While authorizing Nashville Gas Co. to increase rates by $4.417 million, the Tennessee Regulatory Authority has modified its existing policy on the treatment of advertising expenses in gas rate cases.
The authority abandoned a past policy limiting advertising recovery to 0.5 percent of the company's gross revenues. It also ordered a 50-50 sharing between ratepayers and shareholders. It granted, however, the LDC's request for full recovery of both payroll and nonpayroll "sales promotion" costs, rejecting allegations the costs should be treated as advertising expenses.
In approving the rate increase, the authority set the company's cost of common equity at 11.5 percent. In doing so it rejected a proposal to adjust the approved cost of equity for monthly compounding of earnings. It ruled that such an adjustment would be inappropriate because it would assume a constant monthly earnings rate atypical of a gas utility, ignore variable dividend payments and conflict with the calculation of annual earnings used elsewhere in the case. Ratepayers and shareholders will share costs associated with a long-term incentive compensation plans for upper management employees.
In setting rate design, the authority directed the LDC to spread the approved revenue increase equally among all customers, including interruptible sales customers, transportation customers and special contract customers. It also authorized several tariff changes designed to permit the LDC to "respond to existing competitive conditions," including provisions for customers to elect sales or transportation service annually to prevent consumers from switching back and forth between the rate schedules based solely on changes in the price for spot market gas supplies. Re Nashville Gas Co. a Div. of Piedmont Natural Gas Co., Inc., Docket No.96-00977, Feb. 19, 1997 (Tenn.R.A.). t
Phillip S. Cross is an associate legal editor of PUBLIC UTILTIES FORTNIGHTLY.
Northeast Utilities Fights Back
Lawsuits Filed, New Bankruptcy Threatened
On March 3, Northeast Utilities and three of its subsidiaries, Public Service Co. of New Hampshire, North Atlantic Energy Corp., and Northeast Utilities Service Co., filed a lawsuit in U.S. District Court in Concord, N.H., against the New Hampshire PUC and its restructuring rules. The companies are seeking a temporary restraining order preventing the restructuring plan from becoming effective.
The utilities' most immediate objection is regarding parts of the order that will trigger a change in accounting rules governing Public Service Company of New Hampshire's and Northeast Utilities' financial statements. The order states Public Service Company of New Hampshire's stranded cost recovery level must be based on market price of electricity in New England.
The company's auditors have concluded that by basing rates on market prices rather than on PSNH's costs, the company could be forced to write off more than $400 million of assets. That, in turn, would violate key provisions of some loan agreements, possibly allowing lenders to demand immediate repayment of more than $1 billion of debt. Such payment demands could force both utilities to default on their loans, and possibly seek Chapter 11 bankruptcy protection, the company alleges.
The Northeast Utilities companies also plan to sue to recover damages resulting from various portions of the order that the companies believe will result in breach of contract.
Moody's Investors Service has responded to the PUC order by downgrading the credit ratings of Northeast Utilities, along with subsidiaries PSNH and North Atlantic Energy Corp. The downgrades reflect increased regulatory and financial uncertainty. Moody's said the decision has the potential to create default of Public Service Company of New Hampshire's lending agreements, resulting in a second bankruptcy. While recognizing the company's efforts to deter the PUC's action by filing the lawsuit, Moody's believes that the order itself, despite legal standing, represents a political and regulatory environment that is hostile to bondholders.
(em LB
Stranded Cost Recovery Charges
La Capra Report Wins Commission's Approval
With the 1996 enactment of a state law mandating electric restructuring, the New Hampshire Public Utilities Commission had retained La Capra Associates (a Boston consulting firm) to estimate stranded costs following state law and the commission's own preliminary electric restructuring plan for use in the final plan. The commission further directed La Capra to use those costs to estimate interim stranded cost recovery charges, as required by RSA 374-F:4.
The law had directed the PUC to establish interim stranded cost charges for each utility, to be effective for two years following compliance filings by individual utilities. The state had called on the commission to determine final stranded costs that were "equitable, appropriate and balanced ... [and] in the public interest." In response, the PUC had presented two possible methods of determining stranded cost charges. The first involved a levelized, nonbypassable stranded cost charge, which would be calculated by comparing the projected generation market price over a 10-year period to the book generation cost. The second approach (em which the commission preferred (em compared New Hampshire utility rates against a regional average. The commission eventually adopted the results of the La Capra study, finding it to be "the only study which attempts to project the competitive market price of electricity using NEPOOL's vision of a deregulated generation sector, its products and its pricing rules."
On balance, said the PUC, "[W]e find Mr. La Capra's analysis to be superior to the models offered by PSNH and GSEC [Granite State Electric], which contain approaches that we consider to be reflective of regulated market prices."
