<PAGE>
File No. 70-____
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, DC 20549
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
NEW ENGLAND ELECTRIC SYSTEM
(Name of company filing this statement)
25 Research Drive, Westborough, Massachusetts 01582
(Address of principal executive offices)
NEW ENGLAND ELECTRIC SYSTEM
(Name of top registered holding company parent of applicant)
Michael E. Jesanis Kirk L. Ramsauer
Treasurer Associate General Counsel
25 Research Drive 25 Research Drive
Westborough, MA 01582 Westborough, MA 01582
(Names and address of agents for service)
<PAGE>
New England Electric System ("NEES") is a registered holding
company under the Public Utility Holding Company Act of 1935 (the
"Act"). NEES owns the following retail electric companies (the
"Retail Companies"): Granite State Electric Company ("Granite
State") serving approximately 35,000 customers in New Hampshire;
Massachusetts Electric Company ("Mass. Electric") serving
approximately 940,000 customers in Massachusetts; and The
Narragansett Electric Company ("Narragansett") serving
approximately 324,000 customers in Rhode Island. NEES owns New
England Power Company ("NEP") which generates, purchases,
transmits, and sells electric energy in wholesale quantities.
Over 90% of NEP's revenue comes from the sale of electricity for
resale to the Retail Companies. NEP owns assets in each New
England state and has transmission interconnection arrangements
with New York and Quebec, Canada and through the New England Power
Pool (NEPOOL) with the Canadian provinces of New Brunswick and
Ontario and with New Jersey, Pennsylvania, Delaware, and Maryland
(the states comprising the general area of operation of the
Pennsylvania, New Jersey, Maryland interconnection). NEES also
owns New England Power Service Company ("NEPSCO"), a service
company; New England Energy Incorporated, an oil and gas
exploration and development company, and New England Electric
Resources, Inc. ("NEERI"), a consulting services company. NEES
also owns a number of special purpose companies.
Neither NEES nor any subsidiary currently has an ownership
interest in an exempt wholesale generator ("EWG") as defined in
Section 32 of the Act or a foreign utility company ("FUCO") as
defined in Section 33 of the Act. Additionally, neither NEES nor
any subsidiary is a party to, or has any rights under, a service,
sales, or construction agreement with an EWG or FUCO. NEES and
NEERI have filed an Application/Declaration (File No. 70-8783)
requesting authority to make EWG and FUCO acquisitions and
financings.
Item 1. Description of Proposed Transactions:
______________________________________________
A. Introduction
________________
The electric utility business is being subjected to rapidly
increasing competitive pressures, stemming from a combination of
trends, including the presence of surplus generating capacity, a
disparity in electric rates among regions of the country,
improvements in generation efficiency, increasing demand for
customer choice, and new regulations and legislation intended to
foster competition. To date, this competition has been most
prominent in the bulk power market, in which non-utility
generators have significantly increased their market share. In
states across the country, including Massachusetts, Rhode Island,
and New Hampshire, there have been an increasing number of
<PAGE>
proposals to allow retail customers to choose their electricity
supplier, with incumbent utilities required to deliver that
electricity over their transmission and distribution systems (also
known as "retail wheeling").
B. Choice: New England
_______________________
In 1995, the NEES companies announced Choice: New England, a
plan to allow all customers of electric utilities in
Massachusetts, Rhode Island, and New Hampshire to choose their
power supplier beginning in 1998. Choice: New England was
developed in response to 1995 decisions by the Massachusetts
Department of Public Utilities ("MDPU") and the Rhode Island Public
Utilities Commission ("RIPUC") approving a set of principles for
industry restructuring. These principles included allowing
utilities the opportunity to recover the amount by which costs
exceed market prices, commonly referred to as "stranded costs".
Under Choice: New England, the pricing of generation would be
deregulated. However, customers, would have the right to receive
service under a "standard offer" from the incumbent utility, the
pricing of which would be approved in advance by regulators.
Customers electing the standard offer would be eligible to choose
an alternative power supplier at any time, but would not be
allowed to return to the standard offer. Under Choice: New
England, transmission and distribution rates would remain
regulated; however, the plan proposes that cost of service pricing
of distribution rates would be supplemented by a system that would
reward or penalize distribution utilities for their performance
relative to benchmarks established by regulators. Choice: New
England proposes that the cost of NEP's past generation
commitments be recovered through a wires access charge.
Choice: New England is subject to approval by state and
federal regulators and the timetable for their consideration is
uncertain. The plan was filed with the Massachusetts Department
of Public Utilities on February 16, 1996.
On February 7, 1996, the Speaker and the Majority Leader of
the House of Representatives of the Rhode Island Legislature
announced the filing of legislation which would allow electric
consumers in Rhode Island to choose their power supplier. 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
retail kilowatt-hour 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
<PAGE>
power supplier. The NEES companies have announced their support
for 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 also establishes performance-based rates
for distribution utilities, including Narragansett.
Consideration by the Rhode Island Legislature of the proposed
legislation is expected to be completed by the summer of 1996.
On February 1, 1996, the New Hampshire House of
Representatives passed a bill which would require New Hampshire
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 stranded costs. The bill
allows the NHPUC to impose a plan on utilities if none is approved
prior to July 1997.
Previously, the State of New Hampshire enacted legislation in
June 1995 that instructed the NHPUC to establish a retail
competition pilot program open to all classes of customers. The
current NHPUC proposed guidelines provide that each New Hampshire
utility allow customers representing three percent of their peak
loads (four megawatts for Granite State), to have access to
alternative suppliers of electricity for two years, starting May
1, 1996. In January 1996, Granite State reached an agreement with
the NHPUC staff on terms for its participation in the "Pilot
Program." Under the agreement, participating customers would be
responsible for paying access charges that are on average more
than 90 percent of the charges proposed under Choice: New England.
The agreement is subject to approval by the NHPUC. A decision is
expected by the end of February 1996.
Mass. Electric has announced that it will request the MDPU to
allow the implementation of two pilot programs to test Choice:
New England. The first would allow high technology customers
representing one percent of the Retail Companies retail sales to
have direct access to alternative power suppliers beginning in
July 1996. The second would allow residential and small business
customers representing 0.5 percent of the Retail Companies retail
sales to have direct access beginning September 1, 1996.
C. Formation of Marketing Companies
_____________________________________
As a step toward implementation of Choice: New England, NEES
proposes to form one or more marketing companies in each New
England state, New York, New Jersey, Pennsylvania, Maryland, and
<PAGE>
Delaware (the "Marketing Companies"). Marketing Companies would be
established in Massachusetts, Rhode Island, and New Hampshire to
provide standard offer services to existing customers of the
Retail Company (each such Marketing Company, a "Standard Offer
Marketing Company"). Marketing Companies may also be established
in each of the states referenced above to market electricity to
retail and wholesale customers (each such Marketing Company, a
"General Marketing Company"). The Marketing Companies to be
established in New Hampshire may need to be formed and operating
by May 1, 1996, to meet the requirements of the Pilot Program.
The Marketing Companies also propose to provide a broad range
of energy and related services to customers. These services
include but are not limited to, audits, power quality, fuel
supply, repair, maintenance, construction, design, engineering and
consulting.
D. Personnel of Marketing Companies
____________________________________
Staffing is expected to begin with a small group of employees
for the Marketing Companies, primarily sales staff. Technical and
support staff needed for a particular project could be assigned
for the duration of that project from other affiliated companies,
and the assigned employees would continue to be employees of the
affiliated company. All costs associated with such staff
(including compensation, overheads, and benefits) would be fully
reimbursed by the Marketing Company to which they were assigned.
Reimbursements for these costs will be on a thirty-day cycle
basis.
E. Functional Separation of Marketing Companies Staff from
Regulated Companies
______________________________________________
Marketing Company employees will have access only to
information supplied to the marketplace as a whole. The
relationship between the marketing affiliate and regulated
operations will be governed by defined standards of conduct and
with formal audit procedures. Separate books and records will
also be maintained. Procedures similar to those adopted by FERC
for gas marketing affiliates will be adopted for the Marketing
Companies.
F. Financing
_____________
NEES proposes to provide initial financing for each Marketing
Company by the purchase of one thousand shares of the common
<PAGE>
stock, par value $1.00 per share, for a total purchase price of
$1,000. NEES then proposes to make capital contributions and/or
loans to the Marketing Company from time to time, provided that
such NEES financing for all Marketing Companies shall not be in
excess of $15 million, in the aggregate outstanding at any one
time. Any such loans will be in the form of non-interest bearing
subordinated notes payable in twenty years or less from the date
of issue. It is proposed that the above investments be authorized
through December 31, 1999.
