DR 97-014
Public Service Company of New Hampshire
Fuel and Purchased Power Adjustment Clause
Order Addressing Disputed Issues
O R D E R N O. 22,847
February 10, 1998
APPEARANCES: Gerald M. Eaton, Esq. for Public Service
Company of New Hampshire; Dean, Rice and Howard by Anne Davidson,
Esq. for the New Hampshire Electric Cooperative, Inc.; James T.
Rodier, Esq. for Freedom Energy Company, LLC; Campaign for
Ratepayers Rights by Representative Robert Cushing; the New
Hampshire Department of Justice by Wynn E. Arnold, Esq. and
Martin P. Honigberg, Esq. for Governor Jeanne Shaheen; Office of
Consumer Advocate by Michael W. Holmes, Esq. for residential
ratepayers; and Eugene F. Sullivan III, Esq. for the Staff of the
New Hampshire Public Utilities Commission.
I. PROCEDURAL HISTORY
Following a March 5, 1997 prehearing conference, Public
Service Company of New Hampshire (PSNH), on March 14, 1997, filed
with the New Hampshire Public Utilities Commission (Commission) a
petition for an adjustment of rates pursuant to the Fuel and
Purchased Power Adjustment Clause (FPPAC) for the period from
June 1, 1997 through November 30, 1997. PSNH filed testimony and
exhibits in support of its request to change the FPPAC rate from
a credit of $0.00848 (8.48 mils) per kWh to a charge of $0.00118
(1.18 mils) per kWh, which constitutes an increase of $0.00966
(9.66 mils) per kWh or approximately an 8% increase in rates.
On March 24, 1997, the Commission issued Order No.
22,529 which, among other things, set a procedural schedule to
govern the Commission's investigation into the proposed FPPAC
rate, granted the New Hampshire Electric Cooperative, Inc.'s
(NHEC) Motion to Intervene, and granted a motion by PSNH to defer
consideration of the prudence of certain nuclear outages and the
recovery of the corresponding replacement power costs incurred as
a result of those outages.
On April 7, 1997, the Commission granted the late filed
Motion to Intervene of Freedom Energy Company, LLC (Freedom). On
September 5, 1997 the Campaign for Ratepayers Rights (CRR) filed
a Motion to Intervene that was granted by secretarial letter on
October 2, 1997. The Office of Consumer Advocate (OCA) is a
statutorily authorized intervenor.
On May 2, 1997, the OCA filed the testimony of Kenneth
E. Traum and Commission Staff (Staff) filed the joint testimony
of Chester A. Kokoszka, James R. Thyng and Scott J. Joyce. On
May 7, 1997 Staff filed the testimony of Michael D. Cannata, Jr.
and Eugene F. Sullivan, Jr.
On May 9, 1997, four days prior to the scheduled
hearings on the merits in this proceeding, PSNH filed a Motion to
Suspend the FPPAC proceeding. PSNH asserted the suspension was
necessary because it had to dedicate the resources normally
expended on FPPAC to attempt to mediate a resolution to its
federal court lawsuit filed against the Commissioners as a result
of the plan issued in the electric restructuring docket. PSNH
also requested that the FPPAC credit of 8.48 mils be reduced to
4.81 mils because the revenues required to be deferred under
Paragraph B.(K) of the FPPAC formula had been returned to
ratepayers. See, Order No. 22,234 (July 10, 1996).
By Order No. 22,604, the Commission granted PSNH's
request to suspend the proceeding until July 2, 1997, and to
increase the FPPAC rate by reducing the 8.48 mil credit to a 4.81
mil credit.
On July 2, 1997, PSNH, with the support of a majority
of the parties to the aforementioned mediation process, again
requested that the Commission continue to stay the proceeding and
maintain the FPPAC credit placed in effect by Order No. 22,604
until August 5, 1997.
Because of the support for the continued stay expressed
by a majority of the parties, and because there was no immediate
need to move forward with the process given that the FPPAC rate
is subject to reconciliation, the Commission granted the
requested relief. The Commission scheduled a hearing for August
4, 1997, to consider what future actions should be taken after
August 5, 1997. Order No. 22,665 (July 21, 1997).
On August 1, 1997, PSNH filed another motion to
continue the suspension of the docket beyond August 5, 1997. On
August 4, 1997, the Commission heard from the parties to the
mediation regarding the status of the mediation and granted a
further suspension until September 2, 1997. The Commission also
scheduled a prehearing conference for September 11, 1997 to
develop a new procedural schedule, as the mediation process was
expected to be concluded by that point.
On September 10, 1997, PSNH filed a request to increase
the FPPAC rate, effective October 1, 1997, pursuant to the
"trigger mechanism" established by the Commission in Order No.
20,794 (March 23, 1993). Re Public Service Company of New
Hampshire, 78 NH PUC 149 (1993). PSNH stated it anticipated an
under-recovery of approximately $15 million as of December 1,
1997, and that increasing the FPPAC rate from a credit of
$0.00481 per kWh to a charge of $0.0 would reduce the under-recovery to $10 million by December 1, 1997.
A number of parties and Staff opposed the request for a
separate rate adjustment under the trigger mechanism given that
the full FPPAC rate was scheduled to be investigated, reviewed
and set on December 1, 1997. The Commission denied PSNH's
request to increase the FPPAC rate under the trigger mechanism,
stating its preference to entertain potential changes to the
FPPAC rate in one proceeding. Order No. 22,769 (October 27,
1997). Thus, this proceeding addresses issues that were to be
heard in May of 1997 and issues that have arisen since that time.
On November 12, 1997, PSNH filed an Objection and
Motion to Strike Portions of the Pre-filed Testimony of the
Campaign for Ratepayer Rights relating to Pollution Control
Revenue Bonds (PCRBs), an Objection and Motion to Strike Portions
of Pre-filed Testimony of Kenneth E. Traum as it related to the
sale of Seabrook Unit II parts, and an Objection and Motion to
Strike the Pre-filed Testimony of George McCluskey Related to the
Topic of Light Loading and the Pre-filed Testimony of Michael D.
Cannata, Jr. Related to the Topic of Light Loading, Pollution
Control Revenue Bonds and Best Efforts. On November 13, 1997, the
Office of the Governor filed an Objection to PSNH's Motion to
Strike Testimony of George McCluskey. On November 17, 1997,
Granite State Hydropower Assoc., Inc. also entered an Objection
to the Acceptance by the Commission of Testimony submitted by
George McCluskey and Michael D. Cannata, Jr. on the issue of
Light Loading. After hearing oral arguments, the Commission
denied the motions to strike.
Hearings were held November 14, 17, 19, and 22, 1997;
post-hearing briefs were filed on November 25, 1997, by PSNH, the
Office of the Governor, CRR, OCA, and Staff. The Commission
orally deliberated the issues in dispute on December 1, 1997 and
issued Order No. 22,797 (December 3, 1997) implementing an FPPAC
rate of 2.66 mils which reflected the December 1, 1997
deliberations.
II. POSITIONS OF THE PARTIES AND STAFF
1. (a) Capacity Transfer Agreement
A. Public Service Company of New Hampshire
PSNH maintained that the $27.4 million it received from
Connecticut Light and Power (CL&P) for the transfer of capacity
from PSNH to CL&P under the Capacity Transfer Agreement was not
an FPPAC issue, but was rather a base rate issue that should be
addressed in its base rate filing. Apparently, PSNH took this
position because the majority of the costs of the fossil fuel
capacity transferred to CL&P are recovered through base rates.
Notwithstanding this position, PSNH argued that the
FPPAC rate must include the carrying costs and the operation and
maintenance expenses of the share of Seabrook capacity
transferred to CL&P, and "EA" amortization and operation and
maintenance expenses and the fuel costs associated with the share
of the fossil fired capacity transferred to CL&P under the
Capacity Transfer Agreement.
PSNH also maintained that PSNH ratepayers must bear the
$10 million in increased power production costs, commonly
referred to as a production penalty cost, resulting from this
transfer of capacity through the FPPAC rate. PSNH contended that
Paragraph 4 of the Joint Recommendations of the State and
Northeast Utilities (NU) in DR 89-244, which was entered into to
address concerns raised by Staff relative to capacity sales and
production penalty costs, was inapplicable to this capacity
transfer. PSNH argued that because the Capacity Transfer
Agreement was executed by PSNH and CL&P on May 14, 1991 and
Paragraph 4 states that the FPPAC rate would not include
production penalty costs incurred for contracts entered into
after the First Effective Date, May 16, 1991, the Joint
Recommendation was inapplicable to this capacity sale.
B. Office of the Governor
The Office of the Governor generally stated its support
for the positions of the Staff and the OCA on this issue.
C. Office of the Consumer Advocate
The OCA concurred with the position taken by Staff that
the revenues from the capacity transfer should flow through FPPAC
to ratepayers. The OCA argued that because ratepayers are
bearing all of the costs of generation of the transferred
capacity, ratepayers were entitled to all of the benefits of the
transfer. Because the company proposed no change in base rates,
the OCA argued that FPPAC was the only mechanism available to
protect ratepayers.
