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Anthony C. Adonizio Attorney-at-Law 250 North 24th Street Camp Hill, Pennsylvania 17011 Telephone: 717 730-2052 Telecopy: 717 730-0719 E-mail: [email protected] CONFIDENTIAL : This material is subject to and protected by the attorney-client privilege and the attorney work product doctrine. NATURAL GAS UTILITY LINE EXTENSION LAW INVESTIGATION Final Report to Susquehanna Economic Development Association-Council of Governments Dated: September 13, 2014

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Page 1: Anthony C. Adonizio Attorney-at-Law 250 North 24th … Gas Law... · Anthony C. Adonizio Attorney-at-Law 250 North 24th Street Camp Hill, Pennsylvania 17011 Telephone: 717 730-2052

Anthony C. Adonizio

Attorney-at-Law

250 North 24th Street

Camp Hill, Pennsylvania 17011

Telephone: 717 730-2052

Telecopy: 717 730-0719

E-mail: [email protected]

CONFIDENTIAL: This material is subject to and protected

by the attorney-client privilege and the

attorney work product doctrine.

NATURAL GAS UTILITY LINE EXTENSION LAW INVESTIGATION

Final Report

to

Susquehanna Economic Development Association-Council of Governments

Dated: September 13, 2014

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TABLE OF CONTENTS

VOLUME I Page

Natural Gas Utility Line Extension Law Investigation Report 1

I. INTRODUCTION and BACKGROUND 2

II. EXECUTIVE SUMMARY 2

III. DISCUSSION 3

A. THE POTENTIAL THRESHOLD EXPOSURE THAT AN INCUMBENT 4

NATURAL GAS DISTRIBUTION COMPANY, OR OTHERS, MAY SEEK

TO PREVENT EITHER THE FORMATION, OR THE OPERATION OF, A

NEW NONPROFIT GAS DISTRIBUTION ENTITY

(1) Whether, by seeking relief from the Pennsylvania Public Utility 4

Commission (PUC), an incumbent NGDC, or others, may endeavor

to prevent either the formation, or the operations of, a new nonprofit

natural gas distribution entity, and what form such an initiative may

take.

(2) The NGDC arguments which should be anticipated in support 9

of such an NGDC action before the PUC, and the rebuttal arguments

which are available to defend against such an action.

(a) An assertion that the NGDC has exclusive service rights in 9

the territory, due to its PUC approved Certificate of Public

Convenience, and the service territory set forth in its PUC

approved tariff;

(b) An NGDC claim that the nonprofit gas cooperative is not 13

a “bona fide” cooperative, and is thus not exempt from

PUC jurisdiction and control under Section 102 of the Public

Utility Code, and that accordingly, the nonprofit gas

cooperative must apply for and receive a PUC Certificate

of Public Convenience before it may begin to render service;

and

(c) An NGDC assertion that the service by the nonprofit gas 16

cooperative should be prohibited because it is contrary to

public policy.

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TABLE OF CONTENTS (cont.) Page

(3) The advance steps which are available to be taken to best protect 19

the interests of the new nonprofit entity from these potential

exposures

B. ANALYSIS AND COMPARISON OF TYPES OF NONPROFIT 23

ENTITIES WITH AUTHORITY TO CONSTRUCT, OWN, OPERATE

AND MAINTAIN A NONPROFIT NATURAL GAS DISTRIBUTION

ENTITY IN PENNSYLVANIA

(1) Municipal Authority Structure 23

(2) Nonprofit Cooperative Corporation Structure 29

(3) Nonprofit Corporation Structure 36

(4) Other Municipal Government Structures 38

(a) Local Development Districts 38

(b) Boroughs 42

(c) Counties 42

(d) First Class Townships 43

(e) Second Class Townships 43

(f) Third Class Cities 43

(5) Hybrid Structures 46

C. RANKING OF TYPES OF NONPROFIT ENTITIES WITH AUTHORITY 48

TO CONSTRUCT, OWN, OPERATE AND MAINTAIN A NONPROFIT

NATURAL GAS DISTRIBUTION ENTITY IN PENNSYLVANIA

Nonprofit Entity Comparison Table 51

D. POTENTIAL SOURCES OF FINANCING 52

(1) Debt Financing 52

(a) Utility Pipeline, Ltd. Financing 52

(b) Pennsylvania Economic Development Financing Authority 54

Financing

(c) USDA Rural Development Business and Industry Guaranteed 55

Loan Program

(2) Equity Financing 58

IV. CONCLUSION and OPINION 60

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TABLE OF CONTENTS (cont.)

APPENDIX A: Natural Gas Utility Line Extension Law Investigation Gap Analysis

APPENDIX B: Responses to the inquiries set forth in the SEDA-COG Natural

Gas Utility Line Extension Law Investigation June 2, 2014 RFP

VOLUME II

APPENDIX C: Summaries of Interviews

APPENDIX D: Local Government Commission Analysis of the Changes to the

Borough Code in House Bill 1719

APPENDIX E: Application of Gasco Distribution Systems, Inc. for Approval of the

Transfer of its Claysville Division’s Assets, PA PUC Docket No.

A-120002F2001; Commission Order September 29, 2006, and

Commission Order on Reconsideration December 5, 2006

APPENDIX F: Application of Gasco Distribution Systems, Inc. for Approval of the

Transfer of its Kane Division’s Assets, PA PUC Docket No.

A-120002F2000; Commission Order March 22, 2007

APPENDIX G: Application of Sergeant Gas Company for Commission Approval of

the Transfer of its Distribution System Assets to Utility Pipeline, Ltd.

and immediately thereafter to Knox Energy Cooperative Association, Inc.

and for the Abandonment of all Pennsylvania Regulated Service by

Sergeant Gas Company, with the Immediate Commencement of Service

by Knox Energy Cooperative Association, Inc, PA PUC Docket No.

A-2011-2239524; ALJ Initial Decision August 24, 2011 and Commission

Order Adopting Initial Decision September 22, 2011

APPENDIX H: PUC Chapter 56, Subchapter E. Regulations: Termination of Service

(52 Pa. Code §§ 56.321- 56.361); and 66 Pa.C.S. § 1406 (Termination

of Utility Service)

APPENDIX I: Cooperative Corporation Law of 1988 (15 Pa.C.S. § 7101, et seq.)

APPENDIX J: Requirements for Exemption under I.R.C. 501(c)(12),

General Survey of I.R.C. 501(c)(12) Cooperatives,

Internal Revenue Service, 2002 EO CPE, pages 177-179

link: http://www.irs.gov/pub/irs-tege/eotopice02.pdf

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TABLE OF CONTENTS (cont.)

APPENDIX K: Knox Energy Cooperative Association, Inc.

organizational and management documents:

(i) Second Amended and Restated Articles of Incorporation;

(ii) Second Amended Code of Regulations and Bylaws;

(iii) First Amended Management Agreement with Utility Pipeline, Ltd.,

dated March 12, 1999;

(iv) Service Area Map;

(v) Rules and Regulations Governing the Distribution and Sale of Gas;

(vi) Current Act 127 PUC Pipeline Operator Annual Registration, dated

May 12, 2014; and

(vii) Assignment from Utility Pipeline, Ltd. to Knox Energy

Cooperative Association, Inc., dated July 11, 2005

APPENDIX L: Keystone Cooperative Association, Inc.

organizational and management documents:

(i) Current Pennsylvania Department of State Decennial Report, dated

January 3, 2011;

(ii) Rules and Regulations Governing the Distribution and Sale of Gas;

(iii) Assignment from Utility Pipeline, Ltd. to Keystone Cooperative

Association, Inc., dated October 16, 2001;

(iv) Service Area Map; and

(v) Current Act 127 PUC Pipeline Operator Annual Registration, dated

March 23, 2014

APPENDIX M: Reporter’s Guide to Pennsylvania Local Government,

Third Class Cities

APPENDIX N: Economic Development Financing Law (73 P.S. § 371, et seq.)

APPENDIX O: DCED Pennsylvania Economic Development Financing Authority

Bond Financing Program Guidelines

APPENDIX P: USDA Rural Development

Business and Industry Guaranteed Loan Program materials

APPENDIX Q: Pennsylvania Banking and Securities Commission, Cooperative

Business Associations Exemption (10 Pa. Code § 203.188)

APPENDIX R: Keystone Cooperative Association; Petition for a Declaratory Order,

PA PUC Docket No. P-00991710; Commission Order August 12, 1999

(iv)

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Natural Gas Utility Line Extension Law Investigation

TABLE OF STATUTES and REGULATIONS CITED

Page

Federal Statutes

Internal Revenue Code 33, 37, 47, 48, 49, 59

(26 U.S.C. § 1, et seq.)

Securities Act of 1933 58, 59

(15 U.S.C. § 77a, et seq.)

Pennsylvania Statutes

The Administrative Code of 1929 8

(71 P.S. § 51, et seq.)

Borough Code 5, 6, 42

(8 Pa.C.S. § 101, et seq.)

Cooperative Corporation Law of 1988 2, 30, 32, 35, 36, 37, 38, 48, 49, 59, Appendix I

(15 Pa.C.S. § 7101, et seq.)

The County Code 42, 43

(16 P.S. § 101, et seq.)

Economic Development Financing Law 52, 54, Appendix N

(73 P.S. § 1371, et seq.)

Electric Cooperative Law of 1990, 32

(15 Pa.C.S. § 7301, et seq.)

First Class Township Code 43

(53 Pa.C.S. § 55101, et seq.)

Local Development District Act 1, 38, 39, 40, 41, 42, 50

(73 P.S. § 801, et seq.)

Municipality Authorities Act 2, 3, 24, 25, 26, 27, 29, 47, 51, 60

(53 Pa.C.S. § 5601, et seq.)

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TABLE OF STATUTES and REGULATIONS CITED (cont.) Page

Natural Gas Choice and Competition Act 28, 29

(66 Pa.C.S. § 2201, et seq.)

Nonprofit Corporation Law of 1988 22, 29, 30, 31, 32, 37

(15 Pa.C.S. § 5101, et seq.)

Public Utility Code

(66 Pa.C.S. § 101, et seq.)

Chapter 1. General Provisions 9, 13, 28, 38, 59

Chapter 3. Public Utility Commission 20, 21

Chapter 11. Certificates of Public Convenience 9, 10, 11, 34

Chapter 13. Rates and Distribution Systems 38

Chapter 14. Responsible Utility Customer Protections 23, Appendix H

Chapter 15. Service and Facilities 11

Chapter 22. Natural Gas Competition 28, 29

The Second Class County Code 42, 43

(16 P.S. § 3101, et seq.)

The Second Class Township Code 43

(16 P.S. § 65101, et seq.)

Securities Act of 1972 58

(70 P.S. § 1-101, et seq.)

Statutory Construction Act of 1972 45, 46

(1 Pa.C.S. § 1501, et seq.)

The Third Class City Code 43, 44, 45

(53 P.S. § 35101, et seq.)

Unincorporated Area Certified Territory Law of 1990, 16, 17, 18

(15 Pa.C.S. § 7351, et seq.)

Ohio Statutes

Ohio Nonprofit Corporation Law 34, 37

(Title XVII, Chapter 1702, Ohio Revised Code § 1702.1, et seq.)

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TABLE OF STATUTES and REGULATIONS CITED (cont.) Page

Pennsylvania Regulations

General Rules of Administrative Practice and Procedure 8

Before Agencies of the Commonwealth

Title 1 Pennsylvania Code – Part II

(1 Pa. Code § 31.1, et seq.)

Department of Banking and Securities 59, Appendix Q

Title 10 Pennsylvania Code – Banking and Securities

(10 Pa. Code § 1.1, et seq.)

Pennsylvania Public Utility Commission

Title 52 Pennsylvania Code - Public Utilities

(52 Pa. Code § 1.1, et seq.)

Chapter 1. Rules of Administrative Practice and Procedure 19, 20

Chapter 5. Formal Proceedings 20

Chapter 56. Standards and Billing Practices for Residential 23, Appendix H

Utility Service

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Anthony C. Adonizio

Attorney-at-Law

250 North 24th Street

Camp Hill, Pennsylvania 17011

Telephone: 717 730-2052

Telecopy: 717 730-0719

E-mail: [email protected]

September 13, 2014

CONFIDENTIAL: This material is subject to and protected

by the attorney-client privilege and the

attorney work product doctrine.

Susquehanna Economic Development Association-Council of Governments

201 Furnace Road

Lewisburg, Pennsylvania 17837

Attention: Mr. Don Kiel, Senior Principal Program Analyst

RE: Susquehanna Economic Development Association-Council of Governments

Natural Gas Utility Line Extension Law Investigation

Dear Mr. Kiel:

As part of the Susquehanna Economic Development Association-Council of

Governments (SEDA-COG)1 Regional Gas Utilization Initiative (RGUI) evaluation

study, I am pleased to provide this final report setting forth my research results and

opinions on the SEDA-COG Natural Gas Utility Line Extension Law Investigation.2

_________________ 1 SEDA-COG is a local development district, formed and certified pursuant to the Local Development

District Act (Act No. 120 of December 7, 1994; 73 P.S. § 801, et seq.), which serves eleven central

Pennsylvania counties.

2 This report was commissioned by SEDA-COG through its June 2, 2014, Request for Proposals to

perform the Natural Gas Utility Line Extension Law Investigation (RFP). This report is comprised of

the following three related components: (i) this opinion letter; (ii) the Natural Gas Utility Line Extension

Law Investigation Gap Analysis, attached as Appendix A; and (iii) Responses to the particular inquiries

set forth in Appendix A of the June 2, 2014 SEDA-COG RFP, attached as Appendix B. Some of the

inquiries in the June 2, 2014 SEDA-COG RFP anticipated subjects which I find pertinent and necessary

to address here in the discussion of the primary issues. Thus, portions of what is discussed below, will

also be covered in the Appendix B responses to those individual RFP questions. In order to avoid being

unnecessarily repetitive, in some of the responses to the RFP questions in Appendix B, I have simply

made reference there to the material which is discussed below.

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I. INTRODUCTION and BACKGROUND

As indicated in the SEDA-COG RFP, in September, 2013, SEDA-COG was awarded

a project funded in part by the U.S. Economic Development Administration (EDA) to

conduct a Regional Gas Utilization Initiative (RGUI) evaluation study. The work, which

is also being supported by additional entities, is being conducted over an 18-month

period. Main goals include:

Identify the legal, operational and funding requirements to create a municipal

authority, cooperative, corporation or other body charged with facilitating and

expanding natural gas utility service and usage throughout the project area.

Identify potential new industrial sites and parks in close proximity to other

supporting infrastructure for development by county IDC groups in both the short

and long term that will serve as attractive locations for manufactures utilizing gas

as both an energy source and feedstock for their operations.

Identify priority locations that would also provide gas service to residential areas

at the same time so as to significantly reduce energy costs to residential users and

increase disposable income which is a key to stimulating local consumption and

demand so critical to sustaining a vibrant regional economy.

Identify as least one potential demonstration project in each of the three counties

that could be undertaken in the near term in order to test the commercial viability

of this approach to regional economic development.

Identify the infrastructure needed to make natural gas fueling a viable alternative

for locally operated vehicle fleets in the private and public sector, and facilitate

projects for construction of said infrastructure.

As part of the RGUI, SEDA-COG commissioned the Natural Gas Utility Line

Extension Law Investigation to provide it with certain research results,

recommendations and opinions, which are discussed below.

II. EXECUTIVE SUMMARY

As discussed below, after examining applicable Pennsylvania law, and conducting

such other relevant research as I found to be necessary or advisable, I conclude that,

particularly since a municipal authority structure must be ruled out of our consideration

at this time (due to a lack of statutory authority for such an entity to engage in the

subject purpose under the Municipality Authorities Act (53 Pa.C.S. § 5601, et seq.)),

then subject to the potential impediments discussed below, the formation of a nonprofit

cooperative corporation under the Cooperative Corporation Law of 1988, (15 Pa.C.S. §

7101, et seq.) would be a viable structural option, and is the preferred and recommended

choice for the SEDA-COG RGUI for the purposes of constructing, financing, owning,

operating and maintaining a nonprofit natural gas distribution system in Pennsylvania.

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Notwithstanding my recommendation for the formation of a nonprofit cooperative

corporation however, if Section 5607 (Purposes and Powers) of the Municipality

Authorities Act was amended to provide for the creation of a municipal authority to

construct, own, operate or maintain a gas distribution system in Pennsylvania, then, in

that event, that municipal authority structure then would become the preferred choice for

the SEDA-COG RGUI, since a municipal authority would offer a wider range of

capabilities and benefits, including some not found in a nonprofit cooperative

corporation, such as: tax exempt bond financing; condemnation powers; and exemption

from state taxation. Accordingly, before moving forward with plans for a nonprofit

cooperative corporation, I recommend that SEDA-COG consult with its members and

the Pennsylvania Municipal Authorities Association as the feasibility and the timing of

accomplishing such an amendment to the Municipality Authorities Act.

III. DISCUSSION

A. THE POTENTIAL THRESHOLD EXPOSURE THAT AN INCUMBENT

NATURAL GAS DISTRIBUTION COMPANY, OR OTHERS, MAY SEEK

TO PREVENT EITHER THE FORMATION, OR THE OPERATION OF, A

NEW NONPROFIT GAS DISTRIBUTION ENTITY

At the outset here, and as part of our overall planning, we should recognize, and

prepare for, the potential threshold risk that an incumbent natural gas distribution

company (NGDC), which is regulated by the Pennsylvania Public Utility Commission

(PUC), and which is currently providing service in the SEDA-COG region, may well

view the RGUI, and the formation of a new nonprofit municipal or corporate natural gas

distribution entity, as a direct competitive threat to its interests. After all, the earnings of

NGDCs are a direct function of the regulated distribution service which they provide

within their territories, and so we should not be surprised if an NGDC regards the RGUI

negatively, since, from the NGDC perspective, every consumer which is served in the

future by a new nonprofit natural gas distribution entity, represents lost potential future

revenue and earnings for the NGDC.

