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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 POWER COMPANY
(exact name of registrant as specified in charter)
Massachusetts
(state or other
jurisdiction of
incorporation)
1-6564
(Commission
File No.)
04-1663070
(I.R.S. Employer
Identification No.)
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
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total access charge in Rhode Island over the period by up to $40
million on a present value basis when compared to the allowed
return on equity. Power contract costs and nuclear costs
independent of operation would be recovered as incurred over the
life of those obligations, which is expected to be longer than 12
years. The legislation would fix the access charge at 3 cents per
kwh for the period 1998 through 2000. Thereafter, the access
charge would vary, but is expected to decline. With the exception
of the reduced return on equity, the legislation is generally
consistent with the "Choice: New England" plan proposed by the
NEES Companies in 1995.
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.
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Electric utility rates have historically been based on a
utility's costs. As a result, electric utilities are subject to
certain accounting standards that are not applicable to other
business enterprises in general. Financial Accounting Standard
No. 71, Accounting for the Effects of Certain Types of Regulation
(FAS 71), requires regulated entities, in appropriate
circumstances, to establish regulatory assets and liabilities, and
thereby defer the income statement impact of certain costs that
are expected to be recovered in future rates. However, the
effects of regulatory, legislative or utility initiatives, such
as the proposed legislation or "Choice: New England", could, in
the near future, cause all or a portion of the operations of the
NEES companies to cease meeting the criteria of FAS 71. In that
event, the application of FAS 71 to such operations would be
discontinued and a non-cash write-off of previously established
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 POWER COMPANY
s/Michael E. Jesanis
By
Michael E. Jesanis
Treasurer
Date: February 7, 1996
