Appendix — Richards v. New Hampshire

91-200

srr

No.

IN THE

Suprema Court, U.S.

( Gey rPiLEen

AUG 2

OFFICE OF THE GLERE

SUPREME COURT OF THE UNITED STATES

October Term, 1991

ROBERT C. RICHARDS, EDWARD KAUFMAN AND

MARTIN ROCHMAN

Petitioners

THE STATE OF NEW HAMPSHIRE

Respondent.

PET Y FOR WRIT OF CERTIORARI TO

THE SUPREME COURT OF NEW HAMPSHIRE

PETITION FOR WRIT OF CERTIORARI

VOLUME II: APPENDICES C TO J

ROBERT C. RICHARDS*

ATTORNEY FOR PETITIONERS

531 MAIN ST. #315

NEW YORK, NEW YORK 10044

(212) 888-0158

xCounsel of Record

@)

TABLE OF CONTENTS

Opinion of Supreme Court

of New Hampshire

Opinion on Rehearing

of Supreme Court of

New Hampshire

VOLUME II

PUC Report and Order

Approving Rate Agreement,

dated July 20, 1990

Application of RKR for

Rehearing of PUC Order

Approving Rate Agreement

PUC Report and Order

Denying RKR Application

for Rehearing

PUC Report and Order

Denying Application of

CRR and Hilberg for

Rehearing

PUC Report and Order

Denying Petition to Intervene

of Robert C. Richards

Extracts Request of Richards

for Rehearing of PUC Order

Denying Petition to

Intervene

Extracts from PSNH’ Objection

to Request of Richards for

Rehearing of FUC Order

i

PAGE

la

Tla

73a

448a

466a

48la

516a

527a

53la

K.

PUC Report and Order Denying

Richards’ Request for Rehearing

VOLUME III

Bankruptcy Court’s Memorandum

Opinion on "RKR" Objections

Re Confirmation of Plan of

Reorganization

Extracts from Bankruptcy

Court’s Ceneral Findings

of Fact and Conclusions of

Law Re Plan Confirmation Issues

Extracts from Disclosure

Statement for Plan of

Reorganization

Excerpts from Transcript

of Confirmation Hearings

Extracts from Second Report

of Examiner, July 28, 1989

ii

533a

536a

648a

650a

720a

APPENDIX C

DR 89-244

IN THE MATTER OF

NORTHEAST UTILITIES/

PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE

Reorganization Proceedings

BEFORE THE

NEW HAMPSHIRE PUBLIC UTILITIES COMMISSION

i?

TABLE OF CONTENTS

page number

[this appendix]

PROCEDURAL HISTORY

A. BACKGROUND

B. PSNH BANKRUPTCY PROCEEDING

C. DR 89-244

POSITIONS OF THE PARTIES

A. NORTHEAST UTILITIES

B. PUBLIC SERVICE COMPANY

OF NEW HAMPSHIRE

C. NEW HAMPSHIRE YANKEE

D. STATE OF NEW HAMPSHIRE

E. OFFICE OF CONSUMER ADVOCATE

F. GRANITE STATE HYDROPOWER

ASSOCIATION, INC, PENACOOK

HYDRO ASSOCIATES, ERROL HYDRO-

ELECTRIC LIMITED PARTNERSHIP

BRIAR HYDRO ASSOCIATES,

PEMBROKE HYDRO ASSOCIATES,

AND GREGG FALLS HYDROELECTRIC

ASSOCIATES (HYDRO INTERVENORS)

G. BIOMASS INTERVENORS

H. BUSINESS AND INDUSTRY’

ASSOCIATION

I. JOHN V. HILBERG

COMMISSION ANALYSIS

74a

80a

80a

90a

100a

A. RATES PRESCRIBED BY THE RATE

AGREEMENT ARE JUST AND

REASONABLE 150a

Rate Agreement 150a

The Rates Equitably Balance

Investor and Consumer

Interests 154a

Comparison of Rate of

Return to Cost of Capital

Under the Rate Agreement 157a

Comparison of the Rate

Agreement Plans with those

Proposed by PSNH During the

Bankruptcy Proceedings 164a

Comparison of Rates Under the

Rate Agreement with

Foreseeable Rates Under

Traditional Ratemaking l67a

Comparison of Rates Under the

Rate Agreement with Rates

Forecasted for the Other New

England Utilities 174a

Comparison of Rates Under the

Rate Agreement with Rates

Under Alternative Rate Plans 176a

The Bankruptcy Court’s Confir-

mation of the Fairness of the

Compromise Reorganization was

Reasonable 179a

B. BASE RATES 188a

15a

The Acquisition Premium Serves

the Public Interest 189a

Return on Equity 202a

ROE’s for Reorganized PSNH and

North Atlantic Energy Company 202a

The ROE Collar Stabilizes Just

and Reasonable Rates Over the

Fixed Rate Period 204a

ROE Ceiling 204a

ROE Floor 206a

Base Rate Modifications under

Section 5(a) (v) 209a

Recovery of Safety and

Environmental Backfits Under

"EA" of FPPAC 214a

Implementation of Least Cost

Measures 216a

Effect of Compounding 5(a) (v)

Base Rate Adjustments by the

5.5% Annual Increases 218a

Threshold Level of C&LM

Expenditures and Recovery of

Lost Revenues 220a

Load and Resource Plan 222a

NU’s Sales Forecasts 229a

FUEL AND PURCHASED POWER 238a

ADJUSTMENT CLAUSE

Description of FPPAC 238a

76a

Analysis of FPPAC Issues 244a

Reasonableness of the

Assumptions Underlying the

FPPAC BA Reference Level 245a

Interest on Over and Under

Recoveries and Trigger

Mechanism 247a

Off-System Sales, Purchases

and Exchanges 248a

New Hampshire Electric

Cooperative; SPP

Negotiations 250a

Seabrook Power Contract 252a

D.INVESTMENT ADDER IS JUSTIFIED 274a

BY THE SYNERGIES

Seabrook Synergy --

Approximately $188 Million 278a

Steam Unit Availability

Synergy ~--Approximately

$98 Million 284a

NEPOOL-Related Synergies

--Approximately $146

Million 287a

A&G Expense Synergy and the

Coal Purchasing Synergy

-- Approximately $84 Million 292a

Total Projected Synergies 293a

The Importance of Synergies

to Maintain Just and

Reasonable Rates 294a

Tila

Synergies For Stand-alone

PSNH 297a

OUR FINDING OF PUBLIC GOOD IS

NOT CONDITIONED UPON A MERGER

WITH NU 300a

. FINANCING THE REORGANIZATION 306a

Costs of Financing 317a

The Proposed Financing Serves

the Public Good 322a

Financial Viability 326a

Financial Viability of New

PSNH and Stand alone PSNH 336a

New PSNH-Seabrook Operates 336a

New PSNH-Seabrook Canceled 338a

Stand-alone PSNH-

Seabrook Operates 340a

Stand-alone PSNH-

Seabrook Canceled 343a

Summary 345a

Financial Viability of North

Atlantic Energy Corporation 349a

North Atlantic-Seabrook

Operates 35la

Worth Atlantic- Seabrook

Canceled 356a

Financial Evaluation-

John F. Curley 360a

Financial Viability of

78a

— ee ee _

Stand-alone PSNH ~— 365a

Stand-alone PSNH

Capitaliztion and Ratios 365a

Financings for Stand-alone

PSNH 367a

G. THE COMMISSION IS NOT REQUIRED

TO FIND A RANGE OF REASONABLE

RATES : 368a

H. CONTRACTS AMONG CURRENT AND

FUTURE AFFILIATES 369a

NUSCO Service Contract 370a

Management Services

Agreement 372a

Capacity Transfer Agreements

and the Sharing Agreement 374a

I. REQUESTED STRUCTURAL CHANGES 375a

J. NU MANAGEMENT 379a

K. CONCLUSION 384a

IV. REQUESTED FINDINGS 387a

A. NU’S REQUESTED FINDINGS OF

FACT 388a

B. NUS’S REQUESTED APPROVALS 393a

C. STATE’S REQUESTED FINDINGS 405a

D. HYDRO INTERVENORS’ 406a

REQUESTED FINDINGS

79a

DR 89-244

NORTHEAST UTILITIES/

PUBLIC SERVICE COMPANY OF NEW HAMPSHIRE

Appearances: As previously noted

I. PROCE H RY

A, BACKGROUND

This proceeding was initiated by the

commission on December 22, 1989 pursuant

to a mandate of the N.H. Legislature

embodied in RSA 362-C. In that statute

the Legislature directed the commission

to determine generally, whether’ the

acquisition of Public Service Company of

New Hampshire (PSNH) by Northeast (NU)

would be consistent with the public good,

and specifically, whether the proposed

agreement 1 between the State of New

luagreement" means the agreement

dated as of November 22, 1989, as amended

through December 14,1989, executed by and

between the governor and attorney general

of the State of New Hampshire, and

Northeast Utilities Service Company,

actin on behalf of its parent Northeast

80a

Hampshire (State) and NU relating to the

reorganization of PSNH would be

consistent with the public good and

whether the rates for electric service to

be established in connection with the

reorganization are just and reasonable

and should be approved. This agreement

and the authorizing legisiation were

developments in a series of efforts to

restore PSNH to financial health and

ensure the adequacy, reliability and cost

of electric service in New Hampshire.

Uncertainties have clouded PSNH’s

financial health and ability to provide

electric service since the liquidity

crisis of March 1984 when, reacting to

revised estimates for the completion of

the Seabrook Nuclear Power Plant

(Seabrook), a group of banks announced

that they were unwilling to make advances

Utilities. RSA 362-C:2 II.

8la

under the terms of PSNH’s’ revolving

credit agreement. As a result, PSNH was

unable to meet its payments for the costs

at Seabrook and suspended construction in

April 1984. In response, the Joint

Owners entered into a number of

agreements, including the establishment

of an Executive Committee to oversee the

construction budget, and on June 23, 1984

resolved to resume construction of

Seabrook Unit I and initiate a phased

transfer of construction and operation

responsibilities from PSNH to an

independent entity. The latter was never

accomplished and construction, and thus

far operation, have remained the

responsibility of the New Hampshire

Yankee Division (NHY) of PSNH whose

management reports dually to PSNH and to

the Joint Owners.

Meanwhile, PSNH instituted severe

cash conservation measures and proposed a

82a

et a Re in

en ll, ln a ”

three phase financing plan intended to

insure the availability of all funding

necessary to complete Seabrook Unit I.

In the first phase, PSNH sought and

received authority to issue $90,000,000

of short term debt. Docket DF 84-121,

orders no. 17,057 (69 N.H.Puc 275) and

no. 17,076 (69 N.H.Puc 326). In the

second phase, the commission authorized

PSNH to raise $425,000,000 through the

issuance of debentures and of warrants to

purchase shares of stock. Docket DF 84-

167, orders no. 17,222 (69 N.H.Puc 522)

and no. 17,228 (69 N.H.Puc 558). This

second phase financing was intended to

enable PSNH to meet all general corporate

purposes until the end of 1986 with the

exception of Seabrook construction

financing. The then anticipated

commercial operation date of Seabrook

Unit I was between May and August 1986.

The third phase of the financing,

83a

referred to as the "Newbrook Plan" by

PSNH, was considered in DF 84-200 which

the commission opened on August 2, 1984

for the purpose of investigating whether

pre-financing the completion of the

twonstruction of Seabrook Unit I was in

the public good pursuant to RSA 36933 et

seq, In this docket, the commission

reviewed the terms, conditions and the

amount of the third phase financing, the

cost to complete and alternatives to the

completion of Seabrook Unit I and whether

it was financially feasible for PSNH to

engage in its proposed construction plan

including an evaluation of the level of

revenues needed to support the resulting

capital structure.

The N>H> Supreme Court considered an

appeal from the commission’s approval of

the first phase of the financing in

Appeal of Seacoast Anti-Pollution League,

126 N.H. 789, 497 A.2d 847 (1985), and of

84a

the second phase in both Appeal of

Seacoast Anti-Pollution League, 125 N.H.

465, 482 A. 2d. 509 (1984) and in Appeal

of Seacoast Anti-Pollution League, 125

N.H. 708, 490 A.2d 1329 (1984) and

eel ee

affirmed the orders of the commission.

On April 18, 1985 the commission

issued its report and order conditionally

approving the third phase of the PSNH

financing and authorizing PSNH to issue

and sell deferred interest bonds or tax

exempt pollution control revenue bonds in

amounts up to a total of $525 million.

Remanded by the N.H. Supreme Court, on

November 8, 1985 the commission issued

its 15th supplemental order no. 17,939

setting forth the reasonable and probable

range of retail rates to assure PSNH a

lawful return on investment in Seabrook

Unit I. 70 NHPUC 886. The N.H. Supreme

Court affirmed the orders of the

‘commission in Appeal of Conservation Law

85a

eS So ene Venter

il

Foundation of New England, Inc., 127

N.H.606 (1986)

On May 29, 1986, PSNH filed with the

commission Tariff No. 30-Electricity,

which was designed to increase non-energy

revenues by approximately $58.9 million.

In addition, the petition proposed a step

increase in annual revenues of

approximately $35 million which was to

become effective on year after the

effective date of the initial increase.

On June 29, 1987, the commission granted

PSNH an increase of $20,490,899. Re

BP vi m W hire,

72 NH PUC 237, DR 86-122. Most of the

difference between the petition and the

commission’s findings is attributable to

the disparity between PSNH’s request for

a 19% return on equity, which it asserted

represented the appropriate return for

the common equity of a company as risky

as PSNH, and the commission"s finding of

86a

15%. The commission’s order was based in

part on staff testimony that PSNH was so

risky that from an investor perspective,

its stock was a speculative investment

and that “profits such as are realized or

| anticipated in. . . speculative ventures"

offend the judicial standard as

enunciated in Bluefield Water Works &

| Im 4 vi f W

. Virginia. 262 U.S. 679, 692-693 (1923).

| PSNH appealed the commission’s order, and

nearly simultaneously petitioned the

" commission to alter existing rates on

| account of emergency circumstances. It

| requested an emergency rate surcharge of

approximately $70.98 million in

additional revenues, an increase of 15%.

| In order to expedite consideration and

| determination of this request, PSNH asked

that the commission reserve, certify, and

transfer to the N.H. Supreme Court the

question of whether a utility that has

87a

ES ee

insufficient cash from internal sources

and was unable to attract external

capital to meet the requirements of its

business and otherwise support its

financial integrity, was entitled to

rates that would restore its financial

integrity consistent with the interests

of customers, notwithstanding RSA

378:30a, the so-called anti-CWIP statute.

On September 2, 1987, the court deferred

acceptance of the transferred questions

until the commission had addressed two

issues with finding of basic fact: the

claimed need to include some of the

Seabrook Unit I investment in rate base

in order to make interest payments and

expand services to customers, and the

dates and amounts of PSNH’s investments

in Seabrook. The commission submitted to

the court a record reflecting findings of

fact on both issues on October 16, 1987.

Report and sixth supplemental order no.

88a

18,873, 72 NH PUC 485 (October 14, 1987).

-In respect to the claimed need for

relief, the commission found that it was

unlikely that PSNH would be able to meet

its obligations from either external

financing or current rates, even assuming

that its appeal of order no 18,726 in DR

86-122 were successful. It further found

that adjustment of any of the variables

of the traditional ratemaking formula

designed to provide the requested relief

would also be in violation of RSA 378:30-

| a. On January 26, 1988, the court found

that the anti-CWIP statute was

| constitutional and that the commission

was not authorized to ignore’ the

restriction imposed by RSA 378:30-a when

it determines that an emergency exists

for a public utility. Petition of Public

Service Co. of New Hampshire, 130 N.H.

265, 539 A.2d 263 (1988). Subsequently,

on August 5, 1988, the court also

89a

ae

affirmed the commission’s DR _ 86-122

order. Appeal of Public Service co, of

New Hampshire, 130 N.H. 748, 547 A2d 269

(1988), cert. denied.

B,PSNH BANKRUPTCY PROCEEDING

On January 28, 1988, PSNH filed a

voluntary petition for reorganization

under Chapter 11 of the United States

Bankruptcy Code. In its Form 10K for

1989, PSNH summarized the reasons for its

bankruptcy filing as follows, linking the

bankruptcy directly to PSNH’s investment

in Seabrook:

The financial difficulties that

led to the Company’s bankruptcy

were attributable to a

combination of several factors:

the magnitude of the Company’s

investment in the Seabrook

Nuclear Generating Station Unit

1 ("Seabrook"), which

represents more than half of

the book value of the Company’s

assets on its financial

statements; the delay in

obtaining approval of the

operation of Seabrook from the

Nuclear Regulatory Commission

("NRC"); and the prohibition

under New Hampshire law to the

90a

realization by the Company of

any cash income from or return

on that investment until

Seabrook provides service to

customers (the so-called anti-

CWIP statute).

Staff late filed Exhibit 20, 1989 Form

10K, p. 1.

PSNH had begun construction of an

nuclear power plant at Seabrook, N.H.

after receiving a siting certificate in

1974. The Seabrook Nuclear Power Plant

waS originally planned as a two-unit

nuclear reactor plant with a projected

total cost of approximately $1.3 billion

and with completion projected for Unit 1

in November 1979. On May 7, 1979, the

N.H. Legislature enacted the "anti-CWIP"

law (RSA 378:30a), prohibiting any

recovery in rates for any costs expended

by a utility for construction of a plant

until the plant was in commercial

operation. Partly as a consequence of

the anti-CWIP statute, PSNH reduced its

Sla

Original 50% investment in the proposed

plant to 35.6% in the early 1980-’s. By

October 1986, only one unit had been

completed. The cost of Seabrook

including all direct costs and interest

charges as of January 1, 1990 had

escalated to approximately $6.5 billion

due to delays in receiving a commercial

operating license from the NRC and the

delays caused by the Chapter 11

proceedings. Of that total investment,

the amount invested by PSNH was estimated

to be $2.9 billion as of January 1, 1990.

(Ex. NU 1-E, Disclosure Statement at 71)

During the pendency of the Chapter

11 Reorganization, PSNH has functioned as

a debtor-in-possession pursuant to

Sections 1107 and 1108 of the Bankruptcy

Code (Disclosure Statement at 17, Ex. NU

1-E), subject to the jurisdiction of this

commission in the ordinary course of

92a

business.

