SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27670; 70-9641)

KeySpan Corporation, et al.

Supplemental Order Authorizing the Retention of Nonutility Subsidiaries

April 24, 2003

KeySpan Corporation ("KeySpan"), a registered holding company and KeySpan's nonutility holding company subsidiary, KeySpan Services, Inc. ("KSI"), KSI's wholly owned nonutility holding company subsidiaries: KeySpan Business Solutions, LLC ("KBS"); KeySpan Home Energy Services, LLC ("KHES"); KeySpan Communications Corp. ("Communications") and KeySpan Energy Supply, Inc. ("KESI")¹ have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment ("Post-Effective Amendment No. 12") under sections 9(a), 10, and 11 of the Public Utility Holding Company Act of 1935, as amended ("Act"), and rule 54 under the Act to a previously filed application-declaration ("Application"). The Commission issued a notice of the underlying application on October 20, 2000 (HCAR No. 27257).

I. Summary

By order dated November 7, 2000 (HCAR No. 27271),² KeySpan was authorized to acquire Eastern Enterprises ("Merger Order").³ In the Merger Order, the Commission reserved jurisdiction over KeySpan's retention of certain nonutility subsidiaries,⁴ including those held by KSI ("KSI Nonutilities") and Energy North Mechanical Inc. ("ENI Mechanical").⁵

Subsequent to the Merger, under authorization received in the Financing Order, KeySpan restructured the ownership of its Nonutilities. As a result of this overall reorganization, KSI's direct subsidiaries are KBS, KHES, KESI and Communications. Applicants state that KBS, through its subsidiaries, will focus on the larger commercial, industrial, and institutional customers, while KHES, through its subsidiaries, will focus primarily on the residential and small commercial market. KESI will continue to obtain or broker supplies of electricity and gas to help satisfy the retail energy services needs of the customers of the KBS and KHES subsidiaries served through KESI.

Applicants state that KBS and KHES engage in no activity other than as intermediate nonutility holding companies. As part of their role as nonutility holding companies, Applicants propose that KBS and KHES may enter into various contracts on behalf of their respective subsidiaries to purchase equipment, supplies and services. In addition, Applicants propose that KBS and KHES enter into contracts with customers involving multiple of their respective subsidiaries' disciplines and then subcontract the work to these subsidiaries. To the extent that KBS or KHES contract to provides services or goods to their subsidiaries, they will do so in accordance with the affiliate rules under the Act.

II. KSI and the KSI Nonutilities

KBS owns directly and indirectly the following companies: KeySpan Energy Management, LLC ("KEM"); Fourth Avenue Enterprise Piping, LLC ("Fourth Avenue"); WDF, Inc ("WDF"); KSI Contracting, LLC ("KSI Contracting"); KSI Electrical, LLC ("KSI Electrical"); KSI Mechanical, LLC ("KSI Mechanical"); R.D. Mortman & Co., LLC ("Mortman"); Delta KeySpan, LLC ("Delta"); Paulus, Sokolowski & Sartor, LLC ("PSS"); KeySpan Engineering Associates, Inc. ("Engineering"); Binsky & Snyder LLC ("Binsky"); Elling Brothers ("Elling"), Elling Service Company, Inc. ("Elling Service"); a ninety percent ownership interest in Binsky & Synder Plumbing, LLC ("BSI Plumbing"); Binsky & Snyder Service, LLC ("BSS") Northern Peabody, Inc. ("Northern Peabody"), Granite State Plumbing & Heating, Inc. ("Granite State") and EnergyNorth Mechanicals, Inc. ("ENI Mechanical").

KHES owns directly and indirectly the following companies: KeySpan Energy Services Inc. ("KESI"); KeySpan Energy Solutions LLC ("Solutions"); a ninety percent ownership interest in KeySpan Plumbing and Heating Solutions, LLC ("KPH"); KeySpan Plumbing Solutions, Inc. ("KeySpan Plumbing"); Fritze KeySpan, LLC ("Fritze") and Active Conditioning, LLC ("Active").

