The proposal creates a new capacity product called the “Capacity Performance Resource.”
Duff & Phelps Applauds Mass. Atty. General's Plan
The Massachusetts Attorney General and the New England Electric System (NEES) have unveiled a plan to restructure electric utilities in Massachusetts (em "Consumers First."
The plan would allow all residential and business customers of investor-owned utilities to choose their electric supplier on January 1, 1998, and mandates that all customers receive a minimum 10-percent reduction on monthly bills. Existing purchased-power contracts would be honored, and approved utility investments recovered, subject to independent market valuations.
For example, Massachusetts Electric (ME) would recover stranded investments through a charge that starts at 2.8 cents per kilowatt-hour (¢/Kwh) for three years, declining over time. ME would conduct a market valuation of at least 15 percent of its fossil fuel and hydroelectric plants, which would be deducted from what ME could recover.
Duff & Phelps Credit Rating Co. (DPCR) believes the Attorney General's plan could become the template for utility industry deregulation in the state. Terms of the proposal are similar to Rhode Island's recently enacted legislation, which also was supported by NEES.
DPCR feels the basic plan principles support credit quality, but warns that the plan could lengthen the stranded-cost recovery period beyond current levels by holding the access charge at a maximum of 2.8¢/Kwh and declining thereafter. Electric utilities, DCPR points out, would need to reduce their production costs to avoid margin erosion.
Until January 1, 1998, New England Power (NEP) would undergo a wholesale rate freeze; its distribution subsidiaries, including ME, would freeze retail rates. When open access begins, the wholesale contract between NEP and ME would terminate, creating "significant" strandable costs on NEP's balance sheet. The plan calls for generating plant and regulatory asset stranded-cost recovery over 12 years, with an initial return on equity of 9.4 percent, and purchased-power contracts and decommissioning costs over the life of the obligations.
NEES would sell or spin off 15 percent of its nonnuclear generating assets, which would be used to establish a market price for the remaining generating assets, causing a downward adjustment to the access charge, perhaps earlier than 2001. To defray the
10-percent retail-rate decrease, ME would receive a $45-million rate hike when retail choice begins. The plan also gives ME performance-based rates, with a
6- to 11-percent earnings band, sharing above 11 percent, and an earnings cap of 12.5 percent.
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