The State of New Hampshire has been

actively involved in the bankruptcy case

expressing the interest of the State in

the assurance of an adequate source of

electric power for residents at

Sn ee a or anne

reasonable rates. (Par. 9, Bankruptcy

Court General Findings of Fact and

Conclusion of Law Re Plan Confirmation

ain? = -

Issues Ex. NU 14 (hereinafter Findings)).

| It intervened in the bankruptcy case in

hopes of achieving a Satisfactory

resolution on a consensual basis. It

also, in May 1989, created the New

Hampshire Energy Authority and empowered

it to acquire the assets of PSNH, should

that prove necessary to resolve the

bankruptcy of PSNH, to avoid long term

| uncertainty concerning the adequacy,

reliability and cost of electricity to

prevent monopolistic abuses and to make

available a governmental alternative to

' 93a

pT ee

restore the public trust by providing

essential electric service to the public.

RSA 362-B. the statute gave the State

leverage to negotiate a favorable public

utility alternative to a governmental

takeover. i

On June 22, 1988 the Court granted

the State explicit party-in-interest

status within the meaning of @1109 (b) of

the Bankruptcy Code and authorized the

State to intervene generally in the

bankruptcy proceedings pursuant to

Bankruptcy Rule 2018 (a). The State

negotiated with the principal parties

concerning the level of rates which the

debtor may charge N.H. ratepayers after

confirmation of a plan (Disclosure

Statement at 19). Negotiations resulted

in plans proposed by PSNH management,

Northeast Utilities, the United

Illuminating Company and the New England

Electric System. (Findings, par. 7

94a

Se ee en tr

cai As (hee hot Pe AE BLO As «

Disclosure Statement at 23.)

On November 22, 1989, the Governor

and the Attorney General, on behalf of

the State of New Hampshire entered into

an Agreement with NU intended to resolve

the reorganization proceedings. The

State also announce that it would enter

into a similar agreement with any other

party that could produce a plan that

would resolve the bankruptcy; however,

any alternative plan would require the

Support of the creditors and shareholders

Similar to the support accorded the NU

plan at the time of the November 22, 1989

Agreement. In December 1989, PSNH

management joined NU in support of its

reorganization proposal. United

Illuminating and New England Electric

have withdrawn their plans.

The New Hampshire Legislature

approved the Rate Plan on December 18,

1989, subject to NHPUC review = and

95a

implementation. HB1-FN. RSA 362-C. The

Rate Plan, which suspends the Anti-CWIP

Law for the PSNH Reorganization provides

for seven annual 5.5% increments in the

company’s retail rates, commencing

January 1, 1990. The first increase was

implemented on December 28, 1989. DR 89-

219, Report and Order No. 19,655. The

amounts collected are currently being

held in escrow by the New Hampshire State

Treasurer, subject to final approval by

the NHPUC.

The negotiations among the various

parties in interest to this case with

regard to various plan proposals of the

parties culminated in the filing on

December 28, 1989, of the Third Amended

Disclosure Statement of Northeast

Utilities Service Company in connection

with the Third Amended Joint Plan of

Reorganization of NU, PSNH, the Official

Committee of Unsecured Creditors, the

96a

aceon

— eee ore

Official Committee of Equity Security

Holders, Citicorp, Consolidated Utilities

and Communications, Inc. and Shearson,

‘Lehman Hutton, Inc. This Plan was the

Subject of the confirmation hearings

before the U.S. Bankruptcy Court for the

District of New Hampshire (In Re: Public

Service Company of New Hampshire, Debtor

Chapter 11 Case No. 88-00043).

On March 27, 1989 the Plan’s

proponents mailed a ballot, copies of the

Court’s notice, the Disclosure Statement,

transmittal letter from William Ellis and

John Duffett, the chief executive

officers of Northeast Utilities and the

Debtor respectively, and a return

envelope for the ballot accepting or

rejecting the Plan, to all creditors and

all equity security holders of the Debtor

of Record on November ave 1989.

(Findings, par. 19). The Plan was

accepted in writing by the unsecured

97a

creditors and equity holders. A majority

of secured creditors have also accepted

the Plan. On April 20, 1990, the

Bankruptcy Court confirmed the Plan.

Order BK No. 88-43. Upon the effective

date of the Reorganization Plan (August

1, 1990 or such later date as may be

agreed), NU will make approximately $2.3

billion in cash and securities available

for creditors and equity security

holders. The effective date is

contingent on NHPUC approval of the Rate

Plan.

In accordance with the provisions of

the Reorganization Plan, all directors of

the company are deemed to have resigned

on April 30, 1990. A new seven-member

board (three members approved by the

Equity Committee, three members by the

Unsecured Creditors Committee, and one

member jointly approved by both

committees) took office. (Par. 19, order

98a

confirming Third Amended Joint Plen of

Reorganization)

A separate order of the Bankruptcy

court, entered April 13, 1990, placed in

effect a Management Services Agreement

between the company and NUSCO as of April

30, 1990. The Bankruptcy Court found

that the Management Services Agreement is

fair, reasonable, consistent with public

policy and the public interest and is in

the best interests of creditors and

security holders of the Debtor. (Par. 31 —

Bk No. 88-43 order).

The April 20, i990 Confirmation

Order also approved the merger agreement

finding it to be fair, reasonable,

consistent with public policy and the

public interest, and made it binding on

PSNH, NU, NUSCO and NU acquisition

corporation without the need for further

action by any other entity. In addition,

the FERC approved the Management Services

99a

—

Agreement, 50 Fed. Energy Reg. Comm. Rep.

(CCN) @61,266 at 61, (1990). The SEC has

not rejected the Management Services

Agreement . SEC File No. 70-7695.

C. DR 89-244

The instant proceeding was opened by

an order of notice on December 22, 1989

to consider the petition of Northeast

Utilities Service Company (NUSCO) actin

on behalf of its parent NU for Approval

and Implementation of the Agreement

Between the Governor and Attorney General

of the State of New Hampshire and NUSCO.

Larry M. Smukler, Esq., who was the

State’s chief negotiator for -the Rate

Agreement was confirmed Chairman of the

N.H. Public Utilities commission on

December 20, 1989. Subsequently John N.

Nassikas was appointed Special

Commissioner and Presiding Officer after

Mr. Smukler recused himself from this

proceeding.

100a

ait a

The order of notice set a prehearing

conference for January 10, 1990 at which

the parties would address issues of

scope, procedure, intervention and

schedule, and granted full party status

to all parties to DR _ 89-219, the

Temporary Rate proceeding. At the

procedural hearing, the State presented

Stipulated Recommendations of the Parties

regarding Scope, Procedure and Schedule.

Subsequently, the parties presented more

detailed recommendations regarding scope.

ON January 19, 1990, the commission

issued report and order no. 19, 674

granting all motions for intervention and

limited intervention that had not been

previously granted, adopting the

recommendations of the parties regarding

procedures and schedule, and setting

forth the scope of the proceeding.

NUSCO’s Petition also requested

waivers of certain provisions of the

= ET ENO ia nem

10la

requirements of N.H.Admin. Rule Puc

1603.03 (the tariff filing requirements),

arguing that certain information and

materials were either not available to

NUSCO or were not relevant due to the

unique and special nature of this

proceeding. The parties met on January

11, 1990 and on January 18, 1990 filed a

document entitled "Stipulation on NUSCO’s

Requests for Waivers of Certain Filing

Requirements". By report and order no.

19,673 the commission accepted _ the

stipulation finding that the purpose of

the commission’s rules would be fulfilled

by the information and data to be

provided by NUSCO and PSNH in accordance

with the Stipulation. Order no. 19,677

waived requirements regarding notice and

ordered NUSCO to consult with the parties

on the issuance of a bill insert

describing and explaining to customers

the Rate Agreement and Plan for

102a

cae

Reorganization of PSNH.

ee Or

During the course of the proceeding,

parties have filed petitions and the

commission -has issued orders in three

areas: scope, discovery and late

ee

interventions. On January 25, 1990, John

V. Hilberg (Hilberg) filed a motion

requesting the commission to clarify

and/or amend its order no. 19,674

regarding scope, and on February 20, 1990

filed a second motion requesting

reconsideration. On February 8, 1990 the

Office of the Consumer Advocate (OCA)

also filed a motion requesting

Clarification or amendment of the order.

On February 8, 1990, the Hydro

Intervenors filed a motion for rehearing.

The commission denied Hilberg’s motion in

report and order no. 19,703 finding that

| contrary to Hilberg’s assertions, the

Standards for the commission’s review

must be the result of the ratemaking

103a

process rather than a comparison with a

set of alternative rates that would

obtain in other circumstances, and that

consideration of whether the Agreement

and proposed rates

represented a reasonable resolution of

the PSNH bankruptcy did not entwine the

commission with the judgments of the

Bankruptcy Court as the roles of the

Bankruptcy Court and the commission were

separate and distinct. The commission

denied Hilberg’s second motion in order

19,726 on the grounds that it was

untimely and alleged essentially the same

assertions as his first motion.

In report and order 19,714, the

commission clarified its order in

response to the OCA to emphasize that it

did not believe that it could find that

the Plan of Reorganization would serve

the public good independently of finding

whether or not the rates required under

104a

o—e woe

the Rate Agreement’ were just and

reasonable, and to state that it was well

aware of the "constitutional calculus"

defined by the U.S. Supreme Court in

Permian Basin Area Rate Cases, 390 U.S.

at 769, cited at p. 639 of the Appeal of

CLF, Op. Cit. and intended to apply it in

balancing the interests of ratepayers and

investors. The commission denied the

motion of the Hydro-Intervenors in report

and order 19,715, finding that the actual

reduction of the rates in the long term

rate orders of the small power producers

was not an integral part of the Rate Plan

and consideration of that issue could be

appropriately deferred until there was a

issue before the commission requiring

resolution.

Second, the commission has responded

to a series of motions regarding problems

of discovery. In response to motions

filed by staff and PSNH, the commission

105a

by order no. 19,727 amended the

procedural schedule to allow additional

time for the completion of dkacenie’.

The OCA filed a motion to _ compel

responses to data requests on March l,

1990, but withdrew it on March 8th.

Order no. 19,736 and order no. 19,742

granted requests by staff, NUSCO, and

PSNH for protective orders for

confidential, commercial or financial

information. In response to objections

to these orders by the Hydro and the Bio-

mass Intervenors and SES Concord, the

commission issued order no. 19,767

requiring NUSCO and PSNH to file comments

on whether counsel of those intervening

parties should be permitted to review the

studies covered by the protective orders.

When NUSCO and PSNH, the only parties

that could be prejudiced by wider review

of the studies, stated that they did not

object to the relief requested by the

106a

Hydro and the Bio-mass Intervenors and

SES Concord, the commission granted the

motions for reconsideration by order no.

19,781.

By order no. 19,812, the commission

granted the motion of PSNH for a

protective order to afford proprietary

treatment to a list of employees who were

to be terminated from PSNH in conjunction

with the newly assumed NU management of

PSNH. Order no. 19,829 granted a motion

by NU for a protective order regarding

the Seabrook budget study infirmation on

the grounds that premature public

dissemination and disclosure of the

information could adversely affect the

morale of NHY employees thereby impairing

NHY’s ability to bring Seabrook to

commercial operation. On May 22, 1990,

the commission by order 19,834 denied the

motion by the Hydro Intervenors

requesting that NU provide financial

107a

amid

forecasts using NU’s financial model and

output formats but incorporating

alternate assumptions proposed by the

Hydro Intervenors and other related

information. The commission found that

provision of the information requested

would be unduly burdensome to produce,

would be of minimal value, was untimely

and would disrupt the orderly proceeding

of the docket.

Third, the commission dealt with

several instances of late intervention.

On April 9, 1990, the commission granted

from the bench a motion to intervene by

the New Hampshire Electric Cooperative,

Inc. (NHEC). On May 2, 1990, by order

no. 19,811 it made the New Hampshire

Yankee Division of PSNH, the managing

agent for the construction and operation

of the Seabrook Nuclear Power Plant, a

mandatory party to-the proceedings so far

as its interests may appear.

108a

Finally, dissident stockholder

Robert C. Richards (Richards) filed

motions to intervene out of time on April

25 and 26, 1990, and petitions for

intervention on behalf of Martin Rochman

and Edward Kaufman (Rochman and Kaufman)

On May 7, 1990. The stated purpose of

these interventions was to challenge the

constitutionality of RSA 362-C and the

rates that may be established pursuant

thereto. The Official Committee of

Equity Security Holders of PSNH, PSNH,

NU, the State and the BIA opposed the

interventions. The commission denied the

untimely petitions, and Richards’ motion

for rehearing of May 11th; finding that

the interventions will not serve the

interests of justice and will impair the

Orderly and prompt conduct of the

proceedings. Report and orders no.

19,814, no. 19,830 and no. 19,831. On

ies 16, 1990, Richards filed a petition

109a

with the N.H. Supreme Court on behalf of

himself, Kaufman and Rochman for a Writ

of Prohibition to the New Hampshire

Public Utilities Commission. On June 18,

1990, the N.H. Supreme Court denied the

petition for writ of prohibition without

prejudice.

Hearings on the merits were held

between April 9 and May 5, 1990, and

hearings on rebuttal and supplemental

testimony were held on May 22 through 25,

1990. There were 21 hearing days.

Parties filed briefs on June 8, 1990.

The commission granted requests by the

State, the BIA and Hilberg for extensions

until June 18, 1990 for the filing of

their trial briefs.

On June 6, 1990, Counsel for NU

filed, per its agreement with the State

and staff, an opinion to the effect that

the waiver of rights of set-off under

Section 6 of the Seabrook contract will

110a

not preclude PSNH as buyer under the

contract from pursuing all rights and

damages arising from the Seabrook

contract.

On June 8, 1990 the Hydro

Intervenors also filed a motion for

rehearing on their request for further

discovery. On June 21, 1990, the

commission denied the motion by order no.

19,859, on the grounds that the

alternatives proposed by the Hydro

Intervenors could result in substantial

changes to the Rate Agreement, that the

commission clearly established within its

previous scoping orders in this docket

that it will apply applicable law in

determining whether or not the proposed

rates are just and reasonable, that the

requested information would have minimal

probative value, and that the Hydro

Intervenors had presented no factual or

legal arguments that had not been already

lila

ed

considered by the commission prior to its

issuance of order no. 19,834

On June 22, 1990, NU and the State

filed joint recommendations appended to

this report.

II. POSITIONS OF THE PARTIES

A RTHEAST UT TIE

NU avers that the rates under the

Rate Agreement are just and reasonable

under all the standards identified in the

commission’s scoping order. The rates

under the Rage Agreement are likely to be

more favorable than rates that could be

foreseen under traditional ratemaking

whether PSNH becomes an affiliate of NU

or remains a stand-alone company. It

argues that the Rate Agreement fairly

balances the interests of PSNH investors

and ratepayers, in that the rates are the

minimum reasonably required to raise

amounts necessary to satisfy PSNH’s

creditors and equity holders while not

112a

atta neem

¢

unduly burdening ratepayers or the New

Hampshire economy. Under the Plan, by

the end of the ten year-period, real

rates are projected to be lower in New

Hampshire than they are today. The rates

will be competitive with those expected

for other New England utilities, close to

the expected price of electricity of

other NU subsidiaries, only slightly

higher than those forecasted for the New

England region, and substantially lower

than those forecasted for United

Illuminating, the second largest owner of

Seabrook. NU notes that there is not

other alternative plan of reorganization

to which rates under the Rate Plan can be

compared.

Nu Goieente that the Acquisition

Premium is in the public interest. It is

a regulatory asset created by the Rate

Agreement, representing the portion of

NU’ s investment after Subtracting the

ll3a

value assigned to Seabrook and the book

value of PSNH’s non-Seabrook assets. The

concept was developed so that PSNH could

use certain tax benefits more effectively

and apply an asset amortization schedule

tailored to the specific financial

demands and rate recovery limits imposed

on the reorganized PSNH. Thus, it serves

the overall goal of achieving a viable

balance between the creditors’ and

shareholder’s demands for prompt recovery

of their investment and the ratepayers’

interest in minimizing rate increases.

NU argues that the exclusive interest of

the Hydro Intervenors in this proceeding

is in recharacterizing the Acquisition

Premium to make Seabrook power as

expensive as possible, regardless of how

such changes affect ratepayers. NU

believes that since the accounting

treatments of various PSNH assets under

the Rate Agreement further the interests

114a

of New Hampshire ratepayers and conform

with Generally Accepted Accounting

Principles, the commission should reject

any attempts to undermine those

accounting treatments to further the

interests of the Hydro Intervenors.

NU avers that the Fuel and Purchased

Power Adjustment Clause (FPPAC) fairly

balances the interests of investors and

ratepayers. F PAC is based on

traditional ratemaking principles,

including ongoing prudence review of the

cost components. Its purpose is

identical to that of PSNH’s’ current

Energy Cost Recovery Mechanism (ECRM) in

that it provides for periodic’ and

consistent adjustment of electric rates

to reflect certain of PSNH’s costs. It

is also designed to reflect the unique

agreement by PSNH to fix base _ rate

increases for seven years without regard

to inflation or fluctuation of sales and

115a

operation and maintenance (O&M) expenses

not related to fuel costs. The basic

difference between FPPAC and ECRM is that

FPPAC provides for the recovery of long-

term purchased capacity costs, including

those under the Seabrook Power Contract,

in addition to fuel and energy costs. NU

notes that the issues that have been

raised concerning FPPAc revolve around

the assumptions in establishing PSNH’s

fuel and purchased power cost projections

rather than the design of the mechanism.

NU argues that the assumptions underlying

the FPPAC “BA", FPPAC’s baseline fuel and

purchased power expense projections, are

balanced and reasonable and characterizes

- them as a set of individually reasonable

assumptions that, in the aggregate, were

likely to balance each other over the

life of FPPAC and under various factual

circumstances, including fossil fuel

prices, regulatory changes, Seabrook O&M

116a

ee ly (hn Ate

Late when Drea

and performance variations and changes in

the market cost for capacity. NU accepts

the inclusion of interest and a trigger

mechanism in FPPAC as proposed by staff,

but argues that incorporating a Seabbrook

performance mechanism would substantially

alter a fundamental term of the Rate

Agreement and would be inherently unfair

to PSNH because better than anticipated

performance would provide no benefit to

PSNH if it resulted in the return on

equity (ROE) exceeding the equity collar

(13.25%) to balance the potential loss if

performance were worse than anticipated.

