case previously before the Commission.
With respect to one or more of these procedural matters,
therefore, when the time comes, we [607] may well ask
for a different precedure from that followed in the electric
case.
We plan to present our case in the following order.
Mr. William Webster, President of NEES and NEPSCO
will present a brief and general picture of the NEES
System as it exists today, with emphasis on the gas side,
Mr. Robert S. Quig, Coordinator of the Management
Consulting Division of Ebasco Services, Incorporated, will
outline the assignment given to Ebasco and the manner in
which it was carried out by Ebaseo personnel under his
supervision, and will present the report submitted by
Ebasco.
Mr. Harold Dalbeck, head of the Gas Division of NEES
and President of the several gas companies, will describe
the gas division, its history, organization, management,
properties and operation, and will describe the effect of
severance on the gas companies.
Mr. Leigh FitzGerald, a Vice President of New England
Power Service Company, will similarly describe that por-
tion of the NEES electric utility system which is directly
related to the gas system by reason of serving common
customers, using common facilities or personnel, or other-
Wise concerned with the gas business at the operating level,
te
2 Hs wire LRAT ROC PIN COE OSLER ROR: Ss ee eee
Bite, ARE erect Se ae ah eR” LEE SIS
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54
and will describe the effect on the electric eempanies of the
gas companies’ being removed from the [608] System.
Mr. Robert F. Krause, a Vice President of NEES and
NEPSCO, will describe changes in the System since the
hearing in 1957, and will explain the relationships between
the gas and electric divisions at the executive level and
the manner in which each operates independently of and in
competition with the other. He will also supplement his
testimony given in 1957 on the Service Company, with
emphasis on the effect which gas severance would have.
Mr. Harry Hanson, Vice President and Treasurer of
NEES and NEPSCO and Treasurer of most of the oper-
ating companies, will describe the Treasury Department
under his Supervision and the manner in which it functions
with respect to both the electric and the gas companies. His
testimony will be supplemented by Mr. Elmer Lother, Vice
President and Comptroller of NEPSCO. They will, among
other things, present financial statements and exhibits and
will describe the effects which severance of the gas com-
panies would have in the treasury and accounting end.
We will then call several members of the Ebasco organiza-
tion who participated in making the study and preparing
the report and ask them to explain how the work was done,
what standards and tests were applied, how firm the con-
clusions are and in general the soundness and reliability of
the conclusions reached in the report.
[609] Members of the Ebasco group and Mr. Dalbeck will
then be asked to analyze the extent to which the losses on
segregation would result from separating the gas opera-
tions from the electric operations and the NEES system,
and the extent to which they would result from separating
the gas companies from each other, in other words, to what
extent these losses could be avoided by keeping all of the
gas companies together and operating them under common
ownership and control.
By)
Finally, Mr. Webster will be recalled and questioned
concerning his expert opinion on the conclusions expressed
by other witnesses, on the application of the ABC tests to
the facts of this case, on the materiality of the risks to
the gas companies in segregation and on the net effect of
this segregation.
Hearing Examiner Ewell: Mr. Quarles, in regard to
your statement that you intend to present some of the testi-
mony of certain witnesses, perhaps in segments, as need
might arise, I assume, though, that it will be all concluded,
each witness’s testimony will be concluded in your direct
case.
Mr. Quarles: Yes, in the direct case, before we suggest
an adjournment for the study of the record. That is correct.
Our thought is merely that it would be a more readable
record and a clearer record if we deal first with [610] the
study on the assumption of separate operation of the in-
dividual gas companies and then deal with it on the other
assumption of a possible way of continuing operation of
the gas companies as an independent system.
Hearing Examiner Ewell: All right. Are you ready to
go ahead?
Mr, Quarles: I would like first to call Mr. Webster.
Mr. Nowlin: If you don’t mind, just a minute. I assume
the answer is pretty obvious, that in the event it should be
determined that the gas properties are not retainable, to-
gether with electric properties, that the management of
NEES would select the electric properties in lieu of the
gas properties.
Mr. Quarles: That selection has been made. I think it
was in the record before, in my opening statement. I did
express the idea that the electric system is the principal
system.
Mr. Nowlin: Thank you, sir.
Mr. Quarles: Now, may I recall Mr. Webster who has
SEF
56
already been sworn and testified in the earlier phase of
the case.
Hearing Examiner Ewell: All right.
[611] Whereupon,
WILLIAM WEBSTER
having been previously sworn, resumed the stand and
testified further as follows:
Direct Examination
By Mr. Quarles:
Q. Mr. Webster, when you testified in November 1907 in
the earlier hearings with respect to these proceedings, I
believe you said that you were Executive Vice President
and a Director of NEES, President and a Director of
Narragansett Electric Company, President and a Director
of Yankee Atomic Electric Company and a director of New
England Power Company. Since that time have there been
any changes in your positions with the NEES holding
company system? A. Yes. Effective February 25, 1959,
I resigned as Executive Vice President of NEES and was
elected President. On December 22, 1959, I resigned as
President of Narragansett Electric Company but remained
on the board of that company. Effective January 4, 1960,
I was elected President and a Director of New England
Power Service Company. In addition to these positions I
have continued as President and a Director of Yankee
and as a Director of New England Power Company.
Q. In previous hearings in this case, respondent’s exhibit
No. 2 listed the subsidiaries of NEES and showed [612]
the percentage of NEES ownership of each subsidiary.
Have there been significant changes since that time?
A. Yes, there have been.
Q. I show you a tabulation entitled ‘‘Subsidiaries of New
England Electric System at April 1, 1960’? and ask you to
57
describe it. A. This lists the subsidiaries of NEES and
shows the percentage of the common stock of each owned
directly by NEES as of the date indicated. NEES has the
controlling interest, in most cases one hundred percent of
twenty-three subsidiaries. Fourteen of these subsidiaries
are engaged solely in the electric business, eight solely in
the gas business and one is a service company. As noted
at the bottom of this table, New England Power Company,
one of the NEES electric subsidiaries, owns thirty percent
of the common stock of Yankee Atomic Electric Company.
Q. Was this table prepared under your supervision?
A. Yes, it was.
Q. And does it accurately set forth the information it
purports toshow? A. It does.
Mr. Quarles: I will offer that as Respondent’s Exhibit
No. 50. That is the next number.
Mr. Nowlin: No objection.
Hearing Examiner Ewell: Respondent’s Exhibit No. 50
[613] will be received.
(Respondent’s Exhibit No. 50 marked for identifica-
tion and received in evidence.)