The La Capra study used an adjusted regional electricity rate (total retail revenues divided by total kWh sales) to calculate the stranded cost charges for each of New Hampshire's six electric utilities. However, it estimated the figures using 1995 data. The study recommended the charges be updated using 1996 data as soon as available. It also recommended the charges be modified once every six months during the two-year collection period.
According to the La Capra report, the PUC's preliminary restructuring plan had said that utilities with rates at or below the regional average should have a greater opportunity to recover stranded costs than utilities with rates above the regional average. To do this, the La Capra study developed a total average rate target for each New Hampshire electric company, and from that derived a reasonable average rate target of 104.5 percent (see Table 1). La Capra also developed two alternative average rate targets based on lower or higher average rate targets. Using these three average rate targets, La Capra determined base, high and low interim stranded cost charges (see Table 2). (em ES
Table 1. Comparison of 1995
New Hampshire Electricity Rates to
1995 Adjusted Regional Electricity Rates (in cents per kWh)
VECCECE&HGSECNHEC PSNHTOTAL
Total average rate10.549.399.489.1513.3012.3011.78
Adj. regional average rate 10.50 10.98 10.78 10.54 11.17
10.28 10.43
Utility rate as a %
of regional average 100.38% 85.49% 87.92% 86.83% 119.06%
119.73% 112.97%
Table 2. Interim Stranded Cost Charges for New Hampshire Utilities (in cents per kWh)
YearPSNHNHECE&HCECGSECCVEC
Base Case (max. of 104.5%
of the adj. regional average)19983.795.742.832.761.803.32
19993.665.822.832.761.673.19
Low Case (max. of 100%
of the adj. regional average)19983.33N/A N/AN/AN/A3.28
19993.19N/AN/AN/AN/A3.15
High Case (max. of 107.76%
of the adj. regional average)19984.12N/AN/AN/AN/AN/A
19993.99N/AN/A N/AN/AN/A
Source: "Estimates of Electric Utility Stranded Costs Associated with the Introduction of Retail Competition in the New Hampshire
Generation Service Market," Jan. 2, 1997, La Capra Associates, 333 Washington St., Boston, Mass. Connecticut Valley Electric Co. (CVEC); Granite State Electric Co. (GSEC); The New Hampshire Electric Cooperative (NHEC); Public Service of New Hampshire (PSNH);
Concord Electric Co. (CEC); Exeter and Hampton Co. (E&H)
1Re Restructuring New Hampshire's Electric Utility Industry, DR 96-150, Order No. 22,514, Feb. 28, 1997 (N.H.P.S.C.).
2Re Restructuring New Hampshire's Electric Utility Industry, DR 96-150, Sept 10, 1996, 171 PUR4th 564 (N.H.P.U.C. 1996).
3"An Act Restructuring the Electric Utility Industry in New Hampshire and Establishing a Legislative Oversight Committee," enacted May 16, 1996, Rev.Stats.Ann., secs. 129 et seq. In the act, the New Hampshire General Court found the state exhibited the highest average electricity rates of any state in the U.S.
4See, Re Northeast Utilities/Public Service Co. of New Hampshire, 114 PUR4th 385 (N.H.P.U.C. 1990).
5A NEPOOL proposal recently was filed with the Federal Energy Regulatory Commission in compliance with FERC Order 888, and included the planned transfer of operational authority to an independent system operator. See, "Power Pool Politics: How New England Agreed to an ISO," by Gordon L. Weil, PUBLIC UTILITIES FORTNIGHTLY, Feb. 15, 1997, p. 43.
6Quoting state law, PSNH argued that once the PUC had approved the bankruptcy plan, the law required that, "[T]he commission shall not thereafter issue any order or process which would alter, amend, suspend, annul, set aside or otherwise modify such approval or result in the fixing of rates other than in the manner prescribed in the agreement."
7The commission explained: "Seven years of annual 5.5-percent rate increases have produced real rate increase to customers more than 20 percent above those projected by NU for the region during the hearings in DR 89-244. The restructuring plan's limitations of rates to the regional average will produce rates consistent with those which PSNH originally projected for the end of the fixed rate period."
8The commission went on to say that: "Rate regulation is not a mere promise to pay, it is an exercise of the police power. The defect in PSNH's claim thus begins and ends with PSNH's premise: that the legislature treated its sovereign authority as just another bargaining chip to trade away in a commercial transaction."
9Citing Jersey Central Power & Light Co. v. FERC, 810 F.2d 1168, 1189 (D.C.Cir.1986).
10See, Permian Basin Area Rate Cases, 390 U.S. 747 (U.S.1954) (upholding practice of Federal Power Commission of determining rates for gas supplies by identifying certain "major producing areas," and then setting maximum rates based on a composite cost rather than setting rates based on each producer's cost of proving service).
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