ML20205F373
| ML20205F373 | |
| Person / Time | |
|---|---|
| Site: | Pilgrim |
| Issue date: | 04/02/1999 |
| From: | Alexander J BOSTON EDISON CO. |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM) |
| References | |
| CON-#299-20236 2.99.040, 99-06, 99-6, LT, LTR.2.99.040, LTR.99-6, NUDOCS 9904060202 | |
| Download: ML20205F373 (104) | |
Text
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Boston Edison
-kilj 4 see cucaov comuv April 2,1999 BECo Ltr. 2.99.040 ENGC Ltr. 99-06 U.S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, D.C. 20555-0001 Docket No. 50-293 License No. DPR-35
Subject:
Boston Edison Company and Enteray Nuclear Generation Company Additional Information Provided in Support of the Request for Transfer of the Pilgrim Nuclear Power Station Facility Operating License and Materials License
References:
1.
BECo Ltr. 2.98.163 (ENGC Ltr. 98-01) dated December 21,1998 2.
BECo Ltr. 2.99.009 (ENGC Ltr. 99-01) dated January 28,1999 Ladies and Gentlemen:
Attachments A and B are hereby provided in support of the request for transfer of the Pilgrim Station Facility Operating License and NRC Material License from Boston Edison Company (BECo) to Entergy Nuclear Generation Company (Entergy Nuclear) as submitted in Reference 1.
j Attachment A is an order from the Massachusetts Department of Telecommunications and Energy (DTE) dated March 22,1999. The order authorizes the divestiture involving the sale of Pilgrim Station and related assets as embodied in the Purchase and Sales Agreement signed by BECo and Entergy Nuclear pursuant to the Massachusetts Restructuring Act of 1997.
Attachment B is a copy of the financial arrangement by which Entergy Nuclear is guaranteed access to $50 million, if necessary, to meet expenses and obligations to safely operate and maintain the plant. This Attachment is germane to the request for the transfer because it demonstrates that Entergy Nuclear has aatisfied its commitment to provide adequate lunds as described in Reference 1 (Enclosure 1, section ll.F.2, paragraph 3).
Separately, and to assure the NRC staff of continued organizational stability following the transfer, Entergy Nuclear will inform the staff in writing of any changes to the Pilgrim Station organization as described in Reference 2 (responses to questions 6 and 7) for a period of one year following the transition of ownership.
Please feel free to contact Mr. Jack Alexander at Pilgrim (508) 830-8269 or Ms. Connie Wells at Entergy Nuclear (601) 368-5345 if you have any questions or require any additional information.
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9904060202 990402 PDR ADOCK 05000293 fexander k.
I PDR j clear Assessment 5
DWE/jlm/299040 Attachments cc: see next page Pilgrim Nuclear Power Station, Rocky Hill Road, Plymouth, Massachusetts 02360
I Boston Edison Comprny Dock t No. 50/293 Entergy Nuclear Generation Company Licensee No. DPR-35 cc:
Mr. Alan B. Wang, Project Manager Mr. Hubeit J. Miller Project Directorate 13 Region I Administrator Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Mail Stop: OWFN 14B20 Region i 1 White Flint North 475 Allendale Road 11555 Rockville Pike King of Prussia, PA 19406 Rockville, MD 20852
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(10 copies) 1 i
U.S. Nuclear Regulatory Commission Senior Resident Inspector Attention: Document Control Desk Pilgrim Nuclear Power Station Washington, DC 20555-0001 I
Secretary U.S. Nuclear Regulatory Commission General Counsel i
Washington, D.C. 20555-0001 U.S. Nuclear Regulatory Commission ATTN: Rulemakin0 and Adjudications Staff Washington, DC 20555-0001 J
(fax: 301-415-1101)
(fax: 301-415-3725) l John M. Fulton, Esq.
Jay E. Silberg, Esq.
Asst. General Counsel (counsel for Boston Edison)
Boston Edison Co.
Shaw, Pitman, Potts & Trowbridge 800 Boylston Street 2300 N. Street, NW Boston, MA 02199-8003 Washington, DC 20037-1128 (fax: 617-414-2733)
(fax: 202-663-8007)
Douglas Levanway, esq.