D. Freedom Energy Company
Based on his role as a Staff Utility Analyst in the
review of the Rate Agreement in DR 89-244, Mr. Rodier testified
that PSNH's request to recover the production penalty costs
resulting from the sale of capacity to CL&P from ratepayers was
entirely contrary to the "purpose, intent and understanding of
the change effectuated to the Rate Agreement" by the Joint
Recommendations.
E. Staff
Staff argued that the revenues from the capacity
transfer should flow through FPPAC because the production penalty
costs, all of the costs of the Seabrook Power Contract, and the
fuel and Clean Air Act Amendments of 1990 (CAAA) costs of fossil
generation were being passed on to ratepayers through FPPAC.
Staff argued that the FPPAC formula could be construed in a
manner that would provide a mechanism to compensate ratepayers.
Staff also noted that the Commission had plenary ratemaking
authority under RSA 378:7 to equitably compensate ratepayers for
this capacity transfer.
1. (b) Rate Agreement Breach
A. Public Service Company of New Hampshire
PSNH argued that it had not breached the Rate Agreement
as alleged by Staff. With regard to NU's filing of a network
transmission tariff at the Federal Energy Regulatory Commission
(FERC) which resulted in PSNH's loss of millions of dollars in
transmission revenues from the Initial System, PSNH maintained
that FERC Orders 888 and 888-A required the filings. PSNH
further maintained that Section 11 of the Capacity Transfer
Agreement requires that the Agreement be in accordance with the
orders of the FERC and, therefore, there was no breach.
With regard to Staff's contention that NU had not
maintained its pledged units in accordance with good electric
utility practices as required under the Capacity Transfer
Agreement, PSNH responded that the loss of Millstone III was the
only relevant unit affecting the Capacity Transfer Agreement, and
that the loss of this capacity to PSNH had been addressed as per
the terms of the Capacity Transfer Agreement.
PSNH did not address Staff's allegation with regard to
the proposed modifications to the New England Power Pool (NEPOOL)
agreement filed with the FERC and the consequent ramifications to
the Rate Agreement.
B. Office of the Governor
The Office of the Governor generally stated its support
for the positions of the Staff and the OCA on this issue.
C. Office of the Consumer Advocate
The OCA supported the position taken by Staff that NU
had breached the Sharing Agreement and, therefore, the Rate
Agreement.
D. Staff
Staff argued that NU had engaged in a course of conduct
effectively resulting in a breach of the Rate Agreement. Staff's
argument centered on Section 3 of the Rate Agreement and Section
4 of the Rate Agreement and the Sharing Agreement, and the
Capacity Transfer Agreements appended thereto, which it
maintained were fundamental bases underlying the Rate Agreement.
Staff raised three areas which it alleged constituted a
course of conduct by NU amounting to a breach of the Rate
Agreement. First, Staff alleged that NU committed in Section 3
of the Rate Agreement to maintain sufficient capacity to assure
New Hampshire ratepayers an adequate supply of power. To
accomplish this end, NU agreed to maintain certain pledged
generating units in accordance with good utility practice. Three
of the pledged units are Millstone Point Units I, II and III
which comprise approximately 40% of the pledged capacity. Given
that both internal and external investigations of the Millstone
outages concluded the outages were the result of negligent
management of the Units, Staff concluded that NU had failed to
meet this obligation. Staff also argued that the loss of
Millstone III may also have affected revenues to be paid to PSNH
under the current capacity transfer, and may also have affected
the production penalty cost resulting from that capacity
transfer.
Second, NU unilaterally filed a network transmission
tariff with the FERC resulting in the loss of millions of dollars
to PSNH ratepayers in transmission fees from the NU Initial
System while maintaining that PSNH must continue to pay millions
of dollars in transmission fees to the Initial System regardless
of the new network transmission tariff.
Third, NU, as a member of NEPOOL, with the ability to
exercise substantial control over that entity, supported a filing
with the FERC by NEPOOL that would effectively void the Sharing
Agreement and its Capacity Transfer Agreements.
With regard to the second and third items, Staff argued
that NU had a contractual obligation to meet with the State to
attempt to negotiate new arrangements that would provide both the
State and NU with the benefit of their initial bargains, which NU
failed to do. Staff concluded that these actions, when viewed in
their entirety, or as a course of conduct, amounted to bad faith
on NU's part and a breach of the Rate Agreement.
2. Treatment of "EA" Costs Following the Fixed Rate Period
PSNH and Staff concurred that certain costs currently
being recovered through "EA" of FPPAC could be recovered through
either FPPAC or base rates. Alternatively, PSNH argued that
should the Commission determine that such costs are more
appropriately collected through base rates, it should be allowed
to recover the incremental costs of the CAAA through FPPAC.
3. Best Efforts
A. Public Service Company of New Hampshire
PSNH asserted that the State had conceded PSNH
exercised its "best efforts" to renegotiate certain Small Power
Producer (SPP) agreements under Section 12 of the Rate Agreement,
and, therefore, there was no need to defer recovery of portions
of current and deferred SPP costs as there was no longer any
contractual obligation to fulfill.
Assuming, for the sake of argument, there was the
possibility of a best efforts breach, PSNH argued that the
deferrals that occurred during the Fixed Rate Period constituted
sufficient security to ratepayers should the Commission determine
PSNH had not exercised its best efforts under the Rate Agreement.
B. Office of the Governor
The Office of the Governor took no position on this
issue at this time. It did, however, take issue with PSNH's
characterization of any best efforts concessions by the State.
C. Office of the Consumer Advocate
The OCA argued that the Commission should not allow
PSNH to recover a portion of current SPP costs and a portion of
deferred SPP costs because it is apparent PSNH did not exercise
best efforts with regard to these costs. Thus, the OCA concluded
the Commission should defer recovery of some of these costs until
final resolution of the issues in DR 96-148.
D. Staff
Staff took the position that PSNH had not satisfied its
best efforts obligations. Staff specifically noted that PSNH
could have easily financed the renegotiated agreement with Bio-Energy Corp. with retained earnings rather than paying an $85
million dividend to its Connecticut parent and, notwithstanding
the dividend, still had sufficient cash to consummate the
renegotiated agreement. Staff also noted that the Commission had
considered the State's concessions with regard to best efforts
and found that those concessions were merely evidence of
compliance with the best efforts obligation that the Commission
would consider in rendering its ultimate decision on this issue.
Given the level of SPP deferrals at this time, however,
Staff did not see the need to defer recovery of any additional
SPP costs for purposes of dealing with best efforts.
4. Light Loading
A. Public Service Company of New Hampshire
PSNH objected to the testimony of Messrs. McCluskey and
Cannata recommending, respectively, that the Commission defer
recovery of between $20 million to $50 million to be paid to
SPPs, or Qualifying Facilities (QF), on a prospective basis over
the next year.
PSNH argued that Messrs. McCluskey and Cannata had
misinterpreted a response to a data request in DR 94-080 that
indicated PSNH was annually paying $20 million to the State's
SPPs for power provided to PSNH during periods of light loading.
Specifically, PSNH argued that "negative avoided costs"
had been included in its calculation of the stream of payments to
SPPs under the long term rate orders. PSNH also argued that
Messrs. McCluskey and Cannata had misinterpreted the term
"operational circumstances" under FERC rules that would justify
suspension or curtailment of purchases during periods of minimal
load conditions, also known as light loading periods.
B. Office of the Governor
As alluded to above, Mr. McCluskey testified that the
Commission should defer PSNH's recovery through FPPAC of $20
million paid to QFs because payments in that amount may not have
been required under 18 C.F.R. 292.304(f).
Mr. McCluskey testified that 292.304(f) provides that
utilities are allowed to curtail deliveries of power by QFs
during periods of "light (i.e., low) loads" because purchases
during these periods would result in negative avoided costs,
that is, during periods where the QFs would be required to pay
utilities for the power delivered. To avoid this anomalous
result, Mr. McCluskey testified the FERC adopted 292.304(f)
which provides that utilities should cease purchases from QFs
during these periods.
Relying on a data response from PSNH in DR 94-080 that
quantified the amount of money expended annually by PSNH in
payments to QFs during light load periods, Mr. McCluskey
recommended the Commission defer recovery of $20 million. Mr.
McCluskey further testified that the inclusion, or lack thereof,
of negative avoided costs in the calculation of long term rates
granted QFs had no effect on his analysis or his conclusions with
regard to the ramifications of 292.304(f).
C. Staff
Mr. Cannata concurred with Mr. McCluskey that, pursuant
to 292.304(f), a prudent utility should be and should have been
curtailing delivery of power from QFs during periods of light
load. Staff concluded that the annual figure of $20 million
arrived at by PSNH in DR 94-080, however, was in reality closer
to $30 million if the effects of lost joint dispatch savings were
included in the calculation of the revenue impact of QF purchases
during light load periods.
Staff further testified that PSNH miscalculated the
revenue impact of QF purchases by PSNH during light load periods,
thereby understating the cost to ratepayers, because PSNH did not
include all of its base load plants in arriving at the $20
million figure. Mr. Cannata testified that the inclusion of all
base load plants would increase the $30 million figure to
approximately $50 million.