By Mr. Quarles:
Q. Please describe briefly the significant changes which
have taken place in these corporate relationships since
Exhibit No. 2 was submitted in the previous hearings in
this case. A. In the first place, as a result of hearings
before this Commission, a plan for the exchange of NEES
shares for the publicly hold minority interests in common
shares in the straight electric subsidiaries of NEES was
approved. The Findings and Opinion and Order were dated
May 14,-1959. This was enforced by an order of the United
States District Court in June 1959 and was consummated
in July 1959. This involved Merrimack-Essex, Southern
Berkshire, Suburban Electric, Weymouth and Worcester
County and the common stock of these electric companies
58
is now owned one hundred percent by NEES. The then
Lynn Gas and Electric Company was not involved in the
minority interest proceeding as it was at that time a recent
acquisition and was a combination company.
Early in 1959, the Pequot Gas Company, located in the
southeast corner of Connecticut was sold and at the same
[614] time Narragansett Electric Company sold its gas
properties located in Westerly, Rhode Island. Later in
December 1959, Narragansett disposed of its remaining gas
properties in Warren and Bristol, Rhode Island and thus
became a straight electric company.
On February 5, 1960, pursuant to approval by this Com-
mission and by the Massachusetts Department of Public
Utilities, the electric and gas properties of Lynn Gas and
Electric Company were separated. Lynn Gas and Electrie
Company changed its name to Lynn Electric Company and
continues to own and operate the electric properties and
Lynn Gas Company, a new company, owns and operates
the gas properties.
The four inactive subsidiaries which were referred to in
the previous hearings, Connecticut River Development
Company, the Narragansett Company, The Narragansett
Electrie Lighting Company and Yellow Cab Company, have
all been dissolved.
Q. The properties, service areas and operations of the
electric subsidiaries of the NEES were described in this
proceeding in 1957. Have there been any significant changes
since that time? A. Not in substance. The service areas
of the electric companies are substantially the same but
the vital statistics of plant investment, number of cus-
tomers [615] and revenues have increased as the demand
for electric service has continued its upward trend. The
next important System developments in the electric end
of our business will be an additional strong transmission
59
tie to the west which will further connect the Niagara Mo-
hawk Power Corporation with our system, and a new
steam generating station at Brayton Point on Mount Hope
Bay near Fall River, Massachusetts. The 230,000 volt
transmission line to Niagara Mohawk will enable us to buy
230,000 kilowatts of power from Niagara in 1962 and lesser
amounts for the next two years. This arrangement will
allow us to build in one single operation the 450,000 kilo-
watt plant at Brayton Point in two units to come on the
line in 1963 and 1964, These generating units can be then
immediately fully loaded with the help of some temporary
one-unit sales to other New England utilities. The atomic
electric generating plant of Yankee Atomic Electric Com-
pany is rapidly nearing completion. It is expected to go
critical later this year and to be operating on a regular
schedule sometime in 1961.
From the standpoint of electric operations as well as gas
we have made rapid strides in streamlining our manage-
ment and operating procedures. It has been and continues
to be our objective to manage our electric system as if it
were a single company, with lines of authority and respon-
sibility so far as possible running along functional [616]
lines, consistent with state laws and corporate boundaries
and requirements. This has been an evolutionary process
which, while not yet wholly complete, has continued to
move ahead in recent years through the elimination of some
corporate entities and the grouping of remaining ones on a
regional basis. The recent authorization dated December
30, 1959, by this Commission with respect to the organiza-
tion and conduct of business of New England Power
Service Company is expected to enable us to achieve
greater efficiencies and to further improve our functional
organization.
Q. I next show you a map entitled ‘“New England Elee-
trie System—Gas Companies’’ and ask you to state what it
Pe Od RS EAE ACN ER IETS TITS
60
shows. A. This map shows the location and service areas
of the eight gas companies of the NEES system and also
shows the two natural gas pipelines which serve New
England. These eight System gas companies are ail located
in Massachusetts and, with the exception of the Norwood
Gas Company, all purchase natural gas from the Tennessee
Gas Transmission Company. Norwood purchases natural
gas from Algonquin Gas Transmission Company.
@. Was this map prepared under your supervision?!
A. Yes, it was.
Q. And does it accurately set forth the information it
purports to show? [617] A. It does.
Mr. Quarles: I will offer it as Respondent’s Exhibit
No. 51.
Mr. Nowlin: No objection.
Hearing Examiner Ewell: It will be received.
(Respondent’s Exhibit No. 51 marked for identifiea-
tion and received in evidence. )
By Mr. Quarles:
(. Referring to this map, will you indicate the genera!
location of each System gas company and state the number
of customers served by each? <A. Incidentally. throughout
my testimony if I may, | will use round figures. More
precise figures are available in the exhibits and elsewhere
in the record.
In the upper righthand corner of the map is the North
Shore Gas Company which has 33,000 customers. It serves
two areas, the Salem-Beverly area and the Gloucester area.
The headquarters of this company is in Salem.
Closer to Boston, with its headquarters at Lynn, and
serving 41,000 customers is the Lynn Gas Company. Just
north of Boston is the largest of our gas companies, the
Mystic Valley Gas Company. It has 99,000 customers and
has its headquarters in Malden. North of the Mystic Valley
service area is the Lawrence Gas Company, which serves
61
[618] 33,000 customers and which has its headquarters at
Lawrence.
Southwest of Boston and serving 4600 customers in the
town of Norwood is the Norwood Gas Company. This is
the smallest of the System gas companies.
Turning to the west, in the north central part of Massa-
chusetts is the Wachusett Gas Company with its head-
quarters in Leominster and serving 8,000 customers.
South and west of the Wachusett territory is the Central
Massachusetts Gas Company. This company serves two
divisions, the Webster and Southbridge Division and the
Spencer Division. This company serves 9700 customers
and has its headquarters at Webster.
Farther to the west is the Northampton Gas Light Com-
pany which has 8,000 customers and which has its head-
quarters at Northampton.
Q. Now, will you describe in rather broad terms the
areas served by these eight companies, having in mind that
a subsequent witness will be asked to describe each company
in detail? A. These gas companies are, as I have said
before, all located in one state, Massachusetts. They serve
an aggregate of 237,000 customers located in an area of
about 660 square miles with a total population of about
1,032,000 people. Over eighty-five percent of all of our gas
customers are located within a 25-mile radius of Malden,
[619] Massachusetts, which is the headquarters for all
System gas operations. And Malden is just seven miles
from the Boston headquarters of the NEES holding com-
pany system.
The distance from Northampton to the west and Glouces-
ter to the east is just over 100 miles and from Lawrence to
the north and Webster to the south is about 65 miles.
