I/M/O/ the Petition of Atlantic City Electric Company, Conectiv Communications, Inc.

I/M/O/ the Petition of Atlantic City Electric Company, Conectiv Communications, Inc. and New RC, Inc. for Approval Under N.J.S.A. 48:2-51.1 and N.J.S.A. 48:3-10 of a Change in Ownership and Control

BPU Docket No. EM01050308
OAL Docket No. PUC-04036-01

December 19, 2001

Executive Summary of the Initial Brief of the Division of the Ratepayer Advocate⁽¹⁾

On December 19, 2001, the Division of the Ratepayer Advocate filed its initial brief, recommending that the proposed merger of Atlantic City Electric Company, Conectiv Communications, Inc. and New RC, Inc. not be approved unless several key conditions are attached to the approval. The brief addressed six broad topic areas in the case.

Standard of Review

The Ratepayer Advocate's position is that the proper standard of review of the proposed merger transaction is the "of positive benefit to the public interest" test. Under this test, the petitioners would have to establish that New Jersey ratepayers would receive affirmative benefits as a result of the merger. In contrast, the Joint Petitioners have argued that the less stringent "no harm" test should be utilized.

Burden of Proof

The position of the Ratepayer Advocate is that the appropriate evidentiary standard to which a merger transaction should be held is the clear and convincing standard rather than the 51% preponderance of the evidence standard. As we enter the final year of transition to a fully competitive market, "traditional" pre-deregulation standards may no longer be appropriate, and this standard would allow regulators to ensure that adequate safeguards remain in place to protect ratepayers without stifling competitive growth.

Impact on Customer Rates

The Ratepayer Advocate's position is that the proposed merger as filed is not in the public interest because New Jersey ratepayers would not receive any merger-related cost savings under the Joint Petition. The Joint Petitioners presented no comprehensive study of anticipated merger-related costs and savings. Without this analysis, the Joint Petitioners have not quantified the specific benefits to be achieved, and the Board has no evidence upon which to base a determination of whether or how the merger would affect rates. Therefore, the Ratepayer Advocate recommends that the Board: 1. Direct the Joint Petitioners to submit a comprehensive study of anticipated merger-related costs and savings; and 2. If, after the parties to this case have the opportunity to review (and respond to) this additional analysis (including evidentiary hearings), the Board determines that the Joint Petitioners have demonstrated that the merger would result in a net positive benefit to New Jersey ratepayers (and if it meets all other statutory criteria for approval), the Board should then condition merger approval on the pass-through of 100% of the annualized savings as a reduction to ACE's deferred balance contemporaneously with the closing of the merger transaction. Under no circumstances should there be a reduction of merger savings with a portion of the goodwill premium, nor should there be any recovery of "golden parachute" payments in rates or as an offset to any merger savings. Additionally, special executive separation payments, enhanced retirement or severance costs for executives, or post-employment "consulting" arrangements should likewise be included in the category of non-recoverable costs.

Impact on Competition

The position of the Ratepayer Advocate is that the merger should not be approved as filed, because the Joint Petitioners have not proven that the merger will benefit competition, or even that competition will not be harmed by the merger. The Ratepayer Advocate therefore recommends that the Board require the Joint Petitioners to present a detailed assessment of market concentration and market power, including the use of an energy simulation model to look at the hourly behavior of the market under a wide variety of external conditions and bidding behaviors.
Impact on Employees

The Ratepayer Advocate is concerned about what will happen to Conectiv's New Jersey employees after a merger. The Joint Petitioners have made numerous representations that Atlantic City Electric and Conectiv will maintain substantially the same employees as they have today and the merger will require few, if any, involuntary terminations. Therefore, the Ratepayer Advocate recommends that the merger be conditioned on no significant changes in New Jersey employment or employees for a minimum of five years.

Additionally, for the protection of both New Jersey employees and ratepayers, the Ratepayer Advocate recommends that, as a condition of merger: 1. The Joint Petitioners must maintain ACE's corporate headquarters in New Jersey, staffed with upper-level executives who are knowledgeable about New Jersey issues and regulatory policy; and 2. Conectiv be permitted to appoint four members of its own choice out of the twelve members of the New RC Board of Directors.

Impact on the Provision of Safe and Adequate Utility Service at Just and Reasonable Rates

The Joint Petitioners have not proven that the merger will not negatively impact reliability and customer service. Accordingly, the Ratepayer Advocate recommends that the Board approve a Customer Reliability and Service Quality Index ("SQI") as a condition of merger, in addition to the service guarantees promised by the Joint Petitioners. Adoption of the SQI will prevent any system-wide deterioration of service quality and reliability following the merger. In addition to firm baseline standards, the SQI should impose system-wide customer restitution payments for failure to maintain the performance standards.

The Ratepayer Advocate also asserts that the Joint Petitioners should commit to assist low-income ratepayers and customers in financial need. Pursuant to the recent Board Order regarding the Interim Standards for the Universal Service Fund, the Ratepayer Advocate recommends that the Joint Petitioners should implement a Percentage of Income Program ("PIP") as a condition of merger. This sort of plan has been implemented successfully to assist low-income ratepayers in Pennsylvania and is poised for introduction in New Jersey by GPU. The Board ordered that the GPU PIP plan be established without modification, for it will provide the Board with valuable information as it establishes the permanent USF program. It would be in the best interest of the public for the Joint Petitioners to implement a similar plan, and therefore, this should be made a condition of merger.

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1. This Executive Summary has been created for the convenience of members of the public who may wish to read an overview of the Ratepayer Advocate's actual brief filed with the Office of Administrative Law. Please refer to the actual brief filed on December 19, 2001, which is also available at the Division of the Ratepayer Advocate's website, for a complete discussion of this office's legal position on the proposed merger.