Mr. Cannata based his conclusion that PSNH should have
been curtailing purchases from QFs during light load periods on
PSNH's inability to establish that negative avoided costs were
included in the long term avoided cost calculations used to
derive the rates paid QFs in New Hampshire. Mr. Cannata
testified that he had requested information from PSNH that would
have resolved this issue, but PSNH had responded that it could
not find, or it had destroyed, the requested information. Mr. Cannata indicated that Mr. McCluskey's testimony
raised some interesting points he had not considered relative to
"operational circumstances" and "light loading" when negative
avoided costs are included in the development of long term
avoided cost rates. Given the limited time frame for
consideration of this position, however, he testified he did not
feel comfortable taking any position regarding that testimony.
5. Unit II Parts
A. Public Service Company of New Hampshire
PSNH objected to the fact that the OCA had, once again,
raised the issue of the appropriate treatment of revenues from
the sale of Seabrook Unit II parts such as the Unit II steam
generators. PSNH argued that the Commission had conclusively
determined in dockets DR 97-042 and DR 96-285 that Seabrook Unit
II parts were the property of shareholders, and that any profits
realized from the sale of these parts belong exclusively to
shareholders. Re Public Service Company of New Hampshire, 80 NH
PUC 586 (1995); Re Public Service Company of New Hampshire, 81
NH PUC 1034 (1996).
Assuming, arguendo, that the issue was appropriately
before the Commission, PSNH reiterated the positions it took in
those earlier dockets. PSNH argued that pursuant to the Rate
Agreement, the entire value of "old PSNH's" ownership share of
Seabrook Unit I and abandoned Unit II, $700 million, had been
allocated to Unit I, and, therefore, Unit II was the unregulated
property of the shareholders of North Atlantic Energy Company
(NAECo), a wholly owned subsidiary of NU. NAECo owns all of
PSNH's former share of Seabrook.
In support of its position PSNH noted that it had not
collected any of North Atlantic Energy Service Company's (NAESCo)
share of the protect and preserve costs of Unit II parts through
the Seabrook Power Contract. PSNH also argued that the Seabrook
Power Contract contains no provision for the recovery of these
expenses from PSNH and its ratepayers and, therefore, the parts
are logically the sole property of shareholders under the Rate
Agreement.
B. Office of the Consumer Advocate
The OCA argued that ratepayers are currently paying for
Unit II parts because $700 million was the value assigned to
Seabrook Station, Units I and II under the Rate Agreement. The
OCA contended that the $700 million was not allocated to Unit I
for the purposes of the Seabrook Power Contract, but rather that
the Contract included both Units I and II. Thus, the OCA
concluded that the revenue from the sale of Unit II parts, such
as the steam generators, should be returned to ratepayers.
C. Office of the Governor
The Office of the Governor concurred with the position
taken by the OCA and expressed concerns raised relative to the
tax consequences of Unit II part sales to PSNH.
D. Staff
Staff indicated that the majority of Staff supported
the position of the OCA and requested that the Commission take
administrative notice of the testimonies and positions of the
Finance Director, Eugene F. Sullivan, Jr, and the Chief Engineer,
Michael D. Cannata, Jr., in DR 94-172. Administrative notice was
taken without objection.
In DR 94-172 the Commission's Engineering Staff and
Finance Staff took divergent positions on this issue. Mr.
Cannata recommended that the Commission establish an "imprudence
mitigation fund" to recognize the extraordinary performance of
NAESCo, a wholly owned subsidiary of NU that operates Seabrook
Station, in operating Seabrook Unit I. Mr. Cannata argued that
an essential element of this extraordinary performance was
NAESCo's preservation and maintenance of NAECo's abandoned Unit
II parts without compensation. Mr. Cannata represented that the
maintenance and preservation of these parts had resulted in
unrecognized value to PSNH ratepayers by reducing the amount of
time Seabrook would be down because of the availability of these
parts.
Mr. Cannata proposed that the imprudence mitigation
fund be financed from the savings accruing to PSNH ratepayers
because of the availability and use of Unit II parts in Unit I.
Thus, Mr. Cannata concluded that the parts were not part of the
$700 million allocated to Seabrook Station under the Seabrook
Power Contract.
Mr. Sullivan recommended that the Commission recognize
the value of Unit II parts by a pass through of NAECo's share of
the revenues from the sale of Unit II parts to PSNH ratepayers
through the Seabrook Power Contract. Mr. Sullivan also
recommended that it was inappropriate to capitalize Unit II parts
as they were placed in service in Unit I. Mr. Sullivan based
these recommendations on the language in the Rate Agreement that
assigned a $700 million value to "all" of the assets at Seabrook
Station, which included Unit II and its parts, and because the
entire $700 million, paid for both Units, had been allocated to
Unit I for the purposes of the Seabrook Power Contract.
6. Pollution Control Revenue Bonds
A. Public Service Company of New Hampshire
In response to CRR's contention that the lower cost of
debt on certain tax exempt Pollution Control Revenue Bonds
(PCRBs) comprising a part of PSNH's capital structure should be
imputed to NAECo's capital structure for the purposes of the
Seabrook Power Contract during the Fixed Rate Period, PSNH raised
a number of arguments in opposition to this position.
Initially, PSNH argued that the Seabrook Power Contract
was a FERC filed contract that required the pass through of
NAECo's actual cost of capital that could not be displaced by
this Commission under the filed rate doctrine. PSNH also argued
that the Commission had fully reviewed and approved the
financings and capital structures at issue herein under RSA 369
and 362-C in DR 89-244 in approving the Rate Agreement. PSNH
also contended that because of time constraints these bonds had
to be issued in the name of PSNH prior to the creation of NAECo
to meet the timing requirements of the Internal Revenue Code, and
that under the terms of the notes they could not be transferred
to NAECo. Finally, PSNH noted that the lower cost of debt of
these notes will be reflected in PSNH's cost of capital in the
current base rate proceeding.
B. Office of the Governor
The Office of the Governor objected to the fact that
PSNH had failed to respond to four of CRR's data requests
relating to the PCRBs by the conclusion of the hearings in this
matter. The Office of the Governor repeated a concern raised by
Staff that PSNH was failing to supply complete and accurate
information to the Commission and the parties in what appeared to
be a course of conduct designed to withhold financially
detrimental information.
Based on available data, the Office of the Governor
concurred in CRR's position and recommended the Commission impute
the lower cost of capital to the Seabrook Power Contract and pass
those savings on to ratepayers.
C. Campaign for Ratepayers Rights
CRR argued that the proceeds from the low interest, tax
exempt PCRB bonds issued by the New Hampshire Industrial
Development Authority and its successor agency, the Business
Finance Authority (hereinafter referred to jointly as the BFA),
were inappropriately and illegally retained within the capital
structure of PSNH when the assets for which they were issued were
spun off to create NAECo.
CRR maintained that the PCRBs were issued to finance
qualifying pollution control facilities at Seabrook Station and
that absent those facilities, these tax exempt bonds could not
have been issued. Thus, the PCRBs equitably and legally belonged
in the capital structure of NAECo and not PSNH.
CRR contended that had these bonds been placed in
NAECo's capital structure, ratepayers, rather than shareholders,
would have received the benefit of lower interest rates during
the Fixed Rate Period and that the Commission should impute those
savings back to ratepayers.
D. Office Of The Consumer Advocate
The OCA shared CRR's belief that it was inappropriate
for PSNH to hold tax exempt PCRBs when it no longer owns the
pollution control facilities which were the basis for the
issuance of the bonds. The OCA suggested the Commission order
PSNH to request a letter ruling from the Internal Revenue Service
(IRS) concerning the tax exempt status of the bonds.
The OCA recommended that the Commission impute to the
Seabrook Power Contract $212.5 million in lower capital costs
garnered by PSNH during the Fixed Rate Period and require PSNH to
refund those monies to ratepayers.
E. Staff
Staff concurred with PSNH's conclusion that the
Commission had approved the proposed capital structure of PSNH
and NAECo following the divestiture of Seabrook in DR 89-244
which included leaving $100 million in PCRBs in the capital
structure of PSNH. Staff further noted that both the Governor
and Council were explicitly informed by PSNH that all of the tax
benefits of the additional PCRBs would flow to PSNH during the
Fixed Rate Period and ratepayers thereafter.
7. Replacement Power Costs Incurred as a Result of Outages
at Maine Yankee, Vermont Yankee and Connecticut Yankee
A. Public Service Company of New Hampshire
PSNH objected to the disallowance of replacement power
costs at Connecticut Yankee as recommended by Staff. PSNH
maintained Staff had not provided sufficient evidence to support
its recommendation that all replacement power costs be disallowed
for the outage that commenced when Connecticut Yankee shut down
to address the design flaw with the Containment Air Recirculation
(CAR) fans and concluded with Connecticut Yankee's decision to
permanently shut down and decommission the plant.