NU also contends that such a condition

might jeopardize the reorganization

financing and the Nuclear Regulatory

Commission (NRC) approval of NU becoming

managing agent for Seabrook, and is not

needed because NU has an incentive to

contain costs in order not to lose

“customers to self-generation.

ll7Ja

On other issues regarding FPPAC, NU

avers that it has satisfied the concerns

raised by staff- about the capacity and

energy costs to PSNH ratepayers of NU’s

off-system capacity sales. It notes that

neither the renegotiation of the NHEC

buy-back of Seabrook capacity or of the

power purchase arrangements with certain

small power producers (SPPs) need be an

immediate concern as Rate Agreement may

be reopened to address the buy-back

arrangements, and renegotiations of the

SPP power purchase arrangements can serve

only to reduce rates.

NU avers that the Seabrook Power

Contract, designed to minimize financing

costs and ensure the safe operation of

Seabrook is in the public interest.

While PSNH’s obligation to North Atlantic

Energy Corporation (NAEC) are essentially

unconditional, ratepayer’ obligations to

PSNH are not; NU and NAEC’s waiver of any

118a

provision of law that would preclude

commission review of prudence of Seabrook

costs will last as long as the payments

under the Seabrook Power Contract are

treated in a manner similar to their

treatment under FPPAC. Nu agrees that

nothing in the Contract would foreclose

any cause of action that PSNH would

otherwise have against NAEC or diminishes

existing commission powers with respect

to replacement power costs. NU also

notes that the Seabrook Power Contract

avoids rate shock by incorporating a

qualified phase-in plan for PSNH’s

Seabrook investment and that the Seabrook

cancellation recovery provision is at

least as favorable as any likely outcome

under traditional ratemaking.

NU contends that the Investment

Adder, defined as "the capitalized

synergies, efficiencies or other cost

Savings or benefits brought by NU to the

119a

acquisition of PSNH" (Ex. NU i-E at (D-

85-86), is justified by the synergies,

which it calculates to exceed $515

million (PSNH’s share of Seabrook O&M

expenses at $188 million, the fossil

steam unit availability estimated from

three years of actual data and two years

of projected data at $98 million, the

NEPOOL related synergies at $146 million,

and the Administrative and General (A&G)

expense and coal purchasing synergies at

$86 million). NU argues that the NEPOOL

synergies are not as risk of other

members eliminating the savings by

modifying the NEPOOL Agreement because

such changes pertain to some of the most

basic” energy and capacity allocation

formulas in the NEPOOL Agreement and are

therefore not likely to attain the

necessary consensus among NEPOOL members.

NU argues that under the Rate Agreement

the commission cannot revisit the

120a

quantification of the synergies to adjust

the Investment Adder after the merger but

retains its authority to examine the

reasonableness of the O&M costs incurred

by PSNH after the affiliation. NU

expects only to recover prudently

incurred costs, but cannot offer to be a

guarantor of the projected synergies.

NU argues that the ROE Collar fully

protects ratepayers from PSNH receiving

excessive returns in that it caps PSNH’s

Cumulative net present value return on

equity (CUM NPV ROE) during the fixed

rate wassu at 13.25% based on NU’sS $2.3

billion investment in PSNH. It states

that the Collar provides only limited

protection for investors as the same

calculation for the floor is actually a

2.8% ROE.

NU contends that the Base Rate

modifications authorized under Section

5S(a) (v) (A) of the Rate Agreement (Ex. NU

12la

a

1-E at D-14-16) are reasonable and

necessary. This section allows’ for

adjustments for legislative or regulatory

changes which require capital

expenditures of at least $20 million (or

an increase of annual expense of at least

$2 million), changes in the required

payments to the Nuclear Decommissioning

Fund, funding for mandates by legislative

Or regulatory authorities, recovery of

costs of conservation and load management

(C&LM) programs undertaken with

commission approval and changes to the

accounting standards. It notes that it

is undisputed that the definition of the

term "costs" includes a program

costs, and that the issue of whether it

also includes lost revenues and

incentives will be resolved in docket DR

89-187. Therefore, NU requests that they

commission define the term "costs" in

this docket consistent with its findings

122a

Sa

in DR 89-187. NU has clarified that this

section did not intend to permit double

recovery for the same expenses in both

base rates and FPPAC, has agreed that it

was not the intent of the Rate Agreement

that either PSNH or ratepayers should be

disadvantaged by PSNH’s pursuit of least

cost planning measures, and has adopted

the proposal that additional revenues

obtained from the 5.5% compounding effect

of reimbursing PSNH for C&LM expenses

through base rate increases will be spent

on additional C&LM efforts.

NU states that the Rate Agreement

provides substantial non-rate benefits to

ratepayers and the State of New Hampshire

which are further reasons to determine

that its implementation is consistent

with the public good. These benefits

include the strength of NU management,

the application of NU’s expertise to

foster the safe and economical operation

123a

of Seabrook, assured capacity resources

over the next two decades at embedded

cost and the establishment of financially

viable electric utilities (PSNH and NAEC)

to serve New Hampshire reliably and

without substantial risk of another

bankruptcy. The viability is indicated

by the financial ratios, the evidence

that the reorganization financing will be

successful and the reasonableness of NU’s

sales forecasts.

NU presented comprehensive testimony

relating to the terms and conditions of

the first step financings required to

finance the $2.3 billion reorganization

plan confirmed by the Bankruptcy Court.

NU is not seeking approval at this time

of second step financing.

Finally, NU argues that it is not

necessary for the commission to condition

— its finding that the Rate Agreement is in

the public good with a requirement that

124a

ee

=.

the merger take place. NU first argues

that mutual termination, a breach by

either PSNH or NUSCO of the Merger

Agreement, or the emergence of a new

Suitor are all unlikely events. It notes

that the evidence of the financial ratios

indicates that while Stand-alone PSNH

would initially be an unattractive

investment, it would be financially

viable and would improve over time. If

Seabrook failed to achieve commercial

operation or were canceled, Stand-alone

PSNH would still be able to service its

debt and preferred stock, finance

necessary construction expenditures and

remain viable over time. NU notes that

NUSCO will be obligated to provide

management services to reorganize PSNH

for six months after the termination of

the Merger Agreement and assist with the

transition, and must continue to provide

management services for Seabrook

125a

(assuming that NRC and Joint Owner

approval have been received) for up to

five years. while there will be impacts

on rates if the NU synergies are not

achievable by Stand-alone PSNH, savings

like the A&G, coal purchasing, fossil

steam unit availability improvements and

Seabrook operating efficiencies could

continue to accrue to PSNH as a result of

the lessons learned during NU’s

management. Even acknowledging the

increase in rates compared to the merged

PSNH, NU argues that the fundamental

issue is whether New Hampshire ratepayers

would be better off facing such increases

under the Rate Agreement or the return of

PSNH to the uncertainties of the

Bankruptcy Court. In addition to its

arguments that an unconditioned approval

is justified by the evidence, NU also

argues that a finding of public good

conditioned on the merger would make it

126a

impossible to finance the step one

reorganization and therefore would

preclude the timely resolution of the

bankruptcy.

NU concludes by requesting the

commission to make the ancillary findings

regarding the financings, the affiliate

contracts and the structural changes

required by the Joint Plan.

B. PUBLI ERVICE MPANY OF

NEW HAMPSHIRE

PSNH stated that it joined in and

Supported the Brief and Requests for

Findings and Approvals filed by NU in

this proceeding.

In a letter dated June 15, 1990,

PSNH responded to two points raised by

the OCA to clarify its position. It

argues that as there has been no

disallowance for Schiller outage costs

and the docket concerning those costs has

been ssaaue. that issue is not

127a

appropriately within the scope of these

proceedings. In regard to the OCA

recommendation that the commission

finding that the Rate Agreement is in the

public good be contingent on the merger,

PSNH argues that such a condition would

be a major substantive change in the

terms of the Rate Agreement which was

intended, among other things to prevent

chaos in the event a merger failed to

take place. It contends that such a

condition was likely to make PSNH’s Step

1 financing impossible, and that in the

case of unilateral action by PSNH to

prevent the merger, the commission would

have continuing jurisdiction over PSNH

under RSA 365:5 and RSA 374:1 to examine

the prudence of any such- action,

especially if the commission had

previously determined that the

acquisition of PSNH by NU was in the

public good.

128a

ec ih A ys ne tl

ee tee

et Ne ee ne, ME ee

W PSHIRE YANKEE

NHY addressed the issue of the

discrepancy between the estimates of NHY

and NU regarding the cost of operating

Seabrook. It concluded that with NHY as

a stand-alone entity it was confident

that the 1991 operation and maintenance

costs at Seabrook would be $157.5 million

or less and accepted that NU believed

that NU would be capable of operating

Seabrook as part oF a multi-unit

Organization for $113 million or less.

However, the differences in the _ two

estimates could only be resolved by a

jointly conducted, detailed analysis

which could be reasonably initiated only

after Seabrook had attained commercial

operation.

NEW PSHIRE

The State of New Hampshire, by and

through the Attorney General, stated that

the record evidence indicates that the

129a

rates required under the Rate Agreement

are just and reasonable and that the

NUSCO plan for reorganization will serve

the public good. After setting forth

the standard of reasonable rates by

citing n vation Ww

Foundation op. cit., the State requests

the following findings of fact based on

the evidence it cites:

1. The resolution of the PSNH

Bankruptcy is in the public good.

2. The Rate Agreement is fair,

reasonable, consistent with

public policy and the public

interest, and is in the best

interests of ratepayers and

shareholders.

3. The Annotated Rate Agreement

and accompanying glossary

submitted by the State Ex. (AG2)

are adopted as the authoritative

reference guide to the _ Rate

Agreement.

4. The rates proposed under the

Agreement are just and

reasonable, will serve the public

good and effectuates a reasonable

settlement of the PSNH

bankruptcy.

130a

a Pek

5. The 5.5% annual rate increases

for the first seven years will

provide a fair rate of return to

a financially viable PSNH/NU,

based on the efficiencies

stemming from the synergies

included in the Rate Agreement.

6. The 5.5% rate track will

produce a stable source of power

and assurances to customers of

known and measurable rates and

rate increases.

7. PSNH aS a reorganized stand-

alone corporation will exist as a

financially viable business

entity.

8. The commission’s traditional

ratemaking authority resumes at

the end of the seven year rate

plan, at which point it can

adjust rates as it deems

appropriate. A

9. The commission will have

regulatory authority,- although

not ratemaking authority, over

North Atlantic at the end of the

seven year rate plan.

10. FPPAC is in the public good

and its base assumptions’ and

recovery mechanisms, as adjusted

by the Second Joint

Recommendation of the State and

NU, are reasonable and just.

11. During the period of FPPAC’s

existence, PSNH and NAEC will be

subject to prudence review by the

commission of the recovery from

l3la

ratepayers of any and all

payments made under the Seabrook

Power Contract. Following the

expiration of the FPPAC, the

commission can establish whatever

kind of fuel recovery mechanism

it deems to be appropriate for

PSNH at that time.

12. C&LM issues need not be

resolved before the commission

issues a final order regarding

the Rate Agreement. Should the

commission elect to reject the

Joint Recommendation of the State

and NU of June 22, 1990 on this

point, the commission can deal

with those issues in a subsequent

proceeding.

13. The structure of the Rate

Agreement, which incorporates an

Acquisition Premium, is a benefit

to ratepayers, particularly as it

allows effective use of available

tax credits and amortizes a large

part of the Acquisition Premium,

and therefore NU’s acquisition

price, within the fixed rate

period. /

14. The Return on Equity collar

is fair, just and reasonable,

assuring ratepayers that

investors do not earn

unreasonably high returns’ and

protecting investors with a

minimum floor for their returns.

15. The rate arrangements between

PSNH and the SPPs are not

affected by the Rate Agreement

and changes to them will require

132a

separate proceedings.

16. The 20 year load and resource

plan and the assumptions included

in it are just and reasonable and

provide adequate assurances that

NUSCO will be able to supply the

energy needs of New Hampshire

Customers at reasonable cost.

2 The Capitalized values

presented by the plan are not

unduly burdensome to New

Hampshire ratepayers.

18 There are not alternative

reorganization plans being

offered to the commission which

will resolve the PSNH bankruptcy

and will result in the same or

lower costs and risks to the

ratepayers and the State of New

Hampshire.

19. NU has met its burden of

proving that its underlying

assumptions regarding the Rate

Agreement and its financial

forecasts are reasonable and that

the 5.9% increases are

achievable.

20. In approving the Rate

Agreement, the commission is

approving both a rate plan for

reorganized PSNH and the merger

of PSNH and NU, on terms and

conditions established by the

record in this docket. To the

extent the terms and conditions

are modified prior to the merger,

these modifications would, by

definition, present a merger

133a

different from the one considered

by the commission, and would

require further review and

approval by the commission before

a merge could occur.

The State also noted that there was

an outstanding issue regarding

reimbursement of NU’s bankruptcy fees and

expenses. The State and NU-~ were

negotiating treatment of these items at

the time the Requested Findings was filed

and the State expected to achieve an

agreement on the point by the end of the

week of June 25, 1990. On July 12, 1990,

the State filed a Supplemental Proposed

Finding of Fact informing the commission

that the parties had been unable to

agree, and requesting the _ following

finding of fact:

All fees, expenses and

obligations incurred by Northeast

Utilities in the resolution of

the PSNH bankruptcy and proposed

acquisition, whether paid or not,

on or before the First Effective

Date shall be included in the

$2.3 billion Capitalization

ceiling of PSNH. All fees and

134a

eee 8 ae ee ee

“ ae

expenses paid by Northeast

Utilities in furtherance of the

merger of PSNH and NU between the

First and the Second Effective

Dates may be included in the

Acquisition Premium, up to a

total of $45 million. All fees,

expenses and obligations of NU

attributable to the

reorganization and merger of PSNH

and NU shall be subject to review

and determination by the

Commission that they are just and

reasonable.

E, OFFICE OF CONSUMER ADVOCATE

The statement of the position of the

OCA is organized according to the Staff

recommendations put forth in Staff

Exhibit 1C. The OCA agrees with Staff

that the issues of the parachute

payments, the Schiller "disallowance" and

NU’s non-incremental expenses of the

acquisition have receded in importance.

However, the OCA states that to the

extent that there is flexibility in the

‘timing of the parachute payments, they

should be made before the First Effective

Date, and that prior to the First

135a

Effective Date the commission should fine

PSNH an amount equal to the Schiller

disallowance. It stated that payments

should be made toward the NU non-

incremental expenses — prior to the

effective date if feasible, but that its

concerns had been tempered by the

provision that ratepayers will share ina

number of benefits they would not

ordinarily receive. The OCA is satisfied

with the explanation that the Rate

Agreement intended that the NHPUC retain

prudence review of Seabrook costs as long

as its purchased power costs-~ are

collected through a fuel type clause, but

adds that it believes that the commission

would retain this regulatory oversight

even without such an agreement.

Similarly, the OCA believes that the

commission retains jurisdiction over

replacement power costs in the event of

negligence at Seabrook.

136a

The OCA believes that NU has

Satisfactorily addressed the issues of

the PSNH cause of action at law for

damages against NAEC in the event of

mismanagement at Seabrook by NUOP, of the

flows of capacity revenues and costs

through FPPAC, of FPPAC costs’ and

revenues from off-system sales, of the

formula for FPPAC, of the recoverability

of discretionary capital expenditures for

least cost planning measures of less than

$20 million through FPPAC, and of

reporting requirements.

In contrast to staff, the OCA

believes that the 25%/75% sharing of the

load diversity synergy is reasonable in

conjunction with New Hampshire’s 50%

Share of the energy synergy. Also, from

its perspective the issue of wholesale

cost and revenues is not a major issue in

this docket as the NHEC will be

submitting a rate plan at which time the

137a

parties can balance the interests of PSNH

and the NHEC ratepayers. The OCA notes

that it still has serious concerns that

NU will not be able to attain all of

the synergies it predicted, and

recommends the implementation of a

deferred banking mechanism to hold

increases to 5.5% annually. On C&LM, it

observes that increased sales growth

tends +o-——mitigate rate increases.

Therefore, it cannot support C&LM unless

a specific program is available for

analysis, and that discussion on such

specific programs should be deferred to a

separate proceeding. Further, it argues

that any program that attempts to shift

revenue responsibility is "rate design"

requiring legislative approval, and that

the commission should find that the

burden of the 5.5% base rate increases

should be borne equally by all customer

classes, and that the recovery of lost

138a

en a ie A Ae elon wk

revenues occurring because of C&LM

programs would be double recovery since

NU rather than ratepayers receives the

benefit from all capacity sales.

Finally, the OCA contends that the

commission should approve the Rate

Agreement only in the event that PSNH

merges with NU. It states that a Stand-

alone PSNH operating under the Rate

Agreement would exceed the 5.5% annual

increases by approximately $500 million

because of the loss of NU synergies and

therefore would be a viable alternative

only if the value for Seabrook were

Significantly less than $1.5 billion, a

contingency that the OCA believes is at

best speculative.

139a

The Hydro Intervenors argue that the

commission’s determination of the

reasonableness of the proposed rates,

including its calculation of the rate

base component, must be based on some

rational method. They state that New

Hampshire’s statutory basis for

calculating rate base (RSA 378:27 & 28)

is the original cost of the utility’s

"used and useful" property less accrued

depreciation, and that RSA 362-C does not

Supersede those ratemaking principles.

Specifically, they argue that no rational

basis has been identified for the $700

million cost assigned to Seabrook and the

$800 million Acquisition Premium was

Simply the residual after the Seabrook

value was assigned. The Acquisition

Premium can only be explained = as

additional Seabrook cost and therefore

should be identified as such in a

relatively straightforward manner. They

140a

hated SNe ad. thar

warn that the inclusion of such a large

unassigned value would violate the

requirements that rates be designed to

produce a return on the company’s

investment in property and place the

commission’s order at risk of being

reversed or remanded.

INT NOR

The Biomass Intervenors, while

represented in the hearing room, did not

present a witness, perform cross

examination, file a brief or otherwise

indicate a position on the issues

currently before the commission.

H NE N T IATION

The BIA notes that the protracted

struggle to bring PSNH out of bankruptcy

was the product of hard negotiations

among all the affected interests in the

state. Apart from the other standards

which the commission must employ in

determining whether to approve the Rate

14la

Plan, the BIA contends that the

commission should accept the collective

judgement of -the parties to this

proceeding that the Plan represents the

most fair and equitable resolution of the

issues before it.