Applicants state that the following two Nonutilities engage in energy marketing and brokering activities which have been found retainable under rule 58:

1. KESI is a gas and retail electricity marketer. All of the gas and electricity that it trades is resold to residential and small commercial customers located in the United States.

2. KE Supply is engaged in energy brokering activities for customers located in the United States. KE Supply's brokering activities consist of arranging as agent, for the purchase of gas and electricity, and associated transmission and transportation for KESI, and managing the purchases of fuel by its affiliated EWG and the bidding of its affiliated EWG's power into the wholesale electricity market.

Applicants state that the following eighteen companies provide heating, ventilation, and air conditioning ("HVAC") services which have been found retainable under rule 58 or Commission precedent.⁶

1. Fritze designs, builds, installs, and services HVAC systems for commercial and residential customers in New Jersey.

2. KeySpan Plumbing provides piping, plumbing, and maintenance services associated with the installation of gas heating systems, principally with regard to boiler and hot water heater installations. These services are provided to residential and small commercial customers in the New York City metropolitan area.

3. KPH provides piping, plumbing, and maintenance services associated with the installation of gas heating systems, principally with regard to boiler and hot water heater installations for residential and small commercial customers in New Jersey.

4. KEMI is primarily engaged in the service, installation, and construction of power supply and HVAC systems, including burners and boilers for heating purposes. KEMI serves large commercial, industrial, and institutional customers throughout the Northeast. Applicants state that KEMI also is, or may become involved in, the development, ownership, construction, financing, operation, and maintenance of thermal energy facilities, including central steam and chilled water facilities. Applicants state that this activity is permitted under rule 58(b)(vi).

5. Mortman is solely engaged in the service, installation, and construction of power supply and HVAC systems, including burners and boilers for heating purposes. Morton serves large scale residential and commercial customers located in the New York City metropolitan area.

6. Delta designs, builds, installs, and services heating, ventilating, and central air conditioning systems for commercial customers in New England.

7. Solutions provides service and maintenance for heating equipment, water heaters, central air conditioners, and gas appliances to residential and small commercial customers. KESI also offers related safety products and services to its gas customers which include, or may in the future include, safety inspections, repair services, energy assessments and safety checks (i.e., testing for carbon monoxide and faulty wiring), and products which promote safe energy use, increased energy efficiency, or detect carbon monoxide, smoke, or fire.

8. Fourth Avenue is engaged in providing maintenance and installation of boilers and HVAC systems to residential and small commercial customers located in New York.

9. Active is engaged in maintenance and installation of boilers and HVAC systems for residential and small commercial customers located in New Jersey.

10. WDF provides mechanical contracting services to commercial and industrial customers in New York. The mechanical contracting services include the design, construction, alteration, maintenance, and repair of plumbing and HVAC systems.

11. KSI Contracting, provides mechanical and general contracting services to commercial customers. KSI Contracting installs and renovates heating, ventilation and air conditioning systems, as well as oil and gas boilers and burners used for heating. Its services include the installation of all piping equipment, as well as the design and fabrication of piping and sheet metal incidental to its mechanical contracting services that are an integral component of the heating, ventilation and air conditioning systems that it installs. During calendar year ending December 31, 2000, approximately twenty percent of the revenues of KSI Contracting were for non-energy related general contracting services. Applicants state that KSI is exiting the general contracting business. In the future, with the exception of completing projects which are currently under contract, KSI Contracting intends to predominantly provide HVAC mechanical contracting services and not engage in general contracting services. KSI Contracting's non-energy related activities will significantly decrease as a result of it no longer undertaking general contracting projects and focusing on HVAC mechanical related business opportunities.