PSNH argued that its witness, Thomas Dente, had
established that Connecticut Yankee acted appropriately in
addressing the CAR outage and in moving up the refueling of the
Unit while the CAR problem was addressed. PSNH further argued
that Staff had failed to establish NAESCo acted imprudently, or
negligently, with regard to the cause or duration of the outage.
PSNH also objected to the recommended $11,000
replacement power disallowance for alleged imprudence at Vermont
Yankee. PSNH argued that although Vermont Yankee personnel
admittedly acted imprudently in failing to follow standard
procedures, thereby causing the outage, a disallowance was
inappropriate because there was no management imprudence.
With regard to the Maine Yankee outage which commenced
with the discovery of cable separation problems and, again,
concluded with a decision to permanently shut down and
decommission the unit, PSNH argued that it was necessary to
refuel the plant and the decision to decommission the plant was
made during that time period. Thus, any period for disallowance
of replacement power costs should conclude with the beginning of
the refueling outage which lasted until the decision to shut down
was made.
B. Office of the Governor
The Office of the Governor supported Staff's
recommendation that the Commission disallow the recovery of $2.9
million in replacement power costs because the power costs were
incurred as a result of the imprudent operation of the Maine
Yankee, Vermont Yankee and Connecticut Yankee nuclear generating
stations.
C. Office of the Consumer Advocate
The OCA supported Staff's recommended disallowances.
D. Staff
Staff took the position that all replacement power
costs for the outage that commenced when Connecticut Yankee came
down to address the design flaw with the CAR fans and concluded
with Connecticut Yankee's decision to permanently shut down and
decommission the plant should be disallowed. Staff based its
position on the belief that the problem with the CAR fans should
have been addressed earlier than it was, and that this delay,
along with a number of other problems that were discovered while
the plant was down, led to the conclusion to decommission the
unit.
Staff took the position that the replacement power
costs incurred for the outage at Vermont Yankee should be
disallowed because the outage was due to the admitted negligence
of Vermont Yankee personnel. Staff maintained that the fact that
the personnel were adequately trained and that management was not
involved in the negligent conduct were irrelevant to a
determination of whether shareholders or ratepayers should bear
the risk of employee negligence. Staff maintained that
shareholders should bear the risk of negligent conduct by their
agents.
Staff also argued that all replacement power costs
incurred as a result of the Maine Yankee outage should be
disallowed. Staff maintained, and PSNH concurred, that Maine
Yankee was required to come down when it was discovered that the
control room had cable separation problems. In particular, it
was discovered that the cables for the redundant manual trip
buttons in the control room shared the same cable train. Thus,
an accident affecting this single cable train might eliminate
both redundant systems. Once the unit came down to repair this
particular problem, a number of other cable separation problems
for redundant systems were identified. Given the time that would
be required to identify and correct these problems, the decision
was made to refuel the plant. Subsequently, the decision was
made by the owners to shut down and decommission the unit because
it was no longer economic to operate.
Staff contended that subsequent to a fire at one of the
nuclear units located at Brown's Ferry in 1975 in which redundant
systems were threatened by the same event due to the proximity of
the cables operating the redundant systems, nuclear plants
throughout the country were required to identify and separate
cables for redundant systems to avoid this particular problem.
Staff also testified that in 1990 and again in 1992 Maine Yankee
was required to clean up some of its control room wiring problems
and that had those efforts been conducted prudently, this
particular outage would not have occurred.
8. Merrimack and Schiller Stations' Coal Pile Reconciliation
Subsequent to the hearings in this matter, the OCA,
PSNH and the Staff submitted the final reconciliation of the
amount of coal held in inventory at Merrimack and Schiller
Stations. Consequently, this issue is no longer in contention.
9. Seabrook Station Science Center
A. Public Service Company of New Hampshire
PSNH maintained that the costs associated with the
Science and Nature Center (Center) should be included in rates
because the Center was used and useful in the production of
power. PSNH maintained that although the Center does contain
exhibits on nuclear power and Seabrook Station for students and
members of the general public, the building is also used for
training and meetings. NAESCo testified that the building
contains an auditorium that seats 100 people which is the only
facility large enough to conduct a meeting of all of the plant's
department heads. PSNH also noted that the Commission had
specifically ruled that the Center should not be disallowed from
PSNH ratebase on two prior occasions.
B. Campaign for Ratepayers Rights
CRR claimed that the Center was not intended to be
included in the costs passed on to PSNH ratepayers because it was
not included in Schedule I of the Seabrook Power Contract.
CRR also argued that the Center was a "mini theme park"
that should not be included in rates because it was not
functionally related to the generation of power for customers.
C. Office of the Consumer Advocate
The OCA argued that the Center was designed and
maintained for public relations purposes, and was therefore
operated to promote nuclear power's and the owner's image.
Without criticizing either goal the OCA noted that these were
inappropriate costs to collect from ratepayers.
10. Appropriate Methodology for Calculating Replacement Power Cost Incurred as a Result of Imprudence
A. Public Service Company of New Hampshire
PSNH maintained that the Commission's methodology for
calculating replacement power costs incurred as a result of
imprudent outages at generating units was inequitable, unjust and
unreasonable. PSNH argued that in calculating replacement power
costs the Commission should utilize a net economic harm test.
In applying this test to an imprudent outage, the
Commission would be required to subtract from replacement power
costs to be disallowed any benefits PSNH ratepayers received from
the outage, such as, joint dispatch savings under the Sharing
Agreement or capacity revenues under the Capacity Transfer
Agreement.
B. Office of the Governor
The Office of the Governor argued that PSNH should not
be allowed to recover any replacement power costs incurred as a
result of imprudence.
C. Office of the Consumer Advocate
The OCA argued that the Commission had already
addressed and rejected PSNH's proposed "net economic harm" test.
The OCA argued that each event, the imprudent operation of the
plant in question and the ability to sell power to the majority
owner of a unit, should be addressed discretely.
D. Staff
Staff made the same arguments set forth in the position
of the OCA above.
11. Appropriate Calculation of "BA" Following
the Fixed Rate Period
All of the parties and Staff concurred that the "BA",
or "Base Assumptions" component of FPPAC, must be consistent with
the value set for this component in base rates. Thus, the
computation of "BA" should have no effect on overall rates.
12. North Atlantic Energy Company, Inc.'s Purchase of the Vermont Electric Generation and Transmission Cooperative, Inc.'s Share of Seabrook and Harbor Seals
A. Public Service Company of New Hampshire
PSNH maintained that the purchase of Vermont Electric
Generation and Transmission Cooperative, Inc.'s (VEG&T) 0.4129%
share of Seabrook Station and its inclusion in the Seabrook Power
Contract did not violate RSA 362-C as alleged by CRR. PSNH
maintained it agreed to purchase VEG&T's share of Seabrook
through its affiliate, NAECo, in settlement of a claim in the
VEG&T bankruptcy.
PSNH argued that the State and PSNH agreed to a
modification to the Seabrook Power Contract and, therefore, the
Rate Agreement that provided for NAECo's purchase of the 0.4129%
VEG&T share of Seabrook and an agreement by PSNH to purchase the
entire output of that share in accordance with the terms of the
Seabrook Power Contract. The Agreement between the State and
PSNH to modify the Rate Agreement was subject to the condition
that NAECo's purchase of the VEG&T share of Seabrook and its
subsequent sale to PSNH would not increase rates to PSNH
ratepayers during the Fixed Rate Period. PSNH concluded that
because there could be no change in rates during the Fixed Rate
Period, and any increase in rates would occur after the Fixed
Rate Period, there was no violation of the provisions of RSA 362-C:9.
With regard to the fouling of the cooling tunnels with
the carcasses of dead harbor seals caught in the intake of the
cooling tunnels when the seals venture into the tunnel openings,
PSNH testified that this has only recently become a problem with
the resurgence of the harbor seal population in the Gulf of
Maine. Thus, this was not a design flaw as the harbor seal was
not perceived as a problem at the time of the design and
construction of the cooling tunnels.
B. Campaign For Ratepayers Rights
CRR objected to ratepayers bearing the cost of the
VEG&T share of Seabrook, which commenced at the conclusion of the
Fixed Rate Period, June 1, 1997, because it violated the
provisions of RSA 362-C:9.
CRR also asked for a disallowance of any costs
associated with remedying the harbor seal problem as it was a
design flaw in the construction of the plant. Thus, ratepayers
should not be required to bear the expense of this negligence.
III. COMMISSION ANALYSIS
Given the numerous issues raised in this proceeding, we
will address each issue separately in the order that it was
briefed by the parties and Staff.
1.(A) Capacity Transfer Agreement Revenues
As a result of the nuclear outages in Connecticut,
effective November 1, 1997, CL&P was unable to meet its capacity
capability responsibilities under the rules of NEPOOL. Pursuant
to one of the Capacity Transfer Agreements entered into between
PSNH and CL&P, which is appended to the Sharing Agreement, CL&P
was required to buy a proportional slice of PSNH's excess
generating capacity whenever CL&P is unable to meet its NEPOOL
capacity obligations. The designated percentage of PSNH unit
capacity to be transferred under the Agreement is as follows:
Seabrook 20.0%
Millstone III 10.0%
Merrimack I 7.0%
Merrimack II 18.0%
Schiller 4 5.0%
Schiller 5 5.0%
Schiller 6 5.0%
Newington 20.0%
Gas Turbines 10.0%
Total 100.0%
Exhibit 41 at 9. CL&P paid PSNH $27.4 million for the transfer
of this capacity and its attendant energy.