G. Rule 24 Certificates
________________________
NEES shall file certificates with the Commission pursuant to
the terms and conditions of Rule 24 under the Act on a quarterly
basis in connection with the formation of Marketing Companies. As
part of such Rule 24 filings, NEES shall provide the Commission
with: (1) copies of the by-laws and articles of organization or
incorporation of any Marketing Company formed during such period,
(2) a report of the number of permanent employees assigned to any
Marketing Company during such period, and (3) a balance sheet,
twelve months ending income statement, and statement of cash flow
for each Marketing Company.
Item 2. Fees, Commissions and Expenses
_______________________________________
Fees, commissions, and expenses to be incurred in connection
with the transactions contemplated by this Application/
Declaration are not expected to exceed $25,000. This amount
includes a $2,000 filing fee paid by wire transfer to the
Commission at the time of filing this Application/Declaration.
Item 3. Applicable Statutory Provisions
________________________________________
The sections of the Act and rules or exemptions thereunder
that are believed to be applicable to the transactions are:
Sections 6(a), 7, 9(a), 10, 12, and 13, and Rule 45, all relating
to the authority for NEES to undertake the transactions proposed
herein.
Item 4. Regulatory Approval
____________________________
State regulatory commission approval may be required before
the Marketing Company operating in a specific state may sell
<PAGE>
electricity to retail customers in that state.
Except for the foregoing, no Federal or state commission or
regulatory body, other than the Commission, has jurisdiction over
the proposed formation of the Marketing Companies.
Item 5. Procedure
__________________
The Applicants request that the Commission take action with
respect to this Application/Declaration without a hearing being
held, on or before May 15, 1996, or as soon thereafter as
practicable.
The Applicants (i) do not request a recommended decision by a
hearing officer, (ii) do not request a recommended decision by any
other responsible officer of the Commission, (iii) hereby specify
that the Division of Investment Management may assist in the
preparation of the Commission's decision, and (iv) hereby request
that there be no 30-day waiting period between the date of
issuance of the Commission's Order and the date on which it is to
become effective.
Item 6. Exhibits:
- ------------------
(a) Exhibits
B Form of Subordinated Note
*F Opinion of Counsel
*G-1 Financial Data Schedule for NEES (Parent Company
Only)
*G-2 Financial Data Schedule for NEES (Consolidated)
H Proposed Form of Notice
I Choice: New England
*To be filed by amendment
(b) Financial Statements
*1-A Balance Sheet of NEES at December 31, 1995,
Actual (Parent Company Only) (Pro Forma not
included since formation of new companies)
<PAGE>
*1-B Statement of Income and Retained Earnings for
NEES for twelve months ended December 31, 1995,
Actual (Parent Company Only) (Pro Forma not
included since formation of new companies)
*2-A Consolidated Balance Sheet of NEES at December
31, 1995, Actual (Pro Forma not included since
formation of new companies)
*2-B Statement of Consolidated Income for NEES for
twelve months ended December 31, 1995, Actual
(Pro Forma not included since formation of new
companies)
*To be filed by amendment
Item 7. Environmental Effects
______________________________
The transactions proposed by this Application/Declaration do
not involve a major Federal action significantly affecting the
quality of the human environment.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned company has duly caused this
Application/Declaration on Form U-1 to be signed on its behalf, as
indicated by the undersigned officer thereunto duly authorized.
NEW ENGLAND ELECTRIC SYSTEM
s/Michael E. Jesanis
_______________________________
Michael E. Jesanis, Treasurer
Dated: February 20, 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. 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 assumed or shall be held to any
liability therefore.
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
B Form of Subordinated Note Filed herewith
F Opinion of Counsel To be filed by
amendment
G-1 Financial Data Schedule for To be filed by
NEES (Parent Company only) amendment
G-2 Financial Data Schedule To be filed by
for NEES (Consolidated) amendment
H Proposed Form of Notice Filed herewith
I Choice: New England Filed herewith
Financial
Statement No. Description Page
- ------------- ----------- ----
1-A Balance Sheet of NEES at December 31, To be filed by
1995, Actual (Parent Company only) amendment
(Pro Forma not included since
formation of new companies)
1-B Statement of Income and Retained To be filed by
Earnings for NEES for twelve months amendment
ended December 31, 1995, Actual (Parent
Company only) (Pro Forma not included
since formation of new companies)
2-A Consolidated Balance Sheet of NEES at To be filed by
December 31, 1995, Actual (Pro Forma amendment
not included since formation of new
companies
2-B Statement of Consolidated Income for To be filed by
NEES for twelve months ended amendment
December 31, 1995, Actual (Pro
Forma not included since formation of
new companies
<PAGE>
EXHIBIT B
OPEN ACCOUNT ADVANCE
SUBORDINATED PROMISSORY NOTE
$_____________________ DATED:_________________
FOR VALUE RECEIVED, the undersigned [Name of Marketing Company]
(Marketing Company), a ____________ corporation hereby promises to pay to NEW
ENGLAND ELECTRIC SYSTEM (NEES) ON DEMAND, but in any event, no later than
____________ the principal sum of ________________________ DOLLARS
($____________) or, if less, the aggregate unpaid principal amount of all
advances made by NEES to Marketing Company pursuant to authority granted by
orders of the Securities and Exchange Commission under the Public Utility
Holding Company Act of 1935 (the 1935 Act) without interest. All such advances
and all payments made on account of the principal hereof shall be recorded by
NEES and endorsed on the grid attached hereto which is part of this Subordinated
Promissory Note.
TERMS OF SUBORDINATION
(a) The principal on this Subordinated Promissory Note is and shall be
subordinated in right of payment in all respects to all other indebtedness of
Marketing Company to any lender which is not an "affiliate" of Marketing
Company, as that term is defined in the 1935 Act (hereinafter, "Senior Debt").
(b) Without limiting the foregoing subparagraph (a), (i) no payment on
this Subordinated Promissory Note shall be made or received, directly or
indirectly, in cash or other property or by set-off or in any other manner
(including, without limitation, from or by way of collateral), so long as any
Senior Debt remains outstanding, except that prepayments of principal on this
Subordinated Promissory Note may be made and received so long as, but only so
long as, at the time of such payments and immediately after giving effect
thereto, no Event of Default, or event which, with the giving of notice or the
lapse of time, or both, would become an Event of Default exists under the
provisions of any Senior Note or any other instrument evidencing Senior Debt or
any agreement under which Senior Debt is then outstanding, and (ii) in the event
of any insolvency or bankruptcy proceedings directly or indirectly involving
Marketing Company, then all principal of and interest (including, without
limitation, any and all interest which shall accrue after the filing of any
petition in bankruptcy) on, the Senior Debt shall first be paid in full before
any payment on account of principal, premium (if any) or interest is made upon
this Subordinated Promissory Note, and in any such proceedings any payment or
distribution of any kind or character, whether in cash, securities or other
property, to which the holder of this Subordinated Promissory Note would be
entitled if this Subordinated Promissory Note were not subordinated to the
Senior Debt shall be made by the liquidating trustee or agent or other person
making such payment or distribution, or by the holder of this Subordinated
Promissory Note if received by him, directly to the holders of the Senior Debt
to the extent necessary to make payment in full of the Senior Debt remaining
unpaid, after giving effect to any concurrent payment or distribution to or for
the holders of the Senior Debt.
<PAGE>
ADVANCES AND
REPAYMENTS OF PRINCIPAL
Advances and payments of principal of this Subordinated promissory Note
were made on the dates and in the amounts specified below:
DATE AMOUNT AMOUNT OF BALANCE OF NOTATION
OF LOAN PRINCIPAL PRINCIPAL MADE BY
PRE-PAID OR UNPAID
REPAID
<PAGE>
EXHIBIT H
PROPOSED FORM OF NOTICE
New England Electric System ("NEES"), a registered holding
company under the Public Utility Holding Company Act of 1935 (the
"Act") has filed a Form U-1 Application/Declaration (File No.
70-____) under Sections 6(a), 7, 9(a), 10, 12, and 13 of the Public
Utility Holding Company Act of 1935 and Rule 45 thereunder. NEES
owns retail electric companies (the "Retail Companies"), New
England Power Company ("NEP") which generates, purchases,
transmits, and sells electric energy in wholesale quantities, New
England Power Service Company ("NEPSCO"), a service company, New
England Energy Incorporated, an oil and gas exploration and
development company, and New England Electric Resources, Inc.
("NEERI"), a consulting services company. NEES also owns a number
of special purpose companies.
Neither NEES nor any subsidiary currently has an ownership
interest in an exempt wholesale generator ("EWG") as defined in
Section 32 of the Act or a foreign utility company ("FUCO") as
defined in Section 33 of the Act. Additionally, neither NEES nor
any subsidiary is a party to, or has any rights under, a service,
sales, or construction agreement with an EWG or FUCO. NEES and
NEERI have filed an Application/Declaration (File No. 70-8783)
requesting authority to make EWG and FUCO acquisitions and
financings.
