PUC endorses direct access, plant divestiture and limits on recovery of stranded costs. Says order will not interfere with 1990 bankruptcy plan for Northeast Utilities. The New Hampshire Public Utilities Commission has issued its final plan for restructuring the state's electric industry, at the same time announcing what is believed to be the first formal policy decision by a state utility commission that would deny full recovery of costs left "stranded" by the transition to competition.
Released on Feb. 28, the 125-page decision %n1%n is accompanied by a separate document of equal length, that presents the commission's analysis of its legal authority to limit stranded-cost recovery and effect other aspects of restructuring.
In substance, the plan varies little from a preliminary proposal announced by the commission back in September 1996. %n2%n It essentially follows guidelines and a timetable contained in a new state law on electric restructuring enacted in May 1996. %n3%n
In the face of considerable controversy, the commission has maintained its original plan to limit recovery of stranded investment by tying recovery to a benchmark based on regional average electric rates for New England utilities. It also has denied claims by Northeast Utilities that the restructuring policy will conflict with a bankruptcy rate plan agreed to by Public Service Co. of New Hampshire and Northeast Utilities back in 1990 (see sidebar). That agreement %n4%n had been approved by both the commission and the Federal Bankruptcy Court and had served as a foundation for the purchase of PSNH and its Seabrook investment by Northeast Utilities, a regional utility holding company.
The decision announces many other key policies, including:
• Plant Divestiture. Distribution utilities (discos) must divest generation and aggregation/marketing services within two years of the start of customer choice.
• Contract Divestiture. Discos must also sell rights to buy power under existing purchased power contracts.
• Rate Unbundling. Utilities must segregate retail service and rate components.
• Billing and Metering. Large industrial and commercial customers may obtain metering, billing, and customer services from competitive providers starting in 1998. PUC defers further unbundling of competitive services until a later date.
• Reciprocity. PUC acknowledges lack of jurisdiction over competing utilities, such as Central Vermont Public Service Co., New England Power, and Unitil Power, but says such companies cannot compete at retail in New Hampshire if they retain generation assets.
• Stranded Costs. Recoverable only with reference to a regional benchmark electric price. PUC defines stranded costs as net "sunk" generation cost (em i.e., net of operating costs and site and salvage value (em including generation-related regulatory assets. Plants with negative stranded costs (plants that are economic) must be netted against uneconomic plants to mitigate stranded-cost recovery.
Also, the PUC issued five supplemental orders that establish utility-specific interim stranded cost charges, based in part on calculations and recommendations prepared at the PUC's direction and presented in a report dated Jan. 2, 1997, by La Capra Associates based in Boston (see sidebar). The interim charges will remain in effect for two years from the implementation of each utility's restructuring compliance plan.
Market Structure
The PUC's final plan is designed to achieve a competitive generation market using bilateral contracts along with pool-based or spot-market transactions, plus the creation of an independent system operator (ISO) to maintain reliability of the regional transmission system. The PUC cited a recently developed proposal by New England Power Pool (NEPOOL), an established regional power pool, to restructure the area's bulk power market as "an adequate framework from which to proceed" on the ISO issue. %n5%n
With the approval of the final plan by the commission, each utility must now submit a comprehensive compliance plan no later that June 30, 1997, with implementation of retail choice by Jan. 1, 1998, under the timetable contained in the state's new restructuring law.
Stranded Costs
The aspect of the restructuring plan that is currently receiving the most attention in the press is the decision by the commission to limit stranded cost recovery in cases where a utility's costs exceed the regional average. The plan is especially controversial as it relates to Public Service Company of New Hampshire, who emerged from bankruptcy nearly a decade ago due in part to a long-term rate agreement approved by the New Hampshire commission. The agreement addressed rate recovery of what has turned out to be PSNH's uneconomic investment in the Seabrook nuclear plant. PSNH now argues that the rate reductions implicit in the stranded cost ruling conflict with the earlier rate agreement.
According to PSNH, the combination of the bankruptcy rate agreement, the commission's 1990 order approving the agreement, and a special state law authorizing its implementation by the commission (R.S.A. sec. 362-C:6) "create an obligation in the Commission" to set rates in 1998 and beyond that to allow full recovery of Northeast Utilities' $2.3 billion investment in PSNH along with an unspecified return, and to ensure full recovery of all FPPAC (fuel and purchased power adjustment clause) costs. Specifically, the utility cites state law (R.S.A. 362-C:6) to argue that once the commission was powerless to revoke the bankruptcy plan, either directly or indirectly. %n6%n
PSNH also has challenged the commission's stranded cost decision on several other grounds: 1) In approving the plan the commission promised in a "contractual sense" to permit recovery of the Seabrook investment; 2) Failure to permit full recovery of the stranded costs is an unconstitutional taking of its property without just compensation; and 3) Passage of the rate plan through the federal bankruptcy process now disables the commission from setting rates or limiting its permissible franchise in any manner.
