Eversource 2002 Annual Report Download - page 26

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The agreements needed to create the RTO and to define the working
relationships among the ISO and the transmission owners should be
created in 2003, and will allow the RTO to begin operation shortly
thereafter. The agreements are expected to include provisions for the
future creation of one or more ITCs within the RTO. The creation of the
RTO will require a FERC rate case, and the impact on NU’s return on
equity as a result of this rate case cannot be estimated at this time.
At December 31, 2002, NU capitalized $1.3 million related to RTO
formation activities.
Merchant Energy Company Counterparty Exposures
Certain subsidiaries of NU, including CL&P, Yankee Gas, Select Energy,
and NGS, have entered into various transactions with subsidiaries of
NRG Energy, Inc. (NRG). NRG’s credit rating has been downgraded to
below investment grade by all three major rating agencies, and NRG is
presently in default on debt service payments. Management does not
expect that the resolution of the transactions with NRG will have a material
adverse effect on NU’s consolidated financial condition or results of
operations. Additionally, NU does not have a significant level of exposure
to other merchant energy companies. For further information regarding
these transactions, see NU’s 2002 report on Form 10-K, Item 1, “Business.”
Restructuring and Rate Matters
Connecticut – CL&P: Since retail competition began in Connecticut in
2000, an extremely small number of customers have opted to choose an
alternate supplier. At December 31, 2002, virtually all of CL&P’s customers
were procuring their electricity through CL&P’s standard offer service. In
2003, Select Energy will continue to supply 50 percent of CL&P’s standard
offer supply service with NRG Power Marketing, Inc. (NRG-PM), a
subsidiary of NRG, contracted to supply 45 percent and a subsidiary of
Duke Energy, Inc. contracted to supply the remaining 5 percent of service.
On November 18, 2001, at NRG-PM’s request, CL&P filed an application
with the DPUC to raise the standard offer rate from an average of $0.0495
per kilowatt-hour (kWh) to $0.0595 per kWh to help promote competition
in advance of the January 1, 2004 termination of the standard offer period
and to provide financial relief to standard offer suppliers. In December
2001, the DPUC rejected CL&P’s request, but opened two new dockets to
examine the absence of effective retail competition in Connecticut and
the financial condition of the suppliers. The first docket culminated in a
joint study report issued in a DPUC decision on February 15, 2002, which
provided the DPUC’s and the Office of Consumer Counsel’s findings on
how to best structure default service and other issues related to electric
industry restructuring. In the second docket, the DPUC concluded on
June 17, 2002, that it would not commence further proceedings.
On July 18, 2002, CL&P, concerned with NRG-PM’s financial viability,
filed a new proposal with the DPUC to maintain current total rates, but to
shift $0.007 per kWh from being used to recover stranded costs to instead
provide additional payments to NRG-PM and Select Energy to ensure
electric reliability in southwestern Connecticut. On July 26, 2002, the
DPUC denied the proposal.
CL&P continues to evaluate NRG-PM’s ability to meet its obligations
under the standard offer service contract. If CL&P is required to seek an
alternate source of supply, CL&P would pursue recovery of any additional
costs associated with obtaining such supply from NRG-PM pursuant to
the contract and may be required to seek DPUC approval to flow through
any such costs to customers. Management believes that recovery of these
costs, should they be incurred, would be permitted under the provisions
of Connecticut’s electric utility restructuring legislation and with the
DPUC’s prior decisions. On February 21, 2003, Fitch Ratings lowered its
rating outlook on CL&P to negative as a result of its concern over timely
recovery of purchased-power costs if NRG-PM were to default on its
CL&P standard offer obligations and CL&P needed to acquire replacement
supply service at significantly higher prices.
On September 27, 2001, CL&P filed its application with the DPUC for
approval of the disposition of the proceeds in the amount of approximately
$1.2 billion from the sale of the Millstone units. This application described
and requested DPUC approval for CL&P’s treatment of its share of the
proceeds from the sale. In accordance with Connecticut’s electric utility
industry restructuring legislation, CL&P was required to utilize any gains
from the Millstone sale to offset stranded costs. The DPUC’s final decision
regarding this application was issued on February 27, 2003, and increased
the amount of net proceeds used to reduce stranded costs by $26.9 million.
The earnings impact of the final decision will be reflected in 2003 earnings
and will result in an increase in first quarter net income of $2.6 million.
On November 1, 2002, CL&P sold its interest in Seabrook to a subsidiary
of FPL Group, Inc. (FPL). The gain on the sale was used to reduce
stranded costs.
CL&P continues to be subject to the earnings sharing mechanism
implemented by the DPUC, under which CL&P’s earnings in excess of
a 10.3 percent return on equity will be shared equally by shareholders
and ratepayers.
CL&P expects to file a distribution rate case with the DPUC in mid-2003
that would be effective January 1, 2004. Also in the second half of 2003,
CL&P will need to secure bids for power supply contracts for 2004 to meet
the needs of its customers. Management has not yet identified what level
of rates it will request in 2004, but believes that several factors could
combine to result in a significant increase in supply costs in 2004. The first
is the expiration of current standard offer supply contracts. Another factor
is the likely impact of LMP in New England with the implementation of
SMD. Implementation of such pricing, which occurred on March 1, 2003,
will force Connecticut electric customers to bear the significant additional
costs of serving southwestern Connecticut with less efficient local
generation because of insufficient transmission capacity to bring cheaper
energy into the region. CL&P’s completed and planned reliability
improvements and transmission construction program will also impact
the level of rates management will request in 2004.
Connecticut – Yankee Gas: Following rate proceedings that began in 2001,
the DPUC ordered a $4 million rate decrease effective April 1, 2002. The
decision endorsed Yankee Gas’ distribution expansion plan, subject to
annual reviews, and approved, with some conditions, its capital
investment ratemaking recovery mechanism, the Infrastructure Expansion
Rate Mechanism (IERM). The final decision also authorized an 11 percent
return on equity for Yankee Gas and a sharing formula between shareholders
and ratepayers for earnings above that level from 2002 through 2005.
On October 1, 2002,Yankee Gas filed supplemental testimony and
exhibits to its original IERM filing with the DPUC on August 1, 2002.
This filing reflected those 2001 through 2003 system expansion projects
that Yankee Gas has undertaken or plans to undertake by December 31,
2003, and that meet certain financial criteria outlined by the DPUC.
Yankee Gas is currently proposing no IERM charge for 2003 and that any
over-collection for 2003 be carried forward to the 2004 IERM period.
A final decision from the DPUC regarding this filing is expected in the
first quarter of 2003.