SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27643; 70-9609)

Energy East Corporation, et al.

Supplemental Order Authorizing Financing Transactions; Release of Jurisdiction; Reservation of Jurisdiction

January 28, 2003

Energy East Corporation ("Energy East"), Albany, New York, a registered public utility holding company, and its direct and indirect subsidiaries listed below, has filed a post-effective amendment ("Amendment") to its previously filed application/declaration ("Application") under sections 6(a), 7, 9(a), 10, 12(b), 12(c), 13(b), 32 and 33 of the Public Utility Holding Company Act of 1935 ("Act"), as amended, and rules 45, 46, 54 and 80-92 under the Act. The other applicants are (i) Energy East Enterprises, Inc. ("Energy East Enterprises"), a Maine corporation that is a wholly owned subsidiary of Energy East and a public utility holding company exempt from registration by order under section 3(a)(1); (ii) Energy East's wholly owned subsidiary Maine Natural Gas Corporation ("Maine Natural Gas"), a Maine corporation; (iii) Energy East's wholly owned subsidiary Energy East Capital Trust 1; (iv) RGS Energy Group, Inc, ("RGS") Rochester, NY, a New York corporation that is a wholly owned subsidiary of Energy East and a public utility holding company exempt from registration by order under section 3(a)(1); (v) RGS's wholly owned subsidiary New York State Electric & Gas Corporation ("NYSEG"), a New York corporation; (vi) RGS's wholly owned subsidiary Rochester Gas and Electric Corporation ("RG&E"), a New York corporation; (vii) Energy East's wholly owned subsidiary CMP Group, Inc. ("CMP"), Augusta, ME a Maine corporation and a public utility holding company exempt from registration by order under section 3(a)(1); (viii) CMP's wholly owned subsidiary Central Maine Power Company ("Central Maine Power"), a Maine corporation and a public utility holding company exempt by order under section 3(a)(2); (ix) Maine Electric Power Company, Inc., ("MEPCo"), a Maine corporation in which CMP has a 78.3% voting interest;¹ (x) Central Maine Power's wholly owned subsidiary NORVARCO,² a Maine corporation; (xi) Energy East's wholly owned subsidiary Connecticut Energy Corporation ("Connecticut Energy"), Bridgeport, CT, a Connecticut corporation and a public utility holding company exempt from registration by order under section 3(a)(1) of the Act; (xii) The Southern Connecticut Gas Company ("SCG"), a Connecticut corporation and wholly owned subsidiary of Connecticut Energy; (xiii) Energy East's wholly owned subsidiary CTG Resources, Inc., ("CTG") Hartford, CT, a public utility holding company exempt from registration by order under section 3(a)(1); (xiv) CTG's wholly owned subsidiary Connecticut Natural Gas Corporation ("CNG"), a Connecticut corporation; (xv) Energy East's wholly owned subsidiary Berkshire Energy Resources ("Berkshire Energy"), Pittsfield, MA, a Massachusetts corporation and a public utility holding company exempt from registration by order under section 3(a)(1); and (xvi) Berkshire Energy's wholly owned subsidiary The Berkshire Gas Company ("Berkshire Gas"), a Massachusetts corporation. Connecticut Energy, RGS, CMP, CTG Resources, and Berkshire Energy are referred to as the "Intermediate Holding Companies." NYSEG, Southern Connecticut Gas, Maine Natural Gas, Central Maine Power, MEPCo, NOVARCO, Connecticut Natural Gas, Berkshire Gas and RG&E are referred to as the "Utility Subsidiaries." Energy East also owns other subsidiary companies that are not public-utility companies under the Act (collectively, "Non-Utility Subsidiaries"). The Commission issued a notice of the filing of the Application on October 4, 2002 (HCAR No. 27573). No requests for a hearing on the Application have been received.

On August 31, 2000, the Commission issued an order (HCAR No. 27224) ("First Merger Order") authorizing Energy East's acquisition of CMP, CTG, and Berkshire Energy ("First Merger").