12. Binsky installs HVAC systems for commercial and industrial customers located primarily in New Jersey. Binsky also provides process piping work for non-HVAC purposes which is necessary in order to attract and retain customers for their HVAC business. For the period beginning in July, 2000 and ending December 31, 2000, Binsky had total revenues of approximately $55 million, sixty-eight percent of which involved the provision of services that are energy related according to Commission rule or precedent. Approximately thirty-two percent of Binsky's total revenues during this period were for process piping work, consisting primarily of the installation of piping necessary for process operations of large energy intensive commercial, industrial, and institutional customers for whom Binsky is providing, or will be seeking in the future to provide, energy related mechanical contracting services. In addition, over the next five years KSI will, either on a stand alone basis or through other methods, to increase the percentage of energy related revenues of BSI so they are substantially energy related as defined by Commission rule and/or precedent.

13. Elling installs HVAC systems for commercial and industrial customers located primarily in New Jersey.

14. BSS services and maintains HVAC systems, which use electricity or gas for commercial and industrial customers located primarily in New Jersey.

15. Binsky Plumbing was formed to comply with certain New Jersey laws governing the ownership of companies providing plumbing services. Binsky Plumbing services HVAC systems for commercial and industrial customers located primarily in New Jersey.

16. Northern Peabody designs, installs, and services commercial and industrial plumbing, HVAC equipment, and processes piping systems necessary for the installation of this equipment.

17. Granite State designs, installs, and services commercial and industrial plumbing, HVAC equipment, and processes piping systems necessary for the installation of this equipment.

18. ENI Mechanical which holds all of the stock Northern Peabody and Granite State.

Applicants state that the following company engages in mechanical contracting services which have been found retainable under Commission precedent:⁷

1. KSI Electrical engages in electrical contracting services including the wiring of, and the upgrading of, power supply for buildings of commercial and industrial customers located in New York and New Jersey.

Applicants state that the following company engages in safety services which have been found retainable under Commission precedent:⁸

1. KSI Mechanical, engages in the installation and renovation of sprinkler systems and fire suppression systems, including related piping fabrication for the systems it installs, for customers located in New York and New Jersey.

Applicants state that the following company engages in communications activities which have been found retainable under Commission precedent:⁹

1. Communications constructs fiber optic facilities and owns a fiber optic network which is used by affiliates and non-affiliates for telecommunication services such as voice communications and data transmission.

Applicants state that the following company engages in power consulting and engineering services which have been found retainable under Commission precedent:¹⁰

1. Engineering reviews the power supply needs of its large commercial, industrial and institutional customers and designs efficient, new power supply and heating systems, such as cogeneration facilities and boiler facilities to meet customers' energy needs.

Applicants state that the following company engages in engineering and consulting activities and is retainable under prior Commission precedent:¹¹

1. Paulus, Sokolowski & Sartor, Inc. ("PSS") engages in engineering and consulting services relating to design and permitting. PSS' services are as follows: (a) mechanical and electrical engineering which consists of system analysis (HVAC, humidification/dehumidification, power distribution, grounding, lighting, plumbing and fire protection); programming and planning services (energy studies, utility consumption analysis and planning, equipment analysis, utility analysis and planning, analysis of existing layouts and functional relationships, and analysis of system performance); design services (energy management systems, office environments (lighting, HVAC), equipment installations/modifications and permitting); and construction phase services (observation and evaluation of construction, contract administration, and drawings review); (b) civil engineering and survey services which consists of regulatory compliance and permitting, land use and surveys, site utility master planning, storm water management, roadway design, pavement evaluation/rehabilitation, and subdivision plans and applications; (c) sanitary engineering which consists of sanitary and chemical sewage systems, wastewater treatment systems (including planning and design of waste gas to energy facilities), water supply systems, sludge handling, industrial facility design, construction phase services and water quality services; (d) architecture and facilities planning which consists of architectural planning and design (feasibility studies, site evaluation/selection/planning, zoning assistance, new building renovations/modifications, construction phase services, project budget and planning and code compliance); and interior design and facility planning (interior design, space analysis, facilities planning and management, lighting design, signage programs and space planning); (e) environmental engineering which consists of soil investigations, groundwater studies, regulatory compliance review, regulatory compliance and permitting, solid waste management, environmental audits, site remediation, spill prevention, air sampling and monitoring, air quality permitting, environmental impact statements and underground storage tank analysis; (f) geotechnical engineering which consists of surface and subsurface investigations, foundation analysis and design, pavement evaluation and design, soil mechanics, geophysical analysis, evaluation and design of retaining structures, landfill site investigations, and forensic investigations; and (g) structural engineering which consists of existing building investigations and analysis, foundation design, high-rise construction design, structural steel design, wood construction design, bid review, construction inspections, cost estimating, seismic analysis and field investigations. PSS' clients consist of large and industrial customers, such as utilities, corporate offices, hotels, laboratories, warehouses, pharmaceutical companies, hospitals, universities, and power plants. Subject to relevant Commission requirements under the Act, PSS may provide services to its affiliates. In addition, over the next five years KSI will, either on a stand alone basis or through other methods, to increase the percentage of energy related revenues of PS&S so that they are substantially energy related as defined by Commission rule and/or precedent.

