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U.S. Securities and Exchange Commission


(Release No. 35-27729; 70-10119)

Energy East Corp., et al.

Order Authorizing the Formation of a Service Company and Service Arrangements

September 30, 2003

Energy East Corp. ("Energy East"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act") and Energy East Management Corporation ("EEMC"), a wholly owned service company, both located in Albany, New York, have filed an application-declaration ("Application") with the Securities and Exchange Commission ("Commission") in accordance with the provisions of sections 6(a), 7, 9(a), 10, and 13(b) and rules 88, 90 and 91 under the Act. A notice of the Application was issued on June 24, 2003 (HCAR No. 27689).

I. Background and Summary

Energy East requests that the Commission authorize the organization of a second wholly owned subsidiary service company called Energy East Shared Services Corporation ("Shared Services"). Shared Services will serve the public utility subsidiary companies in the system ("Utility Subsidiaries").1 In addition, EEMC seeks approval of the revised forms of service agreements ("Revised EEMC Agreements").2 Energy East further seeks Commission authorization for certain of its Utility Subsidiaries to provide services to each other and to Shared Services, to the extent that rule 87(a)(3) does not apply.

II. Requests

A. Formation of the Second Service Company

Shared Services will be a wholly owned direct subsidiary of Energy East and a Delaware corporation that will: (1) have a capitalization of 200 shares of common stock, par value $.01 per share; (2) finance its business through the issuance of debt securities under rule 52(b); and (3) not borrow money from an associate company other than Energy East unless specifically authorized by the Commission in a further proceeding.

The presidents of each of the Utility Subsidiaries will serve on the Board of Directors of Shared Services, in addition to other persons as may be elected from time to time. Shared Services will be staffed by employees who will be transferred over time from other Energy East system companies or who will be hired externally.

B. Services By Shared Services

Shared Services, proposes to provide a variety of administrative and operations services to the Utility Subsidiaries.3 A limited number of services such as human resources (payroll processing and benefits administration) and information technology services will be provided to EEMC and Energy East, where appropriate and consistent with the economical and efficient performance of services at cost ("Authorized Services Between Service Companies"). Energy East states that supply chain and information technology functions, as well as the accounting, treasury, and payroll functions will be fully transferred to Shared Services by January 31, 2004.4 Energy East states that Shared Services or EEMC may, from time-to-time, seek to access the expertise of personnel at the different Utility Subsidiaries for discrete one-time projects such as the review of a new product or a new process that Shared Services is considering deploying across the Energy east system, and Shared Services may then seek input from Utility Subsidiary personnel as to the preferred means of centralizing a particular function or service in accordance with policies of the Energy East system ("Future Services"). Future Services include: human resources, accounts payable, legal services, records retention, transmission and supply services, customer service, engineering services, and regulatory management services. Future Services will be transferred to Shared Services when the internal work necessary to centralize them has been completed, subject, in each case, to notice to the Commission of such transfer of function no later than 60 days prior to the proposed effective date of transfer. All such Future Services will be transferred no later than December 31, 2005. Except for the Authorized Services Between Service Companies, Shared Services will not provide any type of service to associate nonutility companies.

The Service Agreements will provide methodologies to ensure that all client companies pay to Shared Services the cost of all services, computed in accordance with the rules 90 and 91 under the Act and appropriate accounting standards. Where more than one client company is involved in, or has received benefits from, a service performed by Shared Services, the Service Agreements will provide that client companies will pay their fairly allocated pro rata share in accordance with the methods set out in appendices to the Service Agreements. All services provided by Shared Services to Energy East system companies will be on an "at cost" basis as determined under rules 90 and 91 under the Act. Shared Services will maintain its accounts, cost-accounting procedures and other records in accordance with the requirements of the Commission's Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies and utilize the chart of accounts specified in the Federal Energy Regulatory Commission's Uniform System of Accounts for Public Utilities and Licensees (18 C.F.R. Part 101).

No material change in the organization of Shared Services, the methods of allocating cost to associate companies, or in the scope or character of the services to be rendered by Shared Services, subject to section 13 of the Act, or any rule, regulation or order, shall be made unless and until Shared Services shall first have given the Commission written notice of the proposed change not less than 60 days prior to the proposed effectiveness of any such change. If, upon the receipt of any such notice, the Commission shall notify Shared Services within the 60-day period that a question exists as to whether the proposed change is consistent with the provisions of section 13 of the Act, or of any rule, regulation or order, then the proposed change shall not become effective unless and until Shared Services shall have filed with the Commission an appropriate declaration regarding such proposed change and the Commission shall have permitted such declaration to become effective.

C. Services by EEMC

Pending Commission authorization of the formation of Shared Services, some of the functions (supply chain, and information technology) were being performed by EEMC. These functions had been temporarily transferred to EEMC, because EEMC had been established and provided a mechanism for achieving the benefits of centralization pending the authorization and formation of Shared Services. Energy East states it is not appropriate for supply chain and information technology functions to remain in EEMC. These functions are of the most use to the Utility Subsidiaries, and Shared Services serves the Utility Subsidiaries. Therefore these functions will be transferred to Shared Services by January 31, 2004.