In 1995, the NEES companies announced Choice: New England, a
plan to allow all customers of electric utilities in
Massachusetts, Rhode Island, and New Hampshire to choose their
power supplier beginning in 1998. Choice: New England was
developed in response to 1995 decisions by the Massachusetts
Department of Public Utilities ("MDPU") and the Rhode Island Public
Utilities Commission ("RIPUC") approving a set of principles for
industry restructuring. These principles included allowing
utilities the opportunity to recover the amount by which costs
exceed market prices, commonly referred to as "stranded costs".
Under Choice: New England, the pricing of generation would be
deregulated. However, customers, would have the right to receive
service under a "standard offer" from the incumbent utility, the
pricing of which would be approved in advance by regulators.
Customers electing the standard offer would be eligible to choose
an alternative power supplier at any time, but would not be
allowed to return to the standard offer. Under Choice: New
England, transmission and distribution rates would remain
regulated; however, the plan proposes that cost of service pricing
of distribution rates would be supplemented by a system that would
reward or penalize distribution utilities for their performance
relative to benchmarks established by regulators. Choice: New
<PAGE>
England proposes that the cost of NEP's past generation
commitments be recovered through a wires access charge.
Choice: New England is subject to approval by state and
federal regulators and the timetable for their consideration is
uncertain. The plan was filed with the Massachusetts Department
of Public Utilities on February 16, 1996.
As a step toward implementation of Choice: New England, NEES
proposes to form one or more marketing companies in each New
England state, New York, New Jersey, Pennsylvania, Maryland, and
Delaware (the "Marketing Companies"). Marketing Companies would be
established in Massachusetts, Rhode Island, and New Hampshire to
provide standard offer services to existing customers of the
Retail Company (each such Marketing Company, a "Standard Offer
Marketing Company"). Marketing companies may also be established
in each of the states referenced above to market electricity to
retail and wholesale customers (each such Marketing Company, a
"General Marketing Company").
The Marketing Companies also propose to provide a broad range
of energy and related services to customers. These services
include but are not limited to, audits, power quality, fuel
supply, repair, maintenance, construction, design, engineering and
consulting.
Staffing is expected to begin with a small group of employees
for the Marketing Companies, primarily sales staff. Technical and
support staff needed for a particular project could be assigned
for the duration of that project from other affiliated companies,
and the assigned employees would continue to be employees of the
affiliated company. All costs associated with such staff
(including compensation, overheads, and benefits) would be fully
reimbursed by the Marketing Company to which they were assigned.
Reimbursements for these costs will be on a thirty-day cycle
basis.
Marketing Company employees will have access only to
information supplied to the marketplace as a whole. The
relationship between the marketing affiliate and regulated
operations will be governed by defined standards of conduct and
with formal audit procedures. Separate books and records will
also be maintained. Procedures similar to those adopted by FERC
for gas marketing affiliates will be adopted for the Marketing
Companies.
NEES proposes to provide initial financing for each Marketing
Company by the purchase of one thousand shares of the common
stock, par value $1.00 per share, for a total purchase price of
$1,000. NEES then proposes to make capital contributions and/or
loans to the Marketing Company from time to time, provided that
such NEES financing to all Marketing Companies shall not be in
<PAGE>
excess of $15 million, in the aggregate outstanding at any one
time. Any such loans will be in the form of non-interest bearing
subordinated notes payable in twenty years or less from the date
of issue. It is proposed that the above investments be authorized
through December 31, 1999.
<PAGE>
EXHIBIT I
CHOICE: NEW ENGLAND
The NEES Companies' Proposal for
Restructuring the Electric Utility Industry
February 1996
______________________________
[NEES LOGO]
<PAGE>
TABLE OF CONTENTS
Page
I. The Existing Structure. . . . . . . . . . . . . . . . . . .4
A. The Wholesale Transaction: NEP to the Distribution
Company. . . . . . . . . . . . . . . . . . . . . . . .5
B. The Retail Sale: The Distribution Company to the
Customer . . . . . . . . . . . . . . . . . . . . . . .8
II. Existing Structure: Unbundled Prices . . . . . . . . . . 11
A. The Wholesale Sale: Separate Prices for Transmission
and Generation Services. . . . . . . . . . . . . . . 11
B. The Retail Sale: Unbundled Prices for Transmission and
Distribution Service . . . . . . . . . . . . . . . . 13
III. Modified Structure: Functionally Unbundled Transmission
Service . . . . . . . . . . . . . . . . . . . . . . . . . 14
A. The Transfer of Control -- the Consolidation of
Transmission Service Within NEES Transmission. . . . 17
B. Transmission Service to the Distribution Companies . 19
C. Transmission Service to Third Parties. . . . . . . . 21
IV. Revised Structure: Customer Choice (Transition Period) . 24
A. Reformed NEP Contract with Distribution Companies. . 25
B. New Contracts for Power Supply between NEP and its
Marketing and Standard Offer Affiliates. . . . . . . 26
C. Distribution Companies' Rates and Obligations to Retail
Customers. . . . . . . . . . . . . . . . . . . . . . 27
D. The Standard Offer to Retail Customers . . . . . . . 30
E. Market Priced Contracts with Retail Customers. . . . 31
F. NEPOOL Membership. . . . . . . . . . . . . . . . . . 31
<PAGE>
V. Revised Structure: Customer Choice (Transition Complete) 36
VI. Conditions and Timeline Associated with Plan
Implementation......................................37
<PAGE>
CHOICE: NEW ENGLAND
THE NEES COMPANIES' PROPOSAL FOR
RESTRUCTURING THE ELECTRIC UTILITY INDUSTRY
Customer choice -- a simple concept that drives nearly every
economic decision in today's marketplace. The concept is about to
be extended to the electric utility industry. This is our plan to
provide our customers with a choice for their electricity
supplier.
Implementing customer choice presents a significant
structural, economic, and technical challenge to the electric
utility industry. Our business is now structured with vertically
integrated, heavily regulated firms operating within exclusive
franchise areas. It will have to be reformed to allow new
suppliers, market pricing, and customer choice. Transmission
access must be provided on fair, nondiscriminatory terms.
Obligations must be adjusted and transition costs recovered.
Statutes and regulations at both the federal and state levels must
be revised to accommodate the new industry structure.
This document describes our proposal for addressing these
challenges. It specifies the conditions and changes that are
necessary to provide customer choice in a meaningful and
nondiscriminatory way that maximizes incentives for efficiency and
maintains the reliability of the network. The plan contemplates
industry restructuring throughout New England and
<PAGE>
the Northeast creating an active retail market for electricity
across our region. Accordingly, it provides a blueprint for all
utilities in the Northeast. However, the details are focused on
our corporate structure and operations.
The plan is organized in five parts. First, we describe the
way our system is currently organized and regulated. Second, we
unbundle, or separately identify and price, the components of
service that are included in today's rates for electricity.
Third, we functionally unbundle transmission service from the
generation business at the wholesale level. Fourth, we extend
this separation to retail access during a transition period.
Finally, we show the restructured industry after the transition is
complete.
This plan is intended to comply with the policy
pronouncements of all of our principle regulators including the
Federal Energy Regulatory Commission under the Federal Power Act,
the Securities and Exchange Commission under the Public Utility
Holding Company Act, and the state commissions in Massachusetts,
Rhode Island, and New Hampshire acting under their respective
state utility laws. Each of those agencies have issued
significant new policy pronouncements on industry structure within
the past year. This plan is designed to comply fully with all
requirements in each jurisdiction in a way that is consistent
<PAGE>
with the statement of interdependent principles that have been
reached by several interested parties in both Rhode Island and
Massachusetts.
To accomplish this goal, we have built flexibility into the
plan. Specifically, the plan has been designed to allow different
policy choices among each of the states that we serve. Moreover,
the plan recognizes that several options are available to address
each of the myriad issues presented by restructuring. These
options will be discussed at length in the proceedings leading to
plan approval.
Despite this flexibility, the plan is concrete and complete.
It has sufficient detail to ensure that it will work if
implemented. The completeness of the plan has allowed us to work
through the details, develop the documentation, and identify the
changes that are essential to a successful restructuring of our
company and our industry. As such, this proposal should advance
the policy debate from principles to practice. It is a concrete
action plan for customer choice.
<PAGE>
I. THE EXISTING STRUCTURE
A. The Wholesale Transaction: NEP to the Distribution
Company.
B. The Retail Sale: The Distribution Company to the
Customer.
NEP
||
|| I.A.
||
||
DISTRIBUTION COMPANY
||
|| I.B.
||
||
CUSTOMER
||
||
||
||
<PAGE>
I. The Existing Structure.
Unlike most utilities that operate as a single integrated
company, the New England Electric System Companies are already
partially disaggregated. New England Power Company (NEP) controls
and operates all the generation and transmission resources on the
system and provides wholesale, all-requirements power supplies to
three affiliated distribution companies operating in
Massachusetts, New Hampshire, and Rhode Island (together the
"Distribution Companies"). The three Distribution Companies --
Massachusetts Electric Company, Granite State Electric Company,
and The Narragansett Electric Company -- distribute and resell the
power to retail customers. A simplified corporate structure for
each state is shown on Figure I.