In addition to the NGDC threat, we should also foresee the possibility that the

Pennsylvania Office of Consumer Advocate (OCA), and possibly the PUC along with

the OCA, may seek to impose PUC jurisdiction over, and regulation of, the new

nonprofit natural gas distribution entity, in order to guarantee that its consumers have the

same rights and protections which are afforded under the PUC’s regulations to all

NGDC customers.

Thus, before we address the topic of the preferred type of entity which may be

formed and used to provide natural gas service to currently unserved and under-served

areas in the SEDA-COG region, it is necessary and prudent to consider the threshold

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matters of:

(1) Whether, by seeking relief from the Pennsylvania Public Utility Commission (PUC),

an incumbent NGDC, or others, may endeavor to prevent either the formation, or the

operations of, a new nonprofit natural gas distribution entity, and what form such an

initiative may take;

(2) The NGDC arguments which should be anticipated in support of such an NGDC

action before the PUC, and the rebuttal arguments which are available to defend

against such an action; and

(3) The advance steps which are available to be taken to best protect the interests of the

new nonprofit entity from these potential exposures.

As discussed in section III.B. of this report below, the analysis and ranking of types

of nonprofit entities arrives at the conclusion that the creation of a Pennsylvania

nonprofit cooperative corporation, which is exempt from PUC regulation, is the optimal

choice through which to pursue the RGUI. Thus, in discussing this topic of potential

threshold exposures and impediments, I will use that premise.

(1) Whether, by seeking relief from the Pennsylvania Public Utility Commission

(PUC), an incumbent NGDC, or others, may endeavor to prevent either the

formation, or the operations of, a new nonprofit natural gas distribution entity,

and what form such an initiative may take.

I believe that there would be a substantial possibility that, unless some

accommodation were reached in advance (discussed below in section III.A.(3) of this

report), one or more of the NGDCs which are authorized to provide service in Centre,

Clinton and Mifflin Counties3 would be aggressive in seeking to protect its/their

interests, and that, in spite of the arguments in favor of the propriety of the gas

cooperative’s formation and actions (outlined below in section III.A.(2) of this report), _________________ 3 The municipalities in this three county area which are listed in NGDC service territory tariffs are as

follows:

Centre County:

UGI Central Penn Gas, Inc.: Borough of Philipsburg; Borough of South Philipsburg; and

Rush Township

Columbia Gas of Pennsylvania, Inc.: Bellefonte; State College; Benner Township;

Boggs Township; Burnside Township; College Township; Ferguson Township; Harris

Township; Patton Township; Potter Township; Snow Shoe Township; Spring Township;

and Union Township

(footnote3 is continued on next page)

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the local NGDC(s) may initiate litigation at the PUC challenging the right of the

nonprofit gas cooperative, to provide natural gas distribution service in an area included

in the NGDC’s(s’) approved certificate of public convenience and approved tariff

service territory.

I base these concerns here not only on the expectation that the incumbent local

NGDC(s) would seek to protect its/their interests, but also based on their past actions.

For example, earlier this year the Borough of Chambersburg, which is Pennsylvania’s

only borough owned and operated natural gas system (Chambersburg and Philadelphia

Gas Works are the state's only municipal gas systems), sought a clarification of its

authority and powers set forth in the Borough Code (8 Pa.C.S. § 101, et seq.) to

purchase, own, use, operate and maintain its natural gas distribution system, which it has

owned and operated within the Borough for many years.4 Chambersburg believed that

it indeed already had the requisite authority, through several separate provisions of

Pennsylvania law, however, for greater clarity, it desired to add language to the Borough

Code to provide one express provision directly relating to its authority and powers to

own and operate its natural gas distribution system.

Thus, earlier this year, through the Pennsylvania State Association of Boroughs

(PSAB), Chambersburg sought this clarifying amendment to the Borough Code in

House Bill 1719 of 2014. That legislation was the result of a several year effort by

PSAB and the Local Government Commission to edit and modernize the Borough Code,

and to incorporate the Borough Code into Title 8 of the Pennsylvania Consolidated _________________ 3 (continued)

Clinton County:

UGI Penn Natural Gas, Inc.: Crawford Township; Gallagher Township; Grugan

Township; and Wayne Township

UGI Central Penn Gas, Inc.: City of Lock Haven; Borough of Avis; Borough of

Flemington; Borough of Renovo; Borough of South Renovo; Borough of Beech Creek;

Borough of Mill Hall; Allison Township; Bald Eagle Township; Chapman Township;

Noyes Township; Beech Creek Township; Castanea Township; Dunnstable Township;

Pine Creek Township; Wayne Township; and Woodward Township

Mifflin County:

UGI Central Penn Gas, Inc.: Borough of Burnham; Borough of Juniata Terrace;

Borough of Lewistown; Borough of McVeytown; Armagh Township; Brown Township;

Granville Township; Union Township; Bratton Township; Derry Township; Menno

Township; and Decatur Township

(Copies of these respective NGDC tariff pages are included as Exhibits 16.4 through

16.7 of the Appendix B Responses to RFP questions, and copies of the Centre, Clinton

and Mifflin Counties’ municipality maps are included as Exhibits 16.8 through 16.10 of

the Appendix B Responses to RFP questions.)

4 The undersigned served as special counsel and advisor to the Borough of Chambersburg in that matter.

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Statutes.5 Thus, House Bill 1719 was the appropriate vehicle for any such clarifying

amendment, such as the clarification sought by PSAB on behalf of Chambersburg.

While it was expected that this proposed amendment would be routinely included into

the bill, PSAB was surprised when the trade association with represents the NGDCs, the

Energy Association of Pennsylvania (EAP) (link to EAP website:

http://www.energypa.org/) actively opposed the measure.

After negotiation, EAP only agreed to remove its objection to the Chambersburg

clarification, upon the addition of its requested further amendment of the Borough Code,

to restrict this power to own, use and operate a natural gas distribution system, only to

such boroughs which provided such gas service on the effective date of that legislation.

This change requested by the EAP was made to House Bill 1719 in Senate amendments,

which thus effectively prohibited, in perpetuity, all other boroughs in the state, other

than Chambersburg, from owning or operating a natural gas distribution system.

This change to House Bill 1719 is described in the Local Government Commission’s

analysis of the changes to the Borough Code, a copy of which is attached to this report

as Appendix D, and the new restriction on the powers of a borough in the Borough Code

now reads:

Ҥ 1202. Specific powers.

The powers of the borough shall be vested in the council. In the

exercise of any specific powers involving the enactment of an ordinance or

the making of any regulation, restriction or prohibition, the borough may

provide for enforcement and penalties for violations. The specific powers of

the borough shall include the following:

* * *

(60) To authorize:

* * *

(ii) a borough owning or operating a municipal gas distribution system on

the effective date of this section to purchase, own, use, operate and control

municipal gas distribution systems.” (8 Pa.C.S. § 1202(60)(ii)).

This aggressive action by the NGDCs though their trade association, EAP, clearly

demonstrates the extent to which the NGDCs may be expected to go, in order to prevent

or to remove any perceived competitive threat to their interests.

Likewise, when given an opportunity, the OCA has shown that it may be assertive in

seeking to impose mandatory consumer protection requirements on entities which are _________________ 5 House Bill 1719 was later passed by the General Assembly and signed into law by the Governor on

April 18, 2014, as Act No. 37 of 2014. (8 Pa.C.S. § 101, et seq.).

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otherwise exempt from the jurisdiction of, and regulation by, the PUC. In a relatively

recent example of this, in a case before the PUC involving one of the gas cooperatives

operating in the state, Knox Energy Cooperative Association, Inc. (Knox), (discussed

further later in this report), the OCA filed a protest, seeking to impose a broad range of

PUC regulatory and reporting requirements on Knox, even though Knox was otherwise

exempt from PUC regulation under the Public Utility Code as a bona fide cooperative.6

That case came before the Commission because it involved the sale of the assets of

Sergeant Gas Company to Utility Pipeline, Ltd., and thereafter to Knox, and as part of

that transaction, Sergeant Gas Company was required to obtain Commission approval.

The case was ultimately settled by the parties, with Knox essentially being forced to

agree to voluntarily adopt certain PUC regulatory consumer protections procedures (see:

Appendix G of this report for the Commission’s 2011 Order, which contains the

settlement terms).

If an NDGC challenged the right of a new non-jurisdictional entity, such as a

nonprofit gas cooperative, to provide natural gas distribution service in an area included

in the NGDC’s approved certificate of public convenience and approved tariff service

territory, that challenge would likely take the form of a petition filing before the PUC,

seeking a declaratory order, or possibly a complaint filing seeking a PUC cease and

desist order. In a situation where a negotiated arrangement with the local NGDC was

not concluded in advance, we should assume that it would be likely that the incumbent

local NGDC would be aggressive in seeking to protect its interests, and that, in spite of

the arguments in favor of the propriety of the gas cooperative’s actions (outlined below),

the local NGDC may initiate such litigation. In that event, we should also assume that

other NGDCs, as well as the EAP, may seek to intervene in such a case, to support the

local NGDC’s position. As mentioned above, the OCA would likely also intervene,

seeking to impose PUC jurisdiction over, and regulation of, the new nonprofit natural

gas distribution entity, in order to guarantee that its consumers have the same rights and

protections which are afforded under the PUC’s regulations to all NGDC customers.

Another possibility, albeit perhaps less likely, is that the local NGDC(s) may not wait

to initiate litigation until the new gas cooperative begins its operations, but may first

seek to prevent its formation, when the gas cooperative files its Articles of Incorporation

with the PA Department of State (DOS), by filing a protest with the DOS, seeking a

DOS rejection of this initial gas cooperative filing. This situation arose in 1946, when

the electric cooperatives in Pennsylvania sought to form Allegheny Electric Cooperative, ___________________ 6 Application of Sergeant Gas Company for Commission Approval of the Transfer of its Distribution

System Assets to Utility Pipeline, Ltd. and immediately thereafter to Knox Energy Cooperative

Association, Inc. and for the Abandonment of all Pennsylvania Regulated Service by Sergeant Gas

Company, with the Immediate Commencement of Service by Knox Energy Cooperative Association, Inc,

PA PUC Docket No. A-2011-2239524; ALJ Initial Decision August 24, 2011 and Commission Order

Adopting Initial Decision September 22, 2011.

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Inc. to serve their needs as a generation and transmission cooperative under the Electric

Cooperative Law. In that instance, Pennsylvania Electric Company (the primary

wholesale provider of generation and transmission services to the electric cooperatives at

that time) filed a protest with the PA Department of State7 seeking to block the

formation of Allegheny Electric Cooperative, Inc., arguing that the new cooperative

should not be incorporated without first obtaining a certificate of public convenience

from the PUC. That litigation ultimately went to the Supreme Court of Pennsylvania,

which ruled in favor of the cooperative, stating,

“...no matter how similar a cooperative and a public utility may be in fact,

a cooperative is not a public utility within the meaning of the Public Utility

Law. Sec. 2(17) (g) of that statute expressly provides that "The term

'Public Utility' shall not include… (b) any bona fide cooperative

association which furnishes service only to its stockholders or members on

a non-profit basis;…" Pennsylvania Electric Company v. Morrison,

Secretary of Commonwealth et al., 354 Pa. 472 at 476; 47 A.2d 810 at 812

(1946) (emphasis in original). ___________________ 7 Protests filed with the PA Department of State are permitted under Section 506 of The Administrative

Code of 1929 (71 P.S. § 186), and the General Rules of Administrative Practice and Procedure before

agencies of the Commonwealth as follows:

Ҥ 35.23. Protest generally.

A person objecting to the approval of an application, petition, motion or other matter

which is, or will be, under consideration by an agency may file a protest. No particular

form of protest is required but the letter or writing should contain the name and address

of the protestant, the proceeding or matter to which the protest is addressed and a

concise statement of the protest. Only one copy of a protest need be filed. Service need

not be effected upon the parties.” (1 Pa. Code § 35.23).

Ҥ 35.24. Effect of protest.

A protest is intended solely to alert the agency and the parties to a proceeding of the fact

and nature of the objection of the protestant to the proposed agency action, other than a

notice of proposed rulemaking (timely filed responses to notices of proposed rulemaking

will be treated as ‘‘comments’’ and considered by the agency as such). The filing of a

protest does not make the protestant a party to the proceeding; a separate petition to

intervene is required for this purpose. Nor will a protest be considered by the agency as

establishing the truth of the assertions of the protest. Where a timely protest is received

prior to any final action by the agency in the matter, or designating a proceeding for

formal hearing, the protest will be considered in determining what action is appropriate.

If a hearing has been ordered, the protest will be placed into a public file associated with,

but not part of, the record upon which the decision of the agency is made, and will be

available for further exploration of the substantive matters raised therein by the agency

staff and the other parties as may be appropriate.” (1 Pa. Code § 35.24).

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(2) The NGDC arguments which should be anticipated in support of such an

NGDC action before the PUC, and the rebuttal arguments which are available

to defend against such an action.

The arguments from the NDGC(s) and the EAP in such potential litigation could include

the following:

(a) An assertion that the NGDC has exclusive service rights in the territory, due to its

PUC approved Certificate of Public Convenience, and the service territory set forth

in its PUC approved tariff;

(b) An NGDC claim that the nonprofit gas cooperative is not a “bona fide” cooperative,

and is thus not exempt from PUC jurisdiction and control under Section 102 of the

Public Utility Code, and that accordingly, the nonprofit gas cooperative must apply

for and receive a PUC Certificate of Public Convenience before it may begin to

render service; and

(c) An NGDC assertion that the service by the nonprofit gas cooperative should be

prohibited because it is contrary to public policy.

I will now examine the merits of, and rebuttals to, each of these foreseeable NDGC

claims:

(a) An assertion that the NGDC has exclusive service rights in the

territory, due to its PUC approved Certificate of Public Convenience,

and the service territory set forth in its PUC approved tariff.

While an NGDC may claim that the PUC’s prior approval of its service territory, and

that the related PUC finding under the Public Utility Code that service by the NGDC in

that territory is “necessary and proper”, gives it superior rights over an unregulated gas

cooperative, this would be a relatively weak NGDC argument.

An NGDC’s service territory is established first through an application to the PUC

for a certificate of public convenience under Section 1102(a)(1) of the Public Utility

Code:

Ҥ 1102. Enumeration of acts requiring certificate.

(a) General rule. --Upon the application of any public utility and

the approval of such application by the commission, evidenced by

its certificate of public convenience first had and obtained, and

upon compliance with existing laws, it shall be lawful:

(1) For any public utility to begin to offer, render, furnish or

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supply within this Commonwealth service of a different nature or

to a different territory than that authorized by:

(i) A certificate of public convenience granted under this part or

under the former provisions of the act of July 26, 1913 (P.L.1374,

No.854), known as "The Public Service Company Law," or the act

of May 28, 1937 (P.L.1053, No.286), known as the "Public Utility

Law."

(ii) An unregistered right, power or privilege preserved by

section 103 (relating to prior rights preserved).

* * *” (66 Pa.C.S. § 1102(a)(1); emphasis added.

Section 1103 of the Public Utility Code (Procedure to obtain certificates of public

convenience) sets forth the PUC review and approval process, and provides the

following approval standard:

“A certificate of public convenience shall be granted by order of the

commission, only if the commission shall find or determine that the

granting of such certificate is necessary or proper for the service,

accommodation, convenience, or safety of the public. The commission, in

granting such certificate, may impose such conditions as it may deem to be

just and reasonable.” 66 Pa.C.S. § 1103(a) (emphasis added).

As to an applicant’s required demonstration to meet this Section 1103 standard, the

Supreme Court of Pennsylvania has stated that,

“...the PUC's interpretation of this statute,... as a general rule, has required

that an applicant demonstrate a public need or demand for the proposed

service, the inadequacy of existing service or facilities in the proposed

territory, and the applicant's fitness to render such service, along

technical, financial and legal lines. See, e.g., Seaboard Tank Lines, Inc.

v. Pennsylvania PUC, 93 Pa. Cmwlth. 601, 605, 502 A.2d 762, 764

(1985)4... [footnote:

4There are several variations in the Commission's

interpretation of Section 1103, arising out of the fact that certain categories

of jurisdictional utilities compete within their service

territories. See, e.g., Elite Industries, Inc. v. Pennsylvania PUC, 574 Pa.

476, 482-84, 832 A.2d 428, 431-32 (2003); Seaboard, 93 Pa. Cmwlth. at

611-12, 502 A.2d at 767.]” Chester Water Authority v. Pennsylvania

Public Utility Commission, 581 Pa. 640 at 643, 868 A.2d 384 at 386

(2005) (emphasis added).

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If the Commission then determines that the applicant NGDC has demonstrated the

above three elements, and thus finds that the service territory expansion request, “...is

necessary or proper for the service, accommodation, convenience, or safety of the

public” under Section 1103 of the Public Utility Code (66 Pa.C.S. § 1103(a)), then the

certificate of public convenience authorizing the new service territory should be granted.

Following the issuance of the certificate of public convenience, the NGDC appropriately

adds that new territory to its tariff.

The fact that an NGDC has a particular region included in its approved PUC

certificate of public convenience, and its approved tariff, does not, in itself, create an

obligation for the NGDC to provide gas service, but only establishes its right to extend

its service there. Under Section 1501 (Character of service and facilities) of the Public

Utility Code, as interpreted by the appellate courts, NGDCs are not required to extend

service to all customers in their service territory, but are only required to extend service

to customers under reasonable conditions subject to the regulations and orders of the

PUC. 66 Pa.C.S. § 1501; Fayette County Gas Company v. Pennsylvania Public Utility

Commission, 33 A.2d 761 (Pa. Super. 1943); Popowsky v. Pennsylvania Public Utility

Commission, 589 Pa. 605, 910 A. 2d 38 (2006).