The BIA argues that by approving the

Rate Plan as proposed in DR 89-244, the

commission will provide ratepayers with

rate certainty which has been absent for

years and which will enable New Hampshire

commercial and industrial customers to

make strategic plans incorporating a

known and predictable cost of

electricity. In addition, the BIA cites

their study of electricity prices for

commercial and industrial customers as

indicating that a significantly high

proportion of those customers would

respond to prices above those in the Rate

Plan by reduced consumption or complete

migration from the system, resulting in

142a

ere

substantial loss of load for PSNH. The

effects of rate increases similar to

those in the plan are not as adverse.

The BIA believes that the proposed

rate plan meets all of the tests the

commission should use. It provides

revenues to NU which will assure that the

utility providing electricity to New

Hampshire ratepayers will remain a viable

business entity, and competent management

by NU which will assure the efficient and

economical operation of Seabrook and

economies of scale.

The BIA notes that the issue of C&LM

recovery should be addressed in the

commission’s generic investigation, but

appends its position in that case.

Generally, the BIA believes that C&LM

programs have not’ received adequate

attention by New Hampshire utilities, and

by PSNH in particular, and that such

programs offer an effective means to help

143a

ratepayers minimize the economic impacts

of the proposed rate increases. However,

the BIA believes that special attention

should be paid to the impact of the

design of C&LM programs on the need for

additional revenues, and that therefore

incentives are inappropriate. The BIA

argues that if C&LM programs are cost

effective they should be implemented as

part of the utility’s obligation to

provide service in a manner that is

least cost. A more appropriate strategy

for promoting C&LM programs would be to

develop an all source bidding approach,

which the BIA prefers because it would

not violate the rate cap and relies on

the market to ensure that only the most

cost effective programs are pursued.

While believing that there are some

programs, like the promotion of energy

efficient construction through design

research and dissemination of information

144a

WI aad ch tae ipa Addin tated neha ee

on energy devices and practices, it

prefers private sector programs based on

a shared savings approach.

I, JOHN V. HILBERG

Hilberg urges the commission to

reject the Rate Agreement, stating the

reasons for the rejection and sketching

the characteristics of a plan that the

commission would find acceptable,

including commission treatment of any

Seabrook rate case that could eventuate

instead of a new plan. He states that NU

has not met its burden of proof in the

following areas:

that either Seabrook should be

valued at$1.5 billion or there is some

other compelling reason to recognize a

regulatory asset of $800 million;

that the NH share of the synergies

are worth at least $300 million;

that PSNH’s bankruptcy is harmful to

the degree that regulatory oversight of

PSNH should be replaced for seven years

and of Seabrook permanently by the terms

of the Agreement;

that the ironclad, irreversible

145a

provisions of the Agreement represent a

balancing of interests;

that the seven year 45.6% rate

increase is just and reasonable and the

best achievable alternative for New

Hampshire; and

that the NU plan has-~ replaced

uncertainty with rate stability, given

the likelihood of rate increases due to

failure to attain all the synergies

(especially at Seabrook), the probability

of self-generation by large customers,

and the fallibility of load forecasts.

Hilberg argues that evidence in the

bankruptcy court indicates that this

Agreement represents the “best interests"

of the investors and therefore it cannot

also reflect the best interests of

consumers. He states that no rate plan

that guarantees rate increases for seven

years and creates the danger of severe

damage to the state’s economy can be

considered just and reasonable unless the

commission assumes that the alternative

rate case would find the regulatory value

of Seabrook at twice its economic value,

and that in the current’ record, no

146a

ew pe ee el"

substantial basis exists for placing any

specific value on PSNH’s~ share of

Seabrook. He argues that there is little

value to the consensual resolution of the

bankruptcy, as the Bankruptcy Court could

be expected to act expeditiously now that

it has completed the fact finding aspect

of the case; and/or to NU’s assurance of

adequate long-term supply of power, as

with Seabrook on line PSNH is expected to

have sufficient capacity of its own for a

decade. He criticized the Agreement for

encouraging energy profligacy, for the

bias in FPPAC whose treatment of off-

system capacity saies renders PSNH

indifferent to whether or not New

Hampshire retail customers can afford to

buy electricity, and for its

miscalculation of real rate increases,

and he makes the specific recommendation

that the commission should disallow the

‘golden parachutes’ in any case.

147a

Hilberg delineates the

characteristics of a plan that’ the

commission could find acceptable,

proposing that the new plan could be

structured like the Rate Agreement but

with an Acquisition Premium no larger

than the synergies that can be

demonstrated to skeptics. He suggests

that the resulting regulatory value would

be as follows:

Non-Seabrook Assets: $800 million

Seabrook: 700 million

Regulatory Asset 250 million

(synergies)

Total $1,700 million

Should no new plan be presented, the

commission could state that the Seabrook

rate case would be heard within the

framework that no synergies would be

recognized, Seabrook recovery would be

based on an economic value of $700

million plus whatever other prudent

costs the owner can demonstrate and any

148a

recovery beyond $700 million would be

subject to the rule that rates would not

be allowed to be destructive.

Alternatively, Hilberg proposes a

New Hampshire Plan in which the

commission would first establish the

primacy of the criterion that rates

cannot be destructive, defined as

creating widespread pain when customers

leave the system of avoid entering the

system, in such numbers that total sales

drop. He proposes that the commission

establish a rate base that includes

Seabrook’s found economic value, which he

estimates to be in the neighborhood of

$700 million. The company would be

allowed traditional recovery on this rate

base. He then suggests that’ the

commission calculate the prudently

incurred costs of Seabrook in excess of

its economic value, which would be placed

in a deferral account where they would

149a

accrue interest and be amortized on a

Straight line over the expected life of

the asset. These costs would be subject

to a non-economic prudent costs recovery

adjustment. He proposes that annually or

semiannually, for the life of the plant,

the commission would ascertain whether

the rates being charged were destructive,

and estimate the highest level of rates

that could be charged during the upcoming

period without becoming destructive. In

years in which rates could be raised

without becoming destructive, PSNH would

be allowed to draw down the deferral

account until the threshold was reached.

III. COMMISSION ANALYSIS

Rate Agreement

The Rate Agreement of November 22,

1989 (Ex. D, NU 1-E) between NUSCO acting

on behalf of its parent NU, and the

150a

a ee ae Ol

Governor and Attorney General of the

State of New Hampshire is a rational plan

contemplating the resolution of the

reorganization proceedings of Public

Service Company of New Hampshire under

Chapter 11 of the Federal Bankruptcy

Code. The purpose of the Agreement is to

express the obligations of NU and the

State with respect to NU’sS' proposed

acquisition of Psnh and the consummation

of NUSCO’s Plan of Reorganization for

PSNH. NU agrees to undertake good faith

efforts (i) to restore PSNH’s financial

Stability to permit Reorganized PSNH to

provide continued service to its

ratepayers, (ii) to provide residents of

the State of New Hampshire with needed

electric capacity, and (iii) to negotiate

with the joint owners of Seabrook

authorization for an NU system company to

assume responsibility for the operation

of Seabrook.

15la

The Plan provides for acquisition by

NUSCO of ail common stock of PSNH by the

First Effective Date (originally July 1,

1990, now August 1, 1990). Conditions

for NUSCO’s takeover by August 1, 1990,

including regulatory approvals of NRC,

the SEC, FERC, and tax rulings from the

Internal Revenue Service, will not be

granted in time for consummation of the

Plan by the First Effective Date.

Accordingly, NU plans to consummate the

reorganization plan by the second

effective date, pursuant to a merger

agreement between NU, NUSCO and a new

N.H. corporation to be created buy NU.

NU acknowledges that based on delays at

the FERC the plan will be accomplished

under the two-step method, where PSNH

will emerge from bankruptcy as a Stand-

alone company committed to merge with an

NU company after FERC approval of the

part of the plan under its jurisdiction,

152a

a a el

largely, Seabrook, wholesale rates and

transmission. The merger agreement was

approved by the Bankruptcy Court’s

confirmation order April 20, 1990 and

made binding on PSNH, NU, NUSCO, and NU

acquisition corporation without need for

further action by any person Or entity.

Based on total average retail rates

of 9.02 cents per kilowatt hour in effect

on September 15, 1989, the Rate Agreement

ee

Oo

prescribes seven annual increases

commencing with a temporary rate increase

as of January 1, 1990 to become permanent

on the First Effective Date, and further

increases of 5.5% on January 1, 1991,

January 1, 1992, January 1, 1993, January

1, 1994, January 1, 1995, and january l,

1996. The increases total in the

aggregate for the seven-year pericd

approximately $271,000,000 (Wister Tr.

April 16 at 108) and, on a compounded

basis, increased base rates by 45% over

153a

the 9.02 cents per KWH level.

Average retail rates under the Rate

Plan are as follows:

cents KWH

1989 9.02

1990 9.52

1991 10.04

1992 10.59

1993 11.16

1994 11.79

1995 12.44

1996 ~ 43.32

Source: NU 3J, att. 1, State 3, att. III,

Chest 1, Bp. 2:

The Rates Equitably Balance Investor

and nsumer Inter

In the commission’s scoping order we

Stated that we will determine "whether

the rates equitably balance investor and

consumer intexeets so that the rates will

produce a reasonable return to investors

154a

ts i itt te ole sible,

without imposirg an undue burden on

ratepayers and the economy of the state

of New Hampshire." Our analysis and

review of substantial evidence in this

proceeding compels the conclusion that

the rates are just and reasonable, fairly

balancing the interests of investors and

ratepayers.

The compromise rate plan yields the

minimum rates necessary to finance the

payment of the $2.3 billion bankruptcy

compromise to PSNH creditors and equity

holders without unduly burdening

ratepayers or the N.H. economy. Real

rates (compared to nominal rates) are

forecasted to rise one percent per year

over inflation during the fixed rate

period.

Mr. John as Reed, consultant

testified in behalf of the N.H. Business

and Industry Association (BIA) that the

acquisition of PSNH by NU is in the

155a

public interest, that the rate agreement

negotiated between the state and NU is

reasonable, and that "... the rates which

will result from the reorganization plan

and the rate plan will be sustainable and

bearable from the consumer’s perspective,

and will result in a viable utility after

reorganization." BIA-1 at p.3. Mr. Reed

reinforced his conclusion with an

Electrical Price Study (BIA 2) and

concluded that the rate plan avoids the

higher level of rate increase evaluated

in the study which would result in major

load losses and significant economic

impacts. BIA-1 at p.19. The level of

rates being known for the fixed rate

period offers a measure of predictability

to ratepayers, which enables N.H. firms

to project their cost for electric

service in competing with out-of-state

companies and thus provides a competitive

benefit to the N.H. economy. BIA-1, at

156a

19-20.

m nof R f£ R rn

xr R Agreemen

Mr. Eugene Sullivan, Finance

Director of NHPUC presented an analysis

of Rate of Return compared to Cost of

‘capital for the following four cases.

Cost of capital was determined from

projected cost of debt, preferred and

equity apportioned according to the

resulting capital structures.

157a

13 RORNAS NORTHEAST UTILITIES DR 89-244

CUMULATIVE RATE OF RETURN PAGE 1 OF 2

CASE 1: REORGANIZED PSHN SEABROOK OPERATES

NET RATE COST

RATE OPERATING OF OF

YEAR BASE INCOME RETURN CAPITAL

(1) (2) (3) (4)

1990 1,611,312 56,650 3.52% 11.38%

1991 1,586,359 156,991 9.90% 11.53%

1992 1,583,450 159,770 10.42% 11.61%

1993 1,476,469 157, 660 10.68% 11.71%

1994 1,412,817 167,067 11.83% 11.74%

1995 1,369,513 171,530 12.52% 11.76%

1996 1,317, 780 185,269 14.06% 11.76%

10,307, 700 1,054, 937 10.23% Il. 64% AVE.

1) PROJECTED BALANCE SHEETS ADJUSTED F-6 NU 1 E; ATTACHMENT 2

PAGE 8 TO NU 5; STAFF WORK PAPERS EXHIBIT STAFF 22

2) PROJECTED OPERATING STATEMENTS ADJUSTED F-5 NU 1 E; ATTACH-

MENT 2 PAGE 7 TO NU 5; STAFF WORK PAPERS EXHIBIT STAFF 22

3) COLUMN 2 DIVIDED BY COLUMN 1

4) ADDITIONAL SCHEDULES PAGE 6 OF 8 SEABROOK OPERATES; ALSO

STAFF WORK PAPERS EXHIBIT STAFF 22

CASE 2: REORGANIZED PSHN SEABROOK CANCELLED

NET RATE COST

RATE OPERATING OF OF

YEAR BASE INCOME RETURN CAPITAL

(1) (2) (3) (4)

1990 1,611,167 51,704 3.21% 11.43%

1991 -1,585, 780 165,180 10.42% 11.56%

1992 1,531,899 179,188 11.70% 11.61%

1993 1,474,006 204,342 13.86% 11.66%

1994 1,411,064 223,889 15.87% 11.69%

1995 1,371, 406 170,006 12.40% 11.68%

1996 1,319,094 159,216 12.07% 11.71%

10,304,386 1,153,525 11.19% 11.63% AVE.

1) PROJECTED BALANCE SHEETS ADJUSTED F-12 NU 1 E; ATTACH-

MENT 2 PAGE 11 TO NU 5; STAFF WORK PAPERS EXHIBIT STAFF 22

2) PROJECTED OPERATING STATEMENTS ADJUSTED F-11 NU 1 E;ATTACH-

MENT 2 PAGE 10 TO NU 5; STAFF WORK PAPERS EXHIBIT STAFF 22

3) COLUMN 2 DIVIDED BY COLUMN 1

4) ADDITIONAL SCHEDULES PAGE 6 OF 8 SEABROOK CANCELLED; ALSO

STAFF WORK PAPERS EXHIBIT STAFF 22

158a

13 RORNAS NORTHEAST UTILITIES DR 89-244

CUMULATIVE RATE OF RETURN PAGE 2 OF 2

CASE 3: STAND-ALONE PSHN SEABROOK OPERATES

NET RATE COST

RATE OPERATING OF OF

YEAR BASE INCOME RETURN CAPITAL

(1) (2) (3) (4)

1990 2,197,978 61,729 2.81% 11.38%

1991 2,321.024 112,121 4.83% 11.53%

1992 2,302, 838 146,897 6.38% 11.61%

1993 2,274,543 164, 681 7.24% 11.71%

1994 2,232,551 188,394 8.44% 11.74%

1995 2,203, 686 202,393 9.18% 11.76%

1996 2,162,421 219,957 10.17% 11.76%

15,695,041 1,096,1/2 6.98% 11.64% AVE.

1) PROJECTED BALANCE SHEETS ADJUSTED F-18 NU 1 E; ATTACHMENT

2 PAGE 14 TO NU 5; STAFF WORK PAPERS EXHIBIT STAFF 22

2) PROJECTED OPERATING STATEMENTS ADJUSTED F-17 NU 1E; ATTACH-

MENT 2 PAGE 7 TO NU 5; STAFF WORK PAPERS EXHIBIT STAFF 22

3) COLUMN 2 DIVIDED BY COLUMN 1

4) ADDITIONAL SCHEDULES PAGE 6 OF 8 SEABROOK OPERATES; ALSO

STAFF WORK PAPERS EXHIBIT STAFF 22

CASE 4: STAND-ALONE PSHN SEABROOK CANCELLED

NET RATE COST _

RATE OPERATING OF OF

YEAR BASE INCOME RETURN CAPITAL

(1) (2) (3) (4)

1990 1,604, 697 49,318 3.07% 11.43%

1991 1,928,260 29,931 1.55% 11.56%

1992 2,249,962 197,004 8.76% 11.61%

1993 2,244,712 208,299 9.28% 11.66%

1994 2,229,054 220,147 9.88% 11.69%

1995 2,225,935 221, 638 9.96% 11.68%

1996 2,206, 749 230,573 10.45% 11.71%

14,688,469 1,156,910 1.88% 11.63% AVE.

1) PROJECTED BALANCE SHEETS ADJUSTED F-21 NU 1 E; ATTACH-

MENT 2 PAGE 17 TO NU 5; STAFF WORK PAPERS EXHIBIT STAFF 22

2) PROJECTED OPERATING STATEMENTS ADJUSTED F-20 NU 1 E;ATTACH-

MENT 2 PAGE 16 TO NU 5; STAFF WORK PAPERS EXHIBIT STAFF 22

3) COLUMN 2 DIVIDED BY COLUMN 1

4) ADDITIONAL SCHEDULES PAGE 6 OF 8 SEABROOK CANCELLED; ALSO

STAFF WORK PAPERS EXHIBIT STAFF 22

In case 1, NU’S base case,

Reorganized PSNH-Seabrook Operates, it

will be noted that in four years 1990-

1994 the rate of return is projected to

be less than the cost of capital. From

1994-1996 the rate of return is greater

than the cost of capital. On average for

the seven year fixed rate period, the

rate or return is 10.23% compared to

11.64% cost of capital. In case 2,

Reorganized PSNH-Seabrook Canceled, the

rate of return exceeds the cost of

Capital from 1992-1991. Application of

Mr. Busch’s supplemental testimony on

financing costs, NU 5-B to costs of

Capital results ‘a an average cost of

capital for seven years of 11.2% and, if

100 basis points are added to cost of

non-plan financing over the seven-year

period, would increase on average to

about 11.73%. In case 3, Stand-alone

PSNH-Seabrook Operating, and case 4,

160a

Seabrook-Canceled, the rate of return is

Substantially less than the cost of

capital.

The assumptions used for projected

financial statements, balance sheets and

income statements are summarized at pp.

1-6 of Busch Att. 2, NUS. Detailed

assumptions are summarized in the

Financial Viability section infra. Among

the assumptions are:

Peak Load Growth 2.3% compound growth

Seabrook Capacity Factors 1990 60%

1991 63%

1992-5 67%

1996 70%

O&M Expenses 5.3% compound growth

Compound Growth Rates for Fuel Expenses

(1990-1996)

#6 Oil at Newington and Schiller 7.9%

Coal at Merrimack Pe

Coal at Schiller 4.1%

#6 Oil at Wyman ° 6.8%

#2 Oil 6.8%

Jet Kerosene 6.7%

Determination of the level of just

and reasonable rates by traditional

ratemaking methodology, is precluded by

l6la

the Rate Agreement’s prescribing the

level of retail rates of the seven year

fixed rate period. Revenue requirements

are normally determined or derived by

application of a formula:

R+0O + (B x rz)

where R is the utility’s allowed revenue

requirement; O is the allowed operating

expense; B is its rate base defined as

cost less depreciation of the utility’s

property that is used and useful in the

public service, (RSA 378:27) and r is the

rate of return allowed in the rate base.