On September 12, 2000, the Commission issued an order (HCAR No. 27228) ("Financing Order") authorizing (i) ongoing financing activities of Energy East and its subsidiaries; (ii) intrasystem extensions of credit; (iii) the creation, acquisition or sale of Non-Utility Subsidiaries; (iv) the payment of dividends out of capital and unearned surplus; and (v) other related matters pertaining to Energy East and its subsidiaries.

On June 27, 2002, the Commission issued an order authorizing the acquisition of RGS by Energy East (HCAR No. 27546) ("RGS Merger Order"), by which RGS became a direct subsidiary of Energy East ("RGS Merger").

The amended Application seeks several modifications of the authorizations granted in the Financing Order with respect to the ongoing financing activities of Energy East and its subsidiaries and other related matters. It states that the proposed modifications are required in order to reflect the acquisition of RGS and the inclusion of RGS and its subsidiaries as new direct and indirect subsidiaries of Energy East.

In the Financing Order, the following authorizations, among others, were granted for the authorization period beginning September 12, 2000, and ending March 21, 2003:

1. Energy East was granted authorization to issue and sell common stock, preferred stock, and unsecured debentures having maturities of up to 50 years ("Debentures") in an aggregate amount not to exceed $2.5 billion, and unsecured short-term indebtedness having maturities of one year or less ("Short-Term Debt") in an aggregate principal amount at any time outstanding not to exceed $750 million, provided that the aggregate principal amount of all indebtedness of Energy East at any time outstanding (including Short-Term Debt, Debentures, and debt incurred to finance the First Merger ("Previous Acquisition Debt") and the RGS Merger ("Acquisition Debt")) would not exceed $1.5 billion ("Energy East Debt Limitation").

2. The Non-Utility Subsidiaries were authorized to enter into guaranties, obtain letters of credit, enter into expense agreements and otherwise provide credit support to or on behalf of other Non-Utility Subsidiaries in an aggregate principal amount not to exceed $700 million outstanding at any one time, exclusive of any guaranties and other forms of credit support that are exempt under rule 45(b) and rule 52, provided that the amount of any Non-Utility Subsidiary Guaranties in respect of obligations of any Rule 58 Subsidiary shall also be subject to the limitations of rule 58(a)(1). The Non-Utility Subsidiaries providing this credit support were also authorized to charge each Subsidiary a fee for each guaranty provided on its behalf that is not greater than the cost, if any, of obtaining the liquidity necessary to perform the guaranty.

3. The Non-Utility Subsidiaries were authorized to acquire or construct non-utility energy assets in the United States ("Energy-Related Assets") that would be incidental to their energy marketing, brokering and trading operations in an amount up to $500 million.

Financings authorized in the Financing Order were subject to the following limitations: (1) the effective cost of money on Energy East short-term debt will not exceed the competitive market rates available at the time of issuance to companies with comparable credit ratings with respect to debt having similar maturities; the effective cost of money on all short-term financing with respect to Utility Subsidiaries will not at the time of issuance exceed 300 basis points over the comparable term London Interbank Offered Rate ("LIBOR"); (2) maturity of long-term indebtedness will not exceed 50 years; (3) the underwriting fees, commissions, or similar remuneration paid in connection with the issue, sale, or distribution of a security are estimated not to exceed 5% of the principal amount of the financing; and (4) Energy East's common equity, as reflected on its most recent From 10-K or Form 10-Q and as adjusted to reflect subsequent events that affect capitalization, will be at least 30% of its pro forma consolidated capitalization throughout the authorization period. Similarly, the common stock equity of each Intermediate Holding Company and each Utility Subsidiary will be at least 30% of total capitalization throughout the authorization period. The Financing Order stated that proceeds from the financings would be used for general corporate purposes, including: (1) financing, in part, investments by and capital expenditures of Energy East and its Subsidiaries, including the funding of future investments in exempt wholesale generators, as defined in section 32 of the Act, foreign utility companies, as defined in section 33 of the Act, companies engaged or formed to engage in activities permitted by rule 58 ("Rule 58 Subsidiaries"), and exempt telecommunications companies; (2) the repayment, redemption, refunding or purchase by Energy East or any Subsidiary of any of its own securities under rule 42 under the Act; and (3) financing working capital requirements of Energy East and its Subsidiaries.