As is set forth above, the dispute in this case is the
appropriate rate treatment of the $27.4 million paid to PSNH in
compensation for the transfer of capacity to CL&P. PSNH argued
that the revenues were appropriately booked to base rate revenues
because the FPPAC formula did not include a provision for the
flow back of capacity transfer revenues to ratepayers and,
presumably, because the majority of the generation comprising the
transfer is booked to base rates. The other parties to the
proceeding argued that the FPPAC formula could be construed in a
manner to provide a mechanism to flow these revenues through to
ratepayers. They also argued that, although a majority of this
generating capacity is booked to base rates, it would be
inequitable to book the revenues to base rates because ratepayers
would never see the benefits of the transfer and shareholders
would receive a windfall due to the mechanics of the historic
test year used in traditional ratemaking methodology.
We concur with these parties and Staff. Thus, we have
concluded that the only equitable, just and reasonable treatment
of the capacity transfer revenues is to pass the revenues back to
ratepayers this FPPAC period through the FPPAC formula or, in the
alternative, pursuant to our general ratemaking authority.
Initially, we believe the FPPAC formula can be construed to
provide for the flow-through of the capacity transfer revenues to
ratepayers. The FPPAC formula found at Rate Agreement at
p. D-91 reads as follows:
[[[Enf + PCf + EA]
FPPAC rate = - BA] x SFT] + PA
[[[kWh Req X DE ]
"PCF" is defined as the "forecasted purchased capacity expense",
Rate Agreement at D-91, and also as "[t]he capacity costs
associated with other system power and unit contract capacity
purchases . . . ." Rate Agreement at D-103. Although these
definitions are written in affirmative language, there is no
prohibition on a negative capacity expense, in other words "PCf"
could be a negative number. Thus, in this instance the purchased
capacity expense would be a negative $27.4 million and placed in
the FPPAC formula to lower the overall rate for fuel and
purchased power to PSNH ratepayers.
We believe this is the only logical conclusion that can
be reached where $10 million of production penalty costs caused
by the capacity transfer, the fossil generation fuel costs, the
entire cost of the Seabrook Power Contract and all of the costs
of the CAAA are being passed on to ratepayers through the FPPAC
formula.
With regard to any arguments that some of the costs of
the transferred capacity are recovered through base rates and,
therefore, the revenues should be passed through base rates, we
note that any capacity purchase costs would not be borne through
base rates but are FPPAC costs under "Enf". Thus, we conclude
there should be parity under the FPPAC formula for capacity
purchases and sales.
Assuming, arguendo, we were to accept PSNH's argument
that these revenues, or some portion thereof, cannot be passed
through the FPPAC formula to ratepayers and that these revenues
should appropriately be taken into account as part of a base rate
proceeding, the result would be a windfall to shareholders. The
capacity revenues would be booked more than a year out of test
year for the current base rate proceeding. Accordingly, the
benefit of that revenue would not be captured for ratepayers.
We believe this is inappropriate. As the OCA correctly
asserted, ratepayers are funding the generation resources that
are the source of these capacity revenues, whether through base
rates or the FPPAC rate and, therefore, equity requires that the
revenues garnered from these resources be flowed through to
ratepayers. The New Hampshire Supreme Court has held on a number
of occasions that the Commission's ratemaking authority under RSA
378:7 is plenary and that the Commission has general ratemaking
authority under RSA chapter 378 to implement the method in which
rates are put into effect. See, State v. New England Telephone
and Telegraph Co., 103 N.H. 394, 397 (1961); Nelson v. Public
Service Company of New Hampshire, 119 N.H. 327, 332 (1979).
Thus, to the extent the FPPAC formula does not
accommodate the flow-through of capacity revenues, we will
exercise our general ratemaking authority and flow-through the
$27.4 million in capacity transfer revenues to ratepayers
concurrent with this FPPAC period. We take this action only to
the extent necessary to avoid an injustice to ratepayers and a
windfall to shareholders.
1.(B) Rate Agreement Breach
In its testimony and its post hearing brief, Staff
raised a number of concerns it characterized as a "potential
breach" of the Rate Agreement. After reviewing the testimony of
both Staff and PSNH, the Rate Agreement and the attendant Sharing
Agreement, and Order No. 19,889 in DR 89-244 approving the Rate
Agreement, Re Northeast Utilities/Public Service Company of New
Hampshire, 114 PUR4th 385, 75 NH PUC 396 (1990), we have
concluded that NU has engaged in a course of conduct which could
be characterized as a breach of the Rate Agreement.
Pursuant to Section 3 of the Rate Agreement, NU agreed
to provide PSNH's capacity needs, should they arise, for a period
of ten years following the First Effective Date under a Capacity
Transfer Agreement. The Rate Agreement provides that this
Capacity Transfer Agreement is designed to "assure an adequate
supply of electric service to the ratepayers of New Hampshire . .
. ." Rate Agreement at D-7-D-8. The executed agreement provides
that NU will "at all times operate and maintain" the pledged
generating units "in accordance with good electric utility
practice." Capacity Transfer Agreement (CL&P to PSNH) at
Paragraph 3. The Agreement also provides that NU will,
"consistent with good electric utility practice . . . use
reasonable efforts to assure that the [pledged Units] are
operable at their applicable winter or summer Normal Claimed
Capability Rating." Id.
The nuclear generating stations, Millstone Units I, II,
and III, comprise approximately 40% of the capacity pledged to
PSNH by NU under this Capacity Transfer Agreement. Rate
Agreement, Appendix F at D-112. The three Millstone Units have
not operated for over eighteen months because of their failure to
meet the requirements of the Nuclear Regulatory Commission (NRC).
Both internal and external investigations of the cause of these
outages indicate they are the result of management negligence at
the highest levels of the NU organization. The three Units can
no longer be claimed for capacity purposes and there is no clear
indication that Unit I will ever return to service or that Units
II and III will return to service soon.
We believe there is a prima facie showing that NU's
operation and maintenance of the Millstone Units has failed to
live up to the language and intent of this Capacity Transfer
Agreement. This leads us to question whether the State of New
Hampshire may have been deprived of one of the fundamental
benefits negotiated under the Rate Agreement. Tr. at 107-110.
(November 14, 1997)
Pursuant to Section 4 of the Rate Agreement, NU
committed to enter into an agreement with PSNH "pursuant to which
NU will credit [PSNH] with 50 percent of any . . . energy savings
received under NEPOOL rules resulting from the combined operation
of the NU system and [PSNH]." Rate Agreement at D-10. In a data
response to a Staff interrogatory in this proceeding, NU/PSNH
indicated that the changes to the NEPOOL agreement currently
pending before the FERC would render the Sharing Agreement
meaningless under the revised NEPOOL agreement pending approval
before the FERC. Ex. 32, at 13-14. Our own review of NU/PSNH's
response to that data request confirms Staff's testimony; the
Sharing Agreement as it relates to energy savings and capacity is
meaningless. Ex. 32, Att. MDC-6. Given NU's membership and
status in NEPOOL, and the information and control that flow from
that station, we find the failure of NU/PSNH to meet with the
State to discuss the reformation of NEPOOL and its effect on the
Sharing Agreement, under both the current regulatory regime and
in a restructured environment, disturbing.
The Sharing Agreement explicitly provides that
[u]pon the determination that any term or other
provision is invalid, illegal or incapable of being
enforced, the parties shall negotiate in good faith to
modify this Agreement so as to effect their original
intent as closely as possible . . . .
Sharing Agreement, at Section 11(c).
While we understand the proposed changes to NEPOOL are
necessary to implement the restructuring of the electric industry
and that the restructuring of the industry would render these
agreements, which address generation, meaningless, we are also
cognizant that there will be some period of time during which
bundled rates remain the status quo. Thus, to the extent the
current regulatory regime remains in place, i.e., to the extent
PSNH and the Initial System continue to own generation and
generation continues to be bundled with transmission and
distribution services, the NEPOOL Agreement and the Sharing
Agreement and the economic assumptions underlying those
agreements as originally crafted remain.
Again, we believe NU/PSNH's failure to meet with the
State to discuss the ramifications of the changes in the NEPOOL
agreement and to discuss NU's positions and input into the
proposed changes to the NEPOOL agreement may have deprived the
ratepayers of New Hampshire the benefits negotiated under the
Rate Agreement.
The final issue relates to NU's filing of a "network
transmission service" tariff at the FERC that replaced PSNH's and
the Initial System's stand-alone transmission tariffs. The
testimony revealed that PSNH ratepayers are annually losing
millions of dollars in transmission revenues to the NU Initial
System as a result of this new transmission tariff.