As Figure I illustrates, two key transactions define the
current power supply relationship: (a) the wholesale power
transaction between NEP and the Distribution Company, and (b) the
resale of the power from the Distribution Company to retail
customers. A review of each of these transactions is important to
establish the baseline from which our restructuring plan begins.
Thus, each of the transactions is summarized below. However,
despite separate wholesale and retail transactions, the NEES
companies as a whole have operated as a tightly integrated system.
Thus, from the perspective of our customers, service from Mass.
Electric, Narragansett, or Granite State Electric is equivalent to
a purchase from a single vertically integrated utility company
such as Boston Edison Company. As with Boston Edison, Mass.
Electric provides electricity to retail customers under bundled
rates that do not include separate charges for generation,
transmission, or distribution.
A. The Wholesale Transaction: NEP to the Distribution
Company.
NEP provides wholesale service to all three of its affiliated
Distribution Companies and several unaffiliated customers under a
contract that is subject to comprehensive regulation by the
Federal Energy Regulatory Commission (FERC) acting under Part II
of the Federal Power Act, 16 U.S.C. 824 et seq. The key features
of the contract include the following (NEP
Primary Service for Resale, Original Vol. No. 1, the "NEP
<PAGE>
Tariff"):
1. NEP is committed to providing all of the electricity
requirements of each Distribution Company and
maintaining an aggregate capacity of generation and
transmission facilities sufficient to cover the
Distribution Company's current loads and expected load
growth. (NEP Tariff, Sch. 1, p. 4)
2. The Distribution Companies are committed to providing
NEP with seven years' notice before changing supply
sources or serving the loads of additional utilities.
(Id, Sch. 1, pp. 3, 9)
3. Under a Memorandum of Understanding executed by NEP and
the Distribution Companies that amended their service
agreements, FERC Docket, ER94-1074-000,1 NEP has agreed
to submit its integrated resource plan for review by the
state commissions in Massachusetts, New Hampshire, and
Rhode Island, and to subject all significant new supply
side commitments involving contracts or commitments
longer than three years for purchases or projects having
capacity over 30 megawatts to a single state veto by any
state commission. Each of the Distribution Companies
has agreed to pay the costs that NEP has incurred to
serve it in the event the Distribution Company
terminates all or any part of its purchases under NEP's
tariff, or a law, rule, or order is promulgated which
limits the right of the Distribution Company to be the
exclusive seller of electricity at retail within its
current franchise territory.
4. NEP's wholesale prices under which the Distribution
Companies purchase their power requirements are
established using a marginal cost rate design under
which NEP's tail blocks are based on its long run
marginal costs and an initial block is used to reconcile
the overall revenues that NEP collects to its reasonable
and prudent costs of providing service. Today, NEP's
tail block prices are based on its long
_________________
1The Memorandum of Understanding was approved by the State Commissions in
Massachusetts (Docket D.P.U. 93-138 (Nov. 3, 1993)), New Hampshire (Docket DE
93-141 (Sept. 9, 1993)), and Rhode Island (Docket No. 2116 (Sept. 28, 1993)).
The Memorandum of Understanding was approved by FERC as an amendment to the
service agreements of the respective Distribution Companies in Docket ER94-
1074-000.
<PAGE>
run marginal costs under its current resource plan. The
resource plan assumes that NEP continues to have the
right and responsibility to plan for and procure
adequate capacity for the Distribution Companies
electricity needs including load growth. As a result of
capacity additions that would be required under the
resource plan approved by the three state commissions,2
NEP's marginal cost tail block is significantly higher
than the short run marginal costs reflected in the
current market.3
5. The specific prices that NEP is now charging for
wholesale service are established by a settlement
agreement on the W-95 rates. Under that agreement,
prices are fixed at least through January 1, 1997.
6. NEP's prices for requirements service are bundled.
Because the Distribution Companies are required to buy
all of their power requirements from NEP, NEP has not
priced transmission service separately from the cost of
generating kilowatthours.4
The all-requirements contract, together with the requirements
of the Public Utility Holding Company Act of 1935 that mandate the
operation of registered holding companies as
integrated systems, have allowed and required the NEES Companies
to operate together as one integrated system with a single
________________
2 Settlements covering the 1994 edition of the integrated resource plan for the
NEES Companies were approved by each of the three state commissions in Docket
D.P.U. 94-112 (Massachusetts, Nov. 1, 1994), Docket No. 2231 (Rhode Island,
Mar. 3, 1995) and Docket No. DE 94-063 (New Hampshire, April 11, 1995).
Pursuant to those settlements, 1995 updates were filed with the Commissions.
No action was taken under the updated forecast by the Commissions or the parties
to the cases.
3 Long-run marginal costs will almost always exceed short-run marginal costs
under the current system of regulation given the need for reserve margins and
long-run plans that are designed to assure that available supplies will always
exceed demands with only a limited ability to clear demand and supply through a
market price.
<PAGE>
unified resource plan. Thus, NEP has had primary responsibility
for owning, operating, or purchasing supplies necessary to meet
the electricity needs of all three Distribution Companies, and
making adequate arrangements to transmit these supplies across the
regional transmission network. NEP has the assigned capability
responsibility within NEPOOL. It integrates these resources into
its own load dispatch under the NEPOOL Agreement. And it
allocates the costs of this bundled service to the Distribution
Companies under the rates established by FERC under NEP's all-
requirements tariff. The costs associated with these purchases
are then reflected in the rates that the Distribution Companies
charge to retail customers -- the second key transaction that
occurs under the existing structure.
B. The Retail Sale: The Distribution Company to the
Customer.
In contrast to the wholesale transaction which is regulated
by FERC, the Distribution Company's resale of the power to retail
customers is comprehensively regulated by state commissions. The
_________________
4 In addition to the Distribution Companies, NEP provides all-requirements
service to seven other nonaffiliated customers under the NEP Tariff at the same
prices and on the same terms as the affiliates. These nonaffiliated customers
will be affected by future modifications to NEP's Tariff insofar as they affect
wholesale transactions, but may not be affected by changes associated with
retail access. Specific details will have to be developed with the
nonaffiliated customers that should not prevent or delay implementation of
choice for affiliated Distribution Companies.
<PAGE>
key features of this transaction are as follows:
1. The Distribution Companies generally have the obligation
to serve the electricity needs of all customers within a
defined franchise or service area on demand. Thus, they
have an obligation to extend distribution lines and
arrange for adequate transmission and generation
capacity to meet the peak demands of all customers
wherever located. The Distribution Companies discharge
the first obligation themselves, but, as discussed
above, have contracted with NEP to provide the
transmission and generation functions.
The regulatory obligations associated with planning and
resource procurement have intensified in recent history.
Planning has become more sophisticated, and new
suppliers, resource options and legal requirements have
increased the complexity of the planning and resource
procurement process. This complexity has been reflected
in the coordinated, three-state planning and resource
procurement reviews incorporated in the Memorandum of
Understanding discussed above.
2. Unlike NEP, the Distribution Companies have
traditionally had limited contractual relationships
with retail customers. Rather, the Distribution
Companies have relied on the exclusivity of their
franchises and on their statutory and constitutional
rights to commission determined rates that recover the
reasonable costs of providing regulated service to
support the financial commitments and investments that
have been made to supply service to customers. In
recent years, we have supplemented these statutory
rights with direct customer contracts. For example, we
have implemented Service Extension Discount Agreements,
and Service Extension Agreements with many of our
largest customers. Under these agreements, customers
have agreed to provide us with five years advance notice
before taking service from an alternative supplier.
These Agreements are addressed directly in this plan.
3. The Distribution Companies have special obligations
stemming from their role in providing an essential
service to the customers in their service territories.
For example, Distribution Companies have provided
conservation and load management services, have
obligations to provide universal service to customers
<PAGE>
with special rates to low income customers, and face
limitations on their ability to terminate service for
nonpayments.
4. The Distribution Companies, as with utilities in
general, must comply with laws and regulations requiring
approvals for or reviews of financing, accounting,
business transactions, and affiliate transactions not
faced by other firms in our economy. For example, under
state law, our Distribution Companies and other
utilities must receive commission approval of all long
term financings, property acquisitions and sales, loan
guarantees, affiliate transactions, and changes in
accounting. These financial, accounting, and business
restrictions are particularly stringent under the Public
Utility Holding Company Act of 1935.
5. The rates and terms of service are also comprehensively
regulated by state commissions. Historically, this
regulation has been designed to achieve two primary
objectives -- first, to establish the utility's overall
revenues at a level necessary to recover its reasonable
and prudent cost of providing service, and second to
prevent unreasonable price discrimination among
customers or customer classes. These purposes have been
achieved by requiring a filing and extensive
investigation into the reasonableness of the utility's
costs and operations prior to authorizing the utility to
change prices.