Applicants state that the estimated fees, commissions and expenses in connection with the application are approximately $50,000 which are comprised primarily of legal fees for outside counsel.

KeySpan currently meets all of the conditions of rule 53(a) except for clause (1). At December 31, 2002, KeySpan's "aggregate investment," as defined in rule 53(a)(1), in exempt wholesale generators ("EWGs"), as defined in the Act, and foreign utility companies ("FUCOs"), as defined in the Act, was approximately $974,979,000. By Commission order dated December 6, 2002 (HCAR No. 27612), KeySpan was authorized to make investments in EWGs and FUCOs in an aggregate amount up to $2.2 billion. KeySpan has complied and will continue to comply with the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) of affiliate utility company personnel rendering services to KeySpan's EWGs or FUCOs and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail rate regulatory commissions. None of the circumstances described in rule 53(b) has occurred.

KeySpan states that there has been no material adverse impact on KeySpan's consolidated capitalization resulting from KeySpan's investments in EWGs and FUCOs. KeySpan says the formation of Captive would not, by itself, or even considered in conjunction with the effect of the capitalization and earnings of KeySpan's EWGs and FUCOs, have a material adverse effect on the financial integrity of the KeySpan system or an adverse impact on KeySpan's public-utility subsidiaries, their customers, or the ability of state commissions to protect the public-utility customers. As of December 31, 2002, KeySpan's consolidated capitalization consisted of 32.08% equity and 67.92% debt. These ratios comply with the requirement in KeySpan's financing order that KeySpan's common equity will be at least 30% of its capitalization. KeySpan states that the proposed transaction will have no adverse impact on KeySpan's ability to satisfy that requirement. In addition, at December 31, 2002, KeySpan's senior unsecured debt was rated "investment grade" by all the major rating agencies. In addition, KeySpan's EWG and FUCO investments have been profitable for all quarterly periods from December 31, 2000, through December 31, 2002.

KeySpan points out that all of its direct or indirect investments in EWGs and FUCOs are segregated from the public-utility subsidiaries. None of the public-utility subsidiaries provide financing for, extend credit to, or sell or pledge its assets directly or indirectly to any EWG or FUCO in which KeySpan owns any interest. KeySpan does not, and will not, seek recovery in the retail rates of any public-utility subsidiaries for any failed investment in, or inadequate returns from, an EWG or FUCO investment.

KeySpan states that investments in EWGs and FUCOs will not have a negative impact on the ability of the public-utility subsidiaries to fund operations and growth. The public-utility subsidiaries currently have financial facilities in place that are adequate to support their operations. The expectation of continued strong credit ratings by the public-utility subsidiaries should allow them to continue to access the capital markets to finance their operations and growth, KeySpan states.