The rebuttal arguments from the nonprofit gas cooperative on this issue of exclusive

service rights would include the following:

Pennsylvania appellate court decisions hold that the approved certificate of public

convenience of the NGDC does not give an NGDC exclusive service rights:

“Indeed, the exclusivity provisions of the Act are more stringent than those

imposed upon public utilities by the Public Utility Code (Code), 66 Pa.

C.S. §§ 101-3315 and its predecessor, as the grant of a Certificate of

Public Convenience and Necessity under the Code does not necessarily

grant a utility the exclusive right to serve a particular geographic

area. See Lukens Steel Co. v. Pennsylvania Public Utility Commission, 92

Pa. Commonwealth Ct. 530, 533 n. 1, 499 A.2d 1134, 1136 n. 1 (1985).”

Central Electric Cooperative, Inc., v. Pennsylvania Public Utility

Commission, 111 Pa. Commw. 223 at 227; 533 A.2d 1084 at 1986; 1987

Pa. Commw. LEXIS 2631 (1986) (emphasis added).

In another case, the Commonwealth Court of Pennsylvania has also stated:

“A Certificate of Public Convenience and Necessity makes it lawful for a

public utility to provide service within a defined territory, and imposes on

the public utility an obligation to provide service in that

territory. See Bland v. Tipton Water Co., 222 Pa. 285, 71 A. 101 (1908). A

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Certificate of Public Convenience and Necessity does not necessarily

grant an exclusive right to serve a particular geographic

area. See, Western Pennsylvania Water Co. v. Pennsylvania Utilities

Commission, 10 Pa. Commonwealth Ct. 533, 311 A.2d 370 (1973);

Pennsylvania Power and Light Co. v. Public Service Commission, 112 Pa.

Superior Ct. 500, 171 A. 412 (1934).” Lukens Steel Company v.

Pennsylvania Public Utility Commission, 92 Pa. Commw. 530 at 533; 499

A.2d 1134 at 1136; 1985 Pa. Commw. LEXIS 1350 (1985) (emphasis

added).

The nonprofit gas cooperative could also argue that this situation is analogous to the

longstanding PUC policy that two NDGCs with overlapping approved service territories

may compete in those areas. To the extent that the PUC has approved overlapping

NGDC service territories, Pennsylvania law is clear that multiple NGDCs may provide

service in the same municipality. There are situations when two NGDCs have service

areas set forth in their respective PUC approved tariffs providing for authority to serve

the same municipality8, and, while we do not see it often, in such a situation where two

NGDCs’ service territories overlap, they can compete.

In the leading decision on this, in 1987 The Peoples Natural Gas Company and T.W.

Phillips Gas and Oil Company both sought to serve industrial customers in White

Township, Indiana County, with each company arguing that its current tariff listed that

municipality. The parties first litigated their dispute before the PUC, and in its decision,

the Commission stated,

"...the Commission, as it is authorized to do, has concluded that it is in the

public interest to spur the efficiencies that are created by competition by

permitting customers to choose among suppliers in overlapping service

territories...[i]t is this Commission's public policy not to prohibit

competition between gas utilities where authorized service territories

overlap."

After the Commission’s decision was appealed to the Commonwealth Court of

Pennsylvania, the Court sustained the PUC’s ruling, stating,

“This policy, established by Commission adjudications, is a long standing

one. See Re Montefiore Hospital Association of Western Pennsylvania, 54

Pa. P.U.C. 566 (1981); Columbia Gas of Pennsylvania, Inc, v. Peoples

___________________ 8 For example, both UGI Penn Natural Gas, Inc. and UGI Central Penn Gas, Inc. each list Wayne

Township in Clinton County in their respective service area tariffs. See: Appendix B, Exhibit 16.5 and

Exhibit 16.6.

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Natural Gas Co., 44 Pa. P.U.C. 308 (1969); Borough of Aspinwall v.

Duquesne Light Co., 41 Pa. P.U.C. 301 (1964).” The Peoples Natural Gas

Company v. Pennsylvania Public Utility Commission, 123 Pa. Commw.

481 at 495, 554 A.2d 585 at 592 (1989).

The Court went on to state,

“... the extent to which competition may be allowed between utilities is a

matter within the exclusive discretion of the Commission. See Dublin

Water Co. v. Pennsylvania Public Utility Commission, 206 Pa. Superior

Ct. 180, 213 A.2d 139 (1965); Sayre v. Pennsylvania Public Utility

Commission, 161 Pa. Superior Ct. 182, 54 A.2d 95 (1947). Absent an

abuse of that discretion, this Court may not disturb the action of the

Commission.” The Peoples Natural Gas Company v. Pennsylvania Public

Utility Commission, 123 Pa. Commw. 481 at 495, 554 A.2d 585 at 592

(1989).

Thus, based on these rebuttal arguments, an NGDC assertion that it has exclusive

service rights in the PUC approved territory, is not likely to lead to a PUC order

preventing the operation of a nonprofit gas cooperative in that area.

(b) An NGDC claim that the nonprofit gas cooperative is not a “bona

fide” cooperative, and is thus not exempt from PUC jurisdiction and

control under Section 102 of the Public Utility Code, and that

accordingly, the nonprofit gas cooperative must apply for and receive a

PUC Certificate of Public Convenience before it may begin to render

service.

The definition of the term “Public Utility” at Section 102 of the Public Utility Code

excludes, “Any bona fide cooperative association which furnishes service only to its

stockholders or members on a nonprofit basis.”, and thus a bona fide cooperative is not

subject to the jurisdiction of, or regulation by, the PUC. (66 Pa.C.S. § 102). While this

seems on its face to be a straightforward rule, the meaning of the qualifier “bona fide” in

the Section 102 definition has been the subject of considerable litigation over the years,

and it may be used as a basis for an NGDC to claim that the nonprofit gas cooperative is

not exempt from PUC jurisdiction. If it is found that the nonprofit gas cooperative is not

a “bona fide” cooperative, then it would not be exempt from PUC jurisdiction, and it

would be required to apply for and obtain a PUC Certificate of Public Convenience

before it could begin to render service. If that came to pass, then a full hearing process

before a PUC Administrative Law Judge would be required on the cooperative’s

application for a PUC Certificate of Public Convenience.

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In the lead case on this subject, Re Adrian Water Co., 53 Pa. P.U.C. 139, in 1979 the

Commission established five criteria to determine whether an entity is an exempt bona

fide cooperative. Those criteria are discussed in the following passage from a later case:

“In Re Adrian Water Co., 53 Pa. P.U.C. 139 (1979), the Commission

established five criteria to determine whether an entity is an exempt bona

fide cooperative association:

(1) the purpose of the organization’s internal structure is to furnish

[utility] service.

(2) the organization furnishes service, either directly or by contract with

another organization only to its members who are identified as such;

(3) membership is limited to those who avail themselves of the services

furnished by the association;

(4) control and ownership by each member is substantially equal and

(5) economic benefits are passed to the members on a substantially

equal basis.

All five of the criteria must be present if an organization is to

be considered a bona fide cooperative association. Anthony V. Valanty v.

Community Trust, 1996 Pa. P.U.C. Lexis 68 (June 4, 1996); Application of

Timber Creek Farms Homeowners Association, 1992 Pa. PUC Lexis 101

(July 8, 1992); John F. Mellon v. Morea Citizens Water Co., 1991 Pa. PUC

Lexis 91 (May 20, 1991).

* * *

In Adrian Water, the Commission held that the pivotal

question, when analyzing the five factors above, is whether, in the absence

of regulations or other protections of the Commission, the customers or

members of the group can exercise a degree of control over the

organization to protect themselves from arbitrary and unreasonable

management decisions. No such evidence exists on this record that would

allow such a determination.

In Valanty, we held that we had jurisdiction over the Trust,

which provided water service, but the Trust could exempt itself from the

Commission's jurisdiction if it changed its corporate structure to a bona fide

cooperative association in compliance with all five criteria set forth in

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Adrian Water. Rather than giving the Trust only one option (to apply for a

certificate of public convenience and come within the Commission's

jurisdiction), we issued a Tentative Order giving the Trust a second option.

The second option allowed the Trust an opportunity to become a bona fide

cooperative association. We further held that, if the Trust did not accept the

second option and show evidence of becoming such an association within

sixty days, it must apply for a certificate of public convenience and comply

with the Code.

The record in the instant matter is devoid of evidence which

would allow this Commission to conclude that the Association is a bona

fide cooperative association and that its subsidiary, Stillwater, is providing

service under the second Adrian Water criterion. Instead, Stillwater

appears to be operating as a de facto public utility whose service must be

certificated.

We will give the Association the opportunity to become a

bona fide cooperative association, as we did in Valanty, which would

permit Stillwater to provide service on the Association’s behalf. If,

however, the Association decides not to become a bona fide cooperative

association and continues to provide service through Stillwater, Stillwater

must apply for a certificate of public convenience;” Ruben Collazo v.

Stillwater Sewer Corporation, PA PUC Docket No. C-20066892; Tentative

Opinion and Order; January 28, 2008; at pages 5-9.

Later in the final decision in the case, the Commission again confirmed the five criteria

which must be satisfied to meet the “bona fide” cooperative test:

“A nonprofit organization does not qualify ipso facto as a bona fide

cooperative association, exempt from Commission regulation. The key

factor is the internal structure of the organization. In its analysis of what

constitutes a “bona fide cooperative,” the Commission considers five

general characteristics: (1) the purpose of the organization’s internal

structure is to furnish service; (2) the organization furnishes service, either

directly or by contract with another organization, only to its members who

are identified as such; (3) membership is limited to those who will avail

themselves of the services furnished by the association; (4) control and

ownership by each member is substantially equal; and (5) economic

benefits are passed to the members on a substantially equal basis. Re:

Adrian Water Company, 53 Pa. P.U.C. 139 (1979).” Ruben Collazo v.

Stillwater Sewer Corporation, C-20066892; Initial Decision Upon Remand;

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November 24, 2009; page 7; adopted by Commission Order and Opinion,

March 15, 2010 (emphasis in original).

These elements of the standard to meet the “bona fide” cooperative test would be

within the nonprofit gas cooperative’s control, as it prepared and approved its Articles of

Incorporation, Bylaws, and other primary governance documents in its organization

process. Thus, while care must be taken to avoid any pitfalls in that process, the

cooperative generally should be able to craft its governance documents in a fashion to

demonstrate compliance with the criteria to meet the “bona fide” cooperative test under

these cases.

Nonetheless, these elements of the “bona fide” cooperative test are also fact-specific,

and so even though the nonprofit gas cooperative may take measures in developing its

governance documents to demonstrate compliance, an NGDC still might endeavor to

argue that all five criteria of the test have not been met.

(c) An NGDC assertion that the service by the nonprofit gas

cooperative should be prohibited because it is contrary to public policy.

If the local NGDC(s) initiate litigation at the PUC challenging the right of the

nonprofit gas cooperative to provide natural gas distribution service in their PUC

approved service area, it is foreseeable that they would include a public policy argument,

asserting that the Commission should use its discretion to prohibit the cooperative’s

activities, which they would allege are contrary to the public interest.

First, we would anticipate that the NGDCs would contend that the public would not

be adequately protected, without application of the PUC’s consumer protection

regulations to the nonprofit gas cooperative. There would be a strong rebuttal to this

argument, since in the enactment of the Public Utility Code, the General Assembly has

already expressly provided for the exclusion of nonprofit bona fide cooperatives from

the jurisdiction of, or regulation by, the PUC (see discussion above in Section

III.A.2.(b)).

Secondly, the NGDCs, by analogy, may point to the public policy statements which

relate to the respective rights to provide service of nonprofit non-jurisdictional electric

cooperatives and Commission-regulated electric companies, which have been the subject

of substantial litigation before the PUC and the appellate courts over the years. The

territorial disputes in Pennsylvania between electric cooperatives and Commission-

regulated electric companies has centered on a state statute passed in 1975, which

ascribed exclusive service territories between the electric cooperatives and the electric

companies, the Unincorporated Area Certified Territory Law of 1990, (15 Pa.C.S. §

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7351, et seq.). That 1975 law (which was later codified by the General Assembly in

1990), which has no parallel law for gas companies, set the boundaries of the respective

exclusive service territories of the electric cooperatives and electric companies as lines

equidistant between their respective distribution lines, as they existed in unincorporated

areas across the state (i.e. everywhere except in boroughs and cities) on the 1975

effective date of the statute (15 Pa.C.S. § 7354(b)), and it applies only to boundaries and

service rights between electric cooperatives and PUC regulated electric companies:

Ҥ 7351. Application of subchapter.

(a) General rule.--This subchapter shall apply only to the establishment of

boundaries of certified territory between retail electric suppliers where one

supplier is an electric cooperative corporation and the other supplier is

subject to the jurisdiction of the Pennsylvania Public Utility Commission

for rates, terms and conditions for electric service.” (15 Pa.C.S. § 7351(a)).

The stated purpose of the Unincorporated Area Certified Territory Law is set forth in

its declaration of public interest as follows:

Ҥ 7353. Geographical areas.

It is hereby declared to be in the public interest that, to encourage the

orderly development of retail electric service in unincorporated areas, to

avoid wasteful duplication of distribution facilities, to avoid unnecessary

encumbering of the landscape of the Commonwealth, to prevent the waste

of materials and natural resources, to minimize inconvenience, diminished

efficiency and higher costs in serving the consumer and otherwise for the

public convenience and necessity, the Commonwealth is divided into

geographical areas, establishing the unincorporated areas within which

each retail electric supplier is to provide retail electric service on an

exclusive basis.” (15 Pa.C.S. § 7353).

While this § 7353 public interest declaration by the General Assembly is not directly

applicable to our gas cooperative situation, it nonetheless shows some of the public

interest arguments which an NGDC might be expected to make in litigation seeking to

prevent the gas cooperative from providing service. Indeed, even though this section of

the Unincorporated Area Certified Territory Law does not apply to gas service territorial

rights, an NGDC might be expected to use this public interest declaration by the General

Assembly in arguing that incursions into its PUC approved service areas are contrary to

the public interest, and should be prohibited, for the same list of public interest reasons

as stated in § 7353, i.e.:

“wasteful duplication of distribution facilities”;

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“unnecessary encumbering of the landscape of the Commonwealth”;

“waste of materials and natural resources”; and

“inconvenience, diminished efficiency and higher costs in serving the consumer”.

The rebuttal arguments from the nonprofit gas cooperative on this public policy issue

would include the following. First, the cooperative could argue that, since its mission is

to provide gas service to unserved and underserved areas, not only would there not be

any duplication of facilities, but that it will be providing an essential service to those

consumers whom the NGDC has failed to serve, which is clearly an activity which is in

the public interest. Second, the cooperative could argue that the Unincorporated Area

Certified Territory Law, and its § 7353 public interest declaration is, by its terms, limited

only to electric service, and is simply inapplicable to NGDCs and gas cooperatives.

Finally, we would anticipate that the NGDCs would contend that the public interest

will not be served by competition from a nonprofit gas cooperative, arguing that the

NGDCs themselves are already acting proactively to extend service to unserved areas.

Here the NGDCs would highlight their new or pending line extension tariff pilot

programs, including the following:

(a) The UGI Get Gas Program, which was approved by the PUC on February 20, 2014

(see: Appendix B Exhibits 16.1 and 16.2: 1/23/14 Recommended Decision in Docket

No. P-2356232; and 2/20/14 Commission Order which adopted the Recommended

Decision), is a five year pilot program for the customers of UGI Utilities – Gas Division,

UGI Penn Natural Gas and UGI Central Penn Gas, set forth in the UGI Growth

Extension Tariff, which is designed to provide natural gas service to additional areas

which are currently unserved or underserved, and which allows selected customers to

pay a monthly surcharge over a ten year period to cover the cost of the main extension,

rather than making a substantial up front contribution under the UGI companies’

traditional line extension policies. (link to the UGI Get Gas Program at its website:

http://www.ugi.com/portal/page/portal/Promotions/GETGas).

(b) The currently pending Columbia Gas of Pennsylvania, Inc. Pilot Rider New Area

Service (NAS) proposal of which would apply to residential customers throughout its

service territory, including Centre County. This Columbia Gas proposal, which at this

writing was awaiting a decision at the Administrative Law Judge stage of the PA PUC

process at Docket No. R-2014-2407345, would authorize a four year pilot program

which would allow customers to pay the new line extension charge over a 20 year time

period. A copy of the original February 26, 2014 filing of the Columbia Gas NAS pilot

proposal, including the proposed tariff changes, is included in Appendix B as Exhibit

16.3.

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The rebuttal arguments from the nonprofit gas cooperative on this public policy issue

would be that, while these NGDC programs are a positive development, they are only

temporary and limited in scope, and in any event, will not meet the totality of the public

need for gas service. Thus, the service extension activity in unserved and underserved

areas which is contemplated by the nonprofit gas cooperative is entirely consistent with

the public interest and should be encouraged by the Commission.

Overall, in considering these foreseeable arguments and rebuttals, in a possible

NGDC action before the PUC, assuming that the cooperative’s Articles of Incorporation

and Bylaws are properly structured to pass the bona fide cooperative tests, then the

cooperative should prevail against these NGDC challenges. Of course, even with a high

degree of confidence about a favorable outcome, any litigation should be avoided if

there are reasonably acceptable alternatives, since engaging in the process itself carries

otherwise avoidable costs, possible project delays and a degree of uncertainty. This

then, takes us to our discussion in the next section, regarding advance steps which

should be considered.

(3) The advance steps which are available to be taken to best protect the interests of

the new nonprofit entity from these potential exposures.

Generally speaking, when there is some degree of uncertainty as to whether an

organization may be subject to the jurisdiction and control of the PUC, one of two

alternative courses is taken to achieve a higher degree of certainty. I will discuss these

two alternatives only briefly, since as set for the below, instead of either of these typical

alternatives, I would recommend a different course.

