National Grid 2006 Annual Report Download - page 8

Narragansett Electric Company
In Rhode Island, Narragansett Electric Company’s (Narragansett) distribution rates are governed
by a long-term rate plan. Between May 2000 and the end of October 2004, distribution rates were
frozen and Narragansett was permitted to retain 100% of its earnings up to an allowed ROE of
12%. Narragansett kept 50% of earnings between 12% and 13%, and 25% of earnings in excess
of 13%. Under a new long-term rate plan, effective from November 2004 until December 2009,
Narragansett Electric agreed to reduce its distribution rates by $10.2 million (pre-tax) per year.
Beginning in January 2005, Narragansett has been able to keep an amount equal to 100% of its
earnings up to an allowed ROE of 10.5%, plus $4.7 million (pre-tax), which represents its share of
demonstrated savings subsequent to the acquisition of Eastern Utilities Associates in 2000.
Earnings above that amount up to an additional 1% ROE are to be shared equally between
Narragansett and its customers, while additional earnings will be allocated 75% to customers and
25% to Narragansett. This regulatory mechanism offers the potential to achieve returns in excess
of traditional regulatory allowed returns.
New England Power Company
NEP is a participating transmission owner (PTO) in New England’s Regional Transmission
Organization (RTO) which commenced operations effective February 1, 2005. ISO New England,
Inc. (ISO) has been authorized by FERC to exercise the operations and system planning functions
required of RTOs and will be the independent regional transmission provider under the ISO Open
Access Transmission Tariff (ISO-OATT). The ISO-OATT is designed to provide non-discriminatory
open access transmission services over the transmission facilities of the PTOs and recover their
revenue requirements. FERC issued two orders in 2004 and two in 2005 that approved the estab-
lishment of the RTO and resolved certain issues concerning the proposed ROE for New England
PTOs. Other return issues were set for hearing. A number of parties, including NEP, filed appeals
from one or more of those orders with the US Court of Appeals for the District of Columbia Circuit.
NEP’s currently allowed ROE for transmission assets is 10.25%. Effective on the RTO operations
date of February 1, 2005, NEP’s transmission rates began to reflect a proposed base ROE of
12.8%, subject to refund, plus an additional 0.5% incentive return on regional network service
(RNS) rates that FERC approved in March 2004. Approximately 70% of NEP’s transmission costs
are recovered through RNS rates. An additional 1.0% incentive adder is also applicable to new
RNS transmission investment, subject to refund.
NEP and the other PTOs participated in FERC proceedings to determine outstanding ROE issues,
including base ROE and the proposed 1% ROE incentive for new transmission investment. On
May 27, 2005, the administrative law judge issued an initial decision which concluded that the
base ROE should be 10.72% and that NEP and other PTOs are not entitled to the proposed
1% ROE incentive. In June and July 2005, parties to the proceeding filed two rounds of briefs in
response to the initial decision and opposing one another’s positions. New England transmission
owners continue to request a base ROE of 11.8% for all facilities before adding the .5% RTO par-
ticipation adder and the 1% adder applicable to new transmission investment. Other parties are
proposing a base ROE ranging from 9.14% to 10.64%, with some parties proposing to allow the
1% adder only for a small subset of projects and others proposing that the 1% adder is not justi-
fied under any circumstances.
The parties continue to await a final decision by the FERC.
On June 30, 2006, the US Court of Appeals affirmed FERC's 2004 order awarding the 0.5%
RTO participation adder on RNS rates. The Court also ruled that FERC acted lawfully when it
denied the 0.5 % incentive adder on transmission owners' ROE for local network service (LNS)
rates. In addition, the Court affirmed FERC's requiring that any transmission owner that might
seek to withdraw from the RTO must first satisfy the Commission that the withdrawal would be
just and reasonable.
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National Grid USA / Annual Report