Thus, the existing structure for the industry is
characterized by tightly integrated planning and operations,
bundled service for supply and transmission, and comprehensive
regulation at both the state and the federal level to control
prices, assure adequate supplies, prevent discrimination, and
promote universal service.
<PAGE>
I. THE EXISTING STRUCTURE: UNBUNDLED PRICES
A. The Wholesale Sale: Separate Prices for
Transmission and Generation Services.
B. The Retail Sale: Unbundled Prices for Transmission
and Distribution Service.
NEP
||
|| II.A.
||
||
DISTRIBUTION COMPANY
||
|| II.B.
||
||
CUSTOMER
||
||
||
||
<PAGE>
II. Existing Structure: Unbundled Prices.
The first step to reform and restructure the industry is to
unbundle the price. By separately pricing generation,
transmission, and distribution services, we improve price signals
to customers and move toward unbundled service. Thus, unbundled
prices are necessary to implement FERC's comparable service
transmission policies, and are a requirement for the upcoming
Massachusetts plan filing. As shown on figure III, unbundling
affects both the wholesale and retail transactions discussed in
the first section of this report. Each of these transactions will
be discussed in turn.
A. The Wholesale Sale: Separate Prices for Transmission
and Generation Services.
Unbundling begins by reformulating the wholesale rate design
for NEP's Tariff to the Distribution Companies. The following
changes are proposed for this transaction under our proposal:
1. Unbundle Transmission Rates from All-Requirements
Service. Under the all-requirements tariff, NEP
provides the Distribution Companies with transmission
service as well as power supply. The unbundled pricing
requires a wholesale rate redesign to break out
transmission costs from generation costs in the NEP
Tariff. The long run marginal cost of transmission
expansion is now reflected in NEP's tail block, and the
embedded cost reconciliation is included in the initial
block. Thus, NEP's rates will be redesigned to
eliminate the transmission components from both price
blocks, and recover them as a separate charge.
The plan also contemplates functional disaggregation of
transmission. This functional disaggregation is
discussed in the next section of this report, together
with the details of the rate design associated with the
redesigned rates for transmission service.
<PAGE>
2. Establish NEP's Marginal Cost Tail Blocks at Short Term
Market Value. As explained under Section I, NEP's tail
block rates are now established at our best projection
of NEP's long run marginal cost of supply developed on
the assumption that NEP continues to have the right and
obligation to serve the electricity requirements of all
customers in the Distribution Companies' service areas.
This approach sets NEP tail block at a higher level than
the current prices in the short term market, and
thus does not provide the Distribution Companies with a
competitive short term price signal. Moreover, the
assumption underlying the long run marginal cost
calculation -- that NEP will remain the sole supplier of
electricity to the customers served by the Distribution
Companies -- is no longer valid. Accordingly, depending
upon the restructuring proposals adopted by
policymakers, NEP may adjust its tail block for energy
down to short run market values, and reflect the
difference in the initial block charge in the wholesale
rate.
Under our proposal, NEP's wholesale rate design will reflect
a separate charge for transmission. The implementation of this
rate design change will require a filing with FERC, which NEP will
request become effective on a prospective basis. NEP is currently
under a rate moratorium that precludes NEP from implementing any
rate change that would increase revenues prior to January 1, 1997.
(W-95 Settlement, Art. 4.0, pp. 12-13). Thus, any rate design
change implemented prior to that time will be done in a revenue
neutral fashion.
B. The Retail Sale: Unbundled Prices for Transmission and
Distribution Service.
The change in the wholesale rate design allows the
Distribution Companies to develop unbundled rate designs for
<PAGE>
retail customers. Unbundled rates need not mean unstable rates or
radical rate redesigns. The bundled, retail prices charged by the
Distribution Companies today are fully cost based, relatively
stable, and the lowest among major utilities in New England. The
unbundled rates will be implemented initially to produce the same
revenues without significant bill impacts for customers.
Actions Required to Implement this Section of the Plan.
Implementation of this portion of the Plan requires the
following:
1. NEP must file a new rate design with FERC. The filing
can be implemented by FERC without any changes to
regulations or statutes under existing precedent that
fully authorizes marginal cost rate designs.
2. The Distribution Companies must unbundle existing retail
rates into generation, transmission, and distribution
components.
<PAGE>
III. MODIFIED STRUCTURE: FUNCTIONALLY
UNBUNDELED TRANSMISSION SERVICE.
A. The Transfer of Control -- The Consolidation of
Transmission Service Within NEES Transmission.
B. Transmission Service to the Distribution
Companies.
C. Transmission Service to Third Parties.
NEP
||
||
Third Parties NEES III.A ||
Transmission ||
||
||
||
III.B DISTRIBUTION
COMPANY
||
||
||
||
||
||
CUSTOMER
<PAGE>
III. Modified Structure: Functionally Unbundled Transmission
Service.
The unbundled pricing for transmission service summarized in
Section II does not fully address FERC's policies for comparable
transmission service at the wholesale level. Under FERC's
preliminary view, (Open Access NOPR, Docket Nos. RM95-8-000 and
RM94-7-001, p. 94):
functional unbundling of wholesale services is
necessary to implement nondiscriminatory open
access. Accordingly, the proposed rule requires
that a public utility's uses of its own
transmission system for the purpose of engaging
in wholesale sales and purchases of electric
energy must be separated from other activities,
and that transmission services (including
ancillary services) must be taken under the
filed transmission tariff of general
applicability. The proposed rule does not
require corporate unbundling (selling off assets
to a non-affiliate, or establishing a separate
corporate affiliate to manage a utility's
transmission assets) in any form, although some
utilities may ultimately choose such a course of
action.
Our plan chooses to implement corporate unbundling of NEP's
generation and transmission system as the quickest, fairest, and
most effective avenue toward nondiscriminatory open access
transmission tariffs. (See Figure III). Specifically, we propose
to create a new corporation -- tentatively called NEES
Transmission Services Inc. or NEES Transmission -- that will have
the responsibility for providing transmission services under
nondiscriminatory, open access transmission tariffs that fully
<PAGE>
comply with FERC's policy directives. (NOPR, pp. 95-96). NEES
Transmission will provide comparable transmission services to NEP
for its own power marketing services and to all of NEP's power
supply and transmission customers, including the affiliated
Distribution Companies, at the same rates and on the same terms
and conditions. It will develop and file separately stated rates
for the transmission and ancillary service components of each
transmission service it provides. NEES Transmission will support
an electronic information network for arranging transmission
services that all transmission customers will use when buying and
selling their power supplies. Finally, NEES Transmission will
provide all necessary ancillary services to all transmission
customers who do not supply their own ancillary services, or
receive them directly from NEPOOL
In short, the functional unbundling of NEES Transmission into
a separate company with the same filed transmission tariffs
available to affiliates and nonaffiliates is designed to meet
fully FERC's proposed requirement that "a public utility take
transmission service for wholesale requirements service
coordination transactions under its own filed tariff." (NOPR, p.
97). As FERC correctly concluded, this requirement "places the
correct incentives on the public utility to file a fair tariff
since it must live under those terms for wholesale purposes."
(NOPR, p. 97).
<PAGE>
Not only will the NEES Transmission tariffs be available for
nondiscriminatory access for wholesale transactions, these tariffs
will be used for retail transactions as well. Specifically, NEES
Transmission will provide transmission service to the Distribution
Company that the Distribution Company can use to provide retail
access or choice to its customers. This unified treatment of
wholesale and retail wheeling is also consistent with FERC's
policy guidance. In the NOPR (p. 99), FERC suggested:
One possible approach that would unify service
standards for wholesale and retail service would
be for each vertically integrated utility to
establish a distribution function that would be
responsible for obtaining transmission service
on behalf of retail customers. This
distribution function then could be treated just
as any other wholesale customer. The
distribution function of the utility would take
service under the single commission filed
tariff.
NEES Transmission's transmission tariffs implement that vision.
They will assure comparable, open access transmission service for
both wholesale and retail wheeling services. They are a
cornerstone of our plan for retail choice.
The implementation of NEES Transmission and open access
transmission tariffs requires the establishment of a new
corporation on the NEES System and creates the following three new
transactions as shown on Figure III.
<PAGE>
A. The Transfer of Control -- the Consolidation of
Transmission Service Within NEES Transmission.
The development of NEES Transmission begins with the transfer
of transmission rights, entitlements, and obligations from NEP to
the new transmission company. Initially, this transfer will be
implemented through an assignment under which NEES Transmission
will gain the right to control the transmission system in return
for reimbursing NEP all costs associated with the transmission
system. The approach is quite similar to NEP's present G&T credit
arrangement with Narragansett. Under that arrangement NEP
controls Narragansett's generation and transmission facilities and
reimburses Narragansett the full cost of those facilities under a
contract and terms filed with and approved by FERC.