(i) Often, an organization which is unsure about whether it will be subject to PUC

regulation, will request an opinion letter from the Chief Counsel of the Commission’s

Law Bureau. This measure has the benefits of being expeditious and cost effective,

however it really gives no more comfort to the organization than the legal opinion of its

own counsel. Indeed, even if the Commission’s Chief Counsel renders his written

opinion just as requested, the Commission’s own regulations provide that it is not

necessarily binding on the Commission, as follows:

Ҥ 1.96. Unofficial statements and opinions by Commission personnel.

Statements contained in formal opinions of the Commission or in decisions

of a presiding officer which are not necessary in resolving the case, and

informal opinions, whether oral or written, expressed by Commissioners,

presiding officers, legal counsel, employes or representatives of the

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Commission and reports drafted by Commission bureaus are only

considered as aids to the public, do not have the force and effect of law or

legal determinations, and are not binding upon the Commonwealth or the

Commission.” (52 Pa. Code § 1.96).

Thus, I would not recommend this alternative.

(ii) Another commonly used method of seeking clarity in advance on jurisdictional and

other issues, is the filing of a Petition for Declaratory Order before the Commission,

under section 5.42 of the Commission’s rules of practice and procedure:

Ҥ 5.42. Petitions for declaratory orders.

(a) Petitions for the issuance of a declaratory order to terminate a

controversy or remove uncertainty must:

(1) State clearly and concisely the controversy or uncertainty which is

the subject of the petition.

(2) Cite the statutory provision or other authority involved.

(3) Include a complete statement of the facts and grounds prompting the

petition.

(4) Include a full disclosure of the interest of the petitioner.

(b) The petitioner shall serve a copy of the petition on the Office of Trial

Staff, Office of Consumer Advocate, Office of Small Business Advocate,

all persons directly affected and on other parties who petitioner believes

will be affected by the petition. Service shall be evidenced with a

certificate of service filed with the petition.

(c) Copies shall also be served in compliance with Commission direction.

(d) Subsections (a)—(c) supersede 1 Pa. Code § 35.19 (relating to

petitions for declaratory orders).” (52 Pa. Code § 5.42).

This process results in certainty on the issues which are raised in the Petition, since

the proceeding culminates with a formal PUC Order, however it can be a lengthy and

expensive process, as the action is assigned to a PUC Administrative Law Judge for

discovery by the parties, formal hearings, briefing and a recommended decision, before

it reaches the Commission level for a final determination. Other demerits to this Petition

for Declaratory Order approach are: the fact that the petitioner has the burden of proof

under Section 332(a) of the Public Utility Code (66 Pa.C.S. § 332(a)), which provides

that the party seeking a rule or order from the Commission has the burden of proof in

that proceeding; and the rule that once such a Petition is filed, discussions with the

Commissioners and staff on the issue is forbidden under the Commission’s ex parte

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communications rules.9 While this Petition for Declaratory Order process is often used

to gain advance clarity and certainty on issues, and while it was used by Keystone

Cooperative Association in 1999 (see Appendix R), I particularly recommend against

this course here, since starting such an action would give the NGDCs and the OGC the

opportunity to participate in the case, and to raise the arguments discussed above in

section III.A.(2).

(iii) Instead of going to the Commission for either a declaratory order or a counsel’s

opinion letter, I believe that the best course would be to directly approach the potential

adversaries in an effort to arrive at mutually acceptable arrangements, in which they

receive enough to satisfy their concerns, and we receive sufficient assurances that they

will not impede our development and other planned activities.

In considering such an approach, I would advise that this process should start with

careful and thorough internal planning, to include reaching determinations on the

fundamental goals of the new nonprofit gas distribution entity. For example, in starting

to plan this approach, it should be determined if it is the goal to have the new entity exist

in perpetuity and to compete with the NGDCs, versus simply to accomplish expanded

gas service in the unserved areas, regardless of who provides that service. If the

identified goal is the later of these two, then there may be a wide number to possible

___________________ 9 “(b) Outside consultation prohibited.--Save to the extent required for the disposition of ex parte

matters not prohibited by this part, no presiding officer shall consult any person or party on any fact in

issue unless upon notice and opportunity for all parties to participate; nor shall any presiding officer be

responsible to or subject to the supervision or direction of any officer, employee or agent engaged in the

performance of investigative or prosecuting functions for the commission. No employee, appointee,

commissioner or official engaged in the service of, or in any manner connected with the commission

shall engage in ex parte communications save to the extent permitted by this part. No officer, employee

or agent engaged in the performance of investigative or prosecuting functions for the commission in any

case shall, in that or a factually related case, participate or advise in the decision, recommended decision

or commission review, except as witness or counsel in public proceedings.

(c) Ex parte communications.--Ex parte communications prohibited in this section shall mean any

off-the-record communications to or by any member of the commission, administrative law judge, or

employee of the commission, regarding the merits or any fact in issue of any matter pending before the

commission in any contested on-the-record proceeding. Contested on-the-record proceeding means a

proceeding required by a statute, constitution, published commission rule or regulation or order in a

particular case, to be decided on the basis of the record of a commission hearing, and in which a protest

or a petition or notice to intervene in opposition to requested commission action has been filed. This

subsection does not prohibit off-the-record communications to or by any employee of the commission

prior to the actual beginning of hearings in a contested on-the-record proceeding when such

communications are solely for the purpose of seeking clarification of or corrections in evidentiary

materials intended for use in the subsequent hearings.” (66 Pa.C.S. § 334(b) and (c)).

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accommodations which might be discussed with the NGDCs, in order to achieve the

avoidance of an adverse relationship. An example of this would be to offer the local

NGDC right of first refusal, or an option to purchase the assets of the new nonprofit gas

distribution entity.10

This type of approach may be attractive to the NGDC, which

would then derive revenues from the new customers, and it also may be attractive to the

___________________ 10

A sale of all, or substantially all, of the assets of either a nonprofit gas cooperative corporation, or a

nonprofit corporation, would be subject to any relevant requirements, and/or required approvals, in its

grant or loan agreements; would also require an approval vote of the membership; and would be subject

to the following procedure of the Nonprofit Corporation Law of 1988:

Ҥ 5930. Voluntary transfer of corporate assets.

(a) General rule.--A sale, lease, exchange or other disposition of all, or substantially all,

of the property and assets, with or without goodwill, of a nonprofit corporation, if not

made pursuant to Subchapter D of Chapter 19 (relating to division), may be made only

pursuant to a plan of asset transfer. The property or assets of a direct or indirect

subsidiary corporation that is controlled by a parent corporation shall also be deemed the

property or assets of the parent corporation for purposes of this subsection. The plan of

asset transfer shall set forth the terms and consideration of the sale, lease, exchange or

other disposition or may authorize the board of directors or other body to fix any or all of

the terms and conditions, including the consideration to be received by the corporation.

Any of the terms of the plan may be made dependent upon facts ascertainable outside of

the plan if the manner in which the facts will operate upon the terms of the plan is set

forth in the plan. The plan of asset transfer shall be proposed and adopted, and may be

amended after its adoption and terminated, by a nonprofit corporation in the manner

provided in this subchapter for the proposal, adoption, amendment and termination of a

plan of merger. A copy or summary of the plan shall be included in, or enclosed with, the

notice of the meeting at which members will act on the plan. In order to make effective

any plan so adopted, it shall not be necessary to file any articles or other document in the

department, but the corporation shall comply with the requirements of section 5547(b)

(relating to nondiversion of certain property).

(b) Exceptions.--Subsection (a) shall not apply to a sale, lease, exchange or other

disposition of all, or substantially all, the property and assets of a nonprofit corporation:

(1) that directly or indirectly owns all of the outstanding shares or other ownership

interest of another corporation to the other corporation;

(2) if made in connection with the dissolution or liquidation of the corporation, which

transaction shall be governed by the provisions of Subchapter F (relating to voluntary

dissolution and winding up) or G of Chapter 19 (relating to involuntary liquidation and

dissolution), as appropriate; or

(3) if made in connection with a transaction pursuant to which all the assets sold, leased,

exchanged or otherwise disposed of are simultaneously leased back to the corporation.

(c) Mortgage.--A mortgage, pledge or grant of a security interest or dedication of

property to the repayment of indebtedness, with or without recourse, shall not be deemed

a sale, lease, exchange or other disposition for the purposes of this section.

(d) Restrictions.--This section shall not be construed to authorize the conversion or

exchange of property or assets in fraud of corporate creditors or in violation of law.” (15

Pa.C.S. § 5930).

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new nonprofit gas distribution entity, which, depending on its lender’s requirements,

may then be able to use the asset sale proceeds as available capital to pursue additional

projects in other unserved areas.

Another aspect of the advance approach to mitigate objections, would be for the new

nonprofit gas distribution entity to consider the voluntary adoption of certain portions of

the PUC’s consumer protection regulations (Chapter 56 Standards and Billing Practices

for Residential Utility Service), in order to assuage any concerns by the OGC staff. It

may suffice to propose only the voluntary adoption of the PUC termination of service

regulations, which are set forth in Chapter 56 at 52 Pa. Code §§ 56.321- 56.361 (a copy

of the PUC termination of service regulations, and the related § 1406 of the Public

Utility Code (66 Pa.C.S. § 1406), are attached as Appendix H), since this was the

settlement reached by Knox Energy Cooperative Association, Inc. with the OCA in the

litigation before the PUC in Docket No. A-2011-2239524 (see: Appendix G).

B. ANALYSIS AND COMPARISON OF TYPES OF NONPROFIT ENTITIES

WITH AUTHORITY TO CONSTRUCT, OWN, OPERATE AND MAINTAIN

A NONPROFIT NATURAL GAS DISTRIBUTION ENTITY IN

PENNSYLVANIA

The Natural Gas Utility Line Extension Law Investigation RFP properly focuses on

the need for an analysis of Pennsylvania law regarding the types of nonprofit entities

which may be formed and used to provide natural gas service to currently unserved and

under-served areas in the eleven county SEDA-COG region, and it directs that the viable

options then be ranked in preferred order, with the identification of barriers. Thus, I

shall now turn to that topic, in which I shall discuss the viability and respective

merits/demerits of the following types of entities:

(1) municipal authority;

(2) nonprofit cooperative corporation;

(3) nonprofit corporation;

(4) other municipal government entities; and

(5) hybrid arrangements.

(1) Municipal Authority Structure

If a municipal authority could properly be formed to construct, own, operate or

maintain a gas distribution system in Pennsylvania, then that structure would be the

preferred choice for the SEDA-COG RGUI, since it would offer a wide range of

capabilities and benefits, including: tax exempt bond financing; condemnation powers;

exemption from taxation; and clear exemption from PUC regulation.

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However, while the Municipality Authorities Act (53 Pa.C.S. § 5601, et seq.),

authorizes a great number of different types of projects in which municipal authorities in

Pennsylvania are permitted to engage, its Section 5607(a) permits only a specified list of

project types for municipal authorities, as follows:

Ҥ 5607. Purposes and powers.

(a) Scope of projects permitted.--Every authority incorporated under

this chapter shall be a body corporate and politic and shall be for the

purposes of financing working capital; acquiring, holding, constructing,

financing, improving, maintaining and operating, owning or leasing, either

in the capacity of lessor or lessee, projects of the following kind and

character and providing financing for insurance reserves:

(1) Equipment to be leased by an authority to the municipality or

municipalities that organized it or to any municipality or school district

located wholly or partially within the boundaries of the municipality or

municipalities that organized it.

(2) Buildings to be devoted wholly or partially for public uses,

including public school buildings, and facilities for the conduct of judicial

proceedings and for revenue-producing purposes.

(3) Transportation, marketing, shopping, terminals, bridges, tunnels,

flood control projects, highways, parkways, traffic distribution centers,

parking spaces, airports and all facilities necessary or incident thereto.

(4) Parks, recreation grounds and facilities.

(5) Sewers, sewer systems or parts thereof.

(6) Sewage treatment works, including works for treating and

disposing of industrial waste.

(7) Facilities and equipment for the collection, removal or disposal

of ashes, garbage, rubbish and other refuse materials by incineration,

landfill or other methods.

(8) Steam heating plants and distribution systems.

(9) Incinerator plants.

(10) Waterworks, water supply works, water distribution systems.

(11) Facilities to produce steam which is used by the authority or is

sold on a contract basis for industrial or similar use or on a sale-for-resale

basis to one or more entities authorized to sell steam to the public,

provided that such facilities have been approved by resolution or ordinance

adopted by the governing body of the municipality or municipalities

organizing such authority and that the approval does not obligate the

taxing power of the municipality in any way.

(12) Facilities for generating surplus electric power which are

related to incinerator plants, dams, water supply works, water distribution

systems or sewage treatment plants pursuant, where applicable, to section

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3 of the Federal Power Act (41 Stat. 1063, 16 U.S.C. § 796) and section

210 of the Public Utility Regulatory Policies Act of 1978 (Public Law 95-

617, 16 U.S.C. § 824a-3) or Title IV of the Public Utility Regulatory

Policies Act of 1978 (Public Law 95-617, 16 U.S.C. §§ 2701 to 2708) if:

(i) electric power generated from the facilities is sold or distributed

only on a sale-for-resale basis to one or more entities authorized to sell

electric power to the public;

(ii) the facilities have been approved by resolution or ordinance

adopted by the governing body of the municipality or municipalities

organizing the authority and the approval does not obligate the taxing

power of the municipality in any way; and

(iii) the incinerator plants, dams, water supply works, water

distribution systems or sewage treatment plants are or will be located

within or contiguous with a county in which at least one of the

municipalities organizing the authority is located, except that this

subparagraph shall not apply to incinerator plants, dams, water supply

works, water distribution systems or sewage treatment plants located in

any county which have been or will be constructed by or acquired by the

authority to perform functions the primary purposes of which are other

than that of generation of electric power for which the authority has been

organized.

(13) Swimming pools, playgrounds, lakes and low-head dams.

(14) Hospitals and health centers.

(15) Buildings and facilities for private, nonprofit, nonsectarian

secondary schools, colleges and universities, State-related universities and

community colleges, which are determined by the authority to be eligible

educational institutions, provided that such buildings and facilities shall

have been approved by resolution or ordinance adopted by the governing

body of the municipality or municipalities organizing the authority and

that the approval does not obligate the taxing power of the governing body

in any way.

(16) Motor buses for public use, when such motor buses are to be

used within any municipality, and subways.

(17) Industrial development projects, including, but not limited to,

projects to retain or develop existing industries and the development of

new industries, the development and administration of business

improvements and administrative services related thereto.

(18) Storm water planning, management and implementation as

defined in the articles of incorporation by the governing body. Authorities,

existing as of the effective date of this paragraph, already operating storm

water controls as part of a combined sewer system, sanitary sewer system

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or flood control project may continue to operate those projects.” (53

Pa.C.S. § 5607(a)).

Regrettably, nowhere in this Section 5607(a) allowable purposes language of the

Municipality Authorities Act, do we find authority for the formation of a natural gas

municipal authority. In discussing the allowable powers of a municipal authority, our

state Supreme Court has made it clear that, if the power and authority is not set forth in

the enabling statute, then the power and authority does not exist:

“Neither Authorities nor Municipalities are sovereigns; they have no

original or inherent or fundamental powers of sovereignty or of legislation;

they have only the power and authority granted them by enabling statutory

legislation. Cf. Genkinger v. New Castle, 368 Pa. 547, 84 A. 2d 303; Kline

v. Harrisburg, 362 Pa. 438, 68 A. 2d 182; Murray v. Phila., 364 Pa. 157,

71 A. 2d 280.” White Oak Borough Authority Appeal, 372 Pa. 424 at 427;

93 A.2d 437 at 438; 1953 Pa. LEXIS 520 (1953)

Thus, we must conclude that a municipal gas authority structure is not an available

option at this time.11

This conclusion, that the retail supply of natural gas service is not

included in the scope of projects permitted under the Municipality Authorities Act, is

also confirmed by the PA Department of Community and Economic Development

(DCED), as demonstrated by the following passage from its publication, Municipal

Authorities in Pennsylvania, which was prepared by DCED in conjunction with the

Pennsylvania Municipal Authorities Association for the Governor’s Center for Local

Government Services:

“Types of Projects. Municipal authorities may be created only for

purposes specified in the Act. The act lists a great variety of projects an

authority may finance, own, operate, or lease. Among the most common are

water supply systems, sewage collection and treatment systems, mass

transit, parking facilities, airports, solid waste disposal facilities and

recreation facilities. Authorities may not construct facilities to supply

retail electric power, gas, telephone or cable TV service.” Municipal

Authorities in Pennsylvania, PA Department of Community and Economic

Development, Ninth Edition, 2002, page 23 (emphasis added) (link:

http://www.penntrain.net/pdf/munauthority.pdf).

_________________ 11

For a further discussion, and recommendations as to the constraints of the Municipality Authorities

Act, please see the Appendix A Natural Gas Utility Line Extension Law Investigation Gap Analysis, at

item [1].

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Moreover, even if it could be argued that natural gas distribution is an allowable

purpose under the Municipality Authorities Act, the statute contains another feature at its

Section 5607(b)(2), which limits the ability of a municipal authority, “...to interfere with

existing business by the establishment of competitive enterprises...”:

Ҥ 5607. Purposes and powers.

