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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: February 7, 1996
THE NARRAGANSETT ELECTRIC COMPANY
(exact name of registrant as specified in charter)
Rhode Island 1-7471 05-0187805
(state or other (Commission (I.R.S. Employer
jurisdiction of File No.) Identification No.)
incorporation)
280 Melrose Street, Providence, Rhode Island 02907
(Address of principal executive offices)
(401) 784-7000
(Registrant's telephone number, including area code)
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Item 5. Other Events
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On February 7, 1996, the Speaker and Majority Leader of the
House of Representatives of the Rhode Island Legislature are
expected to announce the filing of legislation which would allow
electric consumers in Rhode Island to choose their power
supplier. The Narragansett Electric Company (Narragansett), a
subsidiary of New England Electric System (NEES), serves
approximately 75 percent of the electric customers in Rhode
Island. New England Power Company (NEP), another NEES
subsidiary, is Narragansett's all-requirements wholesale supplier
of electricity. Sales by NEP to Narragansett constitute
approximately 22 percent of NEP's revenues. Under the proposed
legislation, large manufacturing customers and new large non-
manufacturing customers would gain access to alternative power
suppliers over a two year period beginning in 1998. These
customers represent approximately 14 percent of Narragansett's,
or 3 percent of the NEES Companies', retail kilowatthour (kwh)
sales. The balance of Rhode Island customers would gain access
over a two year period beginning in the year 2000, or earlier, if
consumers of 50 percent of the electricity in New England gain
similar rights to choose their power supplier. The NEES
Companies support the proposed legislation.
A key provision of the legislation authorizes utilities to
recover the cost of past generation commitments through a
transition access charge on utility transmission and distribution
wires. The legislation divides those past commitments into four
categories: generating plant commitments, regulatory assets,
power contracts, and nuclear costs independent of plant
operation. Generating plant commitments and regulatory assets
would be recovered over 12 years. The return on equity on
unrecovered costs would be reduced to the rate on long-term "BBB"
rated utility bonds (currently approximately 8 percent), plus an
additional one percent if 50 percent of the New England
electricity market has not been opened to retail competition
prior to the year 2000. This lower return on equity will reduce
the total access charge in Rhode Island over the period by up to
$40 million on a present value basis when compared to the allowed
return on equity. Power contract costs and nuclear costs
independent of operation would be recovered as incurred over the
life of those obligations, which is expected to be longer than 12
years. The legislation would fix the access charge at 3 cents
per kwh for the period 1998 through 2000. Thereafter, the
access charge would vary, but is expected to decline. With the
exception of the reduced return on equity, the legislation is
generally consistent with the "Choice: New England" plan proposed
by the NEES Companies in 1995.
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The legislation also establishes performance based rates for
distribution utilities, including Narragansett. Under the
legislation, for the period 1997 to 1999, Narragansett would be
entitled to annually increase its distribution rates by
approximately $10 million per year, less any increases in
wholesale base rates passed on to Narragansett by NEP. For those
three years, Narragansett's return on equity would be subject to
a floor of 6 percent and a ceiling of 11 percent. Earnings over
the ceiling would be shared equally between customers and
shareholders up to an absolute cap on return on equity of 12.5
percent. To the extent that earnings fall below the floor,
Narragansett would be authorized to surcharge customers for the
shortfall.
If the legislation is enacted, implementation of the access
charges would be subject to review by the Rhode Island Public
Utilities Commission and the Federal Energy Regulatory Commission
(FERC). There can be no assurance that the final legislation, or
the implementation thereof, will include access charges that
would recover all costs which may be stranded. In addition, the
access charge proposed under "Choice: New England" and the
proposed legislation recovers only sunk costs such as plant
expenditures and contractual commitments. Because of a regional
surplus of electric generation capacity, current wholesale power
prices in the short-term market are based on the short-run fuel
costs of generating units. Such wholesale power prices are not
currently providing a significant contribution toward other
marginal costs, such as operation and maintenance expenses. NEES
expects this situation to continue in a retail market,
particularly if only a single state such as Rhode Island adopts
retail access. Revenues will also be affected by the NEES
Companies' ability to retain existing customers and attract new
customers in a competitive environment. As a result of the
pressure on market prices and market share, it is likely that
implementation of "Choice: New England" or the proposed
legislation will result in losses of revenue for an indeterminate
period and an increase in revenue volatility.
Electric utility rates have historically been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Financial Accounting Standard
No. 71, Accounting for the Effects of Certain Types of Regulation
(FAS 71), requires regulated entities, in appropriate
circumstances, to establish regulatory assets and liabilities,
and thereby defer the income statement impact of certain costs
that are expected to be recovered in future rates. However, the
effects of regulatory, legislative or utility initiatives, such
as the proposed legislation or "Choice: New England", could, in
the near future, cause all or a portion of the operations of the
NEES companies to cease meeting the criteria of FAS 71. In that
event, the application of FAS 71 to such operations would be
discontinued and a non-cash write-off of previously established
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regulatory assets and liabilities related to such operations
would be required . At December 31, 1995, NEES had consolidated
pre-tax regulatory assets (net of regulatory liabilities) of
approximately $600 million, of which about $500 million is
related to its subsidiaries' generation business (including
approximately $200 million related to oil and gas properties
regulated as part of the generation business), and about $100
million is related to its subsidiaries' transmission and
distribution businesses.
If competitive or regulatory change should cause a
substantial revenue loss or lead to the permanent shutdown of any
generating facilities, a substantial write-down of plant assets
could be required pursuant to Financial Accounting Standard No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (FAS 121).
Consideration by the House and Senate of the proposed
legislation is expected to be completed by the summer of 1996.
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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.
THE NARRAGANSETT ELECTRIC COMPANY
s/Alfred D. Houston
By ________________________________
Alfred D. Houston
Vice President and Treasurer
Date: February 7, 1996