The loss of revenues results from the fact that NU has
treated the filing of the network transmission tariff as
terminating those provisions of the Sharing Agreement and its
attendant Capacity Transfer Agreements that provided for the
payment to PSNH of transmission fees for the use of PSNH
transmission facilities. It is telling to note that NU still
charges PSNH, and thereby PSNH's ratepayers, transmission fees
for similar transmission services that flow from PSNH to
Connecticut and Massachusetts.
NU failed to abide by the terms of the Sharing
Agreement that required it to meet with the State and in good
faith attempt to reform the agreements to retain the economic
benefits to New Hampshire ratepayers for the use of the PSNH
transmission system. Again, we believe this behavior has
resulted in New Hampshire ratepayers losing the benefit of the
bargains constructed within the Rate Agreement, the Sharing
Agreement and the Capacity Transfer Agreements.
With regard to all three of these issues, we believe
the Attorney General's Office should investigate this course of
conduct and take the appropriate action. We are concerned not
only with the overall failure of NU to communicate with the State
concerning the restructuring of NEPOOL as it relates to a
restructured electric industry, but with the immediate economic
consequences of that failure on PSNH ratepayers prior to the
emergence of a competitive power market.
2. Treatment of "EA" Costs Following the Fixed Rate Period
The "EA" component of FPPAC was designed to allow for
an increase in rates above the projected seven annual 5.5%
increases in rates during the Fixed Rate Period under certain
extraordinary circumstances. One of the delineated circumstances
was an increase in annual operation and maintenance expenses of
at least $2 million or a capital expenditure of at least $20
million due to new environmental regulations. In DR 95-068 we
determined, with qualifications, that PSNH's expenditures to
comply with the CAAA had met the criteria for recovery of the
costs of compliance under paragraph "EA".
The conclusion of the Fixed Rate Period, which
prevented PSNH from recovering these costs through a base rate
proceeding, and PSNH's pending base rate proceeding led Staff to
recommend that these costs now be collected through base rates in
accordance with customary cost of service regulatory practice.
We concur with Staff that operation and maintenance
expenses and capital costs of generating facilities that were
recovered through the FPPAC paragraph "EA" during the Fixed Rate
Period and that are traditionally treated as base rate items
should now be recovered through base rates following a base rate
proceeding. With regard to incremental increases in costs
associated with the CAAA that occur between base rate
proceedings, we will address that issue when and if the issue
becomes ripe.
3. Best Efforts
Pursuant to Section 12 of the Rate Agreement, NU/PSNH
agreed to use its best efforts to renegotiate the rates paid to
thirteen of the State's largest and most expensive SPPs. There
has been no determination, as yet, by the Commission as to
whether PSNH has met its best efforts obligations under Section
12 with regard to eleven of the SPPs. See, DR 96-148.
In reaction to PSNH's allegations in the temporary rate
proceeding in DR 97-059 that any decrease in rates might force
PSNH into bankruptcy, and because of concerns relative to the
financial viability of PSNH's affiliates and its parent caused by
the Millstone nuclear outages, Staff and the OCA argued that the
Commission should defer recovery by PSNH of some portion of both
past and projected SPP costs. Staff and the OCA argued that a
deferral was necessary to ensure that ratepayers are adequately
protected from an NU or PSNH bankruptcy should the Commission
ultimately conclude that NU/PSNH failed to meet its best efforts
obligations.
We do not believe a deferral mechanism is necessary to
protect ratepayers at this time. PSNH has already deferred
recovery of approximately $200 million in SPP costs. Thus, if
the Commission were to determine that NU/PSNH had not met its
best efforts obligations under Section 12 of the Rate Agreement
and that ratepayers had been harmed by that failure, any damages
could be recouped through the disallowance of deferral recovery.
4. Light Loading
The Commission opened DR 96-149 on its own motion on
May 14, 1996 to investigate concerns that PSNH was purchasing
power from SPPs during periods of "light loading" when such
purchases should have been curtailed under state and federal law.
In this docket, Staff and the Office of the Governor questioned
PSNH's purchases from SPPs in light load situations and
recommended the deferral of recovery of SPP costs when PSNH
should have curtailed purchases.
PSNH bears the burden of establishing the
reasonableness of the rates it seeks to collect from customers.
Based on the testimony of Messrs. McCluskey, Cannata and
Staszowski, we believe there has been a prima facie showing that
PSNH has failed to comply with federal law and the terms of the
Commission's rate orders regarding periods when SPP purchases are
not required.
We reach this conclusion based in large part on PSNH's
inability to provide this Commission with the information and
documentation necessary to substantiate its assertions regarding
negative avoided costs. Thus, we have concluded that we will
defer PSNH's recovery of $10 million, half the amount PSNH
indicated it was overpaying SPPs during periods of light load in
DR 94-080. In the event PSNH can establish it has acted in
accordance with the FERC rules implementing the Public Utilities
Regulatory Policy Act (PURPA) and the rate orders applying the
FERC rules, it will be allowed to recover these funds.
5. Unit II Parts
In DR 94-172, PSNH, NAESCo, NAECo and the Commission
Engineering Staff supported the creation of an imprudence
mitigation fund. The proposed fund would be based on the value
that Unit II parts to PSNH ratepayers. The OCA and the
Commission Finance Staff argued that the proposal was
inappropriate because PSNH ratepayers were already paying for
Unit II parts through the Seabrook Power Contract.
Finance Staff and the OCA based their position on the
fact that the Rate Agreement allocated $700 million to all of
PSNH's interest in Seabrook Units I and II. Thus, when the
entire $700 million was allocated to Unit I under the Seabrook
Power Contract, ratepayers were already compensating shareholders
for any investment in Unit II parts.
PSNH, NAESCo and NAECo responded that they had not
recovered any of the "preserve and protect" costs for Unit II
parts since the inception of FPPAC and that FPPAC did not
explicitly provide for recovery of those costs. They also
claimed that the regulatory treatment by the Commission up to
that time, which allowed NAECo to recover the book value of Unit
II parts placed into service in Unit I under the Seabrook Power
Contract, established that Unit II parts were shareholder
property.
In rejecting the proposed imprudence mitigation fund,
we implicitly concurred with the position of PSNH, NAESCo and
NAECo by allowing the practice of charging ratepayers for Unit II
parts to continue. We did not, however, explicitly rule on the
contention by PSNH, NAESCO and NAECo that Unit II parts are the
sole property of shareholders.
In this proceeding, the OCA explicitly requested that
we address the issue of the appropriate regulatory treatment of
Unit II parts. Specifically, the OCA requested that we return to
ratepayers NAECo's percentage of the profit from the sale of the
Unit II steam generators.
We believe the OCA has raised a valid issue that was
not completely addressed in DR 94-172. Because this issue goes
well beyond the Unit II steam generators and might require
adjustments to NAECo's books for Unit II parts placed in service
in Unit I over the past seven years, the appropriate compensation
to NAESCO for inventory maintenance and further refunds to
ratepayers because of other sales of Unit II parts, this issue
should be addressed in a separate docket. Thus, we will open an
investigation into the appropriate treatment of Unit II parts.
6. Pollution Control Revenue Bonds
Prior to the divestiture of its Seabrook assets to
NAECo, PSNH borrowed approximately $500 million through PCRBs
issued by the BFA. At the time of their issuance, $287.5 million
of the PCRB's were accorded tax exempt status. Subsequently
another $119 million of PCRBs obtained tax exempt status during
the Fixed Rate Period. The tax exempt status of the bonds
significantly lowers their interest rates and, thereby, the cost
of debt to the obligor.
To qualify for PCRB tax exempt status, an entity must
demonstrate to the IRS that the proceeds of the bonds will be
used for very specific "qualifying facilities". When the BFA
issued the $500 million of PCRBs, the proceeds of which were
pledged to PSNH, the qualifying facilities were all associated
with pollution control at Seabrook Station. At the time of the
divestiture of Seabrook assets and liabilities to NAECo, however,
PSNH did not divest these bonds with their attendant low interest
rates to NAECo but, rather, maintained the bonds within the
capital structure of PSNH.
Because PSNH was under a form of price cap regulation
during the Fixed Rate Period, rather than cost of service
regulation, PSNH shareholders received the entire benefit of the
lower interest rate PCRBs during the seven year Fixed Rate
Period. If, however, PSNH had transferred the PCRBs to NAECo,
along with the rest of the Seabrook assets and liabilities, at
the time of the Seabrook divestiture all of the debt savings
would have been passed on to PSNH ratepayers under the cost of
service Seabrook Power Contract which flows through the FPPAC
rate. Thus, during the Fixed Rate Period, PSNH ratepayers would
have paid millions of dollars less than was actually incurred
through the FPPAC rate. Following the Fixed Rate Period, PSNH
ratepayers' share in the benefit of reduced debt costs through
reduced costs are reflected in PSNH's capital structure used in
cost of service regulation or the carrying costs ratepayers must
bear for PSNH's uneconomic assets or stranded costs.
CRR alleges, inter alia, that NU/PSNH never disclosed
to the General Court and the Commission that it intended to
finance the PSNH takeover with tax exempt PCRBs and that the
interest rate benefits from the bonds would be retained by
shareholders during the Fixed Rate Period. To remedy this
situation, CRR has requested that the Commission impute the tax
exempt interest rates of the PCRBs to NAECo for the purposes of
the Seabrook Power Contract, which would result in a multi-million dollar refund to PSNH ratepayers.
