SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 of
the Securities Exchange Act of 1934
Date of Earliest Event Reported: December 23, 1996
EASTERN UTILITIES ASSOCIATES
(Exact name of registrant as specified in this charter)
Massachusetts 1-5366 04-1271872
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
One Liberty Square, Boston, Massachusetts 02109
(Address of principal executive offices) (Zip Code)
Item 5. Other Events
Settlement Agreement
On December 23, 1996, Eastern Utilities Associates' (EUA) subsidiaries
Eastern Edison Company (Eastern Edison) and Montaup Electric Company (Montaup)
reached an agreement in principle with the Attorney General of Massachusetts
and the Massachusetts Division of Energy Resources on a plan which would allow
retail customers to choose their supplier of electricity in 1998 and provide
Eastern Edison and Montaup full recovery of "stranded costs", prudently
incurred embedded costs they would have been entitled to recover but cannot
because of competitive market pressures. A formal plan is expected to be
filed for approval with the Massachusetts Department of Public Utilities
(MDPU) in the first quarter of 1997.
The agreement envisions that all of Eastern Edison's customers will have
the ability to choose an alternative supplier of electricity beginning on
January 1, 1998. Until a customer chooses an alternative supplier, that
customer would receive "Standard Offer" service which would be priced to
guarantee that customer at least a ten percent savings from today's
electricity prices. Eastern Edison would be required to arrange for "Standard
Offer" service and would purchase power for "Standard Offer" service from
suppliers through a competitive bidding process. The agreement is also
designed to achieve full divestiture of Montaup's generating assets via
implementation of a plan, to be submitted to the MDPU by July 1, 1997, that
would require (1) separation of Montaup of its generating and transmission
businesses and (2) full market valuation and sale of all generating assets
through an auction or equivalent process, to be conducted by an independent
third party.
Upon the commencement of retail choice in Massachusetts, Montaup's
wholesale contract with Eastern Edison would be terminated. In return, the
cost of Montaup's above market, embedded generation commitments to serve
Eastern Edison's customers would be recovered, with a return, through a non-
bypassable transition access charge to all Eastern Edison customers. The
transition access charge would be reduced by the fair market value of
Montaup's generating assets as determined by selling, spinning off, or
otherwise disposing of such generating facilities.
Embedded costs associated with generating plants and regulatory assets
would be recovered, with a return, over a period of 12 years, with an initial
return on equity of 8.92 percent. Purchased power contracts and nuclear
decommissioning costs would be recovered as incurred over the life of those
obligations, a period expected to extend beyond 12 years. The initial
transition access charge would be set at 3.04 cents per kWh through December
31, 2000, and is expected to decline thereafter. As the transition access
charge declines during the twelve-year transition period, Montaup would earn
mitigation incentives which would supplement its return on equity above the
initial 8.92 percent.
The agreement also establishes performance-based regulation for Eastern
Edison in place of traditional cost-of-service regulation. Under the
agreement, Eastern Edison's distribution rates would be frozen at 1996 levels
until December 31, 2000. Subsequent to the commencement of retail choice,
Eastern Edison's annual return on equity would be subject to a floor of 6
percent and a ceiling of 11.75 percent. If Eastern Edison's return on equity
so calculated is below 6 percent, it would be authorized to increase its rates
to provide sufficient revenues to increase Eastern Edison's return on equity
to 6 percent. If Eastern Edison's calculated return is above 11 percent, it
would be required to reduce its rates by an amount necessary to reduce its
calculated return on equity between 11 and 12.5 percent by 50 percent and the
earnings above 12.5 percent by 100 percent. No adjustment would be made if
the calculated return on equity falls between 6 percent and 11 percent.
In addition to MDPU approval of the formal plan, implementation of the
plan is also subject to the approval of the Federal Energy Regulatory
Commission and may require enabling legislation by the Massachusetts
legislature. Any disposition of generation assets would also require the
approval of the Securities and Exchange Commission under the Public Utility
Holding Company Act of 1935.
The agreement, if approved, coupled with the Rhode Island Utility
Restructuring Act of 1996, would have an estimated negative impact on EUA
System earnings in 1998 of between 10% to 12% and remove much of the
uncertainty which currently exists as to how EUA will be impacted by electric
utility restructuring.
MDPU Docket #96-100
On December 30, 1996 the MDPU issued its Model Rules in Docket # 96-100,
the second phase of its investigation of the restructuring of the electric
utility industry in Massachusetts and proposed legislation for consideration
by the Massachusetts Legislature that would provide the MDPU with the mandate
to implement these rules. The MDPU has indicated that its overall goal is
to develop an efficient industry structure and regulatory framework that
minimize costs to consumers while maintaining safe and reliable electric
service with minimum impact on the environment. Consistent with the overall
goal, the Model Rules provide for, among other things:
- customer choice of electricity supplier with local distribution
companies guaranteeing default service including continuation of low
income protections and discounts;
- independent central regional transmission system operator;
- non-discriminatory open access transmission;
- functional separation of distribution, generation and transmission;
- distribution services remain a regulated monopoly;
- commitment to significant environmental improvement;
- funding mechanism to provide financial support for renewable and
emerging technologies and continuation of demand-side management
programs; and
- reasonable opportunity for recovery of stranded costs.
While EUA believes that the agreement with the Attorney General and the
Division of Energy Resources is consistent with the requirements of these
Model Rules, it is of the opinion that the MDPU has the authority to approve
the agreement without officially promulgating them.
This 8-K contains a discussion of future revenues and earnings which are
"forward looking statements" under the federal securities law. Actual results
could differ materially from those discussed and there can be no assurance
that such estimates of future results could be achieved.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Current Report on Form 8-K to be signed on its
behalf by the undersigned thereunto duly authorized.
Eastern Utilities Associates
By: /s/ Richard M. Burns
Richard M. Burns, Vice President
(on behalf of the Registrant and as
Chief Accounting Officer)
January 6, 1997