Energy East and its subsidiaries request approval of the following modifications to the authorizations granted by the Commission in the Financing Order:

1. Energy East requests authority to extend the authorization period (currently the period beginning September 12, 2000 (the date of issuance of the Financing Order) and ending March 31, 2003), so that the new authorization period will end on September 30, 2005 (the authorization period, as so extended, is referred to as the "Authorization Period").

2. Energy East requests authority to increase, from $2.5 billion to $3.9 billion, Energy East's authority to issue and sell from time to time during the Authorization Period Common Stock, Preferred Stock, and unsecured debentures having maturities of up to 50 years ("Debentures"); subject to the sublimit on outstanding indebtedness in paragraph 3 below.³

3. Energy East requests authority to increase the Energy East Debt Limitation from $1.5 billion to $2.3 billion, and to increase to $2.3 billion the aggregate principal amount of Debentures it is authorized to issue and sell, in accordance with the terms and conditions set forth in this order and in the Financing Order, provided that the aggregated principal amount of Short-Term Debt, Debentures, Previous Acquisition Debt and Acquisition Debt at any time outstanding shall not exceed the Energy East Debt Limitation.

4. RG&E requests authority to issue, sell and have outstanding at any one time during the Authorization Period unsecured debt securities, to the extent not otherwise exempt in accordance with rule 52(a), with maturities of one year or less in the aggregate principal amount of $200 million. This short-term financing could include, without limitation, commercial paper sold in established commercial paper markets, bank lines and debt securities issued under RG&E's respective indentures and note programs.

5. RGS requests authority to issue, sell and have outstanding at any one time during the Authorization Period debt securities with maturities of one year or less in the aggregate principal amount of $100 million. This short-term financing could include, without limitation, commercial paper sold in established commercial paper markets, bank lines and debt securities issued under RGS's respective indentures and note programs. In addition, RGS will not issue any indebtedness in contravention of any pre-existing orders of any state utility commission.

6. RGS requests authority during the Authorization Period to provide guaranties and other forms of credit support with respect to the securities or other obligations of subsidiaries of RGS ("RGS Guaranties") in an aggregate principal amount not to exceed $100 million, provided that the amount of any RGS Guaranties in respect of any Rule 58 Subsidiary shall also be subject to the limitations of rule 58(a)(1). RGS may charge its subsidiaries a fee for each guaranty provided on its behalf that is not greater than the cost, if any, of providing the liquidity necessary to perform the guaranty (for example, bank line commitment fees or letter of credit fees, plus other transactional expenses). RGS will not issue any guaranties in contravention of any orders of any state utility commission.

7. Energy East's Non-Utility Subsidiaries requests authority to increase from $700 million to $750 million their authority during the Authorization Period to provide guaranties and other forms of credit support with respect to obligations of other Non-Utility Subsidiaries, exclusive of any guaranties that are exempt in accordance with rule 45(b) and rule 52 ("Non-Utility Subsidiary Guaranties"). Non-Utility Subsidiary Guaranties would be subject to the terms and conditions of the Financing Order.