The 1990 Bankruptcy Agreement
The bankruptcy rate agreement cited by PSNH in support of its claim for full recovery of stranded costs established a series of seven average annual base rate increases of 5.5 percent, subject to certain adjustments, including a return-on-equity collar. The "fixed-rate" period ends on July 1, 1997. (There is no dispute that the commission should not disturb this section of the rate agreement. The issue is whether, after the fixed-rate period ends, the commission is constrained in setting rates for PSNH.)
The same agreement contemplates a rate base for the reorganized utility of $800 million for the book value of the PSNH non-Seabrook assets and an acquisition premium of approximately $800 million to be determined according to an established formula by the commission, and reflected on the utility's "stand-alone" books as an acquisition premium to be recovered through rates." The agreement calls for recovery of $425 million of the acquisition premium during the fixed-rate period after which any excess "will be amortized on a straight-line basis and recovered with a return over a period ending 20 years." PSNH argues that in approving the preceding language, the commission guaranteed recovery of the acquisition premium through rates after the fixed-rate period.
The agreement also had established the FPPAC to allow the utility to recover nonbase-fixed and variable power costs. The costs included purchased power costs associated with deliveries of Seabrook power to the utility by its affiliate, North Atlantic Energy Corp., a special-purpose subsidiary of Northeast Utilities that owns a 35.98-percent interest in the Seabrook plant. The FPPAC recovery period was set at 10 years, after which "the cost of fuel and purchased power shall be recovered in the manner established by the NHPUC." The utility argues that the adjustment clause provision creates an obligation that the commission guarantee full recovery of the named costs after the 10-year period.
In rejecting PSNH's entire claim (that the Feb. 28 decision violated the bankruptcy agreement), the commission relied in large part on its overarching responsibility to set just and reasonable rates. The regional average cost cap strikes the appropriate balance between ratepayers and investors and "reflexive inclusion of all costs" is not required in meeting this goal, the commission said. Further, in the commission's view, the state Legislature provided "renewed authority" to adopt such an approach in its 1996 restructuring law wherein it encouraged the commission to bring rates "as close as possible to competitive regional rates." It did not delegate any authority to "develop special exceptions for PSNH," the commission added.
According to the commission, PSNH has misinterpreted the language of the rate agreement and has ignored its own statements and forecasts made in support of the financial plan. According to the commission, the language of the rate agreement cannot be read to guarantee recovery of such a large sum over such a long time period, any more than the rate plan can be interpreted to bind the utility to set its own rates at the regional average. Looking back at the performance of the approved rate order, the commission observed that rates had risen unacceptably despite the bankruptcy plan, and that its new restructuring plan, with customer choice, would do a better job of keeping rates low. It also pointed out that PSNH had claimed rates envisioned under the financial reorganization plan would "approximate those of the regional average after the fixed-rate period." %n7%n
The PUC added that the rate agreement contained no values for what must be recovered through the FPPAC from year 8 through year 10. In establishing such values, the commission will take into account the fact that PSNH like other utilities in the state "has no obligation to serve retail customers beginning on Jan. 1, 1998."
Similarly, the commission found no merit in the utility's claim of a contractual right to recover all of their stranded costs. It explained that Northeast Utilities did pay a purchase price, including the acquisition premium when it agreed to acquire PSNH. But it made that payment to creditors of PSNH, rather than the state; what Northeast Utilities received in return was control of PSNH, rather than any promise from the state, the PUC explained. %n8%n
Constitutional Objections
As to whether limited recovery of stranded costs would constitute a taking under the U.S. Constitution as alleged by PSNH, the commission said that, "A taking only occurs when the balance has been struck in the regulatory process so as unreasonably to favor ratepayer interests at the substantial expense of investor interests." %n9%n
That standard, the PUC advised, is one that the "utilities reasonably should have expected: that when their discretionary spending exceeds the regional average, they are responsible for the difference." The commission also found historic support for its approach in a well known U.S. Supreme Court case upholding "area rates" for natural gas producers. %n10%n The New Hampshire commission said that the similarities between the area rate dispute and its regional cost cap mechanism were "striking."
Finally, the commission found no conflict between federal bankruptcy laws and its application of the stranded cost rule to PSNH. It emphasized that the law is clear that the Bankruptcy Code preserves the authority of state regulators to approve rates contained in a reorganization plan. As a case in point, the commission noted the Bankruptcy Court in the PSNH case had ruled that the confirmed reorganization plan could not take effect until the commission approved the rate agreement. The commission emphasized that in so ruling the court added that nothing in the Bankruptcy Code has the effect of exempting the reorganized utility from "ongoing applicable regulatory requirements by NHPUC." In the commission's view, "The setting of rates years later by this commission is an example of what the Court had in mind when it referred to applicable regulatory requirements" imposed by PSNH's state regulators. t
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