For the following reasons, we decline to take such
action. In December, 1989, NU filed its petition initiating the
Commission's review of NU's acquisition plan of PSNH pursuant to
RSA 362-C and its approved bankruptcy reorganization plan. Along
with the petition, NU filed testimony supporting the acquisition
plan. The testimony of Robert Busch specifies that NU
contemplated the possibility of retaining all outstanding PCRBs
and seeking the issuance of millions of dollars of additional
PCRBs to finance the acquisition.
Furthermore, the Commission explicitly approved the
issuance of additional PCRB financings, Re Northeast
Utilities/Public Service Company of New Hampshire, 75 NH PUC 396,
474-477 (1990), and the record reveals that the Governor and
Council also approved the issuance of additional PCRBs on August
22, 1990. The record further reveals that the Governor and
Council were apprised by PSNH that the benefits of the bonds
would not flow to ratepayers until the conclusion of the Fixed
Rate Period.
7. Replacement Power Costs Incurred as a Result of Outages
at Vermont Yankee, Maine Yankee, and Connecticut Yankee.
In this proceeding, Staff argued that replacement power
costs incurred as a result of outages at the Vermont Yankee,
Maine Yankee and Connecticut Yankee nuclear power plants should
be disallowed because the outages were the result of imprudence.
The New Hampshire Supreme Court has held that when a
utility has exhibited inefficiency, improvidence, economic waste,
abuse of discretion, or action inimical to the public interest,
costs incurred may not be passed on to ratepayers. Appeal of
Seacoast Anti-Pollution League, 125 N.H. 708 (1985). The
prudence standard is one of the specific standards that has been
developed by the Court to govern the inclusion or exclusion of
such costs for ratemaking purposes. Appeal of Conservation Law
Foundation, 127 N.H. 606, 637 (1986). Prudence is "essentially
...an analogue of the common law negligence standard" requiring a
utility to exercise due care in its activities. Id. The test of
due care asks what a reasonable person would do under the
circumstances existing at the time of a decision. Fitzpatrick v.
Public Service Co. of New Hampshire, 101 N.H. 35 (1957). See
generally, Re Public Service Company of New Hampshire, 81 NH PUC
531 (1996). We will apply this standard to the nuclear outages
at issue herein.
As a result of an employee's failure to follow proper
procedures, Vermont Yankee experienced an unplanned outage. PSNH
does not contest that a Vermont Yankee employee acted
negligently, or imprudently, causing the plant to come down and
that negligence caused PSNH to incur $14,000 in replacement power
costs. PSNH argued, however, and Staff conceded, that the
employee had been adequately trained. PSNH further argued that
since "management" was not responsible for the outage,
shareholders should not be penalized through a disallowance of
the replacement power costs.
It is a fundamental principle of law of agency that a
master is responsible for the damages caused by the negligence of
its agent. See, Restatement of the Law of Agency, Second 2,
216. We believe this is an appropriate and equitable result.
Thus, we will hold PSNH responsible for the imprudence of its
agent and disallow recovery of the $14,000 in replacement power
costs.
On December 5, 1996, Maine Yankee experienced an
unscheduled outage because the manual reactor trip buttons were
declared "inoperable" when it was discovered that the wires that
operated each of the redundant systems were located too close to
one another to meet technical specifications. Although it only
took one day to correct the cabling for the manual reactor trip
buttons, the discovery of this cable separation problem in the
control room led to the investigation and discovery of a number
of other cable separation problems throughout the plant.
Further, because of the discovery of the problem with
the manual reactor trip buttons, the NRC, through Generic Letter
96-01, ordered the plant to look at all circuits for operability.
That investigation uncovered 10 to 20 other circuits that did not
meet current standards for cable separation. This led the NRC to
place Maine Yankee on Watch List, Category 2 because of general
maintenance problems at the plant. On December 18, 1996, the NRC
also issued a confirmatory action letter to Maine Yankee
requiring the plant to remain off-line until all problems
identified to date had been resolved.
The confirmatory action letter specifically required
the following actions by Maine Yankee:
(1)complete the initial Generic Letter 96-01 review;
(2)develop a plan and methodology for expanding the
review to determine the extent of the cable separation
problem, and to disposition the issues in accordance
with the unit's design basis; (3)perform a root cause
analysis that would address all hardware deficiencies
identified and use the information to validate the
"comprehensiveness" of the corrective actions; and (4)
meet with the NRC to present the results and actions.
Ex. 46 at 16
Because of the extensive planning and work required to
resolve these issues, Maine Yankee determined it would take
advantage of the required shut down to refuel the plant. At the
same time, plant management began to review the economic
viability of the plant. On August 6, 1997, the Maine Yankee
Board of Directors voted to retire or decommission the Maine
Yankee Nuclear power plant.
Staff argued that all replacement power costs incurred
from December 6, 1996, to August 6, 1997, should be disallowed
because the costs incurred were the result of the imprudent
operation and maintenance of the plant. PSNH argued that Maine
Yankee prudently initiated a refueling of the plant while
addressing the cable separation issues and other problems
identified by the NRC. Therefore, the Commission should not
disallow any replacement power costs incurred after the refueling
of the plant commenced.
Based on the testimony of Mr. Kokoszka that Maine
Yankee had numerous opportunities to correct its cable separation
problems beginning as early as the fire at Brown's Ferry in the
mid-1970s to two required re-examinations of these problems in
the early 1990s, we find the outage to be the result of the
imprudent operation and maintenance of the plant and will
disallow all replacement power costs resulting from the outage
until the determination by management to retire the plant.
Replacement power costs incurred between December 6, 1996 and
August 6, 1997, therefore, are disallowed.
In July, 1996, Connecticut Yankee experienced an
unscheduled outage to effect repairs to the CAR fan systems. The
CAR fans were declared inoperable when the plant's supply vendor,
Westinghouse Electric Corporation (Westinghouse), issued a letter
to all plants of the same design as Connecticut Yankee stating
that the structural integrity of the service water cooling system
could not be ensured under certain operating conditions. Westinghouse identified the potential problem in April of 1996 at
Diablo Canyon nuclear power plant, a sister plant to Connecticut
Yankee, and in June of 1996 officially notified all plants of
this design of the potential problem. In July of 1996
independent contractors retained by Connecticut Yankee advised
that the plant be brought down to effect repairs to the CAR fans.
On July 22, 1996, the Plant was brought down to effect the
repairs to the CAR fans.
On August 9, 1996 management decided to move up the
refueling outage that had been planned for September to coincide
with the repairs to the CAR fan system. On August 17, 1996, the
plant officially went into the refueling mode, which was
scheduled to last 52 days. On October 9, 1996, the Connecticut
Yankee Board of Directors announced that the preliminary results
of an economic analysis of the continued operation of the plant
indicated that the permanent shutdown of the Plant was likely. By
October 9, 1996, the plant was no longer in the refueling mode,
which would have been complete by that time but for the ongoing
economic analysis of the plant. On December 4, 1996, the
Connecticut Yankee Board of Directors made the final decision to
permanently retire the plant.
We find that the plant was prudently brought off-line
to repair the CAR fans and that the decision to refuel the plant
in August while repairs were effected to CAR fans was a prudent
decision. Ratepayers should not, however, bear any costs for
replacement power beyond October 9, 1996, when the plant would
have completed refueling but for the preliminary decision to
retire the plant. Ratepayers should not bear the costs incurred
for replacement power while management considered whether or not
it was in its best economic interest to retire the plant. Thus,
we will disallow all replacement power costs incurred between
October 9, 1996 and December 4, 1996.
8. Merrimack and Schiller Stations' Coal Pile Reconciliation
By letter dated December 3, 1997, Staff provided the
Commission with PSNH's final reconciliation for the coal
inventories at Merrimack and Schiller Stations and the
appropriate revenue adjustments associated with the
reconciliations. The letter indicated that PSNH, the OCA and
Staff had concluded that the final reconciliation of the coal
inventories and the associated revenue adjustments were the
appropriate revenue adjustments to be used in calculating the
FPPAC rate.
Given that the OCA raised this issue, and both Staff
and the OCA, along with PSNH, concurred that the reconciliation
filed with the Commission on December 3, 1997, appropriately
reflected the coal pile inventories and the corresponding
adjustments to revenue, we will accept the proposed adjustments
as just and reasonable.
9. Seabrook Station Science Center
As PSNH correctly noted, this issue has previously been
addressed by the Commission wherein it was determined that the
Science Center was in fact used and useful in the generation of
electricity. See, Re Public Service Company of New Hampshire,
65 NH PUC 251, 259 (1980); Re Public Service Company of New
Hampshire, 72 NH PUC 485, 492 (1987) ("Education Center" allowed
in rates).
We do not believe the record in this case is adequate
to disallow the expenses of the Science and Nature Center. We
believe there was sufficient testimony to establish that the
Science and Nature Center is used for utility business purposes.
