Eversource 2006 Annual Report Download - page 30

28 NU 2006 ANNUAL REPORT
state’s electric utilities, including CL&P. The DPUC-approved contract
structure for the RFP is a “contract for differences,” which will require
each winning bidder to be paid the difference, if any, between a fixed
contract price and the applicable ISO-NE wholesale capacity market
price. The DPUC requested bids in December of 2006. Winning bids are
expected to be selected in April of 2007 and executed contracts will be
approved no later than November 8, 2007. The DPUC will determine
the amount and duration of any such contracts.
New Hampshire:
Environmental Legislation: In April of 2006, New Hampshire adopted
legislation requiring PSNH to reduce the level of mercury emissions
from its coal-fired plants by 2013 with incentives for early reductions.
To comply with the legislation, PSNH intends to install wet scrubber
technology by mid-2013 at its two Merrimack coal units, which combined
generate 433 MW. PSNH currently anticipates the cost to comply with
this law to be $250 million, but this amount has the potential to increase
materially as the project is undertaken, primarily as a result of changes
in commodity prices and labor costs. NU expects that this project will
have a positive impact on NU’s earnings, as state law and PSNH’s
restructuring settlement agreement provide for the recovery of its
generation costs from its customers, including the cost to comply with
state environmental regulations.
Utility Group Regulatory Issues and Rate Matters
Transmission – Retail Rates: Asignificant portion of the NU
transmission business revenue comes from ISO-NE charges to the
distribution businesses of CL&P, PSNH and WMECO. The distribution
businesses recover these costs through the retail rates that are
charged to their retail customers. In 2005, CL&P began tracking its
retail transmission revenues and expenses for recovery. WMECO
implemented its retail transmission tracker and rate adjustment
mechanism in January of 2002 as part of its 2002 rate change filing.
PSNH does not currently have a retail transmission rate tracking
mechanism, but the company requested such a mechanism in its 2006
rate case. Such a mechanism was also included in the rate case
settlement agreement that PSNH reached with the NHPUC staff and
the OCA that was filed with the NHPUC.
ForwardCapacity Market: On March 6, 2006, ISO-NE and a broad
cross-section of critical stakeholdersfrom around the region, including
CL&P, PSNH and Select Energy, filed a comprehensive settlement
agreement at the FERC proposing a forward capacity market (FCM) in
placeof the previouslyproposed LICAP, an administratively determined
electric generation capacity pricing mechanism. The settlement agree-
ment provided for a fixed level of compensation to generators from
December 1, 2006 through May 31, 2010 without regard to location in
New England, and annual forward capacity auctions, beginning in 2008,
for the 1-year period ending on May 31, 2011, and annually thereafter.
According topreliminary estimates, FCM would require NU’s operating
companies to pay approximately the following amounts from December 1,
2006 through December 31, 2009: CL&P – $470 million; PSNH – $80
million; and WMECO – $100 million. CL&P, PSNH and WMECO expect
to recover these costs from their ratepayers. On June 16, 2006, the
FERC approved the settlement agreement. Rehearing of this issue was
sought by several parties, which was denied by the FERC on October
31, 2006. Several parties also challenged the FERC’s approval of the
settlement agreement and that challenge is now pending in the
Court of Appeals. In addition, ISO-NE has received approval from
FERC on many of the rules that implement the terms of the
settlement agreement. On December 1, 2006, the settlement
agreement was implemented and the payment of fixed compensation
togenerators began.
Connecticut – CL&P:
Income Taxes: In 2000, CL&P requested from the IRS a PLR regarding
the treatment of unamortized investment tax credits (UITC) and excess
deferred income taxes (EDIT) related to generation assets that were
sold. On April 18, 2006, the IRS issued a PLR to CL&P regarding the
treatment of UITC and EDIT. EDIT are temporary differences between
book and taxable income that were recorded when the federal statutory
tax rate was higher than it is now or when those differences were
expected to be resolved. The PLR holds that it would be a violation of
tax regulations if the EDIT or UITC are used to reduce customers’ rates
following the sale of the generation assets. CL&P’s UITC and EDIT
balances related to generation assets that have been sold totaled $59
million and $15 million, respectively, and $74 million combined. CL&P
was ordered by the DPUC to submit the PLR to the DPUC within 10
days of issuance and retain the UITC and EDIT in their existing accounts
pending its receipt and review of the PLR. On July 27, 2006, the DPUC
determined that the UITC and EDIT amounts were no longer required
to be held in their existing accounts. As a result of this determination,
the $74 million balancewas reflected as a reduction to CL&P’s 2006
income tax expense with an increase to CL&P’s earnings by the same
amount.
Procurement Fee Rate Proceedings: CL&P was allowed to collect a
fixed procurement fee of 0.50 mills per KWH from customers who
purchase Transitional Standard Offer (TSO) service through 2006. One
mill is equal toone-tenth of one cent. That fee can increase to 0.75
mills per KWH if CL&P outperforms certain regional benchmarks.
CL&P submitted to the DPUC its proposed methodology to calculate
the variableportion (incentive portion) of the procurement fee and
requested approval of $5.8 million for its 2004 incentive payment. On
December 8, 2005, a draft decision was issued in this docket, which
accepted the methodology as proposed by CL&P and authorized
payment of the $5.8 million incentive fee. A final decision, which had
been scheduled for December 28, 2005, was delayed by the DPUC, and
the DPUC re-opened the docket toallow the Office of Consumer
Counsel (OCC) tosubmit additional testimony.
On December 1, 2006, the DPUC issued an RFP tosecure a consultant
to review CL&P’s and UI’s TSO incentive methodologies and requested
comment from all parties on the use of an appropriate statistical
margin of error for calculating incentivepayments which were due to
be filed on January 11, 2007. The DPUC has not established a schedule
beyond the January 11, 2007 comment deadline.
Management continues tobelieve that recovery of the $5.8 million
asset related toCL&P’s2004 incentive payment, which was reflected in
2005 earnings, is probable. No amounts have been recorded in 2006
related to the 2005 or 2006 incentive portions of CL&P’s procurement
fee; however, a preliminary estimate of $3.3 million for 2006 and
$3.6 million for 2005 would be recognized in earnings if CL&P’s
methodology is upheld. The statute allowing collection of a
procurement fee expired on January 1, 2007.