In contrast to Shared Services, Energy East states that EEMC will have a national and regional focus and will be principally engaged in general management and providing strategic services to the Energy East System. EEMC's services as described in the Revised EEMC Service Agreements will include: overall corporate supervision of the Energy East system, strategic advice, investor relations, corporate finance, corporate governance and related activities associated with maintaining a public holding company that is a regional energy services provider, such as corporate financial consolidation and reporting.

D. Other Arrangements

Energy East states that Shared Services will occupy portions of the owned or leased office space of the Utility Subsidiaries and will use portions of the owned or leased computer hardware, communications facilities, office equipment and furnishings and vehicles of the Utility Subsidiaries. Further, Shared Services will also use software currently licensed by the Utility Subsidiaries. Energy East states that none of the property proposed to be occupied, used, or provided constitute facilities used for the production, transmission, transportation or distribution of electric energy or natural or manufactured gas. The Utility Subsidiaries will provide for occupancy and use under license, lease, sublease or service arrangements with Shared Services in accordance with rules, 90 and 91 (collectively, "Leasing Arrangements"). To the extent that rule 87(a)(3) does not apply, Energy East requests, on behalf of the Utility Subsidiaries, authority for the Utility Subsidiaries to provide the specific services detailed in Exhibit B-4 of the Application and the described Leasing Arrangements.

E. Reporting Requirements for Shared Services

Shared Services will file annual reports on Form U-13-60 in accordance with rule 94, commencing with the report for calendar year 2003. In an addendum to its Form U-13-60, Shared Services will report:

  • Authorized Services Between Service Companies noting the amount of services provided;

  • Future Services specifically including: the work order number, a breakdown of each project undertaken noting the amount of compensation to the Utility Subsidiary, the name of the receiving company under that work order, and the total amount billed to the receiving company under that work order.

  • Leasing Arrangements, specifically noting the principal terms of licenses, leases, subleases or service arrangements related to sharing office space, leased computer hardware, communications facilities, office equipment and furnishings and vehicles of the Utility Subsidiaries and provided to Shared Services.

The proposed transaction are subject to rule 54, which provides that, in determining whether to approve the issue of sale of any securities for purpose other than the acquisition of exempt wholesale generators ("EWGs") under section 32 of the Act and foreign utility companies ("FUCOs") under section 33 of the Act or other transactions unrelated to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of subsidiaries of a registered holding company if rule 53(a), (b), and (c) are satisfied. Under rule 53(a), the Commission shall not make certain specified findings under section 7 and 12 in connection with a proposal by a holding company to issue securities for the purpose of acquiring the securities of or other interest in an EWG, or to guarantee the securities of an EWG, if each of the conditions in paragraphs (a)(1) through (a)(4) of that rule are met, provided that none of the conditions specified in paragraphs (b)(1) through (b)(3) of rule 53 exists. These standards are met.

As of June 30, 2003, Energy East's "aggregate investment" (as defined in rule 53(a) (1)) in EWGs and FUCOs is approximately $ 20 million, or approximately 1.7% of Energy East's "consolidated retained earnings" at June 30, 2003, approximately $1.2 billion. Energy East states in accordance with rule 53(a) it will maintain books and records enabling it to identify investments in and earnings from each EWG and FUCO in which it directly or indirectly acquires and holds an interest. Energy East will cause each domestic EWG in which it acquires and holds an interest, and each foreign EWG and FUCO that is a majority-owned subsidiary, to maintain its books and records and prepare its financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"). All of such books and records and financial statements will be made available to the Commission, in English, upon request. As required by rule 53(a)(3), no more than 2% of the employees of the Utility Subsidiaries will, at any one time, directly or indirectly, render services to EWGs and FUCOs. Rule 53(a)(4), Energy East states it will submit a copy of any Application filed with the Commission and each amendment thereto, and will submit copies of any rule 24 certificates as well as a copy of Energy East's Annual Report on Form U5S, to each of the public service commissions having jurisdiction over the retail rates of the Utility Subsidiaries, in each case as required by rule 53.

Energy East further states that the provisions of rule 53(a) are not made inapplicable to the authorization requested by reason of the occurrence or continuance of any of the circumstances specified in rule 53(b). Finally, rule 53(c) by its terms is inapplicable.

Expenses in connection with the preparation of the Application are estimated not to exceed $50,000. The New York Public Service Commission ("NYPSC"), Maine Public Utilities Commission ("MPUC"), Massachusetts Department of Telecommunications and Energy ("MDTE"), and Connecticut Department of Public Utility Control ("DPUC") exercise some degree of regulatory oversight over transactions between regulated public utilities and their affiliates. Applicants state that no additional approval of the NYPSC, MDTE, and DPUC are required, and that the MPUC approved the formation of the service company, the service agreement and the stipulations of the parties.5 Applicants state that no other state or federal regulatory approval, other than the approval of this Commission, is required to consummate the proposed transactions.

Due notice of the filing of the Application 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. Upon the basis of the facts in the record, it is found that the applicable standards of the Act and rules 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 the Application is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act, including Shared Services filing a Form U-13-60 with an addendum and reporting of Exhibit B-4 transactions in Form U-5-S, Item 8.

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

Margaret H. McFarland
Deputy Secretary


Modified: 10/07/2003