The territories served vary quite widely as between com-
panies in industrial and residential characteristies, Heavy
industry is quite generally confined to parts of the terri-
PAS Mince — ' O08 4 ae OCR ROPE WER ts RC SIT ii
62
tories of the Mystic Valley Gas Company, the Lynn Gas
Company and the Lawrence Gas Company. All of our gas
company territories are liberally sprinkled with diversified
light industries, which is quite typical, generally, of Massa-
chusetts industry.
Heavy population densities are mainly in the cities of
Malden, Medford, Everett and Revere in the Mystic Valley
territory, the city of Lynn and the City of Lawrence. The
other areas are characterized by moderate to small sized
cities and towns. Lynn, with a population of about 99,000
is the largest city served by any System gas company, and
is followed by Lawrence with a population of about 76,000,
Medford and Malden in the Mystie Valley territory with
65,000 and 59,000 respectively, are the only other cities
with a population of over 50,000.
[620] Q. Will you now in general terms compare the
gas franchise area of NEES subsidiaries with the retail
electric franchise area of NEES subsidiaries? A. As I
have said, the eight gas subsidiaries of NEES provide
direct gas service to a total of about 237,000 customers in
an area in Massachusetts of 660 square miles with a popula-
tion of approximately 1,032,000 people.
NEES electric subsidiaries provide direct electric service
to a total of about 824,000 customers in a retail franchise
area of about 4,600 square miles with a population of over
2,300,000 people. These retail electric operations are car-
ried on in four states, New Hampshire, Massachusetts,
Rhode Island and a small part of Connecticut.
Comparing the gas operations with electric, it can be
seen that the number of gas customers is about 29 percent
of the electric customers. The retail gas franchise area
of 660 square miles is about 14 percent of the retail electric
service area,
Q. Now, I show you a map with the title ‘‘New England
Electric System Subsidiaries—Electrie and Gas Service
63
Areas in Massachusetts’’ and ask you to state very briefly
what it shows. A. This map shows the gas retail service
areas as well as the electric retail service areas of NEES
subsidiaries in the state of Massachusetts. The gas service
areas are dark [621] shaded, the electric service areas are
shown in vertical cross hatching and the areas where
NEES subsidiaries supply both gas and electric service are
both shaded and cross haiched.
Q. Was this map prepared under your supervision?
A. It was.
Q. And does it accurately set forth the information it
purports to show? <A. It does.
Mr. Quarles: 1 will offer it as Respondent’s Exhibit No,
52.
Mr. Nowlin: No objection,
Hearing Examiner Ewell: It will be received.
(Respondent’s Exhibit 52 was marked for identifica-
tion and received in evidence. )
By Mr. Quarles:
Q. Now, will you develop more fully for us the inform-
ation shown by this map and describe its significance.
A. First this map shows the extent of the area of ‘‘over-
lap’’, that is to say, the areas where NEES subsidiaries
serve both gas and electric customers. Of the total gas
franchise area of 660 square miles, about 494 squaré miles
or 79 percent is also electric franchise area of NEES sub-
sidiaries. The only gas company whose franchise area
[622] is not served in any part by an affiliated electric
company is the Norwood Gas Company whose elecirie com-
petition is furnished by a municipally owned electric plant.
All of the service areas of Central Massachusetts Gas
Company and Lawrence Gas Company are supplied with
electricity by System electric subsidiaries. The service
areas of the five remaining gas companies, North Shore,
Lynn, Mystie Valley, Wachusett and Northampton are sub-
—— SENAY VILL NG IIE ND ARIE BN INES PO Bot
64
stantially coextensive with those of System electric com-
panies.
Of the total number of gas customers, about 184,000 or
over 77 percent are in areas which are supplied with elec.
tric service by NEES electric subsidiaries.
This map also shows the relative size of the electric and
gas service areas of NEES subsidiaries in Massachusetts,
The state of Massachusetts is a relatively small state with
an area of only 7,867 square miles. NEES retail electric
companies serve about 3300 square miles in Massachusetts
which is about 42 percent of the area of the state. The
NEES retail gas service area of 660 square miles is only
slightly over 8 percent of the area of the state.
Q. What particular significance do you attach to this
‘‘overlap’’ of service areas? A. I understand that later
testimony will fully develop and explain the increased
operating costs which will occur if the gas properties are
assumed to be severed [623] from the New England Elee-
tric System. The great bulk of these increased costs will
result from the discontinuance of joint operations at the
local level in certain functions involved in furnishing gas
and electric service, These joint operations would include
service orders, meter reading, billing, credit and collee-
tions, general accounting and the common use of such
physical facilities as offices, garages, ete., all of which are
non-competitive. Not only would the operating costs of
the gas companies be substantially higher if severed from
the System but the retail electric companies, particularly
those involved in the joint operations which I have men-
tioned, would also bear the burden of increases in operating
expenses,
Any increased costs of providing electric and gas service
must ultimately be borne by the customers using such
services. It is upon those combination customers located
in the so-called ‘‘overlap areas’? that the burden of in-
alles fale 5a
65
ereased costs will fall most heavily. They are both gas
and electric customers of NEES companies and will receive
the double impact of increased electric service costs and
inereased gas service costs if the gas companies are separ-
ated from the System. As I have said, over 77 percent of
all System gas customers or about 184,000 people fall into
this category.
Q. Will you now in general terms compare the gas busi-
ness and properties of NEES with the electric business
[624] and properties?’ A. At the end of 1959 our gross
investment in electric plant and equipment amounted in
round figures to $619,000,000. Gas plant and equipment
amounted to about $60,000,000.
(iross revenues for the year 1959 were $146,000,000 from
electric sales and $25,000,000 from gas sales. $885,000 was
derived from miscellaneous sources mostly incidental to
the electric business.
As I have mentioned previously, at the end of 1959,
System subsidiaries provided direct electric service to
824,000 customers and gas service to 237,000 customers.
As is clearly demonstrated by these figures, our electric
System which the SEC has already found to be integrated,
isour principal System.
Q. During the 1957 hearings on the electric aspects
of this case, Mr, Moore outlined the history and the
growth of the System electrie business and properties. Will
you now tell us briefly about the development of the gas
business? A. NEES first obtained control of some gas
business late in 1926 when a controlling interest in Law-
rence Gas and Electric Company was acquired. In 1927
gas properties in Rhode Island and Connecticut were ac-
quired through control of the Rhode Island Publie Service
Company. All of our gas properties other than those of the
Lynn Gas Company were acquired before the end of 1931,
The Lynn properties were [625] acquired in 1957.
