April 1997

New Hampshire: PUC Rules That Utilities With Rates Above The Regional Average Will Not Recover Full Stranded Costs
by Robert Olson  --   Brown, Olson and Wilson, P.C.
(originally published by PMA OnLine Magazine: 05/98)

On February 28, 1997, the New Hampshire Public Utilities Commission ('PUC') issued its final restructuring plan (the 'Plan') providing, in part, that public utilities with rates in excess of New England regional average rates cannot recover all of their stranded costs. Public Service Company of New Hampshire and Northeast Utilities (collectively referred to as 'PSNH') have filed suit against the State of New Hampshire (the 'State') in Federal District Court, requesting that the Court enjoin the Plan.

The Plan
The Plan requires utilities to divest generation assets and purchased power arrangements if the utility wishes to be distribution company in the competitive market. The Plan views such divestiture as necessary to eliminate the market power of vertically integrated utilities.

Regarding recovery of stranded cost, the Plan distinguishes between utility costs incurred due to management discretion and those costs due to either federal or state governmental mandate. Utilities will be given an appropriate opportunity to fully recover stranded costs associated with governmental mandates. Recovery of stranded costs that resulted from management discretion are limited by comparing the individual utilities' retail rates to the average New England rates. Electric utilities with rates above this average will not recover all of their stranded costs. The Plan reasons that less than full recovery for such utilities is fair because they have failed to deliver on their promise of efficient service and shareholders of utilities with rates exceeding the regional average did not have a reasonable expectation of full stranded cost recovery.

The Plan also states that the use of the regional average rate approach, as opposed to a cost-based ratemaking approach, is a fair way to gauge the reasonable expectation of utility's shareholders because in New Hampshire electric utilities always faced the prospect of retail competition. Thus, utilities with the highest electric rates should have reasonably anticipated their vulnerability to competition.

The Plan states that existing purchase power obligations from qualifying facilities ('QFs') will be assumed by the distribution company. The power generated by QFs may be used by the distribution company in providing service to residential and small commercial customers that either have not selected their own power supplier or who are between selection of power suppliers. If the distribution company requires additional power to provide this service, it is directed to purchase power through competitive bids or spot market purchases.

The Plan also requires the state's utilities to file retail transmission tariffs with FERC as a condition to making sales in the competitive market place.

The Plan does not establish any specific registration requirements for competitive power suppliers, but does note that such requirements should provide incentives for suppliers to behave responsibly. The Plan directs the PUC staff to establish a working group to develop appropriate registration requirements. Federal Court Action

On March 3, 1997, PSNH filed a complaint with the Federal District Court requesting that the Court enjoin the Plan. The complaint states that the Plan would require PSNH to write-off approximately $400 million of regulatory assets carried on its books pursuant to Financial Accounting Standard ('FAS') 71. PSNH alleges that such a write-off is required because the Plan does not use a cost-based ratemaking process as required by FAS 71 eligibility requirements. Such a write-off may cause PSNH to seek bankruptcy protection. The Court issued a temporary restraining order preventing enforcement of the Plan as it affects the FAS 71 issue. The Court on March 20, 1997 issued a further restraining order staying indefinitely the Plan as it applies to PSNH. In addition, the Court ordered briefs to be filed by March 28, 1997 on the issue of whether the Court should abstain and permit the PUC and the New Hampshire courts to resolve the dispute. The Court has the matter under consideration. PUC Actions and Rehearing

On March 19, 1997, the PUC stayed the portion of the Plan which PSNH claimed would require it to write-off approximately $400 million of regulatory assets, pending further consideration of the issue. On March 31, 1997, all the state's utilities filed motions for rehearing with the PUC, requesting that the PUC reconsider and revise the Plan and raising a number of constitutional and statutory issues, including claims that the order creates a taking of property by requiring and allowing use of utility transmission facilities and that the order violates the FERC's authority over transmission of power. The PUC has not yet acted on these motions or the motions for rehearing filed by a number of non-utility parties to the docket.

Robert A. Olson is a partner in the law firm of Brown, Olson & Gould P.C. which maintains a nationwide practice in energy law, public utility law and related commercial transactions. He can be reached at:

Brown, Olson & Gould, PC
2 Delta Drive, Suite 301
Concord, NH 03301

rolson@bowlaw.com | (603) 225-9716