10. Appropriate Methodology for Calculating Replacement Power Cost Incurred as a Result of Imprudence
PSNH has requested that we reconsider the decision in
DR 96-077 in which we indicated that the use of a net economic
detriment test to determine levels of replacement power
disallowances for imprudent operation of a generating station was
inappropriate. Re Public Service Company of New Hampshire, 81 NH
PUC 531, 545 (1996). We decline to reconsider that decision and
reiterate that we do not believe it is appropriate to offset the
costs incurred because of the negligent operation of a generating
unit with the revenues garnered as a result of that negligence
from the sale of excess power. Our position is particularly
appropriate where ratepayers have been required to cover all of
the costs incurred by shareholders to own, operate and maintain
the excess capacity used to generate that power.
Furthermore, as indicated in DR 96-077, each act must
be viewed discretely. To do otherwise would potentially obscure
the result of management's imprudence. Id.
11. Appropriate Calculation of "BA" Following the
Fixed Rate Period
The "BA" component, or "Base Assumptions", of the FPPAC
formula was intended to correct the FPPAC rate for those fuel and
purchased power expenses incurred by PSNH that were being
collected in base rates pursuant to PSNH's last traditional rate
proceeding before filing for bankruptcy protection. Rate
Agreement, at D-92. The Rate Agreement specified the exact
amount of the BA component of FPPAC for each year of the seven
years of the Fixed Rate Period. Rate Agreement, at D-106. The
Rate Agreement did not, however, specify BA for the years
following the Fixed Rate Period, although FPPAC is specified to
run for three years beyond the Fixed Rate Period. Thus, it is
unclear what value should be assigned to BA in years eight
through ten of FPPAC.
We believe the Rate Agreement contemplated a base rate
filing following the Fixed Rate Period to address PSNH earnings
following seven years of price cap regulation. Therefore, there
was no need to specify a number to represent the hypothetical
level of fuel and purchased power expenses in the "BA" component
of FPPAC in the Rate Agreement because the actual numbers would
be available to the Commission as a result of the base rate
proceeding.
Given that there is a base rate proceeding pending at
this time, we will determine the level of fuel and purchased
power expenses in base rates and reflect actual "BA" costs in
FPPAC at the conclusion of the proceeding.
12. Costs Associated with North Atlantic Energy Company's Acquisition of Vermont Electric Generation and Transmission Cooperative, Inc.'s Share in Seabrook
As is set forth above, PSNH's affiliate, NAECo,
purchased VEG&T's 0.41259% share of Seabrook Station to resolve
an issue in the VEG&T bankruptcy. In DR 93-092, the Commission
approved the purchase and a modification to the Seabrook Power
Contract proposed by PSNH and the Attorney General's Office that
provided for the recovery of that share of Seabrook from PSNH
ratepayers. Re Public Service Company of New Hampshire, 80 NHPUC
74 (1995). PSNH and the Attorney General agreed to increase the
"BA" component of FPPAC to offset any rate increases that would
result from this modification of the Seabrook Power Contract
during the Fixed Rate Period. Re Public Service Company of New
Hampshire, 79 NH PUC 5, 7-8 (1994).
Because the Seabrook Power Contract Amendment did not
increase rates during the Fixed Rate Period, it is not subject to
the provisions of RSA 362-C:9. Thus, the Amendment was not
subject to legislative approval.
13. Harbor Seals
During the course of the past year, seven harbor seals
have been entrapped and died in the intake tunnels of the
circulation water system which provides cooling water to Seabrook
Station. Testimony revealed that $118,000 had been expended this
year attempting to remediate the problem and that management was
attempting to find a design solution that would resolve the
problem. CRR objected to the recovery of any funds expended at
Seabrook Station to remediate the problem with harbor seals
because the problem resulted from a design flaw by the owners.
As was set forth in Section 7 above, the New Hampshire
Supreme Court has held that when a utility has exhibited
inefficiency, improvidence, economic waste, abuse of discretion,
or action inimical to the public interest, costs incurred may not
be passed on to ratepayers. Appeal of Seacoast Anti-Pollution
League, 125 N.H. 708 (1985). The prudence standard is one of the
specific standards that has been developed by the Court to govern
the inclusion or exclusion of such costs for ratemaking purposes.
Appeal of Conservation Law Foundation, 127 N.H. 606, 637 (1986). Prudence is "essentially ...an analogue of the common
law negligence standard" requiring a utility to exercise due care
in its activities. Id. The test of due care asks what a
reasonable person would do under the circumstances existing at
the time of a decision. Fitzpatrick v. Public Service Co. of New
Hampshire, 101 N.H. 35 (1957). See generally, Re Public Service
Company of New Hampshire, 81 NH PUC 531 (1996).
The issue for our resolution, then, is whether there
was a design flaw in the construction of the cooling tunnel
intakes, such that a reasonable person of the requisite skill
would have noted and corrected the flaw.
The testimony revealed that the cooling tunnel intakes
were designed to minimize their environmental impact. To achieve
that goal, the intake structures were built very large to
decrease the velocity of the water entering the tunnels so that
fish would not become entrapped at the intake. At the time of
construction, harbor seals were much less prevalent in the Gulf
of Maine and were not perceived as a potential problem. In fact,
it was 1993 before the first seal became entrapped in the
tunnels. It appears harbor seals are only recently venturing
inside the intakes and once inside become entrapped in the
tunnels.
Applying the prudence standard set forth above to the
design of the tunnel intakes, we cannot conclude that a
reasonable person of requisite skill and experience would have
modified the design in a manner to prevent the current problem
with harbor seals. Thus, we will not disallow the costs incurred
as a result of seal entrapment or the cost of design
modifications to address the situation.
14. Miscellaneous
Staff also raised a concern relative to PSNH's failure
to timely answer questions and to answer questions completely.
Based on the record in this proceeding, we share Staff's concern.
It appears PSNH has been unresponsive to data requests. We
expect this practice to cease and direct PSNH to answer our
Staff's and all parties' questions in a timely, thorough and
comprehensive manner.
Based upon the foregoing, it is hereby
ORDERED, that Public Service Company of New Hampshire
credit ratepayers for the $27.4 million in capacity transfer
revenues received from Connecticut Light and Power Company this
FPPAC period; and it is
FURTHER ORDERED, that Public Service Company of New
Hampshire meet with representatives of the State and the
Commission to discuss those issues related to Joint Dispatch
Savings, the Sharing Agreement and the Capacity Transfer
Agreements under the current regulatory regime; and it is
FURTHER ORDERED, that the operation and maintenance
expenses and capital costs of generating facilities that are
traditionally treated as base rate items and are currently being
recovered through the "EA" component of FPPAC may continue to be
recovered through FPPAC until they are included in base rates in
the pending base rate proceeding; and it is
FURTHER ORDERED, that there is no need for a best
efforts deferral at this time; and it is
FURTHER ORDERED, that Public Service Company of New
Hampshire defer recovery of $10 million in Small Power Producer
costs this FPPAC period; and it is
FURTHER ORDERED, that the Commission shall institute an
investigation into the appropriate treatment of revenues from
Unit II part sales, the maintenance costs of Unit II parts, the
appropriate treatment of Unit II parts placed into service in
Unit I; and it is
FURTHER ORDERED, that the retention of the Pollution
Control Revenue Bonds in the capital structure of Public Service
Company of New Hampshire was intended under the Rate Agreement;
and it is
FURTHER ORDERED, that Public Service Company of New
Hampshire shall not recover the $14,000 in replacement power
costs incurred because of the imprudent outage at the Vermont
Yankee nuclear power plant; and it is
FURTHER ORDERED, that Public Service Company of New
Hampshire shall not recover the $2.9 million in replacement power
costs incurred because of the imprudent outage at the Maine
Yankee nuclear power plant; and it is
FURTHER ORDERED, that Public Service Company of New
Hampshire shall not recover the $461,000 in replacement power
costs incurred at the Connecticut Yankee nuclear power plant
after October 9, 1996; and it is
FURTHER ORDERED, that the Science and Nature Center is
used for utility business purposes and the expenses of the
Science and Nature Center may be recovered through the Seabrook
Power Contract; and it is
FURTHER ORDERED, that it is inappropriate to offset the
costs incurred because of the negligent operation of a generating
unit with the revenues garnered as a result of that negligence
from the sale of excess power; and it is
FURTHER ORDERED, that the "BA" component of FPPAC shall
be calculated in accordance with the last year of the Fixed Rate
Period until it is established in the base rate proceeding; and
it is
FURTHER ORDERED, that we shall address the appropriate
treatment of the modification of the Seabrook Power Contract to
include the VEG&T share of Seabrook in the next FPPAC proceeding;
and it is
FURTHER ORDERED, that Seabrook Station's problem with
harbor seals is not the result of imprudence.
By order of the Public Utilities Commission of New
Hampshire this tenth day of February, 1998.
Douglas L. Patch Bruce B. Ellsworth Susan S. Geiger
Chairman Commissioner Commissioner
Attested by:
Thomas B. Getz
Executive Director and Secretary