* * *

(b) Limitations.--This section is subject to the following limitations:

* * *

(2) The purpose and intent of this chapter being to benefit the people of

the Commonwealth by, among other things, increasing their commerce,

health, safety and prosperity and not to unnecessarily burden or interfere

with existing business by the establishment of competitive enterprises,

none of the powers granted by this chapter shall be exercised in the

construction, financing, improvement, maintenance, extension or operation

of any project or projects or providing financing for insurance reserves

which in whole or in part shall duplicate or compete with existing

enterprises serving substantially the same purposes.” (53 Pa.C.S. §

5607(b)(2))

Pennsylvania’s courts have construed this limiting provision of the Municipality

Authorities Act broadly, establishing the following rule:

“[T]he apparent purpose of the first provision and second provision

of §5607(b)(2) is to protect existing business enterprises from losing

business to an enterprise created by a municipal authority. Or, in other

words, the apparent purpose is to prevent a municipal authority from

competing with existing business enterprises by providing a better service

or a better product.” Dominion Products and Services, Inc., Dominion

Retail, Inc., The Manchester Group, Inc. and Pamela Post vs. The

Pittsburgh Water and Sewer Authority and Utility Line Security, LLC,

Common Pleas Court of Allegheny County, 2011 Pa. Dist. & Cnty. Dec.

LEXIS 50; 23 Pa. D. & C.5th 202 at 215; affirmed 35 A.3d 1241; 2011 Pa.

Commw. LEXIS 532 (2011).

Thus, unless an amendment of §§ 5607(a) and (b)(2) Municipality Authorities Act

possibly might be accomplished (see: Appendix A Gap Analysis, at item [1]), we must

set this option aside in our further analysis and rankings of potential nonprofit municipal

and corporate entities.

Before leaving this subject of the municipal authority structure, I should also touch

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on an anomalistic reference to the creation of a municipal authority to provide gas

service, which is found in Sections 102 and 2212(m) of the Public Utility Code:

Ҥ 102. Definitions.

Subject to additional definitions contained in subsequent provisions of this

part which are applicable to specific provisions of this part, the following

words and phrases when used in this part shall have, unless the context

clearly indicates otherwise, the meanings given to them in this section:

"City natural gas distribution operation." A collection of real and

personal assets used for distributing natural gas to retail gas customers

owned by a city or a municipal authority, nonprofit corporation or public

corporation formed pursuant to section 2212(m) (relating to city natural

gas distribution operations).” (66 Pa.C.S. § 102; emphasis added).

Ҥ 2212. City natural gas distribution operations.

* * *

(m) Corporate action.--A city that owns a city natural gas distribution

operation may form a nonprofit corporation or public corporation or

municipal authority under the Municipality Authorities Act of 1945 in

order to own, manage, operate, lease or carry out natural gas supply

and/or distribution services for, in place of or on behalf of the city natural

gas distribution operation, provided that no such entity shall provide

natural gas supply services outside of the municipal limits of the city

unless licensed as a natural gas supplier. Notwithstanding subsections (b)

and (c), if a city forms an entity pursuant to this section to provide natural

gas supply services, whether inside or outside of the city, the entity shall be

deemed an affiliated interest of the city natural gas distribution operation,

and Chapter 21 shall apply with respect to that affiliated interest. A

municipal authority formed pursuant to the authorization of this section

shall not exercise the power of eminent domain outside of the municipal

limits of the city in which it is seated. Any entity created under this section

or otherwise to own, manage, operate, lease or carry out natural gas supply

and/or distribution services for or on behalf of a city or a city natural gas

distribution operation shall be deemed a local agency for purposes of 42

Pa.C.S. Ch. 85 (relating to matters affecting government units).” (66

Pa.C.S. § 2212(m); emphasis added).

These references to the creation of a municipal authority by a "City natural gas

distribution operation" in the Public Utility Code were added as part of the 1999 Natural

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Gas Choice and Competition Act (66 Pa.C.S. § 2201, et seq.), which brought the

Philadelphia Gas Works (PGW), owned by the City of Philadelphia12

, under the

jurisdiction and control of the PUC. While at first blush, these provisions of the Public

Utility Code may seem broad enough to permit the formation of a municipal authority to

provide gas service, a close reading shows that the purpose of this language was to

prevent the City of Philadelphia from avoiding PUC jurisdiction over, and regulation of,

PGW, through the creation of another entity, after the enactment of the 1999 Natural

Gas Choice and Competition Act. When this legislation was originally written, the

draftsmen were aware that natural gas distribution was not an allowable purpose under §

5607(a) of the Municipality Authorities Act (as discussed above).13

However, despite

that fact, the above-quoted new provisions in Sections 102 and 2212(m) nonetheless

deliberately included references to the creation of a municipal authority, in order to

prevent the City of Philadelphia from avoiding or escaping PUC regulation of PGW,

even if the Municipality Authorities Act might be amended in the future to permit

natural gas distribution as an allowable purpose under § 5607(a) of the Municipality

Authorities Act. Thus, under Sections 102 and 2212(m), if the Municipality Authorities

Act is amended in the future to permit natural gas distribution as an allowable purpose,

and if the City of Philadelphia then transfers the assets of PGW to a municipal authority,

that new municipal authority owning and operating the former assets of PGW would still

be under the jurisdiction and control of the PUC.

(2) Nonprofit Cooperative Corporation Structure

The formation of a nonprofit cooperative corporation under the Cooperative

Corporation Law of 1988, (15 Pa.C.S. § 7101, et seq.; copy attached as Appendix I) for

the purposes of constructing, financing, owning, operating and maintaining a natural gas

distribution system in Pennsylvania, would be a viable structural option. Nonprofit

cooperatives formed under that enabling cooperative statute have the same very broad

range of allowable purposes, as are permitted for nonprofit corporations generally, under

the Nonprofit Corporation Law of 1988 (15 Pa.C.S. § 5101, et seq.), as follows: _________________ 12

There are four classes of cities in Pennsylvania: first class cities with populations of 1 million and

over (Philadelphia), second class cities with populations of 250,000 and under 1 million (Pittsburgh),

second class A cities with populations of 80,000 and under 250,000, and which elect by ordinance to be

classified as such (i.e., Scranton), and third class cities with populations less than 250,000, i.e., all of the

remaining 53 cities in the Commonwealth. (See: Pennsylvania Legislator’s Municipal Deskbook, Third

Edition (2006), page 21; and 53 Pa.C.S. § 101).

13

The undersigned participated in the 1999 collaborative of stakeholders, which was coordinated by the

PUC, and which had the task of drafting the legislation (House Bill 1331 of 1999), which was then

enacted by the General Assembly as Act No. 21 of 1999, the Natural Gas Choice and Competition Act

(66 Pa.C.S. § 2201, et seq.). This background, concerning the inclusion of references to a municipal

authority in the text of sections 102 and 2212(m), comes from first-hand knowledge, as a result of

participation in that PUC legislative drafting collaborative group.

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Ҥ 5301. Purposes.

(a) General rule.--Except as provided in subsection (b), corporations may

be incorporated under this article for any lawful purpose or purposes,

including, but not limited to, any one or more of the following or similar

purposes: athletic; any lawful business purpose to be conducted on a not-

for-profit basis; beneficial; benevolent; cemetery; charitable; civic; control

of fire; cultural; educational; encouragement of agriculture or horticulture;

fraternal; health; literary; missionary; musical; mutual improvement;

patriotic; political; prevention of cruelty to persons or animals;

professional, commercial, industrial, trade, service or business associations;

promotion of the arts; protection of natural resources; religious; research;

scientific and social.” (15 Pa.C.S. § 5301(a); emphasis added).

Likewise, nonprofit cooperatives formed under the Cooperative Corporation Law 1988

have an even broader range of powers14

than the extensive list of powers allowed for a

Pennsylvania nonprofit corporation:

Ҥ 5502. General powers.

(a) General rule.--Subject to the limitations and restrictions imposed by

statute and, except as otherwise provided in paragraph (4), subject to the

limitations and restrictions contained in its articles, every nonprofit

corporation shall have power:

(1) To have perpetual succession by its corporate name unless a limited

period of duration is specified in its articles, subject to the power of the

Attorney General under section 503 (relating to actions to revoke corporate

franchises) and to the power of the General Assembly under the

Constitution of Pennsylvania.

(2) To sue and be sued, complain and defend and participate as a party or

otherwise in any judicial, administrative, arbitrative or other proceeding in

its corporate name.

(3) To have a corporate seal, which may be altered at pleasure, and to use

the seal by causing it or a facsimile thereof to be impressed or affixed or in

any manner reproduced.

(4) To acquire, own and utilize any real or personal property, or any

interest therein, wherever situated, regardless of any limitation set forth in

_________________ 14

The Cooperative Corporation Law of 1988, at 15 Pa.C.S. § 7102, by its reference to the Nonprofit

Corporation Law of 1988 (15 Pa.C.S. § 5101, et seq.) gives Pennsylvania nonprofit cooperative

corporations all of the same powers of Pennsylvania nonprofit corporations, and later in the statute, at 15

Pa.C.S. § 7112, it adds another power for Pennsylvania cooperative corporations, discussed below.

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its articles prior to January 1, 1972 as to the quantity or value of real or

personal property which it may hold, or as to the amount of income

derived therefrom.

(5) To sell, convey, mortgage, pledge, lease, exchange or otherwise

dispose of all or any part of its property and assets, or any interest therein,

wherever situated.

(6) To guarantee, become surety for, acquire, own and dispose of

obligations, capital stock and other securities.

(7) To borrow money, issue or incur its obligations and secure any of its

obligations by mortgage on or pledge of or security interest in all or any

part of its property and assets, wherever situated, franchises or income, or

any interest therein.

(8) To invest its funds, lend money and take and hold real and personal

property as security for the repayment of funds so invested or loaned.

(9) To make contributions and donations.

(10) To use abbreviations, words, logos or symbols upon the records of

the corporation, and in connection with the registration of, and inscription

of ownership or entitlement on, certificates evidencing membership in or

securities or obligations of the corporation, and upon checks, proxies,

notices and other instruments and documents relating to the foregoing,

which abbreviations, words, logos or symbols shall have the same force

and effect as though the respective words and phrases for which they stand

were set forth in full for the purposes of all statutes of this Commonwealth

and all other purposes.

(11) To be a promoter, partner, member, associate or manager of any

partnership, enterprise or venture or in any transaction, undertaking or

arrangement that the corporation would have power to conduct itself,

whether or not its participation involves sharing or delegation of control

with or to others.

(12) To transact any lawful business that the board of directors or other

body finds will aid governmental policy.

(13) To continue the salaries of such of its employees as may be serving

in the active or reserve armed forces of the United States, or in the national

guard or in any other organization established for the protection of the

lives and property of citizens of this Commonwealth or the United States,

during the term of that service or during such part thereof as the

employees, by reason of that service, may be unable to perform their duties

as employees of the corporation.

(14) To pay pensions and establish pension plans, pension trusts, profit

sharing plans, share bonus plans, share option plans, incentive and

deferred compensation plans and other plans or trusts for any or all of its

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present or former representatives and, after their death, to grant allowances

or pensions to their dependents or beneficiaries, whether or not the grant

was made during their lifetime.

(15) To conduct its business, carry on its operations, have offices and

exercise the powers granted by this article or any other provision of law in

any jurisdiction within or without the United States.

(16) To elect or appoint and remove officers, employees and agents of the

corporation, define their duties, fix their reasonable compensation and the

reasonable compensation of directors, to lend any of the foregoing money

and credit and to pay bonuses or other additional compensation to any of

the foregoing for past services.

(17) To enter into any obligation appropriate for the transaction of its

affairs, including contracts or other agreements with its members.

(18) To have and exercise all of the powers and means appropriate to

effect the purpose or purposes for which the corporation is incorporated.

(19) To have and exercise all other powers enumerated elsewhere in this

subpart or otherwise vested by law in the corporation.” (15 Pa.C.S. §

5502(a)).

In addition to this list of powers, while a nonprofit corporation is prohibited from paying

dividends (15 Pa.C.S. § 5551), a cooperative corporation does not have that restriction

(15 Pa.C.S. § 7112), which gives a cooperative corporation a potential financing

capability which Pennsylvania nonprofit corporations do not have.

Thus, it is clear that this form of cooperative corporation entity could be incorporated

and used to construct, own, operate or maintain a gas distribution system in

Pennsylvania. However, while there is sufficient statutory authority to form and operate

a natural gas cooperative corporation, that entity would not have all of the desirable

powers which we may ideally like to see.15

For instance, unlike an electric cooperative,

which is governed by a separate special corporate statute, (the Electric Cooperative Law

of 1990, (15 Pa.C.S. § 7301, et seq.)), a natural gas cooperative formed under

Pennsylvania’s general cooperative statute would not have certain special powers which

are granted to electric cooperatives, including:

the power of eminent domain (15 Pa.C.S. § 7321(a)(4));

the power to place lines under the state and municipal roads (15 Pa.C.S. §

7321(a)(4); and

an omnibus exemption from state taxes (15 Pa.C.S. § 7333).

_________________ 15

Please see the Appendix A Natural Gas Utility Line Extension Law Investigation Gap Analysis, at

items [2] and [3] for a further discussion, and recommendations as to these constraints.

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Nonetheless, even without these special powers, a nonprofit cooperative corporation

would be a viable structural option.

Indeed, two nonprofit gas cooperatives currently operate in Pennsylvania, Knox

Energy Cooperative Association, Inc. (Knox) and Keystone Cooperative Association,

Inc. (Keystone), each of which share a number of similarities:

Both Knox and Keystone are generally exempt from the jurisdiction of the PUC

(other than for gas pipeline safety jurisdiction);

Knox and Keystone are each operated as a bona fide cooperative, and governed

by a board of directors/trustees which is democratically elected by its member

consumers;

Each is comprehensively managed, operated, and financed under management

agreements with Utility Pipeline, Ltd. (UPL)16

and

Each is exempt from Federal taxation under Section 501(c)(12) of the Internal

Revenue Code17

.

While Knox and Keystone share these and other similarities, they are quite different

from one another both in their respective genesis and structure:

(a) Knox Energy Cooperative Association, Inc.: Knox was formed as a nonprofit

corporation under the Ohio Nonprofit Corporation Law (Title XVII, Chapter 1702, Ohio

________________ 16

“UPL is a privately-owned pipeline management company located in Ohio, formed in 1995, for the

purpose of building new gas distribution systems into areas not served by natural gas. UPL’s primary

role is to serve as the general contractor that designs, engineers, constructs, and finances the new systems

for the homeowners. This procedure has now been applied to many communities in three states. Since

formation, UPL has constructed over 300 miles of new distribution systems for other companies seeking

to provide new gas service into unserved areas. In this effort, UPL has also provided financing to third

party companies, such as Knox, to assist these organizations with the upfront capital requirements

necessary to construct, acquire, and upgrade pipeline distribution systems. The systems built and

financed by UPL now serve almost 12,000 homeowners through five separate non-profit, member-

owned cooperative associations.” Application of Gasco Distribution Systems, Inc. for Approval of the

Transfer of its Kane Division’s Assets, PA PUC Docket No. A-120002F2000; Commission Order March

22, 2007 at page 3.; link to UPL website: http://www.utilitypipelineltd.com/ 17

A brief review of the requirements for IRS approval of a cooperative’s tax exemption request under

section 501(c)(12) is attached as Appendix J: “Requirements for Exemption under I.R.C. 501(c)(12)”,

General Survey of I. R. C. 501(c)(12) Cooperatives, Internal Revenue Service, 2002 EO CPE, pages 177-

179; link: http://www.irs.gov/pub/irs-tege/eotopice02.pdf; also see: Internal Revenue Manual:

http://www.irs.gov/irm/part7/irm_07-025-012.html. In order to secure this exemption, the cooperative

must file IRS Form 1024, Application for Recognition of Tax Exempt Treatment:

http://www.irs.gov/pub/irs-pdf/f1024.pdf. Line by line instructions for completion of IRS Form 1024

are provided in a separate IRS publication at: http://www.irs.gov/pub/irs-pdf/i1024.pdf.

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Revised Code § 1702.1, et seq.), and is operated on a cooperative basis. (link to website:

http://www.knoxenergy.org/). It has approximately 9,000 members located throughout

Ohio and Pennsylvania.

In 2006, Knox acquired the Claysville Division of Gasco Distribution Systems, Inc.

(Gasco), an NGDC regulated by the PA PUC, in an asset purchase transaction in which

Gasco sold the assets to UPL, which then, in turn, transferred them to Knox. The

Claysville Division was comprised of approximately 1,200 residential and 100

commercial customers in the Borough of Claysville, Pennsylvania, and surrounding

areas. This transaction required PUC approval under Section 1102(a)(3) of the

Pennsylvania Public Utility Code, (66 Pa. C.S. §1102(a)(3)), for the transfer of Gasco’s

distribution system assets and facilities, which was given on September 29, 2006, at

Docket No. A-120002F2001. A copy of this PUC Order is attached as Appendix E.

In 2007, Knox acquired the Kane Division of Gasco in another asset purchase

transaction in which Gasco sold the assets to UPL, which then, in turn, transferred them

to Knox. The Kane Division was comprised of 2,877 residential and approximately 415

commercial and industrial customers in the Borough of Kane, Pennsylvania, and

surrounding areas. This transaction received PUC approval under Section 1102(a)(3) of

the Pennsylvania Public Utility Code, (66 Pa. C.S. §1102(a)(3)), on March 22, 2007, at

Docket No. Docket No. A-120002F2001. A copy of this PUC Order is attached as

Appendix F.

In 2011, Knox acquired all of the distribution system assets and facilities of Sergeant

Gas Company (Sergeant) an NGDC regulated by the PA PUC, in another asset purchase

transaction in which Sergeant sold the assets to UPL, which then, in turn, transferred

them to Knox. Sergeant provided natural gas service to 106 residential and 18

commercial customers in Jones Township, Elk County and Wetmore Township,

McKean County, Pennsylvania. This transaction received PUC approval under Section

1102(a)(3) of the Pennsylvania Public Utility Code, (66 Pa. C.S. §1102(a)(3)), on

September 22, 2011, at Docket No. Docket No. A-2011-2239524. A copy of this PUC

Order is attached as Appendix G.