(counsel for Entergy)
Wise, Carter, Childs and Caraway PO Box 651 Jackson, Mississippi 39205-0651 (fax: 601-968-5519)
Mr. Robert Hallisey Mr. Peter LaPorte, Director Radiation Control Program Mass. Energy Management Agency Center for Communicable Diseases 400 Worcester Road Mass. Dept. of Public Health P.O. Box 1496 305 South Street Framingham, MA 01701-0313 Jamaica Plain, MA 02130
A Ehe Gammanmealth of filassachusetta j
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DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY March 22, 1999
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D.T.E.98-119 Petition of Boston Edison Company, an ele t ic company under G.L. c.164, f 1. for Approval of Pilgrim Divestiture Transactio..under the terms of the Electric Restructuring Act.
St.1997, c.164.
D.T.E. 98 126 Application of Commonwealth Electric Company, an electric company under G.L. c.164.
Q l. for Approval of Buyout of Pilgrim Purchase Power Contract and Power Purchase Agreement with Entergy Nuclear Generation Company under the tenns of the Electric Restructuring Act. St.1997, c.164.
j APPEARANCES:
William S. Stowe, Esq.
Catherine J. Keuthen, Esq.
Boston Edison Company 800 Boylston Street Boston Massachusetts 02199 and Robert K. Gad, Esq.
Colleen M. Granahan. Esq.
Ropes & Gray One International Place Boston. MA 02110 FOR: BOSTON EDISON COMPANY P_etitioner D.T.E.98-119 Intervenor D.T.E.98-126 O
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.. m. m.
David S. Rosenzwei. Esq.
5 Keegan. Werlin & Pabian. LLP 21 Custom House Street Boston, MA 02110 ars John Cope-Flanagan. Esq.
COM/ Energy Services Company One Main Street P.O. Box 9150 Cambridge. MA 02142-9150 FOR: COMMONWEALTH ELECTRIC CO.
B:dilomt D.T.E. 98126 1.imireA Panicinant D.T.E.98-119 Thomas J. Reilly. Attorney General BY:
Joseph W. Rogers Rebeca Perez Assistant Attorneys General Regulated Industries Division 200 Portland Street,4th Floor Boston, Massachusetts 02114 Intervenor Robert F. Sydney, Esq.
Vincent DeVito. Esq.
Division of Energy Resources 100 Cambridge Street. Room 1500 Boston. Massachusetts 02202 FOR: COMMONWEALTH OF MASSACHUSETTS DIVISION OF ENERGY RESOURCES
- Intervenor D.T.E.98-119 Paul R. Gauron. Esq.
Goodwin. Procter & Hoar. LLP Exchange Place Boston. Massachusetts 02109 FOR: ENTERGY NUCLEAR GENERATION CO.
Intervenor
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Burton E. Rosenthal. Esq.
Segal. Roitman & Coleman 11 Beacon Street. Suite 500 Boston. MA 02108 FOR: LOCALS 369 and 387, UWUA, AFL-CIO Intervenors Stephen Klionsky, Eq.
Western Massachusetts Electric Co.
260 Franklin Street,21" Floor Boston, MA 02110
' FOR: WESTERN MASSACliUSETTS ELECTRIC CO.
Limited Particinant D.T.E.98-119 Laura S. Otton, Esq.
McDermott. Will & Emery 28 State Street Boston, MA 02109 FOR: MONTAUP ELECTRIC CO.-
Limited Participant D.T.E.98-119 Michael B. Meyer, Esq.
Meyer, Connolly. Sloman & MacDonald. LLP 12 Post Omce Square Boston, MA 02109 FOR: TOWN OF PLYMOUTH Limited Particinant D.T.E.98-119
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............. ~.
D.T.E. 98-!19/126
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. I.
INTRODUCTION
.. Page1 II.
STANDARD OF REVIEW......................
. Page 4 III.
DESCRIPTION OF THE DIVESTITURE TRANSACTION...........
Page 5 A.
Overview..............,
........ Pagc 5 1.
Purchase and Sale
.......................... Page 5 2.
Dccommissioning. Trust Page 7 3.
. Power Purchase Aereements..........
.-Page-9 B.
Description of the Divestiture Process............
Page 12 IV.
REVIEW OF THE ASSET DIVESTITURE............
........ Page 14 A.
Introduction....
Page 14 B.
