Eversource 2009 Annual Report Download - page 117

FS-32
E. Revenues
Regulated Companies: The regulated companies' retail revenues are based on rates approved by the state regulatory commissions. In
general, rates can only be changed through formal proceedings with the state regulatory commissions. The regulated companies also
utilize regulatory commission-approved tracking mechanisms to recover certain costs as incurred. The tracking mechanisms allow for
rates to be changed periodically, with overcollections refunded to customers or undercollections collected from customers in future
periods.
The regulated companies record monthly, day ahead and real time energy purchases and sales net in accordance with accounting
guidance on reporting realized gains and losses on derivative instruments. Revenues and expenses associated with derivative
instruments to purchase and sell energy in the day ahead and real time markets are recorded on a net basis in either Operating
revenues or Fuel, purchased and net interchange power on the consolidated statements of income.
Regulated Companies' Unbilled Revenues: Unbilled revenues represent an estimate of electricity or gas delivered to customers for
which the customers have not yet been billed. Unbilled revenues are included in Operating revenues on the consolidated statements of
income and are assets on the consolidated balance sheets that are reclassified to accounts receivable in the following month as
customers are billed. Such estimates are subject to adjustment when actual meter readings become available, when changes in
estimating methodology occur and under other circumstances.
The regulated companies estimate unbilled revenues monthly using the daily load cycle (DLC) method. The DLC method allocates
billed sales to the current calendar month based on the daily load for each billing cycle. The billed sales are subtracted from total
calendar month sales to estimate unbilled sales. Unbilled revenues are estimated by first allocating sales to the respective rate classes,
then applying an average rate to the estimate of unbilled sales.
Regulated Companies' Transmission Revenues - Wholesale Rates: Wholesale transmission revenues are based on formula rates that
are approved by the FERC. Most of NU's wholesale transmission revenues, including CL&P, PSNH, and WMECO, are collected under
the New England Independent System Operator (ISO-NE) FERC Electric Tariff No. 3, Transmission, Markets and Services Tariff (Tariff
No. 3). Tariff No. 3 includes Regional Network Service (RNS) and Schedule 21 - NU rate schedules to recover fees for transmission
and other services. The RNS rate, administered by ISO-NE and billed to all New England transmission users, including CL&P, PSNH,
and WMECO's transmission businesses, is reset on June 1st of each year and recovers the revenue requirements associated with
transmission facilities that benefit the New England region. The Schedule 21 - NU rate, administered by NU, is reset on January 1st and
June 1st of each year and recovers the revenue requirements for local transmission facilities and other transmission costs not recovered
under the RNS rate, including 100 percent of the construction work in progress (CWIP) that is included in rate base on the New England
East-West Solutions (NEEWS) projects. The Schedule 21 - NU rate calculation recovers total transmission revenue requirements net of
revenues received from other sources (i.e., RNS, rentals, etc.), thereby ensuring that NU recovers all regional and local revenue
requirements as prescribed in Tariff No. 3. Both the RNS and Schedule 21 - NU rates provide for annual true-ups to actual costs. The
financial impacts of differences between actual and projected costs are deferred for future recovery from, or refunded to, customers. As
of December 31, 2009, the Schedule 21 - NU rates were in a total underrecovery position of $38.8 million ($28.2 million for CL&P, $5.6
million for PSNH and $5 million for WMECO), which will be collected from customers in June 2010.
Regulated Companies' Transmission Revenues - Retail Rates: A significant portion of the NU transmission segment revenue comes
from ISO-NE charges to the distribution segments of CL&P, PSNH and WMECO, each of which recovers these costs through rates
charged to their retail customers. CL&P, PSNH and WMECO each have a retail transmission cost tracking mechanism as part of their
rates, which allows the companies to charge their retail customers for transmission costs on a timely basis.
NU Enterprises: Service revenues are recognized as services are provided, often on a percentage of completion basis. Wholesale
marketing revenues are recognized through mark-to-market accounting on underlying derivative contracts and recorded in Fuel,
purchased and net interchange power on the consolidated statements of income. This net presentation of the mark-to-market and
settlement amounts is required because NU Enterprises cannot assert that physical delivery of contract quantities is probable.
F. Derivative Accounting
Most of CL&P and PSNH's contracts for the purchase and sale of energy or energy related products are derivatives, along with all but
one of NU Enterprises', through Select Energy's, remaining wholesale marketing contracts. The accounting treatment for energy
contracts entered into varies and depends on the intended use of the particular contract and on whether or not the contract is a
derivative.
The application of derivative accounting is complex and requires management judgment in the following respects: identification of
derivatives and embedded derivatives, election and designation of the "normal purchases or normal sales" (normal) exception,
identifying, electing and designating hedge relationships, assessing and measuring hedge ineffectiveness, and determining the fair
value of derivatives. All of these judgments, depending upon their timing and effect, can have a significant impact on the consolidated
financial statements.
The fair value of derivatives is based upon the contract terms and conditions and the underlying market price or fair value per unit.
When quantities are not specified in the contract, the Company determines whether it is a derivative by using amounts referenced in
default provisions and other relevant sections of the contract. The estimated quantities to be served are updated during the term of the
contract, and such updates can have a material impact on mark-to-market amounts. The fair value of derivative assets and liabilities
with the same counterparty are offset and recorded as a net derivative asset or liability to the consolidated balance sheets.