Attached as Appendix K are the following Knox Energy Cooperative Association,

Inc. organizational and management documents:

(i) Second Amended and Restated Articles of Incorporation;

(ii) Second Amended Code of Regulations and Bylaws;

(iii) First Amended Management Agreement with Utility Pipeline, Ltd.,

dated March 12, 1999;

(iv) Service Area Map;

(v) Rules and Regulations Governing the Distribution and Sale of Gas;

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(vi) Current Act 127 PUC Pipeline Operator Annual Registration, dated

May 12, 2014; and

(vii) Assignment from Utility Pipeline, Ltd. to Knox Energy

Cooperative Association, Inc., dated July 11, 2005.

(b) Keystone Cooperative Association, Inc.: Keystone was formed as a Pennsylvania

cooperative corporation under the Cooperative Corporation Law of 1988, (15 Pa.C.S. §

7101, et seq.) on May 10, 1999, and provides gas distribution service to approximately

800 members in the Borough of Windber area, in Somerset County, and also in portions

of Cambria County, Pennsylvania. According to Keystone’s most recent 2014 Act 127

PUC Pipeline Operator Annual Registration, Keystone operates 5.7 miles of distribution

lines in Cambria County, and 36.1 miles of distribution lines in Somerset County. (link

to website: http://www.utilitypipelineltd.com/keystone).

Attached as Appendix L are the following Keystone Cooperative Association, Inc,

organizational and management documents:

(i) Current Pennsylvania Department of State Decennial Report, dated

January 3, 2011;

(ii) Rules and Regulations Governing the Distribution and Sale of Gas;

(iii) Assignment from Utility Pipeline, Ltd. to Keystone Cooperative

Association, Inc., dated October 16, 2001;

(iv) Service Area Map; and

(v) Current Act 127 PUC Pipeline Operator Annual Registration, dated

March 23, 2014.

Before leaving this subject on the attributes of a Pennsylvania nonprofit cooperative

corporation, I would also note that, unlike any other type of corporate entity in

Pennsylvania, cooperative corporations have several special statutory contract

protections, which are given only to cooperative corporations under the Cooperative

Corporation Law of 1988 (15 Pa.C.S. §§ 7121-7125). While this is not a major driver in

my recommending this entity type for the RGUI, it is certainly another benefit of

choosing a cooperative corporation structure. These seldom-used provisions originally

were only applicable to Pennsylvania’s agricultural cooperatives, however in the 1988

codification of the cooperative statutes by the General Assembly, these “Cooperative

Contracts” provisions were also made applicable to all types of cooperatives

incorporated in Pennsylvania, and they would apply to a nonprofit natural gas

distribution cooperative corporation formed for the RGUI, giving the new cooperative

potentially important protections from possible future interference by the NGCCs and

others.18

For example, Section 7124 of the Cooperative Corporation Law of 1988 _________________ 18

As a special consultant, the undersigned edited and authored the Cooperative Corporation Law of

1988, as part of the General Assembly’s codification of all of Pennsylvania’s corporate statutes.

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provides:

Ҥ 7124. Relief against breach or threatened breach of contract; penalty for

interference.

(a) Relief against member.--In the event of a breach or threatened

breach of a cooperative contract, the cooperative corporation shall be

entitled to an injunction to prevent the breach or any further breach thereof,

and to a decree of specific performance thereof. Upon showing the breach

or threatened breach and upon filing a sufficient bond, the corporation shall

be entitled to a preliminary or special injunction.

(b) Relief against third parties.--Any person who, with knowledge that

a cooperative contract exists, induces or attempts to induce any member to

breach the contract, or who in any manner aids a breach of the contract,

shall be liable to the cooperative corporation for damages caused by such

interference. The corporation shall also be entitled to an injunction to

prevent any interference or further interference with the contract.” (15

Pa.C.S. § 7124).

Thus, in a situation where an NGDC sought to extend its service to a person who had

already joined the cooperative, the cooperative could seek an injunction against the

NGDC, and also could sue the NGDC for damages, under the provisions of Section

7124(b). The threat of these statutory remedies may become quite useful to the new

cooperative, if the NGDCs seek to actively compete by marketing customers in areas

being served by the new cooperative.

In addition to these Section 7124 protections, Section 7125 of the Cooperative

Corporation Law of 1988 provides:

Ҥ 7125. Action for civil penalty for inducing breach or spreading false

reports.

In addition to the remedies provided in section 7124(b) (relating to

relief against third parties), any person who knowingly and maliciously

induces or attempts to induce any member of a cooperative corporation to

breach a cooperative contract or who knowingly and maliciously spreads

any false report about the finances or management of a cooperative

corporation shall be liable, in a civil action, to the corporation aggrieved, in

the amount of $500 for each offense.” (15 Pa.C.S. § 7125).

Thus, for instance, in a situation where an NGDC’s marketing representatives make

false statements about the new cooperative’s service capability, reliability or its long

term viability, the cooperative could bring a lawsuit for damages under this Section

7125.

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(3) Nonprofit Corporation Structure

The formation of a nonprofit corporation under the Nonprofit Corporation Law of

1988 (15 Pa.C.S. § 5101, et seq.) for the purposes of constructing, financing, owning,

operating and maintaining a natural gas distribution system in Pennsylvania, also would

be a viable structural option. Indeed, as discussed in the prior section, while functioning

on a cooperative basis, Knox Energy Cooperative Association, Inc. is incorporated under

the Ohio Nonprofit Corporation Law (Ohio Revised Code, Title XVII, Chapter 1702, §

1702.1, et seq.; http://codes.ohio.gov/orc/1702).

As discussed in the preceding section III.B.(2), like a nonprofit cooperative

corporation, a nonprofit corporation organized under the Nonprofit Corporation Law of

1988 may be formed, “...for any lawful purpose or purposes...” (15 Pa.C.S. § 5301(a)),

and also like a nonprofit cooperative, a nonprofit corporation would have a broad range

of powers, giving it the ability to construct, finance, own, operate and maintain a natural

gas distribution system in Pennsylvania. Indeed, if Pennsylvania did not have a separate

statute governing cooperatives, then a nonprofit corporation would become the preferred

entity choice.

While a nonprofit corporation structure would meet our threshold test, as being a

viable structural option for consideration, it is inferior to the nonprofit cooperative

corporation option for our purposes because of several distinguishing factors:

(i) A nonprofit corporation would be subject to PUC jurisdiction and regulation, unless it

could demonstrate that it is operated on a bona fide cooperative basis. While this is

achievable by a nonprofit corporation, the risk of coming under PUC jurisdiction would

be less under the nonprofit cooperative corporation structure.

(ii) A nonprofit corporation would be subject to Federal taxation, unless it could

demonstrate to the IRS that it is operated on a cooperative basis under Section

501(c)(12) of the Internal Revenue Code (26 U.S.C. § 501(c)(12), and the related IRS

tests (see: Appendix J). While this is achievable by a nonprofit corporation, the risk of IRS rejection of an application for tax exemption would be less under the nonprofit

cooperative corporation structure.

(iii) A nonprofit corporation formed under the Nonprofit Corporation Law of 1988 could

not include the word “Cooperative” in its corporate name.19

_________________ 19

Section 7103 of the Cooperative Corporation Law of 1988 provides, “The name of an association

shall not contain the term "cooperative" or an abbreviation thereof unless the association is a cooperative

corporation.” (15 Pa.C.S. § 7103(a)(2)).

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(iv) As discussed in the preceding section III.B.(2) a nonprofit corporation may not pay

dividends, which gives a cooperative corporation a potential equity financing capability

which Pennsylvania nonprofit corporations do not have (see a further discussion of this

equity financing aspect in section III.D. below).

(v) A nonprofit corporation would not have the special contract protections, which are

given only to cooperative corporations under the Cooperative Corporation Law of 1988

(15 Pa.C.S. §§ 7121-7125).

Therefore, while a nonprofit corporation can be included in the ranking of entities as

a possibility, it should be placed at a lower preference level than a nonprofit cooperative

corporation.

(4) Other Municipal Government Structures

Aside from the municipal authority structure discussed above, we will next turn to

other municipal government structures, to determine if any may be considered as a

viable alternative. Notably, all municipal corporations are exempt from the jurisdiction

and control of the PUC, to the extent that they furnish service within their corporate

limits.20

In this section, I shall discuss the viability and respective merits/demerits of the

following types of entities:

(a) Local Development Districts

(b) Boroughs

(c) Counties

(d) First Class Townships

(e) Second Class Townships

(f) Third Class Cities

(a) Local Development Districts

As a Local Development District (LDD), SEDA-COG is governed by the Local _________________ 20

The municipal gas system exemption in the Public Utility Code is found in the definition of the term

“corporation” at section 102, which reads, ““Corporation.

” All bodies corporate, joint-stock companies,

or associations, domestic or foreign, their lessees, assignees, trustees, receivers, or other successors in

interest, having any of the powers or privileges of corporations not possessed by individuals or

partnerships, but shall not include municipal corporations, except as otherwise expressly provided in this

part, nor bona fide cooperative associations which furnish service on a nonprofit basis only to their

stockholders or members.” (emphasis added) (66 Pa.C.S.A. § 102). Likewise, Section 1301 of the

Public Utility Code reads, “Only public utility service being furnished or rendered by a municipal

corporation, or by the operating agencies of any municipal corporation, beyond its corporate limits, shall

be subject to regulation and control by the commission as to rates, with the same force, and in like

manner, as if such service were rendered by a public utility.” (66 Pa.C.S. § 1301).

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Development District Act (Act No. 120 of December 7, 1994; 73 P.S. § 801 et seq.),

which provides for the powers of an LDD at its Section 6, as follows:

“Section 6. Powers and duties of local development districts.

(a) Research and coordination.--Each local development district may

conduct necessary research and studies and coordinate and cooperate with

all appropriate groups and agencies in order to develop a long-range

economic development strategy for the district. The strategy should

establish goals and objectives, identify key challenges facing the district,

provide needed services to businesses to enhance economic development in

their respective geographical areas and establish actions and investments

needed to cope with those challenges.

(b) Development activities.--Each local development district shall

conduct enterprise development activities, which shall be broadly

interpreted to include, but not necessarily be limited to:

(1) Business finance assistance.

(2) Capital formation.

(3) Market development.

(4) Export marketing assistance.

(5) Government procurement assistance.

(6) Matchmaker (MNET)/import substitution programs.

(c) Loan programs.--Local development districts shall have the authority to

administer loan programs and to extend loans for economic development to

private firms, nonprofit organizations and public agencies subject to the

provisions of all applicable laws and regulations.

(d) Agency coordination.--Local development districts shall encourage

intergovernmental coordination as well as public and private cooperation,

aiming to achieve broad and varied perspectives to enhance problem

resolution.

(e) Related activities.--Each local development district may also

conduct other development activities, which may include, but need not

be limited to, the following:

(1) Community development.

(2) Housing.

(3) Energy conservation.

(4) Water and sewer.

(5) Waste disposal.

(6) Transportation.

(7) Recreation.

(8) Tourism.

(9) Education and training.

(10) Local government improvement.

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(11) Environment.

(12) Health and human resources.

(13) Any other element appropriate and necessary for the health, safety

and welfare of the citizens in the respective districts.

(f) Additional powers and duties.--Each local development district shall

also have the power and authority to:

(1) Provide, upon request, basic administrative, research and planning

services for any public agency or local political subdivision located within

the district.

(2) Accept, receive and administer loans, contracts, grants or other funds or

gifts from public and private agencies, including the Federal Government

and the Commonwealth for the purpose of carrying out the functions of the

district.

(3) Provide assistance to communities, the private sector, public and

private partnerships or wherever special expertise is needed to achieve

some worthwhile public objective.

(4) Offer training and education opportunities.

(5) Acquire, hold as may be necessary and convenient, encumber or

dispose of real and personal property, except that no local development

district shall have the power of eminent domain.

(6) Charge fees, rents and otherwise charge for services provided by the

local development district, except that no local development district shall

have any power to levy taxes.

(7) Enter into interlocal agreements or interstate compacts to the extent

authorized by laws of this Commonwealth.

(8) Promote the orderly growth, development and redevelopment of

the district in accordance with long-term objectives, principles and

standards that are in the best interests of the welfare of this district's

residents.

(9) Promote the conservation of land, water and air in the district.

(10) Act as the regional clearinghouse for data and information.”

(73 P.S. § 806; emphasis added)

While we do not find express authority here for an LDD’s development and operation

of a municipal gas distribution system, the highlighted language above interestingly

shows an extremely broad range of permissible LDD “enterprise development

activities”, along with the significant statutory directive at Section 6(b) that they,

“...shall be broadly interpreted...”. This scope of powers in the Local Development

District Act might be argued to be sufficiently broad, as to include the power for the

development and operation of a municipal gas distribution system, on the basis that such

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an activity would be within the intended scope of 73 P.S. § 806(e)(1), “Community

development”; 73 P.S. § 806(e)(13), “Any other element appropriate and necessary for

the ...welfare of the citizens in the respective districts.”; or 73 P.S. § 806(b)(3), “Market

development”. In further researching Pennsylvania courts’ construction of these

provisions of the Local Development District Act, I find no decisions which serve to

limit these apparently broad capabilities of an LDD.

Looking then at other portions of the statute for guidance in interpreting these broad

powers in Section 6, it is appropriate to review the Section 2 Legislative findings and

policy in the enactment of the Local Development District Act. Here in the highlighted

items below, we find some further support for an interpretation that Section 6 might be

argued to be sufficiently broad, as to include the power for the development and

operation of a municipal gas distribution system:

“Section 2. Legislative findings and policy.

(a) Findings.--The General Assembly finds as follows:

(1) That economic and community development are essential to the

health, safety and welfare of all citizens of this Commonwealth.

(2) That the declining manufacturing sector of our economy has had

profound consequences for the labor force of this Commonwealth with

higher than average unemployment and greater displacement of workers

and loss of business and industry.

(3) That, since their establishment in the 1960's by the Commonwealth

pursuant to the Appalachian Regional Development Act, local development

districts have been striving to address a variety of problems in their areas.

Local development districts have advocated intergovernmental coordination

and joint actions between the public and private sectors in an effort to find

solutions to problems. These efforts resulted in the establishment of

local development district projects addressing such aspects as transportation, health, housing, education, human resources, environmental

and infrastructure needs. In the past decade, local development districts

have concentrated on enterprise development activities focused on small

and medium-size manufacturers, capital formation efforts and the provision

of technical assistance to business, local governments and other public and

private agencies.

(b) Policy.--

(1) It is hereby declared to be the policy of the Commonwealth

to promote the general welfare of its inhabitants through the

Department of Commerce by certification of local development districts,

which shall exist for the purpose of promoting economic development

within their respective regions. Such purpose is hereby declared to be a

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public purpose for which public money may be spent.

(2) It shall be the policy of the Commonwealth for local

development districts to continue in carrying out economic development

programs, intergovernmental coordination and other activities as

appropriate and necessary for their regions.

(3) It shall be the policy of the Commonwealth for local

development districts to provide coordination to bring to bear human and

financial resources to solve regional issues and problems. The districts shall

provide expertise to secure Federal and State resources to improve regional

economies. They shall continue to act as a partner with the Commonwealth

in assisting its various departments in carrying out Commonwealth

objectives and policies.

(4) It is also the policy of the Commonwealth not to duplicate or to

mandate the delivery of technical and professional economic development

services currently being provided by other economic development

organizations throughout this Commonwealth. (73 P.S. § 802; emphasis

added)

While the argument can be made that an LDD has this authority, since that authority

is not expressly stated in the Local Development District Act, it should be recognized

that an effort by SEDA-COG, or other LDDs, to start a municipal gas distribution

system would be subject to challenges by the NGDCs. Thus, for this reason, and the fact

that our courts have not ruled on this issue, the viability of this structure is open to

question. Therefore, while an LDD can be included in the ranking of entities as a

possibility, it should be placed at a lower preference level than a nonprofit cooperative

corporation.

(b) Boroughs

As discussed above in section III.A.(1) (see: pages 5-6), after a recent amendment to

the Borough Code (8 Pa.C.S. § 101, et seq.), that statute now prohibits all boroughs in

the state from owning or operating a natural gas distribution system, other than

Chambersburg, which was grandfathered by Act No. 37 of 2014.

(c) Counties

Neither The County Code (16 P.S. § 101, et seq.) (which relates to counties of the

first, third, fourth, fifth, sixth, seventh and eighth class), nor the Second Class County

Code (16 P.S. § 3101, et seq.) (which relates to counties of the second class and second

class A) provides the authority for a county to develop or operate of a municipal gas

distribution system. The only authority given to counties is the power to, “...contract for

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the laying of gas lines...” directly associated with the drilling of gas wells on lands

owned by the county (Section 1955, The County Code; and Section 2155, Second Class

County Code).

(d) First Class Townships

The First Class Township Code (53 P.S. § 55101, et seq.) does not provide the

authority for a first class township to develop or operate of a municipal gas distribution

system.

(e) Second Class Townships

The Second Class Township Code (53 P.S. § 65101, et seq.) does not provide the

authority for a second class township to develop or operate of a municipal gas

distribution system.

(f) Third Class Cities

The Third Class City Code (53 P.S. § 35101, et seq.), was recently reenacted with

extensive amendments (Act of March 19, 2014; Act No. 22 of 2014), after a multi-year

effort by the Local Government Commission and the Pennsylvania Municipal League.21

The statute provides third class cities22

with comprehensive powers to install, maintain

and operate a municipal gas distribution system. These powers include the rights to

provide gas service to consumers located outside of the city, “...in surrounding

municipalities, or portions thereof, which are not provided with such services by those

surrounding municipalities, local or regional public authorities or private companies...” (see: Section 3540.1 copied below; 53 P.S. § 38540.1), however that service outside of

the city would be regulated by the PUC, including the requirement to first apply for a

PUC Certificate of Public Convenience.