The same approach will be used to transfer control of
transmission from NEP to NEES Transmission. This transfer
requires a careful review and allocation of costs between NEP's
generation functions and its transmission operations, and the
separation or unbundling of transmission and generation services
in several hundred historical contracts. The review and
allocation will be filed with FERC and thus be subject to a
complete investigation into its fairness.
Among the key issues faced in that review is the allocation
of the costs of generation that must be maintained on the system to
protect reliability in specific areas. On our system, the
<PAGE>
best example is the Salem Harbor units which must be kept in
operation to maintain reliable service in northeastern
Massachusetts. Although this reliability could also be maintained
through significant enhancements to the transmission network in
the area, our preliminary analysis indicates that keeping most of
the Salem Harbor units open even at a premium to the pure market
price of other power supplies may be the least-cost solution for
reliable service in the area. To implement that approach in
northeastern Massachusetts and other areas with local transmission
constraints will require payment from NEES Transmission to the
generating company or other potential suppliers to assure
continued availability of critical units. These payments are
appropriately included in NEES Transmission's cost of service.
Under the tariffs discussed below, NEES Transmission will be
the provider of transmission services for the NEES companies.
Thus, NEP's existing contracts and tariffs will be assigned and
reformulated as appropriate to assign transmission rights and
obligations to NEES Transmission. The objective will be to
consolidate and simplify all existing wholesale transmission
offerings into tariffs that conform to FERC's open access,
comparable service policies. Because NEP, and not NEES
Transmission, owns the transmission assets, franchise rights, and
condemnation authority, NEP will continue to permit, build, and
<PAGE>
operate the transmission system. However, NEP will provide new
service exclusively at the request of NEES Transmission and NEES
Transmission will respond to all requests for service from
affiliates and third parties in accordance with FERC regulations.
NEES Transmission will be the exclusive supplier of transmission
services to third parties and affiliated Distribution Companies
under the rates and contracts discussed in the following sections.
B. Transmission Service to the Distribution Companies.
NEES Transmission will bill out the costs for transmission
service to network and point to point transmission customers
pursuant to FERC filed tariffs. The primary customers for network
service will be NEES Transmission's affiliated Distribution
Companies. Under its tariff, NEES Transmission will bill the
Distribution Companies at the network tariff based on peak
demands. By functionally unbundling network transmission service
to the distribution companies at the wholesale level, we will have
achieved one of FERC's significant policy objectives. NEES
Transmission's wholesale transmission service to affiliates and
nonaffiliates will be at the same price and on the same terms. The
service will apply equally to native load customers and
transmission only customers. Both the transaction between NEES
Transmission and NEP, and the rates between NEES Transmission and
its customers will be subject to comprehensive
<PAGE>
and consistent FERC review. Discrimination and unfair dealing
will be prevented. FERC's comparable service, open access
policies for wholesale transmission service should be fully
achieved.
These same policies also apply for retail access. Following
the FERC model, the rates for transmission service over the NEES
Transmission system to the Distribution Company will be the same,
regardless of the power supplier to the retail customer. Thus,
the same NEES Transmission rate will be added to the access and
distribution charges developed by the Distribution Companies for
retail service. The extension of transmission service to retail
customers is discussed fully in the next section of this plan.
Under the plan, the terms and conditions for retail wheeling will
apply to all load within the service territories of the
Distribution Companies and unaffiliated customers now served under
the requirements rate. Thus, NEES Transmission will develop terms
which assure that load now served by these customers will pay
comparable rates whether access is gained through retail service
or through reclassification as a wholesale customer.5 The
objective is to assure that appropriate transmission charges
determined under the plan are not bypassable or subject to gaming,
and that unified, consistent requirements are established for all
load served within each Distribution Company's service area.
<PAGE>
C. Transmission Service to Third Parties.
The final element associated with unbundled transmission is
the service and rates to third parties for point to point and
network service. As explained above, these services will be
supplied exclusively by NEES Transmission for the use of the
System's transmission entitlements at rates that conform to FERC's
open access comparable service policies. Third parties taking
service under the network or point to point tariffs will be
charged at the same rates, terms, and conditions as affiliates.
Conforming tariffs will be filed with FERC.
The structure and operation of these tariffs may be affected
by the ongoing discussions in New England that may lead to the
formation of a regional transmission group ("RTG"). The formation
of an RTG, however, is not a condition to the implementation of
this element of our plan. We recognize that many of the
transmission issues presented by unbundled service can best be
addressed through a regional solution, but we do not
__________________
5 As discussed below, the rates for distribution service to current customers
within the Distribution Companies' service territory will include an access
charge sufficient to cover all the sunk generation-related costs that have been
incurred to serve those customers. These charges should not be avoided by
nominal reclassification of load from "retail" to "wholesale," and thus
appropriate charges and crediting arrangements between NEES Transmission, the
Distribution Company and customers will be developed to assure consistent,
comparable pricing in these circumstances.
<PAGE>
believe that progress toward customer choice should await complete
reform of regional transmission practices or of NEPOOL
requirements in general. Reforms and improvements in these
systems will only enhance the benefits already incorporated and
realizable under our plan for broad customer choice in New
England.
In conclusion, our plan contemplates the functional
unbundling of transmission service through a separate corporation
at standard tariffs applicable to both affiliates and
nonaffiliates for both wholesale and retail wheeling services.
The plan complies fully with FERC's guidelines, and is a central
feature of fair and nondiscriminatory customer choice.
Actions Required to Implement this Section of the Plan.
Implementation of this portion of the Plan requires the
following:
1. The formation of a new corporation to provide
transmission services over the transmission facilities
and entitlements of the New England Electric System
Companies. The structure, authorities, and contracts of
this corporation should recognize the need to
consolidate transmission assets with transmission
services in the future. For various reasons, it may be
easier for NEP to retain ownership of transmission
facilities and transfer ownership of its generation
facilities to a separate corporation. Thus, the
corporate arrangements, contracts and tariffs should
accommodate further corporate restructuring through
mechanisms like assignment clauses.
Forming and financing the new corporation will require
approvals from the Securities and Exchange Commission
and state commissions. NEES Transmission will also be
subject to FERC's jurisdiction.
<PAGE>
2. The development and filing of the contracts for
transmission services. The development of the contracts
and tariffs discussed in this section is well underway,
and can be accomplished simultaneously with the price
unbundling of NEP's requirements rate discussed under
Section II above.
The formation of NEES Transmission and the implementation of
the transmission filings under this section of the plan can be
accomplished under existing statutes and regulations, and are
consistent with current FERC policies and precedent. The
corporate restructuring and provision for retail transmission
services contemplated in this section of the plan assumes
voluntary action by NEP, which NEP is willing to undertake if the
conditions set forth in Section VI of this plan are achieved.
Absent approval of the conditions in Section VI and voluntary
action by NEP, the legal authority of commissions to force
divestiture or to require unbundled transmission access to retail
customers is strictly limited.
<PAGE>
[CHART INTENTIONALLY OMITTED]
<PAGE>
IV. Revised Structure: Customer Choice (Transition Period).
The formation of NEES Transmission and the implementation of
transmission tariffs is only one element necessary for customer
choice. Significant additional steps must be taken to assure that
the transition to customer choice proceeds reasonably and that a
vibrant and efficient supply market exists for retail customers.
Specifically, NEP's requirements contract must be reformulated to:
(1) provide NEP with a reasonable opportunity to recover costs
incurred to provide service to its wholesale customers; (2) waive
the notice period in the all-requirements rate; (3) redefine NEP's
and the Distribution Companies' obligations going forward; and (4)
create a standard offer to retail customers assuring them of a
reasonably priced, reliable power supply option during the first
phase of the transition period while the market develops. In
addition, arrangements must be established so that the reliability
of the grid can be maintained, NEPOOL requirements can be met, and
a vigorous competitive retail market can develop. This section of
the report sets forth our proposal to meet these objectives.
As with the other sections of the report, this section is
organized by transactions. The diagram of transactions is
included in Figure IV. They include the following:
<PAGE>
A. Reformed NEP Contract with Distribution Companies.
The first step for direct access requires the reformation of
the all-requirements contract between NEP and the Distribution
Companies. The reformed contracts will include the following
elements:
1. A Termination Charge. The termination charge will
recover the costs that NEP has incurred to serve the
Distribution Company from that Distribution Company and
not from any other Distribution Company as required by
the Memorandum of Understanding. The termination charge
will also compensate NEP for waiving the seven year
notice provisions and provide the key inducement for
providing the standard offer of service to retail
customers discussed more fully below. The termination
payment is designed to recover NEP's strandable costs
for existing resources above the market value of those
resources. The calculation of NEP's strandable costs is
provided separately. The pattern of recovery for the
contract termination charge will be shaped so that rates
are stable for customers accepting standard offer
service. Customers seeking alternative suppliers will
then have the potential to realize savings. We expect a
defined payment stream over a period of years to be
specified for the termination charge in the final plan.
