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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 of the
Securities Exchange Act of 1934
Date of Earliest Event Reported: February 1, 1996
NEW ENGLAND ELECTRIC SYSTEM
(exact name of registrant as specified in charter)
Massachusetts 1-3446 04-1663060
(state or other (Commission (I.R.S. Employer
jurisdiction of File No.) Identification No.)
incorporation)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
(508) 389-2000
(Registrant's telephone number, including area code)
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Item 5. Other Events
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As previously disclosed by New England Electric System
(NEES) and its subsidiaries, the electric utility business is
being subjected to rapidly increasing competitive pressures.
Each of the states in which the retail subsidiaries of NEES serve
electric customers has been considering various proposals for
allowing electric customers greater choice over their electricity
supplier. The following is an update of activity occurring in
the NEES Companies service territories. This Form 8-K should be
read in conjunction with NEES's annual and quarterly disclosure.
Rhode Island
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
NEES subsidiary, 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
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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.
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
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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
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.
New Hampshire
On February 1, 1996, the New Hampshire House of
Representatives passed a bill which would require utilities to
file plans by June 1996 with the New Hampshire Public Utilities
Commission (NHPUC) to provide customers with access to
alternative suppliers. The bill contains ambiguous language on
the rights of utilities to recover the costs of past commitments
which may be stranded as a result of such access. The bill
allows the NHPUC to impose a plan on utilities if none is agreed
to prior to July 1997. If enacted into law, the bill would apply
to Granite State Electric Company, a NEES subsidiary,
representing approximately 3 percent of NEES and NEP revenues.
The impact of the legislation on Granite State is uncertain at
this time.
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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.
NEW ENGLAND ELECTRIC SYSTEM
s/Alfred D. Houston
By
Alfred D. Houston
Executive Vice President and
Chief Financial Officer
Date: February 7, 1996
The name "New England Electric System" means the trustee or
trustees for the time being (as trustee or trustees but not
personally) under an agreement and declaration of trust dated
January 2, 1926, as amended, which is hereby referred to, and a
copy of which as amended has been filed with the Secretary of The
Commonwealth of Massachusetts. Any agreement, obligation or
liability made, entered into or incurred by or on behalf of New
England Electric System binds only its trust estate, and no
shareholder, director, trustee, officer or agent thereof assumes
or shall be held to any liability therefor.