These provisions of The Third Class City Code read as follows:

“ARTICLE XXXV

UTILITY SERVICE _________________ 21

See: Local Government Commission website:

http://www.lgc.state.pa.us/third_class_city_code_recodification.shtml 22

There are 53 third class cities in Pennsylvania, including Lock Haven in the project area. A list is

found in the attached Appendix M, Reporter’s Guide to Pennsylvania Local Government, Third Class

Cities. (link: http://pennreporter.wordpress.com/city-council/third-class-city/).

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Section 3501.1. Right to Furnish Water, Lighting, Electric, Gas or

Other Similar Utility Service.--(a) A city may supply water, lighting,

electric, gas or other similar utility service for public and private uses

within the city. For these purposes, a city shall have the power to install,

maintain and operate all necessary facilities and to acquire property and

make improvements as needed. In carrying out the authority granted by this

section, a city may exercise all powers granted to it under this act or any

other law deemed necessary to carry out the purposes of this section,

including the power to acquire, by eminent domain or otherwise, and the

power to temporarily use or lease property.

(b) A city supplying water, lighting, electric, gas or other similar utility

service shall have the authority to fix the rates and charges applicable

thereto in accordance with section 3587.

(c) For the purposes of this section, a city shall have the authority to

incur debt in accordance with 53 Pa.C.S. Pt. VII Subpt. B (relating to

indebtedness and borrowing).

Section 3540.1. Power to Furnish Utilities to Consumers Outside

City.--A city that provides utility service in accordance with section 3501.1

may provide utility service in surrounding municipalities, or portions

thereof, which are not provided with such services by those surrounding

municipalities, local or regional public authorities or private companies,

subject to and in accordance with applicable law and the rules and

regulations of the Pennsylvania Public Utility Commission with regard to

the character of service, extensions and rates.

Section 3585. Payment of Cost of pipes, wires or conduits is made to

permit a city to supply water or light, electric, gas or other similar

utility service to portions of the city not previously supplied with such

service, an assessment of the costs thereof may be made in accordance with

Article XLV-A.

Section 3587. Fixing Rates.-- Council shall fix, or may delegate to a

city department the power to fix, with the approval of council, rates for the

use of water or light, electric, gas or other similar utility service, and, in the

case of consumers outside the city, the fixing of rates shall be subject to and

in accordance with applicable law and the rules and regulations of the

Pennsylvania Public Utility Commission.

Section 3588. Collection of Utility Charges.--(a) Council shall

provide, by ordinance, for the collection of charges for the use of water or

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light, electric, gas or other similar utility service that may accrue, from time

to time, to the city, fixing the time when the charges shall be payable, and

the penalties for nonpayment thereof. The charges shall be assessed to the

respective owners of the real estate on which the utility service is used,

and, if the same shall not be paid in accordance with the provisions of

the ordinance, claims for the amounts due may be filed as a lien and

collected in accordance with the Municipal Claim and Tax Lien Law.

(b) In the case of a city which has agreed to provide water service

through a separate meter and separate service line to a residential dwelling

unit in which the owner does not reside, the owner shall be liable to pay the

tenant's bill for service rendered to the tenant by the city only if the city

notifies the owner and the tenant within thirty days after the bill first

becomes overdue. Such notification shall be provided by first class mail to

the address of the owner provided to the city by the owner and to the billing

address of the tenant, respectively. Nothing herein shall be construed to

require a city to terminate service to a tenant, provided that the owner shall

not be liable for any service which the city provides to the tenant ninety or

more days after the tenant's bill first becomes due unless the city has been

prevented by court order from terminating service to that tenant.

Section 3590. Disposition of Revenues.--The revenues derived from

the city's furnishing of water, light, electric, gas or other similar utility

service shall be applied as follows:

(1) to the purposes of the respective departments under the direction of

which the utility service is provided;

(2) for the reduction of debt related to the provision of that service; and

(3) to any other city department that provides labor or materials for the

maintenance and repair of property or facilities relating to the city's

provision of a utility service.” (53 P.S. §§ 38501.1, 38540.1, 38585, 38587,

38588 and 38590)

For our purposes in this analysis, the precise meaning of the term “surrounding

municipalities” in Section 3540.1 of The Third Class City Code (53 P.S. § 38540.1)

above becomes important, since that term in the governing statute determines where a

third class city is authorized to provide natural gas service. If the term “surrounding

municipalities” is interpreted to mean municipalities which are contiguous with the third

class city, then the authorized service region would be much smaller, than if the that

term is interpreted to mean municipalities which are in proximity to the third class city.

The Third Class City Code defines the word “municipality” as, “A county, city,

borough, incorporated town or township.” (53 P.S. § 35102). However, the word

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“surrounding” is not defined in the statute. Likewise, in the research of court decisions,

we find no guidance on the precise meaning of this term. Thus, it is appropriate to

interpret the word “surrounding” under the requirements of the Statutory Construction

Act of 1972 (1 Pa.C.S. § 1501, et seq.), which provides:

Ҥ 1903. Words and phrases.

(a) General rule.--Words and phrases shall be construed according to rules

of grammar and according to their common and approved usage; but

technical words and phrases and such others as have acquired a peculiar

and appropriate meaning or are defined in this part, shall be construed

according to such peculiar and appropriate meaning or definition.” (1

Pa.C.S. § 1903(a)).

Using this Statutory Construction Act “...common and approved usage...” standard, we

next properly turn to the dictionary definition of the word “surround”, which reads, “to

encompass; to environ; to enclose; to cause to encircle on all or nearly all sides”

(Webster’s Unabridged Dictionary, Second Edition). Since the dictionary definition

does not contain the “contiguous” element, it can certainly be asserted that the

appropriate interpretation of the term “surrounding municipalities” in Section 3540.1 of

The Third Class City Code is a county, city, borough, incorporated town or township in

proximity to the third class city, but not necessarily contiguous with the third class city.

Therefore, a third class city has the power to provide natural gas distribution service to

unserved areas in its vicinity, and should be considered as a viable option, although

obviously limited by the locations of the current 53 third class cities (See: Appendix M,

Reporter’s Guide to Pennsylvania Local Government, Third Class Cities; link:

http://pennreporter.wordpress.com/city-council/third-class-city/). (5) Hybrid Structures

In my June 17, 2014 proposal,23

I mentioned the possibility of creating a hybrid

structure, similar to that of the Maryland Broadband Cooperative, Inc., in which SEDA-

__________________ 23

That portion of the proposal read, “For example, as a means of meeting the goals of the Regional Gas

Utilization Initiative, a special cooperative corporate structure may be possible, coupled with SEDA-

COG membership in the new cooperative in a special defined class, giving SEDA-COG, and/or its

constituent municipalities, the ability to control the governance aspects of the new organization, and to

secure revenue for the development of subsequent projects. This approach would be somewhat similar

to the innovative cooperative structure which I developed for a group of five Maryland Tri-County

Councils in the formation of the Maryland Broadband Cooperative, Inc. (link: http://mdbc.us/; also see

Section III. for additional professional reference information). In the short time since its formation, that

client has been successful in its mission of building a state of the art fiber optic network to provide

broadband services across previously unserved and underserved rural areas of the state, and in driving

related local economic development initiatives.”

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COG, and/or its constituent municipalities, might become members of the cooperative,

giving them the ability to control the governance aspects of the new organization, and to

secure revenue for the development of subsequent projects

However, even though this type of hybrid structure has previously been determined

by the IRS to satisfy its cooperative organizational and operational tests for Federal tax

exemption under section 501(c)(12) of the Internal Revenue Code (see: Appendix J),

after completing the definitive research on Pennsylvania law, and particularly relative to

the five criteria to determine whether an entity is an exempt “bona fide” cooperative,

established in Re Adrian Water Co., 53 Pa. P.U.C. 139 (see the discussion above at

section III.A.(2)(b)), I find that this type of hybrid structure must be ruled out for the

RGUI, since a structure of this nature, established in the new cooperative’s primary

governance documents, may not meet the Pennsylvania “bona fide” cooperative test.

Nonetheless, while a hybrid structure of this nature would not pass muster, there are a

variety of other mechanisms in which third parties might participate in the construction,

management or ownership of the cooperative’s gas system. While the specifics of such

arrangements would turn on as yet undetermined economic feasibility, and are thus

beyond the scope of this report, let me outline some concepts for future consideration.

(a) First, we need to look no farther than the omnibus management agreements which

have been entered into between Utility Pipeline, Ltd. and the two existing natural gas

distribution cooperatives, Knox and Keystone (see: Appendix K; Appendix L; and

footnote 16 above). In these arrangements, the cooperatives have, by contract, assigned

virtually all construction, operations and maintenance responsibilities to Utility Pipeline,

Ltd., thus avoiding the necessity and costs of building an operations staff, while still

retaining fundamental control of the cooperative through its board of directors, and

meeting the “bona fide” cooperative tests discussed above. Particularly since this type

of structure has proven to be successful in Pennsylvania, I would recommend that it be

investigated further, by seeking a definitive proposal from Utility Pipeline, Ltd.

(b) Another type of hybrid mechanism which could be explored is the ownership of

all, or portions of the cooperative’s gas distribution system, by a third party, which

would then lease the facilities to the cooperative. Of course, in any such arrangement

with a third party, that third party itself must have the requisite statutory authority to

own a gas distribution system in Pennsylvania, and so the various types of entities

discussed above which have been ruled out of our consideration for lack of statutory

authority would likewise not be a suitable owner/lessor in such a hybrid arrangement.

However, if such an arrangement with an NGDC was found to produce mutual benefits

to both the NGDC and the new nonprofit cooperative corporation, then depending on

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any restrictions in a future grant agreement, and/or the cooperative’s lender’s

requirements, that type of hybrid structure would be permissible.

(c) Another variant, which may be characterized as a hybrid mechanism, would be a

situation in which a new nonprofit cooperative is formed, with the intention of

transferring its assets to a new municipal authority, if and when Section 5607 (Purposes

and Powers) of the Municipality Authorities Act is amended to provide for the creation

of a municipal authority to construct, own, operate or maintain a gas distribution system

in Pennsylvania (discussed above in section III.B.(1)). This structure would be

applicable in a circumstance where an amendment of the Municipality Authorities Act

was anticipated, but not accomplished in the required timeframe, and in this situation the

new nonprofit cooperative would then be used only as a temporary vehicle to move the

project forward, until a new municipal authority could be validly formed. In this

arrangement, the new nonprofit cooperative could seek shorter term, and potentially

more attractive initial financing for its capital requirements, which would remain in

place until the sale of its assets to the newly formed municipal authority. It would also

be recommended that in securing its initial financing, the cooperative should seek the

right to prepay its debt to the lender without prepayment penalties, since an early

retirement of the original borrowing would be anticipated in this scenario. Such a sale

of the cooperative’s assets to a municipal authority would be subject to the same

requirements and approvals as outlined in footnote 10 above.

C. RANKING OF TYPES OF NONPROFIT ENTITIES WITH AUTHORITY TO

CONSTRUCT, OWN, OPERATE AND MAINTAIN A NONPROFIT NATURAL

GAS DISTRIBUTION ENTITY IN PENNSYLVANIA

The relative ranking of the entity types is done with a view toward identifying the

type of structure which offers the best overall benefits for its use (i) in the RGUI

demonstration project; and (ii) thereafter, in expanding natural gas service and usage

throughout the project area. Summarizing the discussion above, I conclude that the

following entity types are the currently viable options, and should be ranked as follows:

(1) Nonprofit Cooperative Corporation Structure (see sections III.B.(2) and

III.B.(5) above)

The formation of a nonprofit natural gas cooperative corporation would have the

following benefits:

Merits

very broad scope of purposes and powers;

generally exempt from PUC jurisdiction and regulation;

anticipated to be exempt from Federal taxes under IRC Section 501(c)(12);

ability to provide service in any chosen locality;

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ability to issue preferred stock;

recognized existing model in Pennsylvania;

special contract protections, which are given only to cooperative corporations

under the Cooperative Corporation Law of 1988 (15 Pa.C.S. §§ 7121-7125)

The formation of a nonprofit natural gas cooperative corporation would have the following drawbacks:

Demerits

No power of eminent domain;

No power to place lines under the state and municipal roads; and

No omnibus exemption from state taxes.

(2) Nonprofit Corporation Structure (see section III.B.(3) above)

The formation of a nonprofit natural gas corporation would have the following

benefits:

Merits

very broad scope of purposes and powers;

ability to provide service in any chosen locality; and

recognized existing model in Pennsylvania;

The formation of a nonprofit natural gas corporation would have the following

drawbacks:

Demerits

Would be subject to PUC jurisdiction and regulation, unless operated on a bona

fide cooperative basis;

Would be subject to Federal taxation, unless operated on a cooperative basis

under Section 501(c)(12) of the Internal Revenue Code (26 U.S.C. § 501(c)(12),

and the related IRS tests (see: Appendix J);

Would not have the special contract protections, which are given only to

cooperative corporations under the Cooperative Corporation Law of 1988 (15

Pa.C.S. §§ 7121-7125)

No power of eminent domain;

No power to place lines under the state and municipal roads; and

No omnibus exemption from state taxes.

(3) Local Development District (see section III.B.(4)(a) above)

Using a local development district to provide natural gas distribution service would

have the following benefits:

Merits

Direct and exclusive control; and

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Generally exempt from PUC jurisdiction and regulation (except pipeline safety)

for service provided within its constituent counties;

Using a local development district to provide natural gas distribution service would

have the following drawbacks:

Demerits

Questionable scope of purposes in the Local Development District Act, which

would be subject to a challenge exposure; and

No power of eminent domain.

(4) Third Class City (see section III.B.(4)(f) above)

Using a third class city to provide natural gas distribution service would have the

following benefits:

Merits

Clear rights to provide gas service, including in unserved areas in “surrounding

municipalities”;

generally exempt from PUC jurisdiction and regulation (except pipeline safety)

for service provided within the city;

tax exempt bond financing;

condemnation powers; and

exemption from taxation;

Using a third class city to provide natural gas distribution service would have the

following drawbacks:

Demerits

Questionable rights to serve in unserved areas in “surrounding municipalities”,

which are not contiguous to the city, which would be subject to a challenge

exposure; and

PUC jurisdiction and regulation for service provided outside of the city;

A table comparing the attributes of the several types of entities is included on the

following page.

[remainder of page intentionally blank]

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Nonprofit Entity Comparison Table24

Entity Type

Does enabling statute allow

gas distribution

purpose?

Exempt

from PUC

regulation?

Federally tax

exempt?

Eminent domain power?

Power to

issue

stock?

Recognized model for gas distribution

in PA?

Nonprofit Cooperative Corporation

yes

yes, if operated on a bona fide cooperative

basis

yes, if approved by

IRS under §501(c)(2)

no

yes

yes, Keystone Cooperative Association, Inc.

Nonprofit Corporation

yes

only if operated on a bona fide cooperative

basis

only if operated on

a cooperative

basis

no

no

yes, Knox Energy Cooperative Association, Inc.

Local Development

District

possibly yes yes

no

no

no

Third Class City

yes

yes, but not for service outside the

city

yes

yes

no

no

Municipal Authority

no – unless 53 Pa.C.S. § 5607

is amended

yes yes

yes

no

no

Borough

no, but Chambersburg

is grandfathered

yes, only Chambersburg

County no – removed from further

consideration

First & Second

Class Townships

no – removed from further

consideration

_________________ 24

Since it is obviously not an available option for the RGUI, this table does not include a City of the First

Class, Philadelphia, which owns and operates the Philadelphia Gas Works. The municipal authority

entity type would only be an available option, upon the successful amendment of Section 5607 (Purposes

and Powers) of the Municipality Authorities Act. (53 Pa.C.S. § 5607).

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D. POTENTIAL SOURCES OF FINANCING

At this early juncture, I am unable to be definitive as to recommended sources of

financing, however I do have some comments in this area. Virtually any type of startup

business faces the issue of securing capital financing in its development activities, and

with no operating history, securing a capital source can be problematic. Often, even

with a source identified, the lack of an operating history results in the capital being

supplied at above-market rates, and other unattractive credit terms, because of the

perceived credit risk of the unproven borrower. In our case, in approaching decisions

about capitalizing a new nonprofit natural gas cooperative, it would seem to be

particularly critical to secure construction and long-term financing with the lowest rates

available, since the cooperative’s debt service is likely to be its greatest operating cost,

which in turn, will drive its rates for service and its ultimate prospects for success.

Thus to address this threshold problem, it is axiomatic that an early step should be an

investigation of any available grant funding which might be available. Importantly,

even if such a source of grant funding is identified to provide a portion of the required

initial capital, it is necessary to ensure that the grant source will not require a first lien on

the cooperative’s assets, in such a way as to effectively prevent other debt financings by

the cooperative to reach its required initial total capitalization. Thus, if the sources of

initial capital may come from different sources (debt, equity and/or grants), it is vital

that a comprehensive financing plan be developed to not only to meet the cooperative’s

capital needs, but also to have certainty that an initial source, such as a grant, which

offers a small portion of the total capital needs, does not foreclose the availability of a

debt financing source for the majority of the funding.

(1) Debt Financing

(a) Utility Pipeline, Ltd. Financing

Aside from seeking grant funds, since we know that Utility Pipeline, Ltd. has

comprehensive contractual arrangements, including capital financing arrangements, with

both Keystone Cooperative Association, Inc. and Knox Energy Cooperative Association,

Inc., it is recommended that the new nonprofit natural gas cooperative should explore a

proposal from that organization, at least to ascertain a benchmark as to the rates and

terms of that potential source of capital, which can then be compared to the other sources

of capital discussed below.