TRE aie
Se
66
Q. Were the gas properties acquired along with the
electric properties? A. Yes. It was quite common in New
England for gas and electric properties to be operated
as combination corporations or, if separate corporations,
to be under common ownership. Thus when, what is now
NEES acquired control of several sub-holding companies
such as Massachusetts Utilities Associates, Massachusetts
Lighting Companies, North Boston Lighting Properties
and others, gas properties, as well as electric, came into the
System. At one time NEES controlled gas properties in
four states; Massachusetts, Rhode Island, Connecticut and
Vermont, but has since disposed of all those outside Massa-
chusetts.
In Massachusetts we have in the past disposed of rela-
tively minor gas operations in and around North Adams,
in Athol, Gardner, Newburyport and in Blackstone. At one
time there were a total of twenty-five active gas companies,
either straight gas or combination, in the System and by
reason of the disposals which I have mentioned and because
of corporate mergers and consolidations, there are now
only eight System gas companies and all are located in
Massachusetts.
Q. Was there any specific plan or policy behind these
various disposals, mergers and consolidations of the gas
companies? [626] A. Yes. Our acquisitions of gas and
eleetrie companies were usually by groups of companies.
Consequently we ended up with some properties, including
some of the outlying gas properties, which did not lend
themselves to system operation as well as others, Over
the years we have sold off properties which did not fit into
our system picture and have merged and consolidated
others to facilitate their development.
We have, through the Gas Division within our NEES
system, achieved an efficient and economic modus ope ‘andi
for our remaining eight gas companies. Our gas properties
>
67
are now generally confined to the eastern half of one state,
top corporate officers are generally common to all, and one
system divisional organization serves all ‘he gas com-
panies. There are joint operations with the electric busi-
ness Where combination produces economies, and gas opera-
tions are separate from electric operations where separa-
tion makes for the furtherance of business.
Q. When were the first serious discussions indicating that
natural gas might be brought into the New England area?
A. In 1948.
Q. Was that a significant event in the history of gas
business in New England? A. Indeed it was. Just prior
to the introduction of natural gas into New England, the
gas industry generally was in dire straits. The rapid in-
flation which followed [627] World War II had skyrocketed
labor and fuel costs so that the costs of producing manu-
factured gas reached extremely high levels. Most gas
properties in the area were earning little or nothing and
some were operating ‘‘in the red’’, Rate increased pro-
vided temporary relief but with each increase, it was gener-
lly true that the gas business was slowly but surely prie-
ng itself out of the competitive market with other fuels,
System gas operations were no exception to this discourag-
ng picture of the New England gas industry in the late
orties,
Q. How were the NEES gas companies operated prior
01948? A. We operated them substantially in the form
i Which they had been acquired in the early 1930’s. The
irge number of companies which comprised the NEES
ystem in the 1930’s was a result of the historical develop-
lent of the electric and gas industry in the New England
rea on a town-by-town basis and we were faced with many
roblems resulting not only from a large number of cor-
orations but also from the several holding companies in
le System.
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Until the simplification of the holding company system
was effected in June of 1947, System officials were con-
cerned not only with the protracted proceedings relating
thereto but also with the long Service Company proceed-
ings in the early 1940’s. During the same period there
were [628] protracted proceedings before the Federal
Power Commission in connection with the licensing of hydro
electric developments which demanded the attention of
several of our top officials.
In 1947, the corporate simplification proceedings under
the Holding Company Act were completed, and System off-
cials were able to concentrate on operations of the System.
By 1948, we were already experiencing a post-war growth
in our electric business far in excess of what had been
anticipated during the early 1940's. At the same time, we
had come to realize that the manufactured gas business
had a rather dim future and offered little prospect for a
fair return on the NEES investment therein.
Q. What happened in the period 1948 to 1951? <A. As
I have already stated, beginning in 1948, there were serious
discussions indicating that natural gas would be brought
to New England. In 1949 two transmission companies filed
applications with the Federal Power Commission for au-
thority to do so. We lost no time in rolling up our sleeves
and getting to work. We established a task force to nego-
tiate with the transmission companies and to participate
in the FPC certificate proceedings. We engaged the ser-
vices of Ebasco Services, Inc. to make a study of the poten-
tial requirements of the NEES gas companies, the inform-
ation derived therefrom to be used in the FPC proceedings.
Early [629] in 1950, we threw our support to the proposal
of Tennessee Gas Transmission Company for the bringing
of natural gas to our area, and in November of that year,
the Federal Power Commission authorized Tennessee to
69
supply that half of the New England area which included
all of our present companies except Norwood.
Parenthetically I might add that the certificate for Al-
gonquin, the competing transmission line, was not issued
till much later, Norwood did not get natural gas till late
1953.
Meanwhile, in this 1948 to 1951 period, we were increas-
ingly concerned with the difficulties NEES was having
in providing equity capital. We had been forced to cut our
dividend on the NEES common in 1948 and the gas proper-
ties were contributing little if anything to our net earnings.
This had an adverse efect on the market price of the
NEES shares and on the price at which NEES could issue
additional shares.
In 1949 NEES had to issue shares at $10.50 per share.
Our requirements were such that we knew additional shares
would have to be issued early in the 1950’s. A sale of the
gas properties seemed clearly indicated from an economic
standpoint. With the prospects of natural gas coming to
the New England area we felt that we might obtain a fair
price for the gas properties in relation to our [630] invest-
ment in them.
Another factor was the uncertainty stemming from the
provisions in Section 11(b)(1) under the Public Utility
Holding Company Act of 1935, namely, whether the NEES
System would be permitted to retain its gas properties
as then constituted along with its electric properties.
Accordingly, during 1950, we considered various ways of
selling the gas properties and, shortly after the Federal
Power Commission in November of 1950 authorized Ten-
nessee Gas Transmission Company to bring natural gas
to this area, we actively sought purchasers for the proper-
ties.
Q. Will you tell of your attempts to sell the gas proper-
ties? A. Early in 1951 we again asked Ebasco to study
—————————o rt
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70
the gas properties, this time with a view to developing a
brochure fer use with prospective purchasers,
In March 1951, we filed with this Commission for ay
exemption from the competitive bidding requirements, we
agreeing to maintain competitive conditions through the
invitation of proposals from interested purchasers. The
attempts to sell were long and involved due to the many
prospective purchasers with whom we talked and due to
the complexities involved such as the gas properties in
many cases being parts of joint gas and electric operations
[631] within a single company.
Though we invited proposals from 32 persons or groups
who had expressed interest, we received only three bids
for all the gas properties and in October 1951 a contract
was signed with the highest bidder, a group headed by
Lehman Brothers and Bear, Stearns. This contract was
conditioned on the arrangement by the purchasers of senior
financing.
