anthony c. adonizio attorney-at-law 250 north 24th … gas law... · anthony c. adonizio...
TRANSCRIPT
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
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.
-i-
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
-ii-
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
-iii-
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)
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.)
-v-
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.)
-vi-
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
-vii-
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.
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.
-2-
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
-3-
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)
-4-
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.
-5-
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.).
-6-
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.
-7-
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).
-8-
(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
-9-
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).
-10-
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
-11-
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.
-12-
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.
-13-
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
-14-
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;
-15-
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. §
-16-
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”;
-17-
“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.
-18-
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
-19-
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
-20-
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)).
-21-
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).
-22-
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.
-23-
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
-24-
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
-25-
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].
-26-
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
-27-
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
-28-
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.
-29-
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.
-30-
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
-31-
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.
-32-
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.
-33-
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;
-34-
(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.
-35-
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.
-36-
(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)).
-37-
(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).
-38-
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.
-39-
(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
-40-
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
-41-
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
-42-
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/).
-43-
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
-44-
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
-45-
“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.”
-46-
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
-47-
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;
-48-
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
-49-
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]
-50-
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).
-51-
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
-52-
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
-53-
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
-54-
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.
-55-
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
-56-
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.
-57-
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
-58-
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.
-59-
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
-60-
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
-61-