In response to a request for the Keystone and Knox financing arrangements, Utility

Pipeline, Ltd. has indicated that those documents are considered confidential and

proprietary, and cannot be released. Reportedly, in each instance, Utility Pipeline, Ltd.

identified private investors to provide the debt financing (see summary of July 31, 2014

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interview with Vanessa Watson, Vice President of Business Development, Utility

Pipeline, Ltd. included in Appendix C). We also know the following about the general

structure of the Utility Pipeline, Ltd. financing arrangements, taken from the

Administrative Law Judge’s Findings of Facts in the 2011 Knox/Sergeant Gas Company

PUC Initial Decision (see Appendix G):

“11. Since formation, UPL has constructed over 300 miles of new

distribution systems for other companies seeking to provide new gas

service in unserved areas. In this effort, UPL has also provided financing

to third party companies, such as Knox, to assist these organizations with

the upfront capital requirements necessary to construct, acquire, and

upgrade pipeline distribution systems. To receive a payback of such

financing, UPL will receive a rate per mcf for gas flowing through the

system, with no guarantees as to the payment amount. This mechanism

places the risk on UPL that the cooperative will be capable of repaying its

obligations to UPL.” Application of Sergeant Gas Company for

Commission Approval of the Transfer of its Distribution System Assets to

Utility Pipeline, Ltd. and immediately thereafter to Knox Energy

Cooperative Association, Inc. and for the Abandonment of all Pennsylvania

Regulated Service by Sergeant Gas Company, with the Immediate

Commencement of Service by Knox Energy Cooperative Association, Inc,

PA PUC Docket No. A-2011-2239524, ALJ Initial Decision August 24,

2011, Findings of Fact, Page 6.

In looking into this aspect further, after researching the Recorder of Deeds property

records for each of the Pennsylvania counties where Keystone and Knox operate,25

I

located an Assignment between UPL and Keystone, dated October 16, 2001, recorded in

Somerset County, a copy of which is included in Appendix L. This Assignment shows

that UPL granted and assigned the entire system to Keystone free and clear of all liens,

in return for the Cooperative’s agreement to pay UPL in perpetuity based on the

following volumes of natural gas sales for the Keystone system, including additions to

the Keystone system: $3.60 per mcf, for volumes of 0 to 50 mcf per year; $2.80 per mcf,

for volumes of 50 to 400 mcf per year; and $2.00 per mcf, for volumes over 400 mcf per

year. Those annual rates were escalated by 3% per year, starting in 2003. Thus, under

the 2001 Assignment, I calculate that the current rates which Keystone pays to UPL in

2014 are: $5.133 per mcf, for volumes of 0 to 50 mcf per year; $3.992 per mcf, for

volumes of 50 to 400 mcf per year; and $2.852 per mcf, for volumes over 400 mcf per

year.

_________________ 25

McKean, Washington, Elk, Somerset and Cambria Counties

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There is also a similar Assignment between UPL and Knox, dated July 11, 2005, a

copy of which is included in Appendix K. That Assignment also shows that UPL

granted and assigned the system to Knox free and clear of all liens, in return for the

Cooperative’s agreement to pay UPL in perpetuity at a starting rate of $2.92 per mcf,

which then escalates after three years.

The key take away here is that, unlike other types of fixed term loans or bond

financings discussed below, these UPL arrangements require that these payments

apparently continue in perpetuity, with an annual escalator. Thus, while the early years

of these financing arrangements may perhaps be attractive to the cooperative, the later

years clearly would not be, as these UPL financing costs continue to increase over

time without limitation. Unlike a typical long-term debt arrangement which is

ultimately satisfied, in the UPL Assignment arrangements, the cooperative continues to

pay an ever-increasing annual financing cost, which would appear, at some point, to be

unsustainable. Therefore, I could not recommend that the new cooperative enter into

this type of arrangement. However, if UPL proposed a turn-key type of system design

and construction approach, coupled with a more typical finite financing arrangement,

that could be considered.

Thus, while capital financing may be available from Utility Pipeline, Ltd., or perhaps

from other similar firms, that may not be the optimal source of debt financing for the

new cooperative.

(b) Pennsylvania Economic Development Financing Authority Financing

Beyond that possible source of debt financing, probably to most attractive course for

a new nonprofit cooperative to follow is investigate whether tax-exempt bond financing

may be available through the Pennsylvania Economic Development Financing Authority

(PEDFA). An initial review of both PEDFA’s materials and its enabling statute, the

Economic Development Financing Law (73 P.S. § 371, et seq.), shows that financing for

gas distribution projects is authorized. The applicable statute (a copy of which is

attached as Appendix N) refers to financing for projects which furnish gas multiple

times, such as:

“Section 2. Findings and Declaration of Policy.--It is hereby determined

and declared as a matter of legislative finding:

* * *

(11) That to protect the health, safety and general welfare of the people of

this Commonwealth and to further encourage economic development and

efficiency within this Commonwealth by providing basic services and

facilities, it is necessary to provide additional or alternative means of

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financing infrastructure facilities, transportation facilities and systems of

every kind, industrial parks, energy conversion facilities, facilities for the

furnishing of gas or water, communication facilities, tourism, recreational

and sports facilities, convention facilities, health care facilities, education

facilities, facilities and services for persons requiring special care and other

basic service and related facilities and facilities conducive to economic

activity within this Commonwealth;” (73 P.S. § 372).

Likewise, in the DCED Pennsylvania Economic Development Financing Authority

Bond Financing Program Guidelines (copy attached as Appendix O; Note that this

Appendix O material includes the PEDFA application form and instructions;

http://www.ura.org/pdfs/bdcPEDFAguidelines.pdf), we see, “Local furnishing of

electricity or gas” listed on page 1 as a type of facility which generally would be eligible

for PEDFA tax-exempt financing. For more detail on PEDFA financing programs, also

see: http://www.newpa.com/business/business-assistance/center-for-private-financing.

(c) USDA Rural Development Business and Industry Guaranteed Loan Program

If PEDFA financing for some reason is unavailable, then the cooperative should

investigate the availability of a credit enhancement, such as a loan guarantee, to enable it

secure construction and long-term financing with the lowest rates available, and most

attractive credit terms. In researching this aspect, I find that the cooperative would be

eligible to apply for a loan guarantee under the USDA Rural Development Business and

Industry Guaranteed Loan Program (B&I Guaranteed Loan Program). That tentative

conclusion as to general eligibility was confirmed in my discussions with Shaun Stehr,

Business Program Specialist, Business and Cooperative Program, Pennsylvania State

Office, U.S. Department of Agriculture, Office of Rural Development (see: Summary of

Interviews at Appendix C). The B&I Guaranteed Loan Program is summarized at the

USDA Rural Development website, as follows:

“BUSINESS AND INDUSTRY GUARANTEED LOANS (B&I)

The purpose of the B&I Guaranteed Loan Program is to improve, develop,

or finance business, industry, and employment and improve the economic

and environmental climate in rural communities. This purpose is achieved

by bolstering the existing private credit structure through the guarantee of

quality loans which will provide lasting community benefits. It is not

intended that the guarantee authority will be used for marginal or

substandard loans or for relief of lenders having such loans.

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Who May Borrow?

A borrower may be a cooperative organization, corporation, partnership, or

other legal entity organized and operated on a profit or nonprofit basis; an

Indian tribe on a Federal or State reservation or other Federally recognized

tribal group; a public body; or an individual. A borrower must be engaged

in or proposing to engage in a business that will:

1. Provide employment;

2. Improve the economic or environmental climate;

3. Promote the conservation, development, and use of water for

aquaculture; or

4. Reduce reliance on nonrenewable energy resources by encouraging

the development and construction of solar energy systems and other

renewable energy systems.

Individual borrowers must be citizens of the United States (U.S.) or reside

in the U.S. after being legally admitted for permanent residence.

Corporations or other nonpublic body organization-type borrowers must be

at least 51 percent owned by persons who are either citizens of the U.S. or

reside in the U.S. after being legally admitted for permanent residence. B&I

loans are normally available in rural areas, which include all areas other

than cities or towns of more than 50,000 people and the contiguous and

adjacent urbanized area of such cities or towns.

How May Funds be Used?

Loan purposes must be consistent with the general purpose contained in the

regulation. They include but are not limited to the following:

1. Business and industrial acquisitions when the loan will keep the

business from closing, prevent the loss of employment opportunities, or

provide expanded job opportunities.

2. Business conversion, enlargement, repair, modernization, or

development.

3. Purchase and development of land, easements, rights-of-way,

buildings, or facilities.

4. Purchase of equipment, leasehold improvements, machinery, supplies,

or inventory.

What is the percentage of Guarantee?

The percentage of guarantee, up to the maximum allowed, is a matter of

negotiation between the lender and the Agency. The maximum percentage

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of guarantee is 80 percent for loans of $5 million or less, 70 percent for

loans between $5 and $10 million, and 60 percent for loans exceeding $10

million.

What are the Loan Amounts?

The total amount of Agency loans to one borrower must not exceed $10

million. The Administrator may, at the Administrator discretion, grant an

exception to the $10 million limit for loans of $25 million under certain

circumstances. The Secretary may approve guaranteed loans in excess of

$25 million, up to $40 million, for rural cooperative organizations that

process value-added agricultural commodities.

What are the Loan Terms?

The maximum repayment for loans on real estate will not exceed 30 years;

machinery and equipment repayment will not exceed the useful life of the

machinery and equipment purchased with loan funds or 15 years,

whichever is less; and working capital repayment will not exceed 7 years.

What are the Interest Rates?

The interest rate for the guaranteed loan will be negotiated between the

lender and the applicant and may be either fixed or variable as long as it is a

legal rate. Interest rates are subject to Agency review and approval. The

variable interest rate may be adjusted at different intervals during the term

of the loan, but the adjustments may not be more often than quarterly.

Is Collateral Required?

Yes. Collateral must have documented value sufficient to protect the

interest of the lender and the Agency. The discounted collateral value will

normally be at least equal to the loan amount. Lenders will discount

collateral consistent with sound loan-to-value policy.

Annual Renewal Fee?

The annual renewal fee is paid once a year and is required to maintain the

enforceability of the guarantee as to the lender.

The rate of the annual renewal fee (a specified percentage) is established by

Rural Development in an annual notice published in the Federal Register,

multiplied by the outstanding principal loan balance as of December 31 of

each year, multiplied by the percent of guarantee. The rate is the rate in

effect at the time the loan is obligated, and will remain in effect for the life

of the loan.

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Annual renewal fees are due on January 31. Payments not received by April

1 are considered delinquent and, at the Agency discretion, may result in

cancellation of the guarantee to the lender. Holders rights will continue in

effect as specified in the Loan Note Guarantee and Assignment Guarantee

Agreement. Any delinquent annual renewal fees will bear interest at the

note rate and will be deducted from any loss payment due the lender. For

loans where the Loan Note Guarantee is issued between October 1 and

December 31, the first annual renewal fee payment will be due January 31

of the second year following the date the Loan Note Guarantee was issued.

Where Should Applications be Filed?

Complete applications should be sent to the USDA Rural Development

State Office for the project location. A list of offices and additional

information can be obtained at http://www.rurdev.usda.gov/recd_map.html.

Additional materials concerning the USDA Rural Development B&I Guaranteed Loan

Program are contained in Appendix P. If the cooperative is successful in obtaining a

loan guarantee under this USDA Rural Development B&I Guaranteed Loan Program,

then it could take that guarantee to any Federal or state-chartered bank, including

virtually any local bank, to secure its construction loan. Such loans which are supported

by a Federal loan guarantee are typically offered by the lending institution on very

favorable terms due to the B&I Guaranteed Loan Program credit support.

(2) Equity Financing

As discussed above, unlike all other types of nonprofit entities, a nonprofit

cooperative corporation can be formed with the power to issue stock, including preferred

stock. Depending upon the overall initial capitalization plan for the new cooperative,

this capability to issue equity securities can be a significant benefit for the organization,

by giving it the means to raise capital, which may be required to qualify it certain grant

opportunities, as well as certain debt financing sources, which sometimes require that

the new cooperative have a certain equity level in order to qualify for their respective

grant, loan or loan guaranty programs.

In order to have this capability to issue stock, the Articles of Incorporation of the new

cooperative must provide that it is formed “on a stock share basis”, and the Bylaws of

the cooperative, which are initially adopted and approved by its Board of Directors, must

also contain appropriate provisions as to the rights of the Board to issue the securities.

When a nonprofit cooperative corporation is formed on a non-stock share basis, its

member-consumers are ordinarily given a Membership Certificate when they join the

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cooperative to obtain service. However, when a nonprofit cooperative corporation is

formed on a stock share basis, instead of a Membership Certificate, each member is

given a stock certificate for one share of the cooperative’s common stock, representing

the member’s ownership interest in the cooperative corporation.

The issuance of the cooperative’s common stock to its new member-consumers is

generally exempt from the numerous securities registration requirements at both the state

and Federal level. However, if the cooperative determines to issue and sell preferred

stock, certain disclosure requirements apply, and care must be taken to comply with

available registration exemption.26

While a full discussion of this subject is beyond the

scope of this report, it is noteworthy here to point out that Pennsylvania Banking and

Securities Commission’s regulations provide for a general exemption from the otherwise

applicable registration requirement for securities issued by cooperative corporations (10

Pa. Code § 203.188). A copy of this Cooperative Business Associations Exemption

regulation is included as Appendix Q. On the Federal level, SEC registration

requirements are typically avoided by a cooperative issuing preferred stock, by keeping

within the so-called Intrastate Offering Exemption of section 3(a)(11) of the Securities

Act of 1933. (15 U.S.C. § 77c(a)(l1)).27

_________________ 26

Generally speaking, unless a transaction is exempt, the Federal Securities Act of 1933 requires that

before making a sale or offer to sell, the issuer of a security must first file a registration statement with

Securities and Exchange Commission (SEC). Likewise at the state level, unless a transaction is exempt,

the PA Securities Act of 1972 requires that before making a sale or offer to sell, the issuer of a security

must first file a registration statement with Pennsylvania Banking and Securities Commission.

Particularly for a small cooperative, these are costly and burdensome requirements, which can often

make the issuance of securities cost-prohibitive. Thus, it is vital to plan in advance to structure a

cooperative’s plan of raising capital so that the requirements for filing full registration statements may be

avoided, by meeting certain available allowable exemptions.

27

The following is a brief synopsis of the Intrastate Offering Exemption, taken from SEC materials:

Section 3(a)(11) of the federal Securities Act of 1933 ("Securities Act") is generally known as the

"intrastate offering exemption." To qualify for the intrastate offering exemption, a company must:

a. be incorporated in the state where it is offering the securities;

b. carry out a significant amount of its business in that state; and

c. make offers and sales only to residents of that state.

There is no fixed limit on the size of the offering or the number of purchasers. A company must

determine the residence of each purchaser. If any of the securities are offered or sold to even one out-of-

state person, the exemption may be lost. Without the exemption, the company could be in violation of

the Securities Act registration requirements. If a purchaser resells any of the securities to a person who

resides outside the state within a short period of time after the company's offering is complete (the usual

test is nine months), the entire transaction, including the original sales, might violate the Securities Act.

SEC Rule 147 requires that 80 percent of net proceeds be used for a company's Pennsylvania operations.

No filing with the SEC is required.

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IV. CONCLUSION and OPINION

After examining applicable Pennsylvania law, and conducting such other relevant

research as I found to be necessary or advisable, it is my opinion that, subject to the

potential impediments discussed above, the formation of a nonprofit cooperative

corporation under the Cooperative Corporation Law of 1988, (15 Pa.C.S. § 7101, et seq.)

would be a viable structural option, and is the preferred and recommended choice for the

SEDA-COG RGUI for the purposes of constructing, financing, owning, operating and

maintaining a nonprofit natural gas distribution system in Pennsylvania.

The governance documents of the nonprofit cooperative corporation, including its

articles of incorporation, bylaws and board policies, should be crafted in order to meet

the requisite requirements and to establish: (i) that it is a “bona fide” cooperative under

Section 102 of the Public Utility Code (66 Pa.C.S. § 102), and is thus exempt from PUC

jurisdiction and control; and (ii) that it meets the tests established by the IRS for

approval of Federal tax exemption under section 501(c)(12) of the Internal Revenue

Code (26 U.S.C. § 501(c)(12)).

Notwithstanding my recommendation for the formation of a nonprofit cooperative

corporation however, if Section 5607 (Purposes and powers) of the Municipality

Authorities Act was amended to provide for the creation of a municipal authority to

construct, finance, own, operate or maintain a gas distribution system in Pennsylvania,

then, in that event, that municipal authority structure then would be the preferred choice

for the SEDA-COG RGUI, since it would offer a wide range of capabilities and benefits,

including some not found in a nonprofit cooperative corporation, such as: tax exempt

bond financing; condemnation powers; and exemption from state taxation. Accordingly,

before moving forward with plans for a nonprofit cooperative corporation, I recommend

that SEDA-COG consult with its members and the Pennsylvania Municipal Authorities

Association as the feasibility and the timing of accomplishing such an amendment to the

Municipality Authorities Act.

In the event that Section 5607 of the Municipality Authorities Act cannot be amended

in a timely manner to meet the schedule of the RGUI, but is then successfully amended

at later time, to provide for the creation of a municipal authority to construct, finance,

own, operate or maintain a gas distribution system in Pennsylvania, then in that event

consideration should be given to creating such an authority, with the natural gas

distribution system of the nonprofit cooperative corporation then being transferred to the

authority in an asset sale transaction.

This report on the SEDA-COG Natural Gas Utility Line Extension Law Investigation

is given solely for the purposes of SEDA-COG, and should not be relied upon by any

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other person or entity. In order to protect and preserve the confidentiality of the legal

advice and opinions contained in the report under the attorney-client privilege and the

attorney work product doctrine, this report should not be quoted or distributed by

SEDA-COG, without the advance advice of counsel.

Should you have any questions, desire any additional information, or if I may

otherwise assist in the RGUI efforts, please feel free to contact me.

Sincerely yours,

Anthony C. Adonizio

Enclosures (Appendices A through R)

ACA:mah

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