8. As a result of the accounting treatment of the RGS Merger, the retained earnings of RGS was greatly reduced. For this reason RGS requests authorization to pay dividends out of capital and unearned surplus in an amount up to its retained earnings prior to the Merger. In addition, RGS and its subsidiaries seek authorization to pay dividends out of earnings before any amortization of intangibles recognized as a result of the Merger, and any impairment of either goodwill or other intangibles recognized as a result of the Merger.⁴

Applicants state that the transactions authorized under the requested supplemental order would be undertaken in accordance with the terms and conditions set forth in the in the Financing Order and in the amended Application. To the extent that the following listed general terms and conditions set forth in the amended Application and recited below conflict with any general terms and conditions set forth in the Financing Order, the general terms and conditions set forth in the Financing Order would be deemed to be modified:

The effective cost of money on long-term debt borrowings in accordance with authorizations granted under the Application will not exceed the greater of (a) 500 basis points over the comparable-term U.S. Treasury securities or (b) a gross spread over U.S. Treasuries that is consistent with similar securities of comparable credit quality and maturities issued by other companies. The effective cost of money on short-term debt borrowings in accordance with the authorizations granted in the Application will not exceed the greater of (a) 500 points over the comparable-term LIBOR or (b) a gross spread over LIBOR that is consistent with similar securities of comparable credit quality and maturities issued by other companies. The dividend rate on any series of Preferred Stock will not exceed the greater of (a) 500 basis points over the yield to maturity of a U.S. Treasury security having a remaining term equal to the term of that series of Preferred Stock or (b) a rate that is consistent with similar securities of comparable credit quality and maturities issued by other companies. The maturity of indebtedness will not exceed 50 years. Preferred Stock may not have any mandatory redemption provisions. The underwriting fees, commissions, or other similar remuneration paid in connection with the non-competitive issue, sale, or distribution of a security in a accordance with the Application (not including any original issue discount) will not exceed 5% of the principal or total amount of the security being issued.

All outstanding Debentures issued by Energy East under the Financing Order were at the time of issuance, and will continue to be, rated at least investment grade by a nationally recognized statistical rating organization. In addition, Energy East undertakes that it will not issue any Debentures, preferred stock or commercial paper that are not at the time of original issuance rated at least investment grade by a nationally recognized statistical rating organization without further Commission authorization. NYSEG, RG&E and Central Maine Power commit to maintain at least investment grade senior secured and senior unsecured debt ratings by at least one nationally recognized rating agency. Energy East requests that the Commission reserve jurisdiction above the investment grade criteria with respect to Energy East's undertaking set forth above until such time as Energy East files a post-effective amendment seeking authorization to continue use of those investment grade criteria. Energy East will file a post-effective amendment to that effect on or before September 30, 2003.

In the Financing Order the Commission reserved jurisdiction over (i) the issuance by Energy East of securities other than Energy East common stock, short-term debt, and debentures, as approved in the Financing Order; (ii) the brokering and marketing of electricity, natural gas, and other energy commodities activities outside the United States and Canada; (iii) other activities of companies engaged or formed to engage in activities permitted by rule 58, outside the United States; and (iv) the proposed Tax Allocation Agreement previously filed as Exhibit B in Post-effective Amendment No. 3 to the Application. Energy East requests that jurisdiction continue to be reserved over items (ii) and (iii) and states that it will not issue securities other than securities authorized in accordance with the amended Application (common stock, preferred stock, short-term debt and debentures) without further Commission authorization.

Energy East also requests that the Commission release jurisdiction over the Tax Allocation Agreement. Energy East seeks to retain the benefit (in the form of the reduction in consolidated tax) that is attributable to its interest expense associated with the Debentures issued to help finance the cash portions of the consideration paid in the RGS Merger, and the unsecured debt issued to help finance the cash portions of the consideration in the First Merger. Where, as in this case, Energy East's subsidiaries have not assumed any legal obligation for the Acquisition Debt or the Previous Acquisition Debt, it would not be detrimental to Energy East's subsidiaries or to consumers if Energy East were to retain the benefit associated with its interest expense.⁵ Moreover, if Energy East were to allocate the tax savings attributable to the Acquisition Interest Expense to those members of the group with a positive allocation, as dictated by Rule 45(c)(5), the net effect would be the same as if Energy East made a capital contribution to those subsidiaries. The Utility Subsidiaries are not obligated, directly or indirectly, on the Previous Acquisition Debt or the Acquisition Debt, and the Tax Allocation Agreement will not have the effect of shifting Energy East's interest expense to the Utility Subsidiaries.

