Eversource 2003 Annual Report Download - page 26

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constraints, which prevent these areas from obtaining alternative lower-
cost generation. Line losses represent losses of electricity as it is sent over
transmission lines. The costs associated with transmission congestion and
line losses are now assigned to the pricing zone in which they occur, and
the calculation of line losses is now based on an economic formula. Prior
to March 1, 2003, those costs were spread across virtually all New England
electric customers based on engineering data of actual line losses experi-
enced. As part of the implementation of SMD, ISO-NE established eight
separate pricing zones in New England: three in Massachusetts and one
in each of the five other New England states. The three components of
the LMP for each zone are 1) an energy cost, 2) congestion costs and 3)
line loss charges assigned to the zone. LMP is increasing costs in zones
that have inadequate or less cost-efficient generation and/or transmission
constraints, such as Connecticut, and decreasing costs in zones that have
sufficient or excess generation, such as Maine.
CL&P was billed $186 million of incremental LMP costs by its standard
offer service suppliers or by ISO-NE. CL&P recovered a portion of these
costs through an additional charge on customer bills beginning on May 1,
2003. Billings were on a two-month lag and were recorded as operating
revenues when billed. Amounts were recovered subject to refund.
CL&P and its suppliers, including affiliate Select Energy, disputed the
responsibility for the $186 million of incremental LMP costs incurred. NU
recorded a pre-tax loss in 2003 of approximately $60 million (approxi-
mately $37 million after-tax) related to the settlement of this dispute. A
settlement agreement was reached among all the parties involved. This
settlement agreement was filed with the FERC on March 3, 2004 and
will not be final until the FERC approves it. Management expects to
receive FERC approval in the first half of 2004.
The pre-tax loss of approximately $60 million was reflected in two line
items on the consolidated statements of income. Approximately
$58 million was recorded as a reduction to operating revenues, and
approximately $2 million was recorded in operating expenses.
NRG Energy, Inc. Exposures
Certain subsidiaries of NU have entered into various transactions with
subsidiaries of NRG Energy, Inc. (NRG). On May 14, 2003, NRG and certain
of its subsidiaries filed voluntary bankruptcy petitions in the United
States Bankruptcy Court for the Southern District of New York. On
December 5, 2003, NRG emerged from bankruptcy. NRG-related exposures
to certain subsidiaries of NU as a result of these transactions are as follows:
Standard Offer Service Contract: NRG Power Marketing, Inc. (NRG-PMI)
contracted with CL&P to supply 45 percent of CL&P’s standard offer
service load through December 31, 2003. In May 2003, NRG-PMI
attempted to terminate the contract with CL&P, but the FERC ordered
NRG-PMI to continue serving CL&P under its standard offer service
contract. Subsequently, NRG-PMI received a temporary restraining order
from the United States District Court for the Southern District of New
York (District Court) and stopped serving CL&P with standard offer
supply on June 12, 2003. NRG-PMI was ultimately ordered by the FERC
and the District Court to resume serving CL&P’s standard offer service
load and did so on July 2, 2003. During the period NRG-PMI did not
serve CL&P under its standard offer service contract, CL&P’s net
replacement power cost amounted to $8.5 million, which was collected
by CL&P from its customers and withheld from standard offer service
contract payments to NRG-PMI.
On November 4, 2003, CL&P, NRG, the NRG Creditors’ Committee, the
DPUC, the Office of Consumer Counsel, and the attorney general of
Connecticut entered into a comprehensive settlement agreement. Under
the settlement agreement, approved by the bankruptcy court and the
FERC on November 21, 2003 and December 18, 2003, respectively, NRG
was required to continue to deliver power to CL&P under the terms and
conditions of the standard offer service contract through the end of its
term, which was December 31, 2003, in exchange for a commitment by
CL&P to make payments to NRG on a revised weekly schedule. The
settlement agreement also allowed CL&P to retain the aforementioned
$8.5 million withheld from NRG for replacement power purchased by
CL&P during the period June 12, 2003 through July 2, 2003. CL&P will
seek to refund this amount to its customers in 2004 pending DPUC
approval. On January 19, 2004, CL&P paid NRG-PMI its last weekly payment.
Pre-March 1, 2003 Congestion Charges: In November 2001, CL&P filed
suit against NRG in Connecticut Superior Court seeking judgment for
unpaid pre-March 1, 2003 congestion charges under its standard offer
supply contract. On August 5, 2002, CL&P withheld the then unpaid
congestion charges from payments due to NRG for standard offer service
and continued to withhold those amounts through December 31, 2003,
the end of the contract term. The total amount of congestion costs
withheld from NRG was $28.4 million. If it is ultimately concluded
that CL&P is responsible for pre-March 1, 2003 congestion costs, then
management believes that CL&P would be allowed to recover these costs
from its customers. This litigation is ongoing.
Station Service: Since December 1999, CL&P has provided NRG’s
Connecticut generating plants with station service, which includes energy
and/or delivery services provided when a generator is off-line or unable
to satisfy its station service energy requirements. Pursuant to the parties’
interconnection agreement dated July 1, 1999, CL&P provides this service
at DPUC-approved retail rates. In October 2002, CL&P filed a complaint
with the FERC seeking interpretation of a FERC-filed interconnection
agreement in which NRG agreed to pay CL&P’s applicable retail rates for
station service and delivery services. The FERC issued a decision on
December 20, 2002 that agreed that station service from CL&P would be
subject to CL&P’s applicable retail rates and that states have jurisdiction
over the delivery of power to end users even where, as with station service,
power is not delivered by distribution facilities. NRG disputed its obligation
and refused to pay CL&P.
In September 2003, the bankruptcy court approved a stipulation between
CL&P and NRG to submit the station service dispute to arbitration, and
arbitration proceedings have been initiated by the parties. No hearing
dates have been scheduled. On December 17, 2003, the DPUC determined
that CL&P had appropriately administered its station service rates in
providing NRG station service. In unrelated proceedings, the FERC has
issued decisions with conflicting policy direction. In January 2004, CL&P
filed a request with the FERC for further clarification of this issue.
Management will continue to pursue recovery from NRG of the station
service balance, including approximately $4 million NRG placed in an
escrow account related to this matter. In 2003, as a result of NRG’s
bankruptcy, the amount due from NRG in excess of the escrow amount
was reserved. Management believes that amounts not collected from
NRG are ultimately recoverable from CL&P’s customers. Therefore, a
regulatory asset of $11.4 million was recorded. At December 31, 2003,
NRG owed CL&P $16 million for station service. The $16 million owed to
CL&P includes $0.6 million billed to NRG subsequent to its emergence
from bankruptcy on December 5, 2003.