1 of vati Ww

New England, Inc,, 127 N.H. 606, 633-

634, Appeal of Public Service Company of

N,H,, 125 N.H. at 49. However, in this

instance, the allowed revenue requirement

is fixed for seven years by the rate

agreement subject to prospective demand

for electricity by PSNH ratepayers and

wholesale comcelinta over the seven-year

162a

period. NU 1-E at Pp, D-12-13.

Here, the rate base (or its

investment equivalent) determined by the

Reorganization Plan approved by the

Bankruptcy Court to be $2.3 billion

consisting of $800 million of non-

Seabrook assets, $700 million of Seabrook

Assets, and an acquisition premium of

$800 million. The Acquisition Premium is

the difference between the settlement

amount of $2.3 billion and the $1.5

billion total of non-Seabrook assets and

Seabrook assets. The amortization of the

Acquisition Premium affects rate base

substantially during the seven-year fixed

rate period, since $425 million of the

Acquisition Premium will be amortized on

a straight line basis and recovered with

a return over seven years beginning on

the First Effective Date. The balance of

about $375 million will be recovered with

a return over 20 years from the First

163a

Effective Date. NU 1-E, Ex. D (b) D-14.

Operating expenses are a product,

inter alia, of volatile costs and

expenses, the impact of projected

synergies upon costs, the likelihood that

Seabrook will operate successfully at

full power at anticipated capacity

factors, and cost of fuel. Projections

of operating expenses over seven years

appear to be reasonable to the extent

synergies and cost efficiencies are

attained. To limit so far as possible

attrition in ROE through unanticipated

levels of operating expenses, the

commission will exercise continuing

oversight of the impact of operating

expenses on net income, including

prudence review.

During the negotiations in

164a

bankruptcy, the state compared the NU

plans first against plans proposed by

PSNH’s management under a series of

regulatory scenarios:

(1) Reorganization of PSNH into a

holding company, a generation and

transmission company subject to FERC

jurisdiction, and a distribution

company Subject to NHPUC

jurisdiction. Such reorganization

would have permitted PSNH to seek

from FERC a one-time rate increase

of 89% to recover its costs of

Seabrook followed by annual rate

increases of 5% equal to the

projected rate of inflation. By

1998 rates would have exceeded 25

cents per kwh. PSNH recognized that

this plan would have a negative

impact on the state’s economy and

could not be sustained. The State

165a

opposed the 89% increase.

(2) AS an alternative, PSNH

postulated a maximum one-time

increase of 31% plus annual rate

increases equal to inflation as

Sustainable under the N>H. economy.

The State objected to PSNH’s

proposed solution to its financial

difficulties. A 31% increase plus

10 increases of 5% would result in

rates of 17 - 18 cents per kwh in

1998 and 1999.

The forecasted rates under the NU

Plan, compared to rates under traditional

ratemaking resulting from an assumed

$1.8-2.9 billion of Seabrook investment,

and compared to an 89% one-time increase

(for $2.9 billion) and a 31% increase

(for $1.8 billion) are summarized in

Table 3 below.

NOR Sst. U LES N_V ]

——————<x <<

AVERAGE RETAIL RATES

CENTS /KWH

89% 31%

NU ONE TIME ONE TIME

ERE ——— hn SPARS —_I EC BEARE,

1990 9.92 11.82

1991 10.04 10.33 17-50 12.41

1992 10.59 10.81 18.80 13.03

1993 11.17 11.48 i§9.73 13.68

1994 11.79 1 Pe © | 20.72 14.36

1995 12.44 iz. 21.76 15.0

1996 13.12 13.56 22.85 15.83

1997 12.85 13.74 23.99 16.63

1998 13.40 13.91 25.19 17.46

1999 13.30 13.83 26.45 18.33

Source: Attachment III, Chart 21, p. 2

of 2 Volume III, Direct Testimony of Alan

Kessler. State 3c.

Comparison of Rates Under the Rate

Agreement with Foreseeable Rates Under

it FE Kj

Rates resulting from traditional

ratemaking would probably be higher than

under the Rate Agreement. Clearly we

cannot predict the precise level of rates

under traditional ratemaking for Stand-

alone PSNH. Nor is such determination

required to determine whether the Rate

Plan serves the public good with just and

reasonable rates over the fixed rate

lo7a

a

period.

Assuming PSNH becomes a NU affiliate

under the merger agreement and including

PSNH’s Seabrook investment and the

acquisition premium in rate base, NU

estimates that an initial rate increase

of 20% followed by 2.5% increases

annually over the remainder of the fixed

rate period would be required. Ex. NU 3

J at 13-15, Att. 1 pp. 1-3. The increase

Summarized below would be required to

maintain a 13.25% return on common

equity.

RATE PLAN TRADITIONAL RATEMAKING

Average Retail Average Retail

year Cents per kwh £®™| Cents per kwh

1989 9.02 9.02

1990 9.52 10.80

199) 10.04 10.73

1992 10.59 11.07

1993 11.18 11.52

1994 13.79 We Oe

1995 12.44 i229

1996 13.12 12.45

1997 12.86 12.87

1998 13.40 13.41

1999 13.30 - ye Pee |

2000 13.05 13.02

168a

Cumulative retail revenues and

cumulative net present value of retail

revenues through the fixed rate period

and the year 2000 are higher with

traditional ratemaking than under the

Rate Plan. Since the seven 5.5%

increases under the Rate Plan are not

controlled by a requirement that each

year produce a 13.25% ROE, the Rate Plan

avoids rate shock by providing for a

gradual increase in rates producing a

Cumulative ROE of 11.75% by 1997, less

than the market ROE required by

traditional ratemaking principles.

If PSNH were to remain a stand-alone

entity, rates would be higher’ under

traditional ratemaking because the

synergies resulting from the merger would

not apply and financing costs would

increase, assuming that, 1. PSNH’s rate

base will equal the $2.3 billion

investment base resulting from the NU

169a

acquisition, and 2. Seabrook value of

$1.5 billion ($2.3 billion minus non-

Seabrook assets of $800 million)

hypothetically allowed by NHPUC in rate

base.

There is “eubatantial evidence

supporting a possible commission

allowance of $1.5 billion for Seabrook in

Stand-alone PSNH’s rate base although the

theoretical economic value of Seabrook

for purposes of this proceeding is $700

million:

o Testimony of Eugene Sullivan

estimating Seabrook investment

for a rate base between $1.4 ©

billion and $1.9 billion and

offering his opinion that after

a prudency review of Seabrook

costs a value higher than $1.5

billion might be allowed in rate

base(pp. 8 & 17, Staff 4),

possibly between $1.8 billion and

170a

—&«oxo>n0

$2.9 billion. Tr. May 4 at 99-

100.

o Testimony of Alan Kessler, (Ernst

& Young) expert consultant for

the State estimates Seabrook

investment in a rate case at $1.5

billion. Tr. May 1 at 59-60.

Oo Report of Paul L. Gioia, Examiner

regarding:a Seabrook rate case as

an alternative to proposed Plan

of Reorganization established a

range of Seabrook recoveries at

high end of $1.6 - $1.9 billion

with total company values of $2.5

to $2.7 billion; and a low end of

Seabrook recoveries from $1.28 to

$1.56 billion with total company

values from $2.18 to $2.46

billion. Mr. Gioia concluded

that “this range compares with

a Seabrook recovery of $1.4

billion and a total company

l7la

value of $2.3 billion under the

proposed plan". Ex. Hydro 3 at p.

26. -

The Examiner also concluded that

the percentage of Seabrook assets

allowed after a prudence review

if applied to PSNH, would yield

about $1.5 billion. Ex. NU 3J at

14-15.

Mr. Noyes testified that the

probable result of a Stand-

alone PSNH Seabrook rate case

would be a Seabrook value

between an approximate range

of $1.4 to $1.8 billion. The

upper range of $1.8 billion was

consistent with the assessment

by PSNH’s management that

competitive pressure make

recovery of a higher value

unlikely without risking

Substantial losses in sales.

172a

i

Mr. Noyes also pointed out that

PSNH management has written down

its Seabrook investment to $1.8

billion (from $2.9 billion). Mr.

Noyes estimated the lower

boundary at $1.4 billion. NU

3J at pp. 13-16.

Oo Mr. Andrew Herf of Arthur

Andersen & Co. testified before

the Bankruptcy Court that the

$2.3 billion value of PSNH under

the NU Plan of Reorganization

waS within the reasonable range

of outcomes of a litigated rate

case. Ex. NU 20 at 33 and 36.

© PSNH’s estimate of the value of

Seabrook in its financial

statements was $1.8 billion. NU

1-E at Ex. C, p. 38, Note 3 to

financial statements of PSNH in

Form 10K for the year ended

December 31, 1989, Staff Ex. 20.

173a

Comparison of Rates Under the Rate

Agreement with Rates Forecasted for

Qther New England Utilities

We are mindful of established law

in this jurisdiction that "(o]f itself,

the evidence relating to rates elsewhere

has not conclusive probative force".

Appeal of Conservation Law Foundation,

127 N.H. 606, 646 (1986) citing Company

v, State, 95 N.H. 353 at 363 (1949). We

have determined that the rates under the

Rate Agreement are just and reasonable

based on record evidence and detailed

analysis of all aspects of the compromise

plan. We have examined resulting rates

in comparison to rates elsewhere in New

England to determine whether the

compromise rates are competitive with

those of other New England utilities.

The evidence showing that rates under the

rate agreement are marginally higher than

the price of electricity forecasted by

Data Resources for the New’ England

174a

region, and substantially lower’ than

prices forecasted for UI, the second

largest owner of Seabrook, supports the

conclusion that New Hampshire will not be

disadvantaged competitively by PSNH’s

electric rates. Ex. NU 9, HO CADO3 Q-

OCA-075 at Table 5. Reasonably stable

rates are predicted for PSNH after the

fixed rate period. Table 5, Ex. NU 9.

We cannot accept Mr. Talbot’s

testimony that by 1996, PSNH’s rates may

be 48% higher than average New England

utility rates. Al - 1.5% growth rate in

the future, predicated on zero inflation,

flat oil prices accompanied by huge sales

growth is not a realistic forecast.

Noyes~-Sabatino Rebuttal Testimony. Ex. NU

3J, at 26-28.

A comparison of NEPOOL nominal rate

projections for 1991-1996 with nominal

rates forecasted under the Rate Agreement

Shows that NEPOOL rates are forecasted to

175a

be on average marginally equivalent to

the rates under the NU plan.

COMPARISON OF

NEPOOL AND RATE AGREEMENT PROJECTIONS

NOMINAL RATES

Rate Agreement NEPOOL

Year Cents per kwh Cents per kwh

1989 9.02 8.30

1990 9.52 9.19

1991 10.04 9.72

1992 10.59 10.42

1993 11.18 11.03

1994 11.79 11.52

1995 12.44 12.01

1996 13.12 12.55

Source: NEPOOL Electric Price Forecast

for New England, 1988-2004, p.2, Ex. 1.

Comparison of Rates Under the Rate

; s TELE Und 7

Plans

In its Report and Order on Scope

(Order No. 19,674), the commission stated

that in judging the reasonableness of the

level of rates, it would examine,

purseant to RSA 362-C: 5, alternative

reorgarization plans that were filed in

the PSNH bankruptcy case and would result

in the same or lower costs and risks to

176a

ratepayers and the same or greater

benefits to the state as those resulting

from the NU Plan. No such alternative

reorganization plan as defined by RSA

362-C:2, was presented to the

commission.

Hilberg has proposed in brief a"“New

Hampshire Plan", erendcunen like the NU

Rate Plan but containing a Regulatory

Asset of an estimated $250 million

representing synergies, rather than an

acquisition premium of approximately $800

million. He proposes that if no party

presents such an alternative plan, the

commission should state that the Seabrook

rate case would be heard within a

framework that no synergies would be

recognized as $700 million plus whatever

additional prudent costs that would not

result in destructive rates. (Hilberg’s

specific objections to the NU Rate Plan

are addressed elsewhere in the Commission

177a

Analysis).

Consideration of Hilberg’s "New

Hampshire Plan" by the commission is

beyond the scope of this proceeding. It

was not presented to the Bankruptcy Court

and, while such a plan could conceivably

result in lower costs and risks or

greater benefits to ratepayers and the

state, there is no evidence to indicate

that it would affirmatively resolve the

bankruptcy case that it would withstand

judicial review of the proposed treatment

of the costs of the Seabrook investment

or that without merger with NU the plan

would be workable and serve the public

good. Hilberg is in essence asking for a

reconsideration of our scoping order,

already denied by Order No. 19,703. He

proffers hypothetical rate plans and

cutcomes of rate proceedings as standards

of just and reasonable rates against

which to measure the NU Plan. However,

178a

substantial evidence has been presented

in this proceeding and before’ the

Bankruptcy Court relating to the

reasonably possible rates resulting from

a Seabrook rate case considered under

traditional ratemaking. The Bankruntcy

Court concluded, and our own analysis

confirms, that the rates under the Rate

Agreement represent "a fair and equitable

settlement and compromise well within the

range of results reasonably expected ina

litigated rate case." Ex. NU 14 at 12: NU

20 at 54.

The Banl C ‘= Confi bj €

EDA —— EDAD IE oh

Our evaluation of the Bankruptcy

Court’s confirmation of the

reorganization plan leads to the

conclusion that in resolving the PSNH

bankruptcy the public interest will be

served by our independent analysis of the

179a

appropriate implementation of the rate

agreement.

The Bankruptcy Court found that the

rate agreement is fair, reasonable,

consistent with the public policy and

the public interest and is in the best

interests of creditors and equity

security holders of the Debtor.

The Bankruptcy Court denied the

contention of Messieurs Rochman, Kaufman

and Richards - dissident stockholders -

that greater value would be realized by

stockholders in a litigated rate case

before the NHPUC as opposed to the

compromise embodied in the Rate Agreement

under the plan. The Bankruptcy Court

concluded:

The sum total of the evidence before

the court on the issues supports a

finding --- here made --- that the

rate increase results under the Rate

Agreement represents a fair and

equitable settlement and compromise

well within the range of results

reasonably expe -ted in a litigated

rate case. Ex. NU 14 at 12; Ex. NU

180a

20 at 54.

The court further stated that the

plan must provide each holder of a claim

Or interest that has not accepted the

Plan with an amount equal to or greater

than the amount such holder would receive

under Chapter 7. The Court evaluated the

liquidation value of the debtor looking

first to the breakup value of PSNH. The

record evidence suggested that the value

of the pieces is less than the Debtor’s

going concern value. Moreover, the

question would remain as to who would

bear the responsibility to serve PSNH

customers. The Court concluded that if

PSNH would be solc in pieces, it would

bring less than the amount offered under

the plan.

An alternative liquidation analysis

would be the value of PSNH sold as a

going concern. The Court found that the

liquidation value of the debtor is no

18la

higher than the value that is proposed

under this Plan. The bankruptcy was, in

effect, an sunk ted of PSNH, which has

been highly publicized and generated

National attention and substantial and

serious bidders, particularly United

Illuminating Company, New England

Electric Company, and PSNH Management, as

well as Northeast Utilities. (Par. 62

Findings cited at p.6, Memorandum

Opinion, NU 20).

The Rate Agreement adds value to the

Debtor so that in the absence of a Rate

Agreement, the debtor would not command

as high a price in a Chapter 7

liquidation. The relative certainty of

rates and the revenues generated without

the delay and cost of litigation are also

important considerations favoring the

compromise settlement.

The Court analyzed a “non-normal

liquidation scenario". It compared the

182a

return to the estate under the Plan with

the return the Debtor or its successors

could expect to receive under a

traditional ratemaking proceeding for its

interest in the Seabrook plant. Par. 69,

Findings cited at p.8 NU 20. An

indicated one-time increase of

approximately 89% would be necessary to

Support a $2.9 billion addition to PSNH’s

rate base )p.72 NU 1-E). Even if for rate

purposes the Seabrook investment was

reduced to $1.8 billion, the resulting

rates sought from the NHPUC would be

excessive in comparison to the Rate Plan.

(p. 73 NU 1-E, p. 25-26, NU 20). The

Court rejected RKR’s objection contending

that a litigated rate case would result

in more value for the Debtor than that

proposed under the Plan.

The Bankruptcy Court found that the

proponents have shown by a preponderance

of

the evidence that there is a

183a

reasonable likelihood Reorganize PSNH

will in fact be able to perform its

obligation under the Plan as projected.

In determining that the Reorganization

Plan met the feasibility test (Code 1129

(a) (11)) the Court considered the

adequacy of the capital structure, the

earning power of the business, economic

conditions, and the ability of

management. In Re Agawam Creative

Marketing Ass’n,, Inc,, 63 B.R. 612,

619-620 (Bankr. Mass. 1966). The court

concluded that based on record evidence,

particularly the testimony of the

financial advisers upon confirmation, the

Debtor will be able to satisfy its

obligations under the Plan. P.30,

General Findings of Fact and Conclusions

of Law Re Plan Confirmation Issues,

Bankruptcy Court. Ex. NU 14.

The applicable legal standard for a

bankruptcy reorganization court to

184a

evaluate a substantial compromise as part

of the Plan of Reorganization was

Ooutiined in r iv Vv

Anderson, 390 0.s. 414 (1968).

Essentially, the reorganization court

must closely examine and review the

proposed compromise to determine whether

the compromise is a fair and equitable

Reorganization Plan, comparing the terms

of the compromise with the likely rewards

of litigation. There are practical

limits to the Court’s examination of the

details underlying the controversy: "A

district court, in reviewing a settlement

proposal, need not engage in a trial of

the merits for the purpose of settlement

is precisely to avoid such a trial."