In all other respects, Energy East proposes that the Financing Order remain unchanged as a result of the amended Application and any supplemental order issued by the Commission in response, except that the new Authorization Period shall also apply to all other authorizations in the Financing Order that are not modified in any supplemental order.

Energy East states, for the purposes of rule 54 under the Act, that the conditions specified in rule 53(a) are satisfied⁶ and that none of the adverse conditions specified in rule 53(b) exist. As a result, the Commission will not consider the effect on the Energy East system of the capitalization or earnings of Energy East subsidiary that is an "exempt wholesale generator" ("EWG") or a "foreign utility company" ("FUCO") as those terms are defined in sections 32 and 33 of the Act, respectively, in determining whether to approve the proposed transactions.

Fees, commissions and expenses in the approximate amount of $45,000 are expected to be incurred in connection with the amended Application. The New York State Public Service Commission has jurisdiction over the issuance of securities by RG&E and NYSEG, other than indebtedness with maturities of one year or less. The Connecticut Department of Public Utility Control has jurisdiction over the issuance of securities by Southern Connecticut Gas and Connecticut Natural Gas, other than indebtedness with maturities of one year or less. The Maine Public Utilities Commission has jurisdiction over the issuance of securities by Maine Natural Gas, Central Maine Power, MEPCo and NORVARCO, other than indebtedness of up to one year. The Massachusetts Department of Telecommunications and Energy has jurisdiction over the issuance of securities by Berkshire Gas, other than indebtedness with maturities of one year or less. Except as stated above, no state commission, and no federal commission other than this Commission, has jurisdiction over the proposed transactions.

Due notice of the filing of the Amendment has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. On the basis of the facts in the record, it is found, except as to those matters over which jurisdiction has been reserved, that the applicable standards of the Act and rules under the Act are satisfied, and no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that, except as to those matters over which jurisdiction has been reserved, the Application, as amended, is granted and permitted to become effective immediately, subject to the terms and conditions prescribe in rule 24 under the Act and the terms and conditions set forth in the Financing Order.

IT IS FURTHER ORDERED that Energy East will continue to file certificates under rule 24 with the Commission within 60 days after the end of the first three calendar quarters, and 90 days after the end of the last calendar quarter that contains the following information for the reporting period:

1. the sales of any common stock or preferred securities by Energy East and the purchase price per share and the market price per share at the date of the agreement of sale;

2. the total number of shares of common stock issued or issuable under options granted during the quarter under Energy East's dividend reinvestment plan and employee benefit plans or otherwise, including any plans subsequently adopted;

3. if common stock has been transferred to a seller of securities of a company or assets being acquired, the number of shares so issued, the value per share, and whether the shares are restricted to the acquirer;

4. the name of the guarantor and of the beneficiary of any guaranteed note, Energy East Guaranty, Intermediate Holding Company Guaranty or Nonutility Subsidiary Guaranty issued during the quarter, and the amount, terms, and purpose of the guaranty;

5. the amount and terms of any debentures issued during the quarter;

6. the amount and terms of any financings consummated by anyNonutility Subsidiary during that quarter that are not exempt under rule 52;

7. the notional amount and principal terms of any Interest Rate Hedge or Anticipatory hedge entered into during the quarter and the identity of the parties to the instruments;

8. the name, parent company, and amount invested in any Intermediate Subsidiary or Financing Subsidiary during the quarter;

9. a list of U-6B-2 statements filed with the Commission during the quarter, including the name of the filing entity and the date of filing;

10. the amount and term of any Short-Term Debt issued by Energy East during the quarter;

11. the amount and terms of any Short-Term Debt issued by any Utility Subsidiary during the quarter;