Enview of'he Auction Process
....... Page 15 C.
M_aximizine the Value of the Assets Sold.....
Page 17 D.
Benefits of the Divestiture Transaction
....... Page 19 1.
Introduction.........
Page 19 2.
Positions of the Parties...........
............ _ Page 20 a.
Attornev General................
...... Page 20
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b.
POER..
Page 20 c.
Commonwealth Electric.............
..... Page 21 d.
Boston Edison........
..... Page 21 3.
Analysis and Findines Page 22 E.
Liability For Futum Decommissioning Page 25 1.
Introduction............
Page 25 2.
Positions of the Panies.
Page 25 a.
Attorney General..........
......... Page 25 b.
Enterev.........
Page 27 c.
Boston Edison.........
...... Page 28 3.
Analysis -nd Findines Page 29
D.T.E. 98119/126 -
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Bgghtse Power Aareement. Boston Edial................. Page 31 -
1.
Introduction................................, Page 31 2.
Positions of the Parties......
Page 31 1.
DOER................................ Page 31 ii.
Boston Edison........................... Page 32 3.
Analysis and Findines.......................... Pa ge 3 2 G.
?urchase Power Apu.ur.:- Commonwealth Electric.......... ' Page 34 1.'
Introduction................................ Page 34 2.
An=lvsis and Findinas.......................... Page 35 H.
Purchase Power A areement - Municinal Cuanmers............. Page 36 1.
Introduction.....................
Page 36 2.
Position of the Parties Page 37 a.
Attorney General......................... Page 37 b.
Boston Edison......................
Page 37 3.
Analysis and Findines.......................... Page 3 8 V,
itATEMAKING TREATMENT OF PROCFpnS FROM DIVESTITURE
. Page 40 i
A.
Adiustment to Gross Proceeds...........
Page 40
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l.
Jntroduction..........
Page 40 2.
Inclusion of Municinal contract Costs...
Page 40 I
a.
[11t.roduction.........
Page 40
' b.
Position of the Parties....
Page 41 Page 41 J
1.
Attornev General......
Page 41 j
ii.
Commonwealth Electric.
iii.
Boston Edison..
Page 43 c.
Analysis and Findinas......
Page 45
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D.T.E. 98-119/126
-iii-
/
3.
Inventerv and Nuclear Fuel...............
Page 51 Introducti D............................ Page 51 a.
O b.
Positions of the Parties..................... Page 51 i.
Attorney General.....,.............. Page 51 ii.
Boston Edison....
Page 52 c.
. Analvtis and Findinen.
Page 52 4.
Pilurim Geine Forward Costs Page 53 a.
Introduction............................ Page 53 b.
Positions of the Parties
...................., Pagc 54 i.
Attornev General.................
Page54 11.
DDER......................
Page 54 iii.
Commonwealth Electric.....
Page 56 i
d iv.
Boston Edison..............
Page 56 1
c.
ADRlysis and Findinas Page 58 5.
Canital Additinas............................. Page 60 a.
Introduction......................
Page 60
)
l b.
Positions of the Parties............
Page 60 i.
Attorney General...,
Page 60 li.
Commonwealth Electric......
Page 61 iii.
Boston Edison...
Page 61 c.
Analvsis and Findings.......
Page 62 6.
Transaction Costs.............
Page M a.
Introduction.
Page 64 b.
Positions of the Parties.........
Page 64 i.
Attorney General.
Page 64 ii.
Boston Edison................
Page 65 c.
Analysis and Findines.
Page 65 7.
Other Costs
. Page 66 a.
Introduction......
Page 66 b.
Analysis and Findius..
Page 67
D.T.E. 98-119/126
-iv-B.
Residual Value Credit and Transition Charme Reduction '
Page 69 1.
Introduction...............................
Page 69 2.
Analysis and Findines Page 70 VI.
RATEM/ KING TREATMEN" OF COMMONWEALTH ELECTRIC'S
.PROCEE )S F10M THE DIV is 111 URE TRANSACTIO.N........... Page 71 A.
Introduction Page 71 B.
Analysis and Findinas.
Page 72 VII.
ORDER............
Page 73 e
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D.T.E. 98-119/126 Page1 I.