As discussed below, these payments will then be
recovered as part of an access charge by the
Distribution Companies to their retail customers.
2. A Shift in Power Supply Requirements. Following the
implementation of the plan, the Distribution Companies
will be limited to the wires business, and power sales
for all customers will be accomplished through separate
affiliates. During the transition period, NEP will
provide power supplies to the standard offer affiliate
and discontinue sales to the Distribution Company. The
standard offer affiliate will provide standard offer
service to customers until the transition is complete
when it will be dissolved. In addition, separate
marketing affiliates will be established to make sales
at market prices. These changes will allow the
Distribution Company to provide transmission and
distribution service to all suppliers in its service
territory at nondiscriminatory rates including
<PAGE>
reimbursement for the termination charge. It will
complete the implementation of the model for retail
wheeling suggested by FERC in its NOPR.
Because NEP will be shifting its units from regulated
cost of service pricing to unregulated market pricing,
it will request authority to implement market pricing
for its generation from FERC. In addition, NEP will
request certification as an exempt wholesale generator
under the Public Utility Holding Company Act and have
its generation designated as eligible facilities under
that statute. Consents by state ratemaking authorities
are required for this designation under the Holding
Company Act.
NEP's obligation to supply capacity additions to meet
load growth will also be governed by contracts and
marketing success rather than regulatory requirements.
Thus, the obligation to provide generating capacity to
meet future load growth will be deleted from the
contract with both Distribution Companies and marketing
affiliates.
B. New Contracts for Power Supply between NEP and its
Marketing and Standard Offer Affiliates.
As a replacement to the all-requirements supply obligation,
NEP will make an alternative contract with the standard offer
affiliates established in each state we serve. The standard offer
affiliate will in turn make the standard offer for service to
customers discussed below. In addition, NEP will develop market
priced contracts with its new marketing affiliates. The contracts
between NEP and the marketing affiliates will be based on market
value, not cost of service.
As part of the Plan, NEP will propose a program of continuous
environmental improvement at existing generating stations. Those
obligations are contemplated in the principles
<PAGE>
approved in Rhode Island and Massachusetts and will be included in
the Plan as well.
C. Distribution Companies' Rates and Obligations to Retail
Customers.
The reformation of the requirements contract completes the
functional unbundling of retail service. Under this plan, the
Distribution Companies obligations are limited to an obligation to
deliver at nondiscriminatory rates. The rates will include an
access charge to provide the Distribution Company reimbursement
for the NEP termination charge. All marketers and suppliers will,
under our plan, be required to provide power supplies through the
standard transmission and distribution rate. The rate for
transmission and distribution service will be nonbypassable, and
the same rate will be required for comparable service to any
customer within the Distribution Company's service area regardless
of whether the customer is classified as retail or wholesale. We
expect the contract termination provision and distribution rate to
be approved by both state commissions and FERC, so that consistent
nondiscriminatory application can be implemented for all users.
Under the Plan, electricity is supplied under the standard
offer or by the market at market prices by the Distribution
Companies' marketing affiliates and other marketers and suppliers.
Because customers may take the standard offer, many
<PAGE>
customers may perceive little or no change from today's industry
structure. If we are successful in shaping the transition charge,
the only immediate changes will be real price stability for
standard offer customers, and increased opportunities for choice
in the marketplace.
Two other features of the Distribution Companies' operations
may require adjustment. Conservation and load management programs
will continue under our Plan to be implemented by Distribution
Companies. The conservation programs will be available to all of
the Distribution Company's customers regardless of their supplier
and will be continued in accordance with a specific program that
will be agreed to as part of the Plan. The costs of the
conservation and load management programs would be recovered in
the regulated rates for the Distribution Companies subject to
state commission review and approval.6
Second, as explained above, the Distribution Companies have
executed contracts with several customers for service extension
discounts and service extension agreements. These contracts limit
customers' rights to purchase or generate electricity supplies
without providing advance notice to the Distribution Company. If
our plan is approved, however, we propose to allow customers who
have signed SED's and SEA's a window of opportunity to buy down
their notice requirements. The customers who elect to buy down
their notice requirements would be permitted to
<PAGE>
purchase power from a different supplier at the same time as other
customers pursuant to terms and conditions set forth in this Plan.
The notice provisions for self-generation would remain in place,
however. This approach will allow SED and SEA customers to gain
access to the market, and will stimulate the depth of supply and
demand that is necessary to create a meaningful market and a fair
market price. It also assures that our customers are not harmed by
their past commitments to our Company.
The rates for the Distribution Company may be based on
standard cost of service principles, or on a performance based
ratemaking ("PBR") approach. Different approaches may be taken in
the different states, or if PBR is selected, different policies
and details can be incorporated in each state's rate plan. Terms
and conditions and construction advance policies may also have to
be changed to reflect the lower revenues received from a
distribution only charge.
The rate setting process for the Distribution Companies is
critical during the transition period. The Distribution Company
must be allowed adequate revenues to maintain its financial
______________
6 A similar approach can be used to pay for the above market costs of renewable
power supplies that were reflected in the agreement on the principles in
Massachusetts and may be agreed to in the discussions leading to the approval of
this plan. Although the recovery of above market costs was rejected by the
Rhode Island Commision in its order on the Principles, we believe that the
substance of the agreement--calling for the development of renewable resources
- -- may be achievable in a manner that is consistent with the Rhode Island
Commission's concern about costs to customers.
<PAGE>
integrity during this period when the financial uncertainty
facing the Company is at its height. In addition, if a PBR design
is chosen, it can be tailored to provide concrete incentives for
efficiency or to meet public policy objectives
during this time when cooperative action by utilities is essential
to a smooth transition to a competitive future. A well designed
performance-based rate program will encourage improvements in
safety, reliability, customer satisfaction, universal service, and
efficient operation of the distribution system remaining subject
to rate regulation.
D. The Standard Offer to Retail Customers.
The last significant new interface between the NEES Companies
and retail customers is the promulgation of a Standard offer for
power supply, and the creation of a standard offer affiliate in
each state. As explained above, the Standard Offer will continue
at least through the transition period, and will provide customers
with a reasonably priced, reliable supply of electricity while the
market develops. Because different states may have different
policies, individual standard offer affiliates will be established
in each of our jurisdictions to comply fully with state
requirements. The different standard offer affiliates can then
tailor different standard offers to meet the
<PAGE>
requirements of each state commission. This approach is more
flexible and responsive than the promulgation of a single standard
offer for all jurisdictions.
E. Market Priced Contracts with Retail Customers.
In addition to the Standard Offer, new marketing affiliates
will compete in the market for retail customers within the
relevant state. Accordingly, the marketing affiliates and other
marketers, suppliers, and sellers at retail will undoubtedly be
subject to state commission regulations governing such items as
terminations, universal service, defaults, supply assurances, and
dispute resolution procedures. Regulations and statutory
requirements governing financing, accounting, corporate
organization, and general business regulation are less relevant in
the power supply market than under traditional utility service,
and should be eliminated or simplified. The marketing affiliate
in each state will then comply fully with each state's
requirements applicable to others participating in the competition
for customers.
F. NEPOOL Membership.
Finally, under the Plan, power marketers or their suppliers
must be members of NEPOOL, and thus, will be required to meet
NEPOOL rules including settlement of transactions and reliability
related obligations. Under the Plan, a marketer must either join
<PAGE>
NEPOOL or assign its load to a NEPOOL member and be reflected in
that member's requirements under the NEPOOL Agreement. An
amendment to the NEPOOL Agreement has recently been implemented to
expand NEPOOL's membership to include nontraditional suppliers and
marketers. These suppliers will be responsible for obtaining
capacity entitlements to support the loads of the customers signed
by them. In this way, the retail market can be developed within
the existing NEPOOL framework, and the reliability of the system
can be maintained.
This approach does not, however, lead to inordinately complex
metering or billing arrangements. Under the Plan, standard load
shapes will be developed for different kinds of customer classes,
and demands can be reconciled to actual usage using standard
billing protocols. The Distribution Companies will be in a
position to meter and bill customers for both transmission and
distribution service and power supply requirements (at rates
provided by the power marketer). Power marketers will also be
provided with the opportunity to bill their customers separately.
Regardless of the billing method, suppliers will be ultimately
responsible to meet the kilowatthour usage and capacity
requirements of their customers through capacity entitlements and
the settlement of energy transactions under established NEPOOL
rules.
<PAGE>
These NEPOOL rules may be modified in the future. For
example, many have suggested that NEPOOL should switch from an
economic dispatch based on lowest marginal cost to a bid system
similar to that adopted in England. These changes make sense, but
they are not a condition to the implementation of our plan.