Q. Why was this sale not consummated? A. The pur-
chasers were unable to arrange the senior financing and in
February of 1952 we were formally advised of their in-
ability to carry through the contract. Though hearings
had been set before this Commission for February 5, 1952,
they were never held.
Q. Had natural gas arrived in New England by February
1952? A. Yes. It had arrived at some of our Massachu-
setts properties but had not arrived at all of the eastern
areas,
Q. Did the negotiations for sale and the contract for
sale have any effect on the gas operations prior to and upon
the arrival of natural gas? A. Yes. This period was a
critical one in that natural gas was arriving, rates for the
retail sale thereof were being established and policies were
being set. However, during this critical period we were
hamstrung. [632] We did not know whether the gas
ie
properties would be ours, we didn’t know how far pur-
chasers would want us to go.
Tae prospective purchasers, even after the contract had
heen signed, were also hamstrung. They were not certain
that the properties would become theirs and could not
start the building up of their own staffs. Retail gas rates
had to be set but they were not set as low as they might
have been if a company knew it had the properties and
were looking toward long range development. Current
earnings Were important to the consummation of a success-
ful sale and financing.
Q. What was the situation when the sale to the group
headed by Lehman Bros. and Bear, Stearns fell through in
early 1952? A. As a result of the history which I have re-
counted, we suddenly found ourselves with natural gas
already in New England, without promotional policies
and staffs fully established and without retail rates set at
promotional levels. It is no wonder that in 1952 our aver-
age Mef customer usage was below that of some of the
other companies in Massachusetts.
Q. What happened when the sale of the gas properties
fell through? A. We re-examined the status of the gas
properties in the light of the new and radically changed
circumstances. [633] It seemed to us that gas had a fair
chance in the market and could be built up to pull its own
weight as a part of the System. We, accordingly, decided
that further attempts to sell the gas properties should be
dropped and adopted a long range plan designed to fully
develop and promote the natural gas business,
Q. What steps were then taken? A. On Mareh 1, 1952,
an independent gas division was established with separate
management and sales promotional personnel and the job
of developing the market potential of natural gas began.
Gas operations were completely separated from electric
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operations to the extent that it made good economic sense
to do so.
In areas where substantial savings could be made by
joint operations and where the competitive aspects between
gas and electricity were absent, these joint operations were
continued. The separation of gas and electric management
was implemented by corporate separations where gas and
electric service was provided by combination companies.
I should like to emphasize here under this arrangement
gas management reports only to top System management
and is and has been operating under instructions to de-
velop the full potential of the gas market without regard
for its effect on the electrie business.
On the other hand, our electric managers are operating
[634] in the same manner with respect to electricity and I
am convinced that we are achieving the same degree of
competition between gas and electric service that would
| exist if our present gas companies were independently
| owned.
This separation of gas and electric managements and
, the related separation of sales promotional activities
; while at the same time retaining all the advantages and
savings which accrue through joint areas of operation
where it makes good horse sense, seems to us to be an ideal
combination and one from which the consumer derives sub-
stantial benefit. He is assured of adequate and continuing
service whether he elects to purchase gas or electric
service or both, at a cost which I am sure is below what
he would be obliged to pay if the gas properties were
severed from the System.
Furthermore, we feel that through this sensible metiiod
of operating our gas properties, we eliminate the evils
that the Congress had in mind in this connection in design-
ing Section 11(b)(1) of the Publie Utility Holding Com-
pany Act, while we retain the obvious economic advantages
73
of joint operations where these little or no effect on
the competition between gas and electric service.
The availability of natural gas and a competent separate
gas management has produced results beyond our early
[635] hopes. Gross operating revenues from present Sys-
tem gas companies in Massachusetts were about $11,500,000
in 1951 and increased to over $21,000,000 in 1959 or an in-
crease of about 83 per cent. These same companies con-
tributed about $2,100,000 to NEES consolidated income
in 1999 compared with only about $250,000 in 1951.
These figures do not inelude Lynn which did not come
into the System until June 1957 and did not become part of
the Gas Division until the electrie gas properties of Lynn
were separated early this year. This achievement com-
pares favorably with the record of other gas companies in
New England. It is particularly impressive and significant
in view of the handicap under which we started when
natural gas reached New England, which I have already
referred to.
Q. Since 1947 what changes have occurred in the Sys-
tem’s gas property holdings? A. Small properties at some
distance from the center of our gas properties have been
sold and the Lynn Gas properties have been acquired.
Various combination gas and electric companies have been
separated into straight gas companies and straight electric
companies. There have been some mergers and consolida-
tions of gas companies.
(). Why was this done? A. Our purpose was to achieve
a single workable group of gas properties. Though dis-
posing of the more distant [636] properties, we acquired
the Lynn gas properties adjacent to our Mystic Valley and
North Shore gas properties. We also sought to attain the
economies of a unified gas operation and, to the extent
this was not accomplished by mergers or consolidations, it
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was done by the use of a centralized gas organization jy
lieu of larger staffs for each of the gas companies.
Q. You have stated various reasons explaining Why
NEES attempted to sell its gas properties in the early
1950’s. Do these reasons still exist? A. No. For one, the
difficulties in financing have been overcome. The market
for the common shares of New England Electric System
has substantially improved. Whereas in 1949 and 1952 we
were able to sell additional common shares at prices of only
1014, and 125, respectively, the average price on the New
York Stock Exchange now runs somewhere around $20 a
share and we could expect to sell additional shares for a
price of approximately $20 a share.
The market price of NEES shares in the early 1950's
reflected their unseasoned character—a situation that no
longer exists. Though our business continues to expand
and to demand financing, we do not now have the difficulty
in equity financing that we did in the early 1950’s,
In another area, the gas properties are now earning a
fair return and contribute their share to NEES consoli-
dated earnings.
[637] And we have now found in actual experience that
these properties can be operated efficiently and_ inde-
pendently as a separate division of our System at sub-
stantial savings and without either the gas business or the
electric business hindering the other. As you can see,
considerations bearing on the sale or retention of the gas
properties, as part of the New England Electrie System,
are now materially different from those that existed in
the early 1950’s.
Q). I show you now an organization chart with the title
‘‘New England Eleetrie System—Holding Company Sys-
tem—Functional Organization Chart—Electrie and Gas
Operations—March 1960’? and ask if it was prepared
under your supervision? A. Yes, it was.
get
ro
sac. a Ae
75
Q. Does it accurately set forth the information it pur-
ports to show? A. It does.
Mr. Quarles: I offer it as Respondent’s Exhibit No, 53.
Mr. Nowlin: No objection.
Hearing Examiner Newell: It is received.
(Respondent’s Exhibit No. 53 was marked for
identification and received in evidence.)