Greenspun _v., Bogan, 462 F.2d 375, 381

(lst Cir. 1974), citing United Founders

Life I a 2 Nati 1 Lif

Ins. Co.,, 447 F.2d 647 (7th Cir.1971);

185a

284 F.2d 567, 571 (5th Cir. 1960).

The discretionary power of the

Bankruptcy Court to approve or disapprove

compromises or settlements resides in

Bankruptcy Rule 9019. la approving a

settlement amount of $3 billion of a

claim by Pennzoil against Texaco in the

amount of $11.3 billion pursuant to a

Plan of Reorganization, the

Reorganization Court emphasized the

benefits of settlement to avoid expensive

and protracted litigation; the proportion

of class members affirmatively supporting

the Plan, the extent to which the

settlement is the product of "“arms-

length" bargaining, the likelihood of

success of the parties in a litigated

case limited to concrete benefits of a

settlement without the expense of a trial

and subsequent appellate procedures. In

Re Texaco, Inc, 84 B.R. 893 (Bankr. S.D.

N.Y.-1988), appeal dismissed, 92 B.R. 38

186a

(S.D. N.Y. 1988).

In addition to the hypothetical

inclusion in rate base of Seabrook

investment at about $1.5 billion, under

traditional ratemaking rate of return is

essential for a forecast of rates. Under

the Rate Plan, PSNH will earn less than

the cost of money on average over the

seven-year fixed rate period. See cases

(1), (2), (3) and (4), #4sSupra. A

traditional rate case would require a

rate of return at least equal to the cost

of capital under test year principles.

Appeal of Cheshire Bridge Corp,, 126 N.H.

425, 431, 432 (1985), Conservation Law

Foundation, 127 N.H. at 635. Cost of

Capital and rate of return may be

determined by the commission based on the

evidence before it. New England Tel, §&

Tel.v. State, 104.N.H. 229 at 232 (1962),

New England Tel, & Tel. v. State, 95 N.H.

353, 361 (1949).

187a

Revenue requirements under the Rate

Agreement are less than under traditional

ratemaking which would require rates of

return produced by rates equal to the

cost of capital. Financing costs

underlying the Rate Agreement are

estimates of actual embedded costs and

therefore are in accord with traditional

ratemaking principles. Hypothetical :

Stand-alone PSNH would probably incur

higher costs since investors would not

have the assurance of the Rate Agreement.

Ex. NU 6, Curley pre-filled direct

testimony at 20.

5. BASE RATES

The rate base which forms’ the

investment basis for base rates (as

opposed to FPPAC) consists of the $800

million book value of PSNH’s non Seabrook

assets plus the Acquisition Premium. The

commission will require PSNH to file a

detailed accounting of the

188a

reorganization, including severance

payments to employees and senior

management. That accounting should

provide the calculation of net book

value and the Acquisition Premium at the

First Effective Date. At that time, the

commission will address the issue raised

by the State in its Supplemental Proposed

Finding of Fact, of whether ail fees,

expenses and obligations incurred by NU

in the resolution of the PSNH bankruptcy

and proposed acquisition, whether paid or

not, on or before the First Effective

Date shall be included in the $2.3

billion capitalization ceiling or added

to the Acquisition Premium.

The Acqui si ti on Premi um serves the

Public Interest

The Acquisition Premium is equal to

the difference between NU’s $2.3 billion

acquisition cost for PSNH and the sum of

the $700 million assigned value of

189a

Seabrook plus the $800 million book value

of PSNH’s non-Seabrook assets at the

First Effective Date. ($2.3 billion

minus $1.5 billion = $800 million) Ex. NU

1-E D-5, D-6). The result of this

calculation creates the Acquisition

Premium will be established at the First

Effective Date, Ex. No. 1E at D-6, Ex. E

to Rate Agreement, D-110. The

Acquisition Premium in this procedure is

not a payment for PSNH assets in excess

of net book value and therefore is not an

acquisition premium as the term is

normally defined in traditional

regulation.

The acquisition adjustment is not

depreciable for income tax purposes. As

part of the rate plan, the acquisition

adjustment is amortized over twenty

years, $425 million of the acquisition

premium is amortized over 7 years and the

remaining $364 million is amortized over

190a

20 years.

Mr. Sullivan testified that "in

terms of traditional ratemaking it would

be more appropriate if the acquisition

adjustment were assigned to the Seabrook

investment to arrive at a value of $1.489

billion, or a per KW value of $3,640 per

KW. The Seabrook investment would then

be depreciated 40 years and benefit from

accelerated depreciation. Seabrook’s

costs would be more matched with the use

of that power if the costs are spread

over its life". Sullivan Staff 7 at 1l2-

B. Mr. Sullivan also testified that the

plan in effect assigns the acquisition

value to non-Seabrook assets inconsistent

with a realistic appraisal of Seabrook

and non-Seabrook assets. He

acknowledged, however, that assigning the

acquisition adjustment to the value of

Seabrook would increase the FPPAC because

additional depreciation and capital costs

19la

would be flowed through to ratepayers and

cash flow to NU would be reduced since

the acquisition adjustment would be

recovered over the life of the plant (40

years) instead of twenty years. Staff 4

st i3. Also, if the rate plan was

Structured to add the acquisition

adjustment to Seabrook value on the North

Atlantic Company overall capital costs,

debt and equity, would be higher. Mr.

Sullivan testified that with Seabrook

running, rates are just and reasonable.

Mr. Sullivan concluded that changing

the structure of the plan would cause

disruption of a.carefully constructed

compromise.

The Acquisition Premium, aS a

regulatory asset in PSNH’s rate base

enables PSNH to utilize tax benefits more

effectively (Kessler Tr. May 1 at 179-80)

and to schedule asset amortization

consistent with financial requirements

192a

and limits on rate recovery by

reorganized PSNH. Noyes Transcript April

17 at 147-53. Robust cash flow reduces

external financing and financing costs,

and therefore, rates over the longer

term. Tr. april 19, at 35-36. the

commission is persuaded that the

Acquisition Premium meets the policy goal

of the reorganization to balance

expeditious recovery of creditors’ -and

shareholders’ investment with minimal

rate increases anticipated by ratepayers.

Mr.Neil H. Talbot, Senior Economist

with the Energy Systems Research Group

(ESRG) of TELLUS Institute (witness for

the Consumer Advocate) testified that the

Acquisition Premium should not be allowed

in PSNH’s rate base unless NU will

guarantee claimed cost Savings due to the

merger. Ex. OCA 1, Talbot pre-filed

direct testimony Exhibit C (NT-2) at 8,

16-19. Mr. Talbot relies on a treatise

193a

by James C.-Bonbright, Principles of

Public Utility Rates (1961) pp. 176-178,

which postulates that an acquisition

premium should not be allowed in rate

base unless the acquirer can justify the

premium above the net book value of total

assets. Mr. Talbot’s argument’ is

inapposite to the acquisition adjustment

in this case, since NU is not paying a

premium above the net book value of PSNH

assets. As we have seen, reduced to

simplest terms, NU pays a total of $2.3

billion for PSNH assets recorded at $3.7

___ billion on PSNH’s regulatory books and

$2.6 billion on its financial books. Ex.

NU 3-J, Noyes/Sabatino Rebuttal Testimony

at 8. In the traditional sense as used

by Bonbright there is no true acquisition

premium requiring justification by a

demonstration of the public good.

Assuming, arguendo, that the

Acquisition Premium is a payment in

194a

excess of net book value, N.H. law would

permit recovery of the regulatory asset.

If the acquisition price for PSNH’s

assets serves the public good -- as we

find herein -- the total purchase price,

including the Acquisition Premium, may

be included in rate base. Public Service

Co. v. New Hampton, 101 N.H. 142, 150-151

(1957); Accord Aprval of Public Service

Co, of New Hampshire, 124 N.H. 479

(1984), citing Greenville Electric

Light j C 1 Publi 5 ;

Company, 56 N.H.PUC 188, 192-95 (1971)

and N.H,. Electric Coop and Franconia

Paper Co., 56 N.H.P.U.C. 253 at 261

(1971).

The standards justifying the

addition to rate base of an acquisition

premium relate to:

(1) whether the acquired assets may

be operated as an integral part of

the acquirer’s system;

(2) whether the purchasing utility

195a

may better provide necessary capital

to finance the operations of the

system;

(3) whether the purchasing utility

can furnish engineering, accounting

and other management services needed

by the seller; and

(4) whether the purchasing utility

can more economically operate the

system, particularly where’ the

selling utility is bankrupt.

NUSCO articulates these standards in

its brief at p. 28, and states that NUSCO

has proven that its acquisition of PSNH

meets these criteria.

First, NU and PSNH complement each

other’s system due to diversity of

seasonal peaks and operating efficiencies

in the joint operation and dispatch of

electricity from their system. Second,

NUSCO has demonstrated its ability to

refinance PSNH by providing capital

necessary to resolve the PSNH bankruptcy

and restore financial stability to PSNH,

infra. Third, the Management Services

196a

Agreement approved by the Bankruptcy

Court and the FERC, will supply PSNH --

before and after the merger -- with

strong management and access to

financial, engineering, administrative,

accounting and operational resources. Ex.

NU 2, Ellis, Pre-filed Direct Testimony

at 47-52; Tr. April 11 at 43, 122-24; Ex.

NU 7 Opeka Pre-filed Direct Testimony at

37-82; Tr. April 24 at 9-10, 42-47, 50-

56. Substantial economies in the

operation of PSNH will accrue through

implementation of various synergies

outlined infra.

The Acquisition Premium is not

related to the Investment Adder. The

State incorporated in the rate agreement

the precept that rates would not be

prescribed to support an investment of

more than $2 billion to settle the

bankruptcy, unless any amount up to $300

million over the $2 billion was justified

197a

by capitalized ratepayer benefits caused

by NU through the reorganization. eo

April 12 at 262-63. If NU demonstrates

to the commission efficiencies or cost

synergies to justify the $300 million

increase to the investment base, the

Investment Adder increases the ceiling

calculation of the ROE collar to allow a

return on $2.3 billion, before the ROE on

such investment would cause aerate

reduction. The $300 million Investment

Adder would not affect any component of

Seabrook or non~-Seabrook rate base or

assets or the Acquisition Premium. The

Acquisition Premium is a_ regulatory

asset unaffected by benefits brought to

the reorganization by NU.

Mr. Talbot’s direct testimony

asserts that "it would not be proper from

a ratemaking standpoint to allow the

acquisition premium or the ‘investment

adder’ which is part of it in the rate

198a

base, unless there were a strong

justification -on the grounds of the

public interest". Talbot, OCCA-1 at pp.

4-5; See Report to the State of New

Hampshire Office of the Consumer

Advocate, pp. 2-3. Mr. Talbot is in

error in relating the synergies to the

Acquisition Premium as the “ultimate

rationale for the acquisition". p. 3,

Report, OCA-1.

We find that the Acquisition Premium

of $789 - $800 million:-is a regulatory

asset amortized in accordance with

generally accepted accounting principles

and serves the public interest.

Fred H. Balluff, CPA consultant for

the Hydro Intervenors testified that the

entire Acquisition Premium should -

considered as an additional cost related

to Seabrook. Hydro 1A, p. 2, and

depreciated over the designated useful

life of 39 years. Hydro 1A, p. 3. Mr.

199a

Balluff offered three alternative

accounting changes to the acquisition

adjustment to the Seabrook investment:

(1) Transfer the $789 million

acquisition adjustment to North

Atlantic as a cost of the Seabrook

plant and depreciate the investment

over 39 years.

(2) Transfer the $789 million

acquisition adjustment to North

Atlantic as an acquisition

adjustment to be amortized by North

Atlantic in the same manner proposed

for PSNH.

(3) Consider the acquisition

adjustment part of the cost of power

from Seabrook, but keep the $789

million on the books of New PSNH as

deferred cost as proposed by NU

except-classify the amortization as

purchased power cost. (Account 555

in FERC Chart of Accounts).

Both staff and the state oppose the

adoption of Mr. Baluff’s suggestions. Ex.

Staff 4, Sullivan Pre-filed Direct

Testimony at 12-14, state request for

findings #13.

There is no rational justification

for the requested changes. The Rate

Agreement’s accounting treatment of the

200a

Acquisition Premium is consistent with

generally accepted accounting principles.

Sullivan, Tr. May 4 at 60-63. The

Acquisition Premium is the remainder of

the value not assigned to Seabrook and

PSNH’s non-Seabrook assets, as a result

of the negotiated settlement inscribed in

the Rate Agreement. Options (1) and (2)

above constitute a substantive change in

the rate agreement requiring approval of

the creditors and equity committees and

the Bankruptcy Court. The two options do

not enhance the compromise reorganization

plan and would endanger its viability.

Mr. Balluff’s third option

characterizing the Acquisition Premium as

a “deferred purchase power cost" could

disrupt a fundamental provision of the

Rate Agreement without adding substance

to agreement. Tr. May 1 at 220-27.

Change in accounting treatment or

redefinition of the Acquisition Premium

20la

would probably require approval of the

parties and the Bankruptcy Court and

would delay PSNH emergence from

bankruptcy while unnecessarily risking

its ultimate success. In the absence of

compelling need de not here demonstrated

-- the commission does not believe the

rate plan should be drastically

compromised by assigning the acquisition

adjustment to Seabrook.

Return on Equity

ROES for Reorganized PSNH and North

Atlantic Energy Company

Reorganized PSNH expects to earn a

cumulative net present value ROE of

11.75% over the fixed rate period, or 150

basis points below the ROE collar cap.

Ex. NU 1-E at D-81; Ex. NU 3, Noyes

Prefiled Direct Testimony at 14. The

Seabrook Power Contract establishes an

ROE for NAEC of 13.75% for ten years, and

thereafter at the average of allowed

202a

ROE’s of the Yankee Companies. FERC has

disallowed such automatic adjustment.

(Ex. A to the Rate Agreement, Ex. NU 1-E

D28). The 13.755 ROE for NAEC is

reasonable for a newly capitalized

company. NAEC will be a single asset

company owning a controversial nuclear

power plant at Seabrook, with a single

customer, New PSNH. There will also be

the regulatory risk of two prudence

reviews, by NHPUC and the FERC for the

duration of the power contract. The

11.75% ROE for PSNH is below the market

return for a hypothetical Stand-Alone

PSNH.

According to Mr.Curley (NU financial

witness), the anticipated ROE’s of 11.75%

and 13.75% are below the 13% to 14%

market-required ROE’ s for electric

utilities. Tr. April 20 at 86-87.

PSNH’s emergence from bankruptcy would

require a return even higher that the

203a

market rate due to higher debt costs and

risk premium for equity. Tr. April 20 at

87-88.

Mr. Kessler’s testimony that the

Rate Agreement will produce a fair return

to investors supports the proposition

that the ROE’s under the Rate Agreement

are reasonable. Tr. May 1 at 235-36.

Period

The ROE Collar limits the range of

return on equity:to be realized by the

rates during the fixed rate period by:

(1) Capping PSNH’s CUM NPV ROE at

13.25% based on NU’s investment in

PSNH; and

(2) Prescribing a floor on CUM NPV

ROE, beginning at 8% in 1993, 9% in

1994, 9.75% in 1995, and 10.5% in

1996. Att. 2, Staff Ex. 1, Ex. NU l-

E at D-12 and Exhibit B.

Lin

The ROE ceiling is calculated based

on PSNH earnings and average common

204a

equity balances to the extent the New

Hampshire Public Utilities Commission

finds that Reorganized PSNH has justified

an investment adder of at least $300

million above an investment of $2

billion. Rates paid by PSNH ratepayers

will grant PSNH the opportunity to earn

up to 13.25% on its $1.6 billion

investment ($800 million non-Seabrook

assets + $800 million acquisition

premium) and will allow NAEC to recover

its $700 million investment for Seabrook

in the purchase power contract.

Allowance of the $300 million Investment

Adder is predicated on the NHPUC’s

finding that NU will cause operational

savings and other synergies to result in

a reduction in revenue requirements on a

net present value basis of at least $300

million. The overall impact of synergies

will tend to offset the adder through

operational efficiencies so that

205a

ratepayers will be providing an

equivalent of a return on $2.0 billion.

The calculation of the ROE ceiling based

on the forecast of PSNH’s financing

(Schedules in Volume II of NU’s initial

filing) indicates that the net income

return on equity, cumulative net present

value (NI ROE--CUM NPV) will provide low

returns in the early years of the fixed

rate period and higher returns in the

later years as shown by the following

schedule:

a -- V

1990 0.53%

1991 4.39%

1992 6.40%

1993 7.69%

1994 9.15%

1995 10.42%

1996 11.75%

It will be noted that the NI ROE CUM NPV

is 11.75%, or less than the 13.25% ROE

required to trigger a rate decrease.

ROE Floor

The ROE floor protects ratepayers

206a

against significant increases in base

rates over the fixed rate period by

guaranteeing NU a return on only the

first $2 billion of its total $2.3

billion investment. The risk associated

with the return on acquisition price in

excess of $2 billion in effect is

transferred to NU investors by reducing

the acquisition price by $300 million

through elimination of the Investment

Adder. For purposes of the _ floor

calculation the ROE is computed based on

a $2.0 billion investment. This

hypothetical ROE would then be measured

against the "nominal" floor trigger

points of 8% in 1993, 9% in 1994, 9.75%

in 1995 and 10.5% in 1996 to determine if

the 5.5% increased rate level should be

further increased; the CUM NPV ROE for

floor is 14.78% in 1993, 15.56% in 1994,

16.12% in 1995 and 16.72% in 1996. Rodier

Att. 2; ps Be State Ba. 43; The

_207a

"nominal" floor trigger points do not

activate an increase above the floor,

Since they are measured against a

hypothetical ROE assuming the acquisition

price for PSNH was $2.0 billion instead

of $2.3 billion.

PSNH’s actual ROE measured against

total investment would be considerably

lower than the "nominal" ROE.

"Effective" trigger points based on

PSNH’s earned return on its’ entire

investment of $2.3 billion would be

(0.3%) in 1993, 0.8% in 1994, 1.8% in

1995 and 2.8% in 1996 prior to triggering

additional rate increases. Att. 2, p.3,

Staff 1; Case 9, Ex. 6, Case 10, Ex. 6,

Staff 4.