Rather, our plan can be implemented today under the current
NEPOOL agreement with its expanded membership and enhanced
accounting and billing capabilities. The introduction of
competition will create the impetus for continued NEPOOL reform to
eliminate cross subsidies and assure fair rules for all
participants. In contrast, delaying retail choice until after
agreement on NEPOOL reforms simply creates an incentive for debate
and delay.
Actions Required to Implement this Section of the Plan.
The transactions described above are the heart of our plan
for customer choice. Implementation of these transactions require
us to complete the following tasks:
1. Reform the NEP All-Requirements Contract. The first
step in the analysis is development of the termination
charge and the specification of ongoing responsibilities
for wholesale power supply. This action will require
the consent of the three state commissions and a filing
and approval at FERC. We do not intend to move forward
with restructuring absent agreement on the restructured
wholesale contract and the appropriate termination
charge. Restructuring will either be completed by all
states within the same time frame, or steps will be
taken to protect non-participating states. This
approach is consistent with the procedures established
under the Memorandum of
<PAGE>
Understanding, FERC statement of policy on transition
arrangements as set forth in the NOPR, and the actions
of the state commissions to this point. Specifically,
our objective is to assure that all of our states are
satisfied with our implementation of the plan.
2. Develop and File Revised Rates for Retail Distribution
Service. The Distribution Companies must further
unbundle rates to eliminate power supply costs and
provide Distribution Services. The retail wheeling
rates will include transmission charges from NEES
Transmission and termination charges from NEP as well
as the ongoing costs of the Distribution Company.
These rates can be established using either traditional
cost of service analysis, or performance based
ratemaking. Different approaches may be used in
different states.
The conservation and load management charges and any
above market payments for renewable resources agreed to
in the plan will also need to be filed and approved. The
SED agreements, Service Extension Agreements, and other
terms and conditions will be reformulated per the above
discussion and filed with state commissions for
approval. Parallel filings will also be made with FERC
to assure consistent treatment between state and federal
agencies, to eliminate any jurisdictional
uncertainties, and to ensure that the access charge is
nonbypassable. FERC approval will be required to ensure
that customers cannot evade the state approved access
charge by interconnecting directly with the transmission
system.
3. Create Marketing Affiliates and Standard Offer
Affiliates in Each State. These steps will require
approvals by the affected states and the Securities and
Exchange Commission under the Holding Company Act.
4. Establish Rules for Marketers and Sellers to Retail
Customers. Regulations for retail sellers will need to
be developed before each state commission.
5. Adjust NEPOOL Capability Responsibility Formula and
Billing and Metering Regulations. The NEPOOL capability
responsibility formula and billing and metering
requirements will have to be adjusted to accommodate
load transfers for retail customers contemplated in the
Plan. Typical load shapes and
<PAGE>
billing protocols will need to be developed to integrate
loads into NEPOOL calculations for energy billing and
capability responsibility calculations.
6. Waiver of Planning, Rate and Regulatory Requirements for
Power Marketers and Suppliers. State commission, FERC,
and SEC action is required for NEP to become an EWG and
its generation to become eligible facilities. Because
power supplies will be developed in the market, rate and
planning regulations and statutes should be revised to
eliminate administrative reviews of rates
for electricity sales and supply plans. Corporate,
financing, and accounting regulation over the power
suppliers should be greatly simplified or eliminated.
As in the prior section, these tasks can be accomplished most
effectively with the consent of all interested parties. The
corporate reorganizations, modifications to contractual and
ownership arrangements, and simplification of regulatory
requirements discussed above cannot be implemented absent broad
consensus. Specifically, authority to force divestiture and
corporate reorganization of utilities, require access over
transmission and distribution facilities for retail wheeling, and
mandate early termination of the NEP all-requirements contract is
sharply limited.
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[CHART INTENTIONALLY OMITTED]
<PAGE>
V. Revised Structure: Customer Choice (Transition Complete).
The last step in the transition is shown on Figure V. That
figure illustrates the completed restructuring. The following
changes have occurred. First, all transmission assets have been
transferred from NEP to NEES Transmission, the contract between
those two companies has been terminated, and NEP's generation is
provided transmission service under NEES Transmission's generally
available, open access transmission tariffs. Second, the contract
termination charge between NEP and the Distribution Companies will
have been fully discharged, and the all-requirements contract will
be terminated. The Distribution Companies' collection of their
termination payments through an access charge will be complete.
Finally, the Standard Offer period will have lapsed, and the
standard offer affiliate will have gone out of business. NEP and
its marketing affiliates will be operating in the market just as
all other suppliers and marketers.
No additional contracts or new arrangements will be required
to complete this transition other than the final assignment or
sale of the transmission assets and entitlements to NEES
Transmission from NEP. The contractual arrangements leading to
the other elements of the final restructuring will have already
been established and put into place.
<PAGE>
As the figure illustrates, the final result under our plan is
choice by all retail customers of their power suppliers. The plan
contemplates continued operation of NEPOOL, a vigorous wholesale
market, and a fully developed, competitive retail market under
which all suppliers have access to all customers, and fair,
nondiscriminatory, open access transmission and distribution
tariffs.
Choice -- the simple, but powerful economic concept -- will
have been provided to all of our customers and to the customers of
other utilities in New England. The consequences of that choice
- -- better service, lower prices, and more options -- will be made
available to all electricity customers in New England. The
implementation of our plan will be complete.
VI. Conditions and Timeline Associated with Plan Implementation.
As described above, the implementation of the Plan requires a
major effort by us, other utilities, interested parties, our
commissions, and other policymakers throughout New England. We
and others have recognized that consent is the only effective and
efficient way to achieve the restructuring plan outlined above.
One of the interdependent principles agreed to by a broad range of
stakeholders in both Massachusetts and Rhode Island provides that:
<PAGE>
Consensus and settlements are more likely than
litigation to move restructuring forward, given
numerous potential interstate, state-federal,
state-utility, and inter-party substantive and
jurisdictional conflicts.
That Principle is especially applicable under our Plan, whose
implementation requires approvals from three state commissions,
FERC, and the SEC, and contemplates revising our pricing, service,
and transmission arrangements with 1.3 million retail customers,
one hundred other utilities, and NEPOOL itself. Tasks this
complex simply cannot be accomplished effectively or efficiently
without voluntary action and broad based consensus.
This consensus has already begun through the agreements on
Principles reached in Rhode Island and Massachusetts. The
Principles approved by our regulators in those two states set
forth a framework for agreement and address each of the key issues
that must be resolved to maintain a reliable, financially stable,
and environmentally sound system of electricity production and
transmission. Specifically, the Principles require our plan to
maintain reliability, benefit all customers, recognize the
enforceability of all power supply contracts, provide a reasonable
opportunity to recover stranded costs, reduce rates in the near
term below what they otherwise would have been, unbundle services,
provide retail customers with choice, streamline the
administrative process, improve environmental performance,
continue conservation and load
<PAGE>
management programs, continue to provide universal service,
consider performance based ratemaking, and maintain our financial
integrity. Our plan has been structured to meet each of these
Principles. Compliance with the Principles is a condition of Plan
implementation.
From our perspective the key element is the principle that
establishes a reasonable opportunity to recover all of our
stranded costs. This principle recognizes that we have made
significant commitments to provide reliable service to customers
in the past that have been evaluated by our regulators, found to be
reasonable and prudent, and are now reflected in rates. Recovery
of these costs during the transition period is central to the
fairness of the Plan, critical to the financial integrity of the
system, consistent with our current power supply arrangements,
authorized under the regulatory policies articulated by FERC, the
Massachusetts Department of Public Utilities, and the Rhode Island
Public Utilities Commission, and required as a matter of law and
the Constitution. Implementation of our Plan is conditioned on a
reasonable opportunity for full recovery of stranded costs.
Implementation of the Plan also requires the development of a
reasonable market for retail customers. To assure this
development, implementation of our Plan is conditioned on choice
by all retail customers for all utilities in a state. We are
<PAGE>
unwilling to open our service area to other utilities unless the
retail market in the entire state is opened to choice. Ideally,
choice will be extended to retail customers throughout New England
and the Northeast. However, direct access across the region is
not a condition for plan implementation.
Finally, the rights of the Distribution Companies should be
redefined and made clear. During the debate leading to
restructuring, various parties, including commissions, have
suggested that franchise rights are subject to some significant
doubt. These doubts should be resolved, and the rights and
obligations of all distribution utilities should be clearly
specified in Plan proceedings. Specifically, rules establishing
the obligation to deliver and the prevention of bypass or
duplicate facilities should be established. Existing laws should
be harmonized with the restructured industry, and as explained
above, consistent access charges must be adopted by federal and
state authorities. An acceptable redefinition of rights and
obligations is also a condition of Plan implementation.
These conditions, together with acceptable regulatory
approvals, are necessary to effective Plan implementation. We
cannot and will not voluntarily implement the Plan unless they are
in place. The conditions are reasonable, the Plan is fair, the
choice is clear. We should move forward with Choice: New England.