By Mr. Quarles:
[638] Q. Will you first tell us in general how this chart
differs from the one received as respondent’s Exhibit #22,
in the previous hearings in 1957? A. There are two major
differences, the first perhaps being more obvious than the
second. The first difference is that the previous exhibit
which you have just referred to omitted the gas companies
as a part of the System organizational pattern.
The second significant difference is the treatment which
this present exhibit gives to the functions of the New Eng-
land Power Service Co.
Q. Why is the Service Co. treated differently in this ex-
hibit than in the previous one? A. Prior to January 1,
1960, the New England Power Service Co. was rendering
services for all companies in the NEES holding company
system under a form of organization and method of opera-
tion approved by this Commission about twenty vears ago.
That was before the reorganization of the holding company
system in 1947 and the System had yet to prove its inte-
gration from both a corporate and geographical point of
view.
The approval of the Service Co operations in 1941 was
based upon an entirely different set of facts than now
prevail. For instance, at that time the System had 63
subsidiaries, five of which were sub-holding companies and
[639] the minority interest situation was substantial and
complex. In 1941 the holding company system was in the
electric, the gas, the water, the steam, the trolley, the bu;
2.25 a hat oe et
76
and the taxicab businesses. Today the System engaged jn
only the electric and gas businesses. The corporate and
business simplifications have been accompanied by major
streamlining of management along functional lines.
Were it not for the problems of historical development
and the need for incorporation in the states served, the
NEES properties could be economically and_ efficiently
operated as a single corporation.
As I indicated previously in my testimony, we now ap.
proximate such single company operation through our in-
tegrated holding company setup in which Boston Office
personnel function for the benefit of the entire System and
provide for all System companies the usual services ex.
pected from top management. New England Power Service
Co. serves all of the units in the System with technical,
financial, construction, managerial and other services at
cost and consequently at less expense than these units could
secure equivalent service if each of them attempted to
maintain comparable personnel of their own. However,
prior to 1960, NEPSCO was not authorized to render man-
agerial services and accordingly our streamlining along
functional lines had been hampered.
[640] By 1959, we had attained sufficient experience to
clearly indicate that, in order to promote the efficient and
economic operation of the System as a whole, there should
be changes in the organization of the Service Co. and its
method of conducting business. As a result, we filed with
the S.E.C. in September 1959, a request for approval of
modifications in the organization and conduct of business
with respect to the New England Power Service Co.
Very briefly, our proposals were as follows:
(1) Officers and directors of the Service Co. to be selected
regardless of interlocking positions between the Service
Co., NEES and the System operating companies. In this
connection all NEES officers would hold similar positions
77
in the Service Co., thus making possible the elimination of
duplicate management personnel within the holding com-
pany system.
(2) All officers and employees of the Service Co., who
would also be officers or employees of NEES, would be
paid by the Service Co. Such payments would be then
charged out to associated companies, including the Holding
Company, benefitting from their services in accordance with
the present cost allocation formula approved by the S.E.C.
The S.E.C. by order dated December 30, 1959 (File No.
37-7) approved in substance our proposals for a trial
period [641] of eighteen months. In the meantime, we are
to supply the Commission with periodic reports so that the
effect of the changes may be studied and appraised.
The organization chart reflects these changes in that
various Service Co. departments are shows reporting to an
appropriate top executive who is in most cases an officer
of NEES as well as of the Service Co.
Q. Will you now briefly describe the organization chart
with particular reference to the gas companies? <A. Re-
porting to the President and the Chairman of the Board
are six top level executives whose titles to a large degree
are self-explanatory. Bearing in mind that this is a fune-
tional chart of all System operations and does not reflect
the responsibilities of the corporate officers to their respec-
tive boards of directors, I will point out the corporate
afliliations of the top executives,
The Chairman, the President, and the Vice President and
Treasurer, the Vice President and General Counsel, and
the Vice Presidents for Management and Public Relations,
all occupy similar positions both with New England Elee-
tric System and with New England Power Service Co. The
Vice President, Electric Engineering and Operations, is a
Vice President of New England Power Co. as well as of the
Service Co. The Vice President for System Planning, is
LYONS ORICON SLANE TED
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78
concerned only with the electric side of the business and is
a [642] Vice President of New England Power Co.
The functional boxes on the upper part of the chart
shown as reporting in to the top Vice Presidents represent,
with a few exceptions, the services performed by New En-
gland Power Service Co., and taken together with all of
the top executives form what we refer to as the ‘Central
or more simply as Boston Headquarters,
,
Organization’
The lower part of the sheet starting about on a level with
‘Central Region Engineer’? on the extreme left, re.
present the field operations which include field engineering
(electric), electric production and transmission, retail
treasury operations (both gas and electric), retail electric
management, and finally, the management of the gas opera-
tions and companies. As you can see, these field operations
are organized on a regional basis and the gas and electric
managements are completely separated until they report
in to the Vice President for Management.
Looking at the lower right hand part of the chart, you
will see how the management of the gas operations fits in
to the organizational structure. The President of the gas
companies, four top assistants and their staffs as well as
the eight gas companies, form what is referred to as the
‘Gas Division’’. This Division is responsible for all phases
of gas operations except the treasury functions as will be
fully described by others. The President of [643] the gas
companies reports to the various boards of directors of the
y companies and also reports directly to the Vice President
for Management.
At this point I might emphasize that ultimate responsi-
bility for corporate activities rests with the respective
boards of directors of each of the System companies, Ad-
ministrative and managerial advice is supplied by Service
Company officers only upon request of the respective com-
§ panies.
eo
79
Q. Would you say that this chart fully and completely
describes the present organization of the New England
Klectric System holding company system? A. Not at all.
As I testified in the electric part of this ease in November
1957, you have to realize that we do not have here any
rigid military organization, Any chart is but a convenience,
an over-simplified approximation.
I was impressed by what Mr. Clarence B. Randall, former
president of Inland Steel Co., said recently about organiza-
tion charts, He said, and I quote, ‘* Warm human relation-
ships must not be put into cold storage. Situations that
are essentially fluid must not be frozen. The wise manage-
ment man will remember that the organization chart is
auseful seaffold with which to build a house but still know
that it is not the house.’’
[644] I coneur in these statements and they certainly
apply to our organization.
The Chart, while useful from a functional point of view,
‘imply cannot show the myriad cross eurrents and lines
of cooperation, communication and consultation which exist
and which contribute in no small way to an efficient and
elective organization. While these countless lines cannot
as a practical matter be shows on the chart, they will be-
tome apparent as our testimony develops.