Staff’s low growth forecast (Staff

Ex.6) and staff’s conservation and load

management case do not project a rate

increasers a result of the decreased net

income level as shown by the following

208a

tabulation: (p.11, Staff Ex.4)

xr ive Fl Low h

1990 53% 53%

1991 2.69 2.47%

1992 4.37 3.72

1993 -.27% 5.46 4.56

1994 81% 6.73 5.79

1995 1.77% 7.776 6.92

1996 2.84% 8.90 8.28

B R ifj ion

2(a) (v) ;

Other than the annual 5.5 percent

increases and any changes due to~ the

operation of the ROE Collar, the only

changes to base rates permitted by the

Rate Agreement would be pursuant to

Section 5(a)(v) as follows:

(A) legislative or regulatory changes

such as changes to federal or state

tax or environmental regulations that

require capital expenditures of at

least $20,000,000 or an increase or

decrease in annual expense of at

least $2,000,000 (To the extent not

otherwise covered in "EA" of FPPAC).

(B) changes required by the Nuclear

Decommissioning Financing Committee

in the level of monthly payments.

(to the extent not otherwise covered

by Section 8 of the Rate Agreement,

209a

page D-17) .?

(C) revenues to accomplish programs

mandated for Stand-alone PSNH or NUNH

by legislators or regulators.

(D) costs associated with Conservation

and Load Management programs that

have been undertaken with the

specific approval of the New

Hampshire Public Utilities

Commission.

To the extent any new accounting

Standards or rules are promulgated during

the Fixed Rate Period Stand-alone PSNH

shall be entitled to the same general

rate treatment accorded to other New

Hampshire utilities by the New Hampshire

Public Utilities Commission for such new

accounting standards or rules Ex. NU 1-E

2 Ex. NU 23, Joint Recommendation

for Commission order between the State of

New Hampshire and NU filed June 22, 1990

at 1-2. Said Joint Recommendation and

its companion "Second Joint

Recommendation to the Commission" (filed

by the State and NU with the original

Joint Recommendation) and the Staff

response thereto dated June 27, 1990 are

attached to this report as Appendix A.

210a

at D-13 to D-14; Ex. NU 3-I at 1.

During the course of the hearings, a

number of important issues emerged

regarding the interpretation and

implementation of base rate adjustments

under Section 5(a) (v) of the Rate

Agreement:

1. "EA" of the FPPAC formula Ex. NU

1-E at D-103 as defined on page 13 of

Exhibit C appears to substantially

overlap with the provisions of Section

5(a) (v) (A) above, with regard to recovery

of safety and environmental pbackfits

raising at least the theoretical

possibility of a double recovery, but in

any event creating ambiguity as _ to

recovery of certain expenditures, such as

Merrimack SO2 scrubbers. Ex. Staff 1 at

19.

2. With regard Section 5/(a) (v) (A)

and EA of the FPPAC formula it is not

clear what capital expenditures are

recoverable if they are discretionary and

undertaken voluntarily. It is clear that

mandated expenditures over $20 million

are recoverable, but is not clear whether

a voluntary expenditure of over $20

million is recoverable or whether NUNH

would be willing to voluntarily undertake

expenditures of less than $20 million

Since they are not recoverable, even if

such an expenditure would be the least

cost option. NU’s financial motivation

may be to undertake only those project

that require capital expenditures greater

21la

than $20 million or that involve cleaner,

more expensive fuels that can be

recovered under FPPAC on a dollar-for-

dollar basis. (Id. at 19 and 20)

Moreover, the potential impact of

Section 5(a) (v) (C) is also not clear. For

example, NU could argue that a capital

expenditure of less than $20,000,000

stemming from a legislative or regulatory

change .is recoverable under Section

5(a) (v) (C) ("revenues to accomplish

programs mandated for Stand-alone PSNH or

NUNH by legislators or regulators.

3. Under Section 5(a)(v)(D), the

"cost" of conservation and load

management (C&éLM) programs is fully

recoverable. The term "cost", however, is

not defined by the rate agreement. NU

stated repeatedly during the hearings

that it contemplates such "“costs" to

include not only direct costs (e,qg.,

material and labor associated with

installing a water heater wrap) but also

a revenue erosion allowance to offset

lost sales and a financial incentive.

Many of these programs may also be in the

best interest of NU’s stockholders to the

extent that they help forestall

conversions from electricity to

substitute fuels for end uses such as

water heating. Id. at 20.

4. According to NU, not only is C&LM

implementation contingent upon the

following cost recovery, the rate

agreement also proposes to allow NU to

add such costs to the ongoing base rate

level which is Subject to the 5.5%

annual increases. This would result in

NU’ s stockholders benefitting

212a

additionally (including the financial

incentive) due to the compounding effect

of the 5.5 per cent annual increases on

the initial amount of C&LM cost recovery.

id. at 21

The framework for our evaluation of

each of the issues arising under Section

5(a) (v) is whether the risks have been

fairly apportioned and whether’ the

interests of ratepayers have been

properly balanced. The Staff concurred

in the Joint Recommendations? of NU and

the State, appended hereto, with the

exception of limiting the commission’s

authority to impose additional

substantive conditions. The commission

adopts the Joint Recommendations and its

3Ex. NU-23, Joint Recommendation for

Commission order between the State of New

Hampshire and NU filed June 22, 1990 at

1-2. Said Joint Recommendation and its

companion "Second Joint Recommendation to

the Commission" (filed by the State and

NU with the original Joint

Recommendation) and the Staff response

and concurrence thereto dated June 27,

1990, are attached to this report as

Appendix A.

213a

proposed remedies and finds that

incorporating the recommendations as

part of its report will fairly apportion

risks and properly balance the interests

of investors and ratepayers in

implementing the Rate Agreement.

However, the commission reserves its

right to impose such substantive

conditions as may be necessary to serve

the public good.

Staff recommended that the language

of Section 5(a)(v) (A) should be modified

to make it clear that the annual cost of

safety and environmental backfits will

not be recovered under Section 5(a) (v) (A)

but rather under the term "EA" of FPPAC,

in order to eliminate any hypothetical

double recovery or confusion and

ambiguity as to which provision is

applicable. EX. Staff i-C,

214a

Recommendation No. lla.

NU and the State have proposed that,

to the extent that Section 5(v) (A) of the

Rate Agreement allows recovery for the

cost of compliance with environmental

orders, regulations, and laws, its should

be interpreted to apply only to such

costs incurred in connection with PSNH’s

non-production facilities. All such

costs incurred by PSNH for production

facilities shall be recovered through

FPPAC, pursuant to the definition of the

term "EA". Joint Recommendation at @6(i)

We find that staff’s recommendation

has been satisfactorily addressed.

Moreover, the proposal does not solely

address the relatively innocuous “double

recovery" issue discussed by NU in its

Brief at 76. It also remedies two other

very substantial staff concerns discussed

infra.

215a

implementation of Least Cost Measures

Staff recommended that PSNH

implement least-cost measures without an

NHPUC mandate in order to counteract the

strong disincentive under Sections

5(a) (v) (A) and (C) of the Rate Agreement

to voluntary implementation of least cost

Capital expenditures of greater or less

than $20 million since they are not

recoverable under either provision. Ex.

Staff 1-C, Recommendation No. 11b.

In response NU and the State have

recommended the following:

The parties acknowledge that the

intent of the Rate Agreement is

that neither PSNH por ratepayers

should assume the risks or costs

(beyond the requirements of

Section 5 (v) of the Rate

Agreement) from any determination

made by PSNH as to whether or not

to pursue least cost measures.

Toward that end, and consistent

with the parties’ desire not to

exceed the projected rate path,

the parties agree to cooperate in

achieving their mutual goal by

recommending, as needed,

innovative mechanisms to permit

216a

rate stability and implementation

of least-cost measures without

adversely affecting the financial

assumptions upon which the

Undersigned Parties relied in

agreeing to the 5.5% percent rate

path. Such innovative

mechanisms could include

retention by PSNH of any fuel

expense savings until the capital

costs incurred by PSNH for such

measure are repaid.

Joint Recommendation at @6(ii).

The foregoing proposal of NU and the

State may be irrelevant to the extent it

appears to contemplate recovery of fuel

Switching expenditures under Section

5(a)(v) since costs related to fuel

Switching are clearly designated by the

Rate Agreement for recovery under EA of

FPPAC, not Section 5(a) (v). We will also

state our understanding of the Rate

Agreement that the types of costs

recoverable under Section 5(a)(v) (A) and

Section 5 (a) (v) (C) are mutually

exclusive. For example, a capital

expenditure of less than $20 million

217a

selected by PSNH as its least cost option

in response to a generic legislative or

regulatory change would clearly not be

recoverable under Section 5(a) (v) (A) and

would also not be eligible for recovery

under Section 5(a)(v)(C). The types of

costs recoverable under Section

5 (a) (v) (C) would be only those associated

with new programs specifically mandated

hereafter for PSNH.

Neither the cost of safety and

environmental backfits under the term

"EA" of FPPAC (Joint Recommendation at

6(i)), nor least cost expenditures of

less than $20 million mandated by the

NHPUC can be recovered by NU, since there

is no provision’ under "EA" of FPPAC

comparable to Section 5(a) (v) (C).

increases

Staff recommended that rate

218a

adjustments authorized under Section

5 (a) (v) (A) through (D) should not

increase the ongoing base rate levels

which are subject to the 5.5% annual

increases. Ex. Staff I-C, Recommendation

No. 12. In response, NU and the State

have proposed that all incremental C&LM

costs recovered under Paragraph

5 (a) (v) (D) of the Rate Agreement in one

year shall be increased by NU by 5.5%

annually for the remainder of the fixed

rate period. The intent of this proposal

is that compounding of the 5.5% increases

in allowed C&LM costs will be matched by

corresponding increases in C&LM

expenditures and will not be retained by

PSNH as income. Joint Recommendation at

@7 (ii).

This proposal satisfactorily

addresses the problem of compounding C&LM

expenditures. In addition, the Joint

Recommendation at @6(i) which provided

219a

for recovery of environmental and safety

backfits through FPPAC rather than base

rates eliminates the compounding effect

of the 5.5% annual rate increases on

these expenditures and thus reduces the

ultimate impact on customer rates.

Threshold Level of C&LM Expenditures

na R Vv

Staff recommended that NU undertake

threshold C&LM activities consistent with

least cost integrated resource planning

principles within the 5.5% rate

projections. According to staff, C&LM has

an essential role to play in prudent

utility management and it is expected

that NU will do that C&LM necessary to

comply with existing commission orders

without awaiting further commission

approval or mandate. NU should obtain

the approval it needs for additional cost

recovery for C&LM (e.g., lost revenues)

220a

in a proceeding separate from DR 89-244.

Ex. Staff 2A.

In response, NU and the State have

proposed that if the commission orders

PSNH to implement any C&LM programs in

excess of the base level included in the

current projections for the Rate

Agreement, PSNH shall be entitled to

recover fully the sum of any and all

incremental direct program costs. In

addition, PSNH shall be entitled to

recover fully all other costs (including

lost fixed costs) and incentives related

to C&LM programs only as may be permitted

either in this or any other commission

proceeding. Joint Recommendation at

@7 (i).

The NHPUC staff agreed to use its

best efforts to facilitate the issuance

of a report and order of the commission

in docket DR 89-187 relating to cost

recovery and incentive for C&LM on or

221ia

before the issuance of a report and order

in this docket. Joint Recommendation at

@7 (ii).

The base level for C&LM programs

included in the current base rate

projections for the rate agreement are

the programs approved by the commission

totalling approximately $1.167 million in

annual 1989 costs to PSNH. Rate WI and

other interruptible program costs (which

in 1989 had cost approximately $750,000

of the $1.167 million) shall be recovered

as Purchased Capacity Expense under

FPPAC. Joint Recommendation at @7(ii).

We find this reasonable given that the

design and costs of the Rate WI programs

is uncertain and that $1.167 million is a

more appropriate level for other Cé&LM

programs to be included in the base rate

projections than $400,000 ($1.167

million minus $750,000).

Load and Resource Plan

222a

In section 3(d), the Rate Agreement

states that "prior to the First Effective

Date, NU will file with the NHPUC for its

approval a load and resource plan for a

period of 20 years reasonably

demonstrating that the ratepayers of New

Hampshire will be provided with safe and

adequate electric service at just and

reasonable rates." (NU 1-E, p. D-10) In

compliance with this section of the Rate

Agreement, NU filed a Twenty Year

Forecast of Loads and Resources, Ex. NU

4-C on January 24, 1990.

NU states in its Brief at 82 that it

has presented evidence that “(t]he Twenty

Year Resource Plan demonstrates [its]

ability to provide concrete, reasonably

priced generation supply options to PSNH

Over the next twenty years, whether or

not Seabrook operates. Ex. NU 4-C at 5-

13; Ex. NU 4 at 23-62: Ex NU 4-A; Tr.

Apr. 11 at 184-204; Ex. NU 8, HSTAFO1 Q-

223a

Staff-O%@; Ex. NU 9, HSTAFO1 Q-OCA-007,

008, 009. In its request for findings,

NU avers that the commission can approve

the Twenty Year Load and Resource Plan in

accordance with section 3(d) of the Rate

Agreement if it finds "that the 20 year

Load and Resource Plan submitted by NUSCO

provides adequate assurances that NU will

have availabie sufficient supply side

options as reasonable cost to meet the

energy needs of New Hampshire for 20

years." (Requested findings, p.2) NU

further argues that the Load and Resource

Plan "demonstrates that PSNH will be able

to conduct effective least cost planning

pursuant to New Hampshire law by giving

PSNH access to sufficient, attractively

priced generation supply options." (Brief

at 83).

Staff testified that "the NU Twenty

Year Forecast of Loads and Resources

demonstrates that there are adequate

224a

resources to meet both PSNH’s and the

Combined System’s needs for the ten year

term of the rate plan." Ex. Staff 2A at

8; Ex. Staff 2 at 34-36; Tr. May 1 at

171-173; Tr. May 3 at 114-116. However,

with respect to section 3(d) of the Rate

Agreement and the nature of the

commission approval required by that

section, staff noted that "Nu _ has

acknowledged that the Twenty Year

Forecast of Loads and Resources is not a

least cost resource plan and does not

meet the commission’s requirements for

least cost planning.” Ex. Staff 2A at 9.

Further, staff testified that it believed

that

"resource planning in accordance

with the principles of least cost

planning requirements is

necessary to establish that any

rates that result are just and

reasonable ...-Therefore, [it]

recommends that the commission

indicate in any approval of the

load and resource plan that the

approval goes to the extent that

the load and resource plan

225a

demonstrates that there are

sufficient resources to meet

PSNH’s needs, but not to approval

of specific resources at this

time. The commission should make

it clear that NU needs to comply

with the commission’s least cost

resource planning requirements

during the rate plan period and

beyond in order to demonstrate

that rates will be just and

reasonable".

Ex. Staff 2A, Summ. at 9.

The issue before the commission is

whether the Twenty Year Forecast of Loads

and Resources filed by NU “reasonably

demonstrate[s] that the ratepayers of New

Hampshire will be provided with safe and

adequate electric service at just and

reasonable rates" so that the commission

approval required by the Rate Agreement

at section 3(d) can be granted. The Load

and Resource Plan is not a least cost

integrated resource plan. NU notes that

"{a)ll the parties have repeatedly stated

that the "Twenty Year Resource Plan does

a

not relieve PSNH from New Hampshire’s

226a

least cost planning requirements." (Brief

at 82) The commission accepts this

commitment by NU to abide by our existing

and any future least cost’ planning

requirements. Therefore, it is left to

us to determine whether the showing of

adequate capacity resources in the Twenty

Year Load and Resource Plan along with

NU/PSNH’s commitment to plan in

accordance with least cost planning

requirements is sufficient to demonstrate

that ratepayers will be provided service

at just and reasonable rates.

The Joint Recommendation for (@ 10)

Suggests that if is sufficient. NU/PSNH

and the State recommend that section 3(d)

"be interpreted consistent with the

intent of the parties negotiating

the Rate Agreement that the 20 year

load and resource plan filed by

NUSCO provides adequate assurances

that NUSCO will have available

sufficient supply side options at

reasonable cost to meet the energy

needs of New Hampshire for 20 years.

Further, the Commission’s

acceptance of the 20 year load and

227/a

resource plan shall not relieve

NUSCO from its obligation to

implement least cost planning as

specified by the Commission, or

limit, in any way, the right of the

Commission to set just and

reasonable rates."

Joint Recommendation at 6. We find that

this interpretation of Section 3(d) is in

fact necessary. The Twenty Year Load and

Resource Plan as filed does not provide a

sufficient basis for finding that the

rates which result will be just and

reasonable. In order to make such a

finding, we will require NU/PSNH to

comply with all existing and any future

least cost integrated planning or any

other resource planning requirements of

the commission.

In addition, our approval of the

Twenty Year Load and Resource Plan should

not be interpreted to be a finding now

that the capacity outlined in that plan

is priced at market rates. Such a

finding can only be made in the context

228a

of PSNH’s ongoing resource planning and

our review of its in PSNH’s least cost

planning filings.

NU’s_ Sales Forecasts

NU forecasts electricity sales to

grow at a compound annual growth rate of

2.7% per year between 1988 and 1998,

covering the period of the rate plan. Ex

NU 3, The NU Sales Forecast for PSNH,

1988-89, p. 45. The corresponding

compound annual growth rate for 1990

through 1996, the period of the 5.5%

projected rate increases, is 2.3%.

NU forecasted sales by assuming that

Sales are equal to the ecumike trends,

multiplied by the kilowatt hours (kWh)

per unit of the economic’ driver,

multiplied by the cumulative price

effect, minus supply switching [(the

economy x kWh x_= price) - (supply

switching) ]. Ex. NU 3, The NU Sales

Forecast for PSNH, 1988-98, p. 2.

229a

NU used forecasts of economic and

demographic trends for New Hampshire from

a variety of sources including “Data

Resources Incorporated (DRI) Regional

Information Service (RIS) Summer 1989

forecast for the State of New Hampshire".

Ex. NU3, The NU Sales Forecast for PSNH,

1988-98, p. 2. The DRI RIS forecasts

were adjusted upwards by DRI at NU’s

request to correct what NU Saw as

inconsistencies. Nu response to Q-Staff-

204

The cumulative price effect was

derived from price elasticities that were

adjusted from PSNH estimates. NU halved

elasticities presented by PSNH in its

1989 Edition Load Forecast after

comparing them to elasticities from other

sources including DRI and Arthur D.

Little (ADL). Ex. Nu 3, The NU Sales

Forecast for PSNH, 1988-98,p.3.