12. The amount and terms of any Short-Term Debt issued by any Intermediate Holding Company during the quarter;

13. consolidated balance sheets as of the end of the quarter and separate balance sheets as of the end of the quarter of each company, including Energy East, that has engaged in jurisdictional financing transactions during the quarter;

14. a table showing, as of the end of the quarter, the dollar and percentage components of the capital structures of Energy East on a consolidated basis, each Intermediate Holding Company and each Utility Subsidiary;

15. a retained earnings analysis of Energy East on a consolidated basis, each Intermediate Holding Company and each Utility Subsidiary detailing gross earnings, goodwill amortization, dividends paid out of each capital account, and the resulting capital account balances at the end of the quarter;

    In addition the rule 24 certificates filed within ninety days after Energy East files its consolidated income tax return will contain the following information for the reporting period:

16. the amount of any tax credit or loss carryover generated by Energy East during the preceding taxable year as a result of interest expense on Acquisition Debt and Previous Acquisition Debt;

17. a description of how the income tax credit and/or income tax liability was calculated and allocated to all companies included in the consolidated tax return, showing all of Energy East's interest costs and any assumptions used in the calculations; and

18. a statement that the allocation of tax credits and liabilities was conducted in accordance with the Tax Allocation Agreement in effect and filed as an exhibit.

IT IS FURTHER ORDERED, that jurisdiction is continued reserved, pending completion of the record, over (i) the brokering and marketing of electricity, natural gas and other energy commodities activities outside the United States and Canada; (ii) other activities of companies engaged or formed to engage in activities permitted by rule 58 outside the United States; and (iii) the investment grade criteria with respect to Energy East's undertaking set forth above until such time as Energy East files a post-effective amendment seeking authorization to continue use of those investment grace criteria, which Energy East will file on or before September 30, 2003.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

¹ The remaining interests are owned by two other Maine utilities. MEPCo owns and operates a 345kV transmission interconnection between the Maine-New Brunswick, Canada international border at Orient, Maine.

² NORVARCO holds a 50% general partnership interest in Chester SVC Partnership, a general partnership that owns a static var compensator located in Chester, Maine, adjacent to MEPCo's transmission interconnection.

³ Energy East proposes to leave the amount of Short-Term Debt authorized in the Financing Order unchanged at $750 million.

⁴ As a result of the Merger, RGS recognized approximately $634 million of goodwill and $12 million of intangible assets. Those amounts were recognized in RGS' common stock equity as additional paid in capital. Statement of Financial Accounting Standards No. 142 requires that goodwill no longer be amortized, but instead be tested at least annually for impairment. Statement 142 also requires an intangible asset with an indefinite life that is not amortized to be tested for impairment annually, or more frequently if circumstances indicate it might be impaired. Approximately $4 million of the intangible assets recognized as a result of the Merger are being amortized. The annual amortization expense is $1.4 million.

In the Financing Order, the Commission authorized the companies Energy East previously acquired to pay dividends out of earnings before amortization of goodwill. Because goodwill and certain intangible assets recognized as a result of the RGS' Merger with Energy East are not amortized, any decrease in the value of those assets is recognized as an impairment instead of amortization expense. Therefore, RGS is requesting authorization to pay dividends out of earnings before any impairment of goodwill and any impairment or amortization of intangible assets recognized as a result of the Merger.

⁵ As of September 30, 2002, Energy East had $1.495 billion (which includes $345 million of junior unsecured debt issued to Energy East Capital Trust I, a subsidiary) of Acquisition Debt and Previous Acquisition Debt. The amount of indebtedness with respect to which Energy East will retain the benefit attributable to its interest expense in accordance with the proposed Tax Allocation Agreement will not exceed $1.495 billion.

⁶ As of June 30, 2002, Energy East's aggregate investment in EWGs and FUCOs was approximately $21.8 million, or approximately 2.1% of Energy East's "consolidated retained earnings" of $1.1 billion as of the same date.

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