For example, while gas and electrie management is com-
pletely independent and separated until the top of the
functional organization is reached there are many instances
of cooperation and consultation between the two to mutual
advantage. These instances would include problems in pub-
lie relations, relations with municipal and local authorities,
local tax and assessment problems, pooling and manpower,
equipment and materials in times of emergencies or dis-
asters, joint use of facilities for economy reasons, personne!
and labor problems and many others,
A concrete ease in point oceurred last year when two of
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80
the older, less efficient System steam plants were shut
down permanently. Most of the employees who became
available could be absorbed in electric operations elsewhere
on the System. By negotiations between gas management
and electric management, some of these people came over
into [645] gas operations where, because of their System
training and background, they quickly and capably fitted
into vacancies in the gas organization.
The reverse of this situation occurred when our gas pro-
duction plants were converted to a peak shaving and stand.
by status when natural gas became available.
Q. Will you now describe in general terms how the Gas
Division functions under the Central Organization? A. In
my testimony in November 1957 on the electric portion of
this case, I outlined in some detail hew the various retail
electric companies operate with respect to the ‘Central
Organization’’. In broad terms and in many specific fune-
tional areas this description would be essentially true as to
gas operations.
However, although the Gas Division has strong ties to
the ‘‘Central Organization’’ and relies on it for the broad
policy guidance expected of top management and for most
of the other services which are offered through the Service
Company, there are some major differences. These differ-
ences come about partly because of the basie differences
in the technical and practical aspects of the production
and distribution of gas and electricity and partly because
of our policy of promoting unrestricted competition be-
tween gas service and electric service for the available
market.
[646] Let us look at the electric side of the business for
a moment. The two top vice presidents at the left of the
organization chart are primarily concerned with electric
operations. The Vice President, System Planning is entire-
ly electrie while the Vice President, Electric Engineering
‘ eee
81
and Operations is concerned exclusively with the electric
operations except for the purchasing function which he
supervises for both electrie and gas operations and for
minor engineering and construction services which are
needed by gas management from time to time,
There are compelling reasons why electric planning, pro-
duction, transmission and distribution must be conducted
on an over-all system basis. The reasons were explained
by Mr. Brandt in his testimony in the electric portion of
this case and inelude the advantages of larger generating
units, economic balance between steam and hydro genera-
tion, interconnections with our systems and other reasons
almost equally important. These factors transcend corpor-
ate boundaries and all electric companies benefit as a result
of the direction and coordination of these activities at the
system level,
Comparable gas activities are coordinated at the Gas
Division level. Problems involving gas purchases from
pipeline companies, production of gas for peak shaving and
standby purposes, storage and distribution of gas and
[647] all of the engineering problems connected with these
functions have many practical and economic differences
from their electrie counterparts and should be and are
handled directly by a gas Management devoting its full
time and attention to them. But the Central Organization
does provide the basic policy framework, the broad mana-
gerical guidance and know-how within which the Gas Divi-
sion operates,
Treasury activities shown functionally on the organiza-
tion chart under the Vice President and Treasurer, can be
more fully explained by Mr. Hanson. It js enough for me
fo say that all treasury operations from the top to the
bottom of the chart are essentially the savie for gas opera-
tions as for electric operations. At the top, financing is
ee en aa nT
newer
82
planned and carried out on a system basis for the holding
company and its electric gas subsidiaries.
All of the technical services available through the Service
Company in the treasury and accounting areas are equally
available and equally necessary to both electric and gas
subsidiaries. You will also notice that at the field level
on the chart starting with the block ‘‘Central Region
Treasury Representative,’’ in all regions where there are
both gas and electric companies, the treasury and account-
ing function is completely integrated.
The Vice President for Management is primarily con-
cerned with retail management. The President of the gas
[648] companies as well as the retail electric managers re-
port to him. Various Service Company departments also
report to him; Electric Sales Promotion, Rates, Labor and
Personnel Relations, ete. Only two of these have no connee-
tion with gas operations and these are (1) Electric Sales
Promotion and (2) Distribution Coordination.
~ Gas Sales Promotion is the responsibility of the Presi-
dent of the gas companies with the assistance of his Sales
Promotion Manager and staff and the Service Company
offers no services and has no connection with this area of
gas operations.
The second function under the Vice President, Manage-
ment which has no connection with gas, is a temporary ar-
rangement during a transitional period of gradually trans-
ferring the technical responsibility for the day to day
operation and maintenance of electric distribution facili-
ties from local management to the field superintendents
under the Electric Engineering and Operations Vice Presi-
dent.
At the extreme top right of the organization chart are
the Vice President, Public Relations and the Vice President
and General Counsel. They and the Service Company func-
qt
83
tions under their direction are available for advice and
services to both the electric and gas organizations.
Q. How are the differences between electric and gas man-
agements [649] resolved? A. I can recall no instances of
major conflicts since we established the Gas Division.
Minor differences between electric and gas managements
occasionally arise at the local level and this is only an in-
dicator of the high degree of competition that exists be-
tween the two. These differences are usually settled on a
fair give and take basis and if on rare occasions a decision
at the top level is necessary, it is made on the merits of the
particular case.
Because we firmly believe that maximum competition is
best for both the System and its customers, we require
the Gas Division to justify any proposed policies and plans,
estimates and expenditures on the basis of necessity,
reasonableness and the economics of each situation as it
applies strictly to the gas business. The electric companies
are under similar ground rules as applied to the electric
business.
Q. I now show you three tabulations: the first is entitled
“New England Electric System and New England Power
Service Co.—Officers and Directors at April 1, 1960’’; the
second is entitled ‘‘New England Electric System—Officers
and Directors of Electric Subsidiaries at April 1, 1960’’;
and the third is entitled ‘‘New England Electric System—
Officers and Directors of Gas Subsidiaries [650] at April 1,
1960.’ Were these prepared under your supervision?
A. Yes, they were.
Q. Will you briefly tell us what these tabulations show?
A. They are largely self-explanatory. The first tabulation
lists all of the officers and directors of New England Electric
System and the New England Power Service Co. and shows
that NEES officers now hold similar positions with the
Service Co.
84
The second tabulation shows the principal officers and all
of the directors of the NEES eleterie subsidiaries. It also
shows which of the directors are System employees and
those which are not.
The third table shows similar information with respect
to the gas subsidiaries of NEES.
Q). Do these tabulations accurately set forth the in-
formation they purpose to show? A. They do.
Mr. Quarles: I will offer them as Respondent’s Kx-
hibits numbered respectively 54, 59, and 56.
Mr. Nowlin: No objection.
Hearing Examiner Kwells: Received.
(Respondent’s Exhibits Nos. 54, 55, and 56 were
marked for identification and received in evidence.)