Lastly, NU estimated the amount of

230a

supply switching (self generation and

cogeneration) that would take place under

various price scenarios and incorporated

an estimate, corresponding to its price

projections, into the sales forecast. NU

assumed that it would be able to make

some rate design changes for what it

callea "vulnerable" customers. (NU

response to Q-TSRO007)

Staff expressed the concern that the

uncertainties in NU’s sales forecast for

PSNH all work in the direction of leading

to an overestimation of sales rather than

counterbalancing each other. (Ex. Staff

2, P-o) Staff questioned NU’s upward

adjustments to the DRI RIS economic and

demographic forecasts, NU’s adjustment to

PSNH’s price elasticity estimates and

NU’s assumptions about rate design

changes and self and cogeneration. (Ex.

Staff 2, pp. 4-20) While staff concluded

that the NU sales forecast was not

23l1la

unreasonable, it was concerned that it

might be optimistic. An overly optimistic

sales forecast could threaten the

financial viability of the rate plan and

lead to additional rate increases for

customers.

NU responded by arguing that it has

established the reasonableness of its

sales forecasts and points out that "NU

and its investors, not New Hampshire

ratepayers, bear the risk of optimistic

sales projections over the Fixed Rate

Period. . . unless the floor of the ROE

Collar is triggered." (Brief at 90) Both

Staff and NU testified that it was

unlikely that the floor of the ROE Collar

will be triggered even under a low sales

forecast scenario. Ex. Staff 4, Response

to Q-Staff 154.

NU has stated that "the primary

determinant- of sales growth is economic

growth in New Hampshire, which is

232a

essentially independent of electric

price" Brief at 91. NU has adjusted the

DRI economic and demographic forecasts to

be consistent with a manufacturing

employment forecast it believes to be

accurate. Staff has expressed its

concern that manufacturing employment may

not be the key driver for

nonmanufacturing employment, and hence

population growth, and that NU’s

adjustment may not be appropriate. Staff

Ex. 2 at 9. We note further that NU has

assumed steady growth in nonmanufacturing

employment and population even when

growth in manufacturing is projected to

fluctuate, remaining virtually flat in

some years, declining in others and

increasing in some. Ex. Staff 2, Attach.

JGB-1, pg. 1 of 4.

NU has also incorporated rate design

changes in the PSNH sales forecast to

protect "vulnerable" customers. At the

233a

same time, NU argues that its sales

forecast is not "overly dependent" on its

assumptions about rate design. Brief at

91. However, both the BIA and NU

testified that it was important that

NU/PSNH be able to make some rate design

changes. Ex. BIA 1, p. 17; Ex. NU 3, The

NU Sales Forecast for PSNH, 1988-89, p.

. The rate design assumptions NU has

actually incorporated into the _ sales

forecast for PSNH do not appear to have

much impact as NU has modeled them:

overall sales increase slightly if

revenue reallocation is precluded and no

additional self or cogeneration is

assumed. NU responses to Q-TSR-004.

Nevertheless, we find it important to

investigate rate design further and order

the company to consult with staff and

propose a schedule for a rate design

234a

proceeding by January 1, 1991.4

Our greater concern, however, is

with NU’s price elasticity assumptions

and its use of them. NU argues that est

should be stressed that real electric

prices are relatively flat under the Rate

Agreement" (Brief at 91) and in a

footnote at p.21 states that it "believes

ratepayers understand the difference

between real and nominal prices". This

commission does not need to determine the

question of whether ratepayers respond to

real or nominal prices. At least in the

4The commission is constrained by

RSA 362-C:8 which provides:

Notwithstanding any law or rule to the

contrary, during the fixed rate term of

the approved agreement or plan the

commission shall not cause the allocation

of base rate revenue responsibility among

residential, commercial, industrial and

municipal customers in effect on

September 15, 1989, for the electric

customers, serviced by Public Service

Company of New Hampshire or its

successor, to change without legislative

approval of the commission’s finding that

such revenue responsibility allocation is

unjust or unreasonable.

235a

short term, ratepayers respond to the

prices they see on their bills. In this

situation ratepayers will be responding

to a series of known price increases over

a period of seven years. It is

acknowledged that these price increases

will exceed the projected rate of

inflation, if only by a small amount.

the commission’s concern is with the

magnitude of ratepayer response to these

price increases during the seven year

period and with the nature of ratepayer

response at the end of this seven year

period. It seems clear that seven years

of known price increases should have some

cumulative effect.

The results of the BIA’sS survey of

New Hampshire’s businesses and industries

for their reactions to electricity price

increases supports the conclusion that

there is a threshold effect in responses

to long term price increases. Ex. BIA-1l.

236a

Businesses and industries, as well as

residential consumers, will make

decisions on the purchases of equipment

and appliances and the design of

buildings and heating and process systems

which may last beyond the seven year

period of the rate plan. To the extent

that price increases trigger such

customer investment decisions, these

Sales are lost to the PSNH system for the

life of those investments. Steady price

increases known over a period of time

which drive customers from the system may

result in discontinuity of demand that

does not reverse itself in equivalent

fashion when prices stabilize. We are

facing a path oof sustained price

increases above the rate of inflation.

Failure by PSNH to recover its lost sales

when these price increases end will have

an impact on rates beyond the seven year

period of 5.5% increases and on PSNH’s

237a

financial health.

Despite the concerns that have been

raised about the implications of errors

in the forecast, we note that no party

has argued that the NU sales forecast for

PSNH is within the bounds of

reasonableness, but we believe it is at

the upper end of those bounds.

C, FUEL AND PURCHASED POWER ADJUSTMENT

CLAUSE

Description of FPPAC

The purpose od FPPAC, which will be

in effect for ten years after the First

Effective Date, is to eliminate the risk

that volatility in fuel and purchased

power expense could jeopardize the

financial condition of Reorganized PSNH

or alternatively result in a windfall to

the company. FPPAC countervails these

risks through the timely, adequate

recovery from or refund to ratepayers of

changes in fuel and purchased power

238a

expense, without a change to base rates.

The base reference level to be used

for the FPPAC has been designed so that

there would be no revenues generated

during the fixed rate period under the

mechanism if the financial and economic

assumptions on which the Rate Agreement

was based were to occur. Under the terms

of FPPAC, PSNH will recover or refund the

difference between its actual fuel and

purchased power costs and the projected

base reference amount of those costs used

to set base rates. Ex. NU 1-E at D 91-

106. The following costs and expenses

are recoverable under FPPAC:

-Energy expenses and changing fuel

prices

-Purchased capacity and transmission

expense

-Reductions to Small Power

Producer/Cogeneration payments

-Hydro-Quebec support payments

-Seabrook Power Contract payments

-Cost of NHEC Seabrook Buyback

Agreement

-PSNH’s share of NEPOOL interchange

expenses net savings

239a

-Cost of Environmental Safety

Backfits, fuel switching or other

mandated improvements which require

a capital expenditures of

$20,000,000 or generate an

increase or decrease to annual

expense of' $2,000,000.

Ex. NU 3I at 2.

Each December and June, the company

would file for an FPPAC’ rate effective

for the next six months, beginning with

January and July, respectively.

FPPAC will replace PSNH’s current

adjustment mechanism (ECRM) and

reconciliation from prior ECRM periods

may affect FPPAC’s first period

calculation. There are two major

differences between FPPAC and ECRM. One

is chiefly a difference in form while the

other is a difference in substance.

The difference in form is that the

two mechanisms work in different ways to

accomplish the same goal, the recognition

of actual expense incurred. FPPAC

examines total expense and applies a

240a

Surcharge or surcredit (i.e., the FPPAC

rate) to base rates so that the sum of

the two components of revenue, FPPAC

adjustment and base rate reference level,

reflects the actual expense incurred. In

contrast, ECRM acts as an integral

component of base rates that adjusts base

rates to reflect the actual expense

incurred. The FPPAC method is desirable

following the reorganization of PSNH

because the fluctuations in base rates

that would result under the ECRM approach

are not compatible with the fixed

schedule of seven annual base rate

increases established by the Rate

Agreement.

The substantive difference between

FPPAC and ECRM is that FPPAC takes into

account non-energy costs that ECRM did

not consider, such as purchased capacity

expense and the Seabrook Power Contract,

in order to make its operation more

24la

compatible with the principles’ and

requirements of the Rate Agreement.

FPPAC addresses several major

contingencies. As noted above in the

Base Rate Modification Section, if there

are environmental backfits, safety

backfits or fuel switching capital

expenditures required that involve at

least a $20 million total investment or

that cost at least $2 million annually,

the annual costs will be included for

recovery in FPPAC. There are also

deferral mechanisms designed to maintain

the annual 5.5% rate increases provided

for in the Rate Agreement. These

mechanisms specifically address the

renegotiations of certain of the small

power producer (SPP) contracts, the

possibility of premature retirement of

Seabrook during the fixed rate period and

negotiations with the New Hampshire

Electric Cooperative (NHEC).

242a

The FPPAC base has been designed to

reflect current SPP contract rates. The

FPPAC formula provides that customers

will receive 90 percent of any reduction

in the cost of power from the eight

designated SPPs and 100 percernt of any

cost reductions from the remaining SPPs.

Thus, if the renegotiations are

unsuccessful, there would o no

additional impact on rates resulting from

the higher cost of power under existing

agreements.

In the event Seabrook operates

commercially, but is prematurely retired,

the combination of replacement power

costs and continuing payments under the

Seabrook Power Contract might lead to

rate adjustments under FPPAC during the

fixed rate period that cause total rate

increases in a particular year to exceed

5.5_ percent. The deferral mechanism

prevents this during the fixed rate

243a

period by limiting the amount of these

costs that can flow through FPPAC.

In the event that a combination of

events relating to the SPP contracts,

NHEC arrangements and premature Seabrook

retirement would result in a total rate

increase in a particular year of more

than 5.5 percent, an additional deferral

mechanism will defer such amounts as

required to bring the rate increase down

to the 5.5 percent level. Ex. NU 1-E

B(K) at p. D 102.

Analysis of FPPAC Issues

There were five issues relating to

FPPAC that emerged during the hearing:

the reasonableness of the assumptions

underlying the FPPAC BA reference level,

interest on over and under recoveries and

a trigger mechanism, off-system

purchases, sales and exchanges, rate

effects of negotiations with NHEC and

the SPPs, and the Seabrook Power

244a

Contract.

Underiying the FPPAC BA Reference

Level

In order to design a viable -cost

recovery mechanism that would protect

both PSNH and ratepayers over the fixed

rate period, it was necessary to define

and project a baseline fuel and purchased

power cost reference level using the best

data available at the time. Staff and

OCA asserted that some of these reference

level assumptions may be overly

optimistic. Staff recommended that the

FPPAC be modified in order to allow the

recovery of Seabrook O&M costs exceeding.

FPPAC assumptions only if Seabrook

exceeds performance expectations (Ex.

Staff 113, Recommendation No. 9), and the

OCA extended this concept to other

synergies that affect costs recovered

through the FPPAC. Ex. OCA 1, Talbot Pre-

filed Direct Testimony at 10.

245a

EO eeeoeoee

However, it is important to note

that, in the event the assumptions

underlying the FPPAC BA reference level

are realized in the aggregate (individual

assumptions may well vary so long as they

are offset by other charges) over the

life of the FPPAC, the FPPAC mechanism

would result in no change to ratepayers’

bills. BA is the base assumptions for

FPPAC costs included in the 5.5% rate

increases. It appears that the cost

assumptions incorporated in the FPPAC,

taken as a whole, were reasonable when

they were first negotiated and continue

to balance utility and consumer risks.

Upon extensive evaluation, we find that

the assumptions underlying the FPPAC BA,

taken in their entirety, are reasonable

and stabilize prices for electricity to

maintain the projected reasonable rate

level found by the commission to balance

investor and consumer interests.

246a

tri EY

Staff recommended, and NU agreed, that

the commission add to the FPPAC mechanism

provisions for interest on over and under

FPPAC recoveries, and a trigger mechanism

to allow for mid-course changes to FPPAC

rate adjustments. Ex. Staff iB,

Recommendations Nos. 5a and 5b. Joint

Recommendation at @3. These

recommendations do not affect ratepayers

and investor risk allocations, and do not

change the structure of the FPPAC or its

baseline assumptions. According to Nu

they would not require NU to go back to

the Legislature, PSNH equity security

holders, unsecured creditors or the

Bankruptcy Court for approval.

We find that these recommendations

serve the interests of both ratepayers

and investors. We also note that

interest on over and underrecoveries not

247a

only keep ratepayers and investors whole

when actual costs diverge from the FPPAC

rate being billed, but also have the

benign effect of encouraging the

estimates on which the FPPAC rate is

based to be as objective as possible,

Since there is no incentive for an

inflated FPPAC rate resulting in an

"interest free" loan from ratepayers.

Off-System Sales, Purchases, and

Exchanges

Staff and OCA pointed out two ways

in which the Rate Agreement might be used

to disadvantage PSNH ratepayers to the

benefit of NU stockholders. First,

because the FPPAC automatically passes

all purchased power costs through to

ratepayers while all capacity sales

revenues go to stockholders, Staff was

concerned that NU will have an incentive

to sell PSNH short of capacity and then

require PSNH to purchase power from NU.

248a

Ex. Staff 1B, Recommendation No. 6.

Staff and OCA also expressed concerns

that the certain sales will increase

energy costs to PSNH ratepayers

recoverable under FPPAC. id. at

Recommendation No. 7. NU satisfied these

concerns by agreeing that the FPPAC will

be interpreted so that energy and power

costs flowing through to ratepayers will

not include (i) the cost of any purchase

of capacity made in order to replace a

portion of PSNH capacity sold that causes

PSNH to be unable to meet its allocated

Capability responsibility or (ii) the

incremental cost of energy required to

replace energy from resources sold

pursuant to capacity sales contracts

entered into after the First Effective

Date. Joint Recommendations at @4; Tr.

May 25 at 86-89.

We find that the remedial actions

taken by NU in accordance with the Joint

249a

Recommendation at @4 to address the

deficiencies pointed out by Staff and OCA

are desirable and will result = in

substantial monetary benefits to

ratepayers over the seven-year life of

the rate agreement.

SPP Negotiations

According to NU, the rate agreement

provides a flexible approach to

addressing any result that may arise from

negotiations between NU and NHEC

concerning the so-called "Seabrook buy-

back contract." Tr. April 18 at 141-42.

Under Section 12 of the Rate Agreement,

NUSCO has agreed to undertake its best

efforts to renegotiate the buy-back

arrangement with NHEC/ Ex. NU 1-E at D-

20. Section 12 of the Rate Agreement

expressly provides that when the result

of those negotiations is finally

determined, either the State or NUSCO may

250a

reopen the Rate Agreement to address that

result. This flexible approach was

specifically intended to permit’ the

commission to approve the Rate Agreement

without having to resolve the buy-back

issue. Tr. April 9 at 44-46; Tr. April

18 at 129-34. Moreover, Section 12 of

the Rate Agreement provides that any

successful renegotiation is subject to

the approval of the commission. Ex. NU

1-E at D-20. Therefore, the rate

agreement ensures that the State and the

commission will determine both during the

fixed rate period and thereafter whether

the negotiated buyback arrangement serves

the public good.

Similarly, Section 12 of the Rate

Agreement provides that NUSCO will use

its best efforts to renegotiate power

purchase arrangements with certain SPPs.

Ex. NU 1-E at D-20. The current PSNH

rate projections do not assume any

25la

reduced power purchase costs due to these

renegotiations. Ex. State 1, Kessler

Pre-filed Direct Testimony at 19-20. In

the event such renegotiations provide for

reduced purcnased power costs, as noted

above such cost savings will be shared

pursuant to Rate Agreement Exhibit C,

Paragraph B.D. Thus, successful SPP

renegotiations can only serve to decrease

rates.

We find that the flexibility built

into the Rate Agreement regarding future

negotiations with NHEC and the SPPs are

desirable and a positive factor in the

determination of the public good.

Seabrook Power Contract

PSNH currently owns approximately

35.6% of Seabrook.” Absent the

“Connecticut Light and Power, an NU

subsidiary, owns approximately 4% of the

Seabrook Nuclear Power Plant, with the

balance of the ownership distributed

among 10 other joint owners.

252a

Agreement, PSNH’s share of the Seabrook

costs could not be included in rates

until it is actually providing service to

customers pursuant to the so-called anti-

CWIP statute RSA 378:30a, which provides

as follows:

378:30-a Public Utility Rate

Base; Exclusions. Public Utility

rates or charges shall not in any

manner be based on the cost of

construction work in progress.

At no time shall any rates or

charges be based upon any costs

associated with construction work

if said construction work is not

completed. All costs of

construction work in progress,

including, but not limited to,

andy costs associated with

constructing, owning, maintaining

or financing construction work

in progress, shall not be

included in a utility’s rate base

nor be allowed as an expense for

rate making purposes until, and

not before, said construction

project is actually providing

service to consumers.

In light of the Supreme Court’s

holding in Petition of Public Service

Company of New Hampshire, 130 N.H. 265

(January 26, 1988) that the so-called

253a

anti-CWIP statute, RSA 368:30-a precludes

inclusion of CWIP in rates even in

emergency circumstances, the legislature

passed RSA 362-C to authorize the

commission to examine the rate agreement

and determine whether, taken as a whole

and in the context of the joint plan, it

is "consistent with the public good." RSA

362-C:3. The legislature further directed

that if the commission finds the rate

agreement to be consistent with the

public good, it shall,

"notwithstanding any other

provision of law, establish and

place into effect the levels of

rates, fares, or charges in the

fuel and purchased power

adjustment clause to be

maintained for Public Service

Company of New Hampshire, or its

successor, in accordance with,

and during the time period set

forth in, the Agreement... ."

[Id.]

Thus, to the extent that the commission

finds the plan to be in the public good,

it can implement the plan notwithstanding

254a

such contrary provisions of law as RSA

378:30a, which would otherwise bar

inclusion of Seabrook costs in PSNH’s

rates.

The reorganization plan provides

that PSNH will maintain its current

ownership of Seabrook after the First

Effective Date and until the

consummation of the merger. Ex. NU 1-E

at 24. After the second effective date,

when the PSNH _ merger with NU is

consummated, PSNH will transfer its

Seabrook interest to a newly formed NU

Subsidiary, referred to in the plan as

NEWCO, but subsequently named North

Atlantic Electric Company (NAEC). Once

PSNH has transferred its Seabrook

interests to NAEC, its rights and

obligations to Seabrook power will be

defined primarily

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