# Appendix — Richards v. New Hampshire > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_2480%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1991 - **Citation:** 502 U.S. 899 ## Text 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 ] ——————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 21 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_2480%3A2. Public record. Not legal advice.