[651] Q. Inext show youa tabulation entitled ‘* Compara-
tive Data for 25 Large Combination Gas and Electric Utili-
ties and Systems for the year 1958 Arranged in Accordance
with Their Gas Operating Revenues”’ and ask you to de-
seribe it. A. This shows numbers of customers, operating
revenues and square miles of service area where available,
for both gas and electric operations of the companies indi-
cated. The source of the information is indicated at the
bottom of the table.
Comparing the NEES system gas operation with the
other companies on the tabulation it can be seen that by any
one of the three criteria, NEES ranks well down on the list
in size,
Of the 25 companies or systems, NEES stands 12th m
number of gas customers, and 15th in gas operating reve-
nues.
Comparing gas service areas where it is possible to do
so, eight of thirteen companies reporting gas service areas
have larger service areas than the NEES gas companies.
In this comparison I am using for NERS, the 661 square
miles shown at the bottom of the sheet as this reflects the
&5
sale of our Rhode Island and Connecticut gais properties
which took place in 1959. It is obvious from looking at the
numbers of customers and combined [651-A] sservice areas
of the companies which do not report gas sservice areas
separately, that there are at least five or sixx more com-
panies which outrank NEES from the standypoint of size
of gas service area.
I would also point out that most of these uttilities listed,
operate within a single state and that our nextt door neigh-
bors, the New England Gas and Electric Assocciation which
operates entirely within Massachusetts, has ai gas service
area Which is larger than that of the NEES gais companies.
Q. Was this tabulation prepared under your s:supervision ?
A. Yes, it was.
Q. And does it accurately set forth the iniformation it
purports to show? A. It does.
Mr. Quarles: I offer it as Respoindent’s Exxhibit No. 57.
Mr. Nowlin: No objection.
Hearing Examiner Ewell: It may be receiveed.
(Respondent’s Exhibit No. 57 was markked for iden-
tification and received in evidence.)
Mr. Nowlin: May I ask one question, Mir. Webster.
This Exhibit No. 57, there are no registered lholding com-
panies [652] on that exhibit, except New Englland Electric
System, are there?
The Witness: Not that I know of.
By Mr. Quarles:
Q. Does the gas business in New England thave any im-
portant characteristics distinguishing it from tthe gas busi-
ness in other parts of the country? <A. There are some
differences but I would say that the most impoortant is the
high cost of natural gas from the transmissiom companies.
We are at the ‘‘end of the line’’ in New Engtland and our
pipeline cost of natural gas is the highest of’ any area in
the country.
PEE TORRE SELES LE ea
86
Furthermore, the geologists tell us that there is little
hope of finding a suitable geological formation for the
underground storage of gas to improve our load factors
on the pipeline cozupanies and presently available peak
shaving processes are expensive. The high cost of natural
gas has an adverse effect on our competitive situation with
other fuels particularly with respect to space heating.
In the area served by the NEES gas companies, #2 oil
is our chief competitor for home heating. Our present
rates are currently just about on a par competitively with
+2 oil. As the present domestic market for increased gas
sales is space heating, any further increases in costs of
[653] any nature would be serious. This is not true in other
sections of the country where gas has a distinct competitive
advantage over other fuels for heating.
Q. Mr. Webster, Mr. Nowlin has just called my attention
to the Middle South Utilities Incorporated appearing near
the bottom of the tabulation, Exhibit No. 57. In order to
make sure there is not a mistake in the record, is it not
a registered holding company under the Act? A. Of
course, it is, and I failed to see it when I answered not that
I know of.
Q. Have there been increases in the cost of pipeline
gas to New England gas companies since the introduction
of natural gas? A. Yes, there have been several, the most
recent of which became effective April 6, 1960 to all com-
panies purchasing gas from Tennessee Gas Transmission
Co.
As a result of proceedings before the Massachusetts De-
partment of Public Utilities, we have been permitted to
escalate our rates to substantially compensate for these
increases but as I have said, we are up against competitive
ceilings on our rates.
In addition to this increase these seven NEES companies
no longer have available to them the Peak Shaving Rate
87
which Tennessee had offered under a temporary authoriza-
tion of the Federal Power Commission. This rate was
finally disapproved by the FPC so that our companies,
beginning [654] with the winter of 1959-1960, have had to
substitute manufactured gas for peak shaving at a greater
cost than the 90 cents per MCF rate of Tennessee.
Q. What are some of the other distinguishing character-
istics of the gas business in New England which might
be typical of the NEES gas properties? A. First of all,
the heating season is longer and more severe in New Eng-
land than in most areas of the United States. This has an
important bearing on the consumption of fuels for heating
purposes and if gas becomes more expensive than other
fuels, the total dollar effect on the consumer using gas is
much greater. This certainly would limit the market for
gas space heating and would tend also to limit or dis-
courage the use of gas for other domestic purposes.
Secondly, the gas companies in New England are adding
new customers at a slower rate than in most sections of
the U.S. New England is a mature area and it is inevitable
in a rapidly expanding country that the younger sections
should grow more rapidly than an area that was settled
over 300 years ago.
Also, it is true that because natural gas became avail-
able much later in New England than in most other areas,
competing fuels became firmly entrenched, and consequently
it is more difficult to displace them. This ties [655] back
also to what I said a few moments ago with respect to the
competitive price situation. With pipeline gas costing what
it does and with little or no price advantage over compet-
ing fuels the problem becomes more difficult.
Q. Does all this suggest to you that the future of the
gas business in New England is doomed? A. Not at all.
There is definitely a major place for gas even out here at
the end of the pipeline. But it will require careful manage-
BEET ES i AEE ARR YE RET PRE ELON TLR NE
88
ment and taking advantage of every pible economy to
realize its full potential.
Q. Will you now tell us in genera
gas subsidiaries of NEES are subj) to regulation?
A. As I stated earlier, all of these comy'°* are located in
Massachusetts and thereby subject a: rates, form of
accounts, security issues, mergers, re? with affiliates
and many other matters to the jurisd?” of the Massa-
chusetts Department of Public Utilitie! he Department
has a staff of experts on matters invol® the ~apalinee! well
as the electric business and has the tae snasante wed
vestigations of these companies on tad within their
jurisdiction. These gas companies are? subject to the
jurisdiction of the Federal Power tpeaitad but the
rates under which they purchase na! gas from the
pipeline companies are so subject. ;
Q. Is the regulation of NEES gas panies by the
[656] Massachusetts Department of a Utilities ham-
pered or made less effective in any wa> their affiliation
with the NEES system? <A. Without ew ta Spent
for the Department, I am sure that Fao the opperss.
Certainly, their being subsidiaries of egistered holding
company does not affect the authori?’ POWST of the
-ration it appears
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