Applicants state that, other than this Commission, no other federal or state regulatory commission has jurisdiction over the retention by KeySpan of the Nonutilities.

Due notice of the filing of this Application, as amended, 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 that the applicable standards of the Act and rules under the Act are satisfied, and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that jurisdiction is released over the retention of the KSI Nonutilities and that Post-Effective Amendment No. 12 be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.

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

¹ At the time KeySpan registered as a holding company, KeySpan Energy Supply, Inc. (`KE") was a direct subsidiary of KeySpan and the Merger Order permitted KeySpan to retain KE Supply (without reservation of jurisdiction) because its activities satisfied rule 58(b)(1)(v) (i.e., KE is a energy marketer). Subsequent to the Merger Order, ownership of KE Supply was reorganized for tax purposes so that it became a wholly owned subsidiary of KSI and, an indirect subsidiary of KeySpan. The reorganization was done under authority received in the Financing Order.

² The Merger Order was modified by two supplemental orders on December 4, 2000 (HCAR Nos. 27286 and 27287.) KeySpan also received authority for various financing and reorganization activities. See HCAR No. 27272 (November 8, 2000), as corrected HCAR No. 27286 (December 1, 2000) (collectively, the "Financing Order").

³ By order dated May 29, 2002 (HCAR No. 27532), the Commission approved a reorganization of Eastern from a Massachusetts business trust to a Massachusetts limited liability company ("Conversion Order"). On May 31, 2002, under the Conversion Order, Eastern and KeySpan New England, LLC ("KNE LLC"), a newly formed Massachusetts limited liability company subsidiary of KeySpan, executed an agreement and plan of merger, with KNE LLC as the surviving entity. KNE LLC now holds the nonutility subsidiaries previously owned by Eastern and is an exempt holding company under section 3(a)(1) of the Act.

⁴ In the Merger Order, the Commission also reserved jurisdiction over KeySpan's retention of the following additional wholly owned, indirect nonutility subsidiaries: Eastern Enterprises Foundation ("EEF"); Eastern Urban Services, Inc. ("EUS"); Eastern Associated Capital Corp. ("EACC"), and Eastern Associated Securities Corp. ("EASC"). EEF, EUS, EACC, and EASC, are subsidiaries of KNE LLC. KeySpan will file a separate post-effective amendment addressing the retention issues regarding these companies at a later date.

⁵ ENI Mechanical was an indirect, wholly owned subsidiary of Eastern Enterprises. Subsequent to the Merger, ENI Mechanical and its wholly owned nonutility subsidiaries ("ENI Companies") became indirect, wholly owned subsidiaries of KeySpan. KeySpan then moved the ENI Companies under KSI and dissolved ENI Mechanical on or about August 24, 2001 under reorganization authority granted in the Financing Order.

⁶ Applicants state that these HVAC services are appliance services permitted under rule 58(b)(1)(iv). See Cinergy Corp., HCAR No. 26662 (February 7, 1997), See also, Conectiv, Inc., HCAR No. 26832 (February 25, 1998).

⁷ See GPU, Inc., HCAR No. 27165 (April 14, 2000).

⁸ See Consolidated Natural Gas Co., HCAR No. 26757 (August 27, 1997).

⁹ See The Southern Company, HCAR No. 26211 (December 30, 1994) (authorizing investment in a company that would design, construct, finance and operate a wireless communications system to serve the needs of the registered holding company system and regional nonassociates.); See also Appalachian Power Company, HCAR No. 24772 (December 9, 1988) (lease of fiber optic system)

¹⁰ See Cinergy Corp., HCAR No. 26662 (February 7, 1997); See also, Conectiv, Inc., HCAR No. 26832 (February 25, 1998).

¹¹ See WPL Holdings, Inc., HCAR No. 26856 (April 14, 1998); See also, Central and Southwest Services, Inc., HCAR No. 26898 (July 21, 1998); General Public Utilities, et al., HCAR No. 25108 (June 26, 1990).

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