INTRODUCTION On December 3.1998, Boston Edison Company (" Boston Edison") filed a petition with the Department of Telecommunications and Energy ("Dsy=huent-) for approval of the following: (1) the sale of its Pilgrim Nuclear Power Station and related assets (" Pilgrim") to Entergy Nuclear Generation Company ("Entergy); (2) the adjustment of Boston Edison's transition charge after the divestiture closing to reflect the proceeds of the sale through a l
residual value credit ("RVC"); and (3) the purchase by Boston Edison from Entergfof power ~ -
from Pilgrim under two power purchase agreements ('PPAs") and the recovery of any above-market costs associated therewith in the transition charge. This petition was docketed as D.T.E.98-119.
Pursuant to notice duly published, public hearings were held in Plymouth, Massachusetts on December 21,1998, and January 5.1999. Another public hearing was held at the Department's offices on December 22,1998. The Attorney General of the i
Commonwealth (' Attorney General") filed a notice of intervention as of right. pursuant to G.L. c.12 i 11E. The following entitles sou5 t armt were allowed to intervene in D.T.E.
h 98-119: the Commonwealth of Massachusetts Division of Energy Resources (-DOER").
Entergy, Locals 369 and 387 Utility Workers Union of America American Federation of Labor / Congress of Industrial Organizations (UWUA. AFL-CIO) (-Locals 369 and 387").
Commonwealth Electric Company (" Commonwealth Electric'). and Montaup Electric Company FMontaup"). The petition of the Town of Plymouth (" Plymouth") to intervene as a full participant in D.T.E.98-119 was denied, but the town was allowed to participate as a
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D.T.E. 98 119/126 Page 2 limked participant. Western Massachusetts Electric Company (-WMECo") was also allowed to participate as a limited panicipant.'
. On Decenaber 3,1998. Boston Edison also filed an application for approval of rate reduction bonds ("RRBs") pursuant to G.L. c.164. I IH(b). Boston Edison prorises to-securitize approximately 5800 million of transition costs, the majority of which are associated
'with the proposed divestiture of Pilgrim. This application was docketed as D.T.E.98-118 and will be addressed in a separate order.
On December 21,1998, Commonwealth Electric, a wholesale contract customer of Pilgrim. filed a petition with the Department for approval of the following actions: (1) to terminate and buyout its existing obligation with Boston Edison to purchase power fium 4
Pilgrim: (2) to include the buyout amount as an adjustment to Commonwealth Electric's transition charge: (3) to enter into a PPA with Entergy; and (4) to include the above-market value of the PPA with Entergy as an adjustment to its transition charge. This petition was docketed as D.T.E. 98126.
Pursuant to nesice duly published, a public hearing in D.T.E.98-126 was held at the' Department's offices on January 12,1999. The Attorney General filed a notice of intervention as of right. pursuant to G.L. c.12, i 11E. The following entities sought and were allowed to 1
I The petitions to intervene in D.T.E.98-119 of Citizens Urging Responsible Energy
(-CURE'). John T. O'Connor. and Massachusetts Citizens for Safe Energy (-MCSE')
were denied (Hearing Officer's Ruling on Petitions to Intervene (December 23,1998)).
MCSE's and CURE's appeals of the hearing officer ruling were also denied.
- D.T.E.
98-119/126. Interkeutnry Order Denving CISR's. MCSE's and CURE"3 Anneals of Hearine Officer Rulinn (March 19, 1999).
s W 9 W **es eg*.
gphra aqseng.ame D.T.E. 98-119/126 Page 3 intervene D.T.E. 98126: Boston Edison, Entergy, and Locals 369 and 387.2 On January 30.
1999, the Department granted motions by Boston Edison and Commonwealth Electric to consolidate D.T.E.98-119 and D.T.E.98-126.3 Evidentiary hearings were held on January 20. 21,22,25 and 26 and February 12.
1999. In support of its petition in D.T.E.98-119, Boston Edison presented the testimony of Geoffrey Lubbock. the director of generation divestiture for Boston Edison, and John Reed, president of Reed Consulting Group (" Reed Consulting"). In support of its petition in D.TSE.98-126. Commonwealth Electric presented the testimony of Michael Kirkwood, director, supply administration, transmission services and system control for Commonwealth Electric, and Robert Martin, manager of regulatory accounting for Commonwealth Energy System's electric operating subsidