DPU proposes rules for electric industry restructuring.

BOSTON--(BUSINESS WIRE)--May 1, 1996--The Department of Public Utilities (DPU) today issued proposed rules for the restructuring of the electric industry. These proposed rules are intended to reduce costs over time for all consumers of electricity. They will allow broad customer choice and will promote full and fair competition in the generation of electricity. These proposed rules are issued for public comment and hearings before adoption of final rules in September.

The DPU also announced its vision of a restructured electric industry to include the following:

1. An Independent System Operator which

(a) operates the regional transmission system reliably

(possibly evolving from the current NEPOOL system),

(b) is independent and unaffiliated with electric

companies, and

(c) applies comparable transmission rates, terms and

conditions to all generators.

2. A Power Exchange to manage a competitive bidding pool for

short-term power sales.

3. Functional separation of electric companies into generation,

transmission and distribution corporate entities.

4. Preservation of discounts for low-income customers, shut-off

protections, and provision of service to all customers.

5. Registration requirements for generation suppliers,

including marketers and aggregators.

6. A reasonable opportunity for recovery of stranded costs,

including a proposal to protect municipalities from loss of

utility property taxes associated with diminished generation

plant value.

7. Options for phased incentives for electric companies to

divest their generation assets to stimulate a robust

competitive market.

8. Promotion of environmental goals.

9. Support for energy efficiency and renewable energy 

resources.

10. Encouragement, but not a requirement, for towns with

Municipal Electric Companies to participate in the

restructured industry.

11. A price cap system of economic incentive regulation for the

remaining distribution and transmission monopolies.

12. Unbundling of rates on bills by January 1,1997 into separate

components, i.e. transmission, distribution and a market

proxy for energy costs. Implementation of competitive

generation market by January 1, 1998.

DPU Chairman John B. Howe said, "Today's proposal is a major step forward in our efforts to bring the benefits of competition and expanded choice to electricity consumers. We are committed to working in concert with the industry, consumer groups, and other stakeholders to chart a course to a new electric industry structure that is fundamentally workable and fair."

Secretary of Consumer Affairs Nancy Merrick, whose office oversees the DPU, praised the new rules, stating "This is a thoughtful and comprehensive approach to restructuring that will save ratepayers money while keeping existing consumer protections intact." Merrick added "This is another creative example of the Weld/Cellucci administration's approach to reinventing government." -0-

EXECUTIVE SUMMARY Background

This explanatory statement and accompanying proposed rules represent the latest step in a series of initiatives undertaken by the Department of Public Utilities ("Department") aimed at promoting the development of a fully competitive market in the supply of electricity to Massachusetts consumers. This statement follows and amplifies upon our August 16, 1995 Order in Electric Industry Restructuring, D.P.U. 95-30, in which we established our goals for a restructured electric industry. We reaffirm that "[r]educing costs, over time, for all consumers of electricity is the primary objective of the Department's efforts in restructuring the electric industry. The Department's overall goal... is to develop an efficient industry structure and regulatory framework that minimize costs to consumers while maintaining safe and reliable electric service with minimum impact on the environment." Id. at 13.

In February 1996, in accordance with Electric Industry Restructuring, four electric companies, along with the Commonwealth's Division of Energy Resources, submitted restructuring proposals. None of these represented a negotiated resolution of the issues. The Department opened this rulemaking on March 15, 1996, in response to commenters' requests, in order to address the following issues: (1) market structure, (2) market power, (3) transmission, (4) distribution, (5) stranded cost calculation and recovery mechanism, (6) rate unbundling, (7) performance-based regulation, (8) environmental regulation and demand-side management, (9) default service, (10) universal service, (11) the effect of restructuring on municipal electric companies, and (12) the local and utility tax impacts of restructuring (Order Commencing Notice of Inquiry ("NOI")/Rulemaking and Setting a Procedural Schedule, D.P.U. 96-100, at 5-6 (March 15, 1996)).

The explanatory statement and proposed rules in Attachment A present specific proposals in those areas where the Department believes its future direction is most clear; alternatives in those areas where the Department is less certain of its preferences; and questions on many topics where rules may be warranted but where the Department is not in a position to make any specific proposals. We emphasize that none of these approaches, including those presented as specific proposals, is intended to represent a final resolution of any issue. Rather, they are offered to serve as reference points and to generate response and discussion as this investigation proceeds.

Our vision of a restructured industry includes (1) an independent system operator ("ISO") and a power exchange ("PE") that are independent of those who would transact business with these entities; (2) a regional, zoned network transmission tariff; (3) the functional separation of electric companies into distinct corporate entities with appropriate rules governing interaffiliate transactions; (4) protections to ensure that electricity is available and affordable to all customers; (5) possible mechanisms to provide a reasonable opportunity for stranded cost recovery, options for phased incentives to divest, and a proposal to protect municipalities from loss of electric company property taxes associated with diminished generation plant value; (6) protection of the environment; (7) promotion of energy efficiency and renewable resources; (8) encouragement, but not a requirement, for municipal electric companies to participate in the restructured industry; (9) a price cap system of performance-based regulation; and (10) the unbundling of rates on bills, beginning January 1, 1997, into separate components, i.e., transmission, distribution, and a market proxy for energy costs; and (11) a competitive generation market by January 1, 1998.

Independent System Operator and Power Exchange

An ISO, whose minimum responsibility would be to operate the transmission system in New England in accordance with established reliability standards, represents a first key component of the future market structure. A second key component of the future market structure is a PE, which would facilitate a short-term pool for energy transactions. The Department is committed to ensuring that there is a robust electricity market in the PE, and thus seeks comment on whether electric distribution companies, at least initially, should be required to meet requests from customers for Basic Service with purchases from the PE (see Basic Service, below, and the discussion of alternative approaches to providing Basic Service in the explanatory statement). True independence of the ISO and PE from market participants is an important feature. This framework seems to be consistent with our initial reading of the Federal Energy Regulatory Commission's ("FERC") final rule on transmission access and pricing issued on April 24, 1996 ("FERC Order 888").

Transmission

Also important to the development of a truly competitive market for generation is the implementation of a workable regulatory framework for transmission access and pricing. The Department sees a need for a regional, network tariff that would include adders and subtractors within zones to reflect transmission constraints. The rules established in FERC Order 888 appear to offer promising solutions to issues of jurisdiction, access, pricing, and construction.

Corporate Structure

The Department also includes a proposal for functional separation of electric companies into distinct corporate entities with rules of conduct governing affiliate transactions, which is seen as necessary for full and fair competition in generation markets. The rules of conduct would have distribution companies make service available under non- discriminatory tariffs that offer the same terms to both affiliated and non-affiliated entities in the market, and would provide protections against the potential for abusive interaffiliate transactions. The rules would require electric distribution companies to make customer information (subject to customer approval) available to market participants on the same terms and at the same time that they provide such information to marketing and retail affiliates.

Basic Service and Universal Service -- Consumer Protections

Consistent with its historic consumer protection mandate, under our proposal the distribution company would continue to have an obligation to connect all customers in its service territory to the distribution system and to provide distribution service. As part of a distribution company's obligations, the Department proposes two types of service to ensure that electricity is available and affordable to all customers: Basic Service and Universal Service. The distribution company would be required to provide Basic Service to all customers in its service territory (1) who do not choose to contract directly for electricity with another supplier; (2) who cannot obtain power in the open market; or (3) whose supplier fails, for any reason, to provide electricity. Basic Service would be available to all customers at all times. The Department outlines several options for how the distribution company could buy power to supply Basic Service customers and solicits comment on how to ensure that this service provides competitively-priced power while avoiding possible affiliate abuses. Universal Service, which provides for low-income discounts, will continue to be available to all customers who are currently eligible. The level of the discounts, and the method of collection of the subsidies from other customers will be calculated as they are now. In order to maintain a market price for generation, the discounts will be applied to the regulated components of the bill, i.e., transmission, distribution and stranded costs charges. Universal Service will be available to all eligible customers whether they receive competitive generation service or Basic Service.

The Department's explanatory statement and proposed rules also provide for continued billing and termination protections for Basic Service customers. The relationships between customers and competitive generation suppliers would otherwise be governed by the terms of their contracts. Finally, the Department proposes rules for minimal supplier registration requirements, and requests comment on whether additional rules are necessary to protect customers.

Stranded Cost Recovery and Property Taxes

The proposed rules offer a possible framework for stranded cost recovery. They anticipate that electric companies would be provided a reasonable opportunity to recover the net, nonmitigable stranded costs that were on their books as of August 16, 1995. Before any such recovery can occur, however, each electric company would have to demonstrate that it has taken and will take all reasonable actions to mitigate those stranded costs through sales from generating units, reduction in power purchase contract amounts, asset sales, and other means. The Department seeks comment on options for phased incentives for the sale of generating assets as a means to address both stranded costs and market power concerns. Each company would recover stranded costs through a non-bypassable "stranded cost access charge" that would remain in place across the ten year transition period. Electric companies would have an additional opportunity to recover stranded costs to the extent that they can achieve efficiencies through cost reductions, consistent with the Department's primary objective of reducing costs, over time. Because considerable concern exists regarding the effects of a significant over- or underrecovery of stranded costs, the Department has proposed that, based on actual experience, stranded costs be periodically subject to some degree of reconciliation. Finally, if owners of generating facilities recover their stranded costs, municipalities should expect to receive property taxes commensurate with the sum of the market value and the stranded costs associated with any given facility.

Environmental Protection

Consistent with the principles of Electric Industry Restructuring to support and further the goals of environmental regulation during the transition, the explanatory statement describes the Department's intent to support efforts by the Department of Environmental Protection to ensure that increased competition in electric power supply does not come at the expense of the environment. The Department solicits comments on how to ensure that generators under its jurisdiction take appropriate steps to minimize environmental impacts from restructuring, and on specific options such as setting comparable emissions standards for existing and new generating units, and standards for toxics.

Renewable Energy Resources and Energy Efficiency

During the transition to a restructured industry, Department policies will encourage low environmental impact resources such as renewable energy resources and energy efficiency programs in order to offer these resources a meaningful chance to compete. Regarding renewable energy sources, the Department endorses market-based approaches and outlines three options to promote their development by: (1) encouraging direct purchases from renewable energy resources where renewables might be priced slightly above the market price of electricity; (2) establishing a renewables fund that would be collected through a low, non-bypassable charge; and (3) requiring distribution companies to purchase power generated by customers' on-site renewable energy resources with capacities of 30 kilowatts or less.

The Department remains committed to ensuring that energy efficiency has a meaningful opportunity to compete in the future electric industry for two reasons: to correct market failures and to achieve the public benefits of energy efficiency. Toward that end, the Department expects electric distribution companies to continue their energy efficiency efforts, although we expect demand-side management ("DSM") programs to become increasingly market-driven and to focus on market transformation initiatives.

Municipals

The rules that we propose would apply to the existing investor-owned utilities, and in more limited ways, to certain new entrants to Massachusetts electricity markets. The rules do not change the jurisdictional boundaries of the Department with respect to municipal electric companies, nor do they seek to require the involvement of municipal electric companies in the restructuring process. We do encourage municipal electric companies to integrate their activities with those of the restructured industry for the benefit of all consumers in the Commonwealth.

Performance-based Regulation

In accordance with its principle favoring incentive forms of regulation, the Department establishes its preference for price cap regulation for all electric distribution companies. Bills from electric distribution companies would include a component for services provided by a distribution company that would be governed by a price cap formula. The price cap formula would adjust a price cap index by factors to accommodate inflation, changes in productivity, and exogenous costs. These price caps would be adjusted annually and would remain in place for five years. The other components of bills from electric distribution companies might include a pass-through of market generation charges, a pass-through of FERC-approved transmission charges, a stranded cost access charge, and a general access charge to support low-income discounts, energy efficiency programs, and the renewables fund.

Implementation of Unbundled Rates Beginning January 1, 1997

As we pursue steady progress toward a restructured electric industry in Massachusetts, we plan to begin implementing revenue-neutral, unbundled rates in early 1997 in keeping with the schedule established in our March 15, 1996 Order in this proceeding. Through the rate unbundling process, we anticipate that customers will become familiar with an unbundled bill format, the different components of the cost of electricity, and movements in the cost of electricity in a competitive generation market through market proxy pricing.

A Competitive Generation Market by January 1, 1998

By promulgating regulations that support a competitive generation market in those areas over which we have jurisdiction, and providing guidance or making policy recommendations on those issues where we do not have jurisdiction, or where it may be shared, we hope to eliminate any barriers to a fully competitive generation sector within the Commonwealth of Massachusetts by January 1, 1998, and to lend impetus to the structural changes required at the federal and regional level at the same time.

Conclusion

We intend to work cooperatively with the Massachusetts Legislature, with our fellow New England regulators, and with other state and federal authorities to accomplish the goal of an efficient industry structure and regulatory framework. The Department appreciates the efforts of all who have contributed proposals and comments to date in this proceeding. We look forward to continued participation by commenters in the upcoming hearing and comment stages of this proceeding as we endeavor to restructure the electric industry in a way that will best serve consumers in the Commonwealth. Further, we hope that the additional clarity provided by this explanatory statement and the proposed rules will encourage further negotiations among Massachusetts electric companies and other stakeholders and result in settlements of the outstanding company-specific electric restructuring dockets.

CONTACT: John B. Howe, Chairman

[phone]

or

Timothy J. Shevlin, Jr.

Executive Director

[phone] REPEATS: New York 212-575-8822 or 800-221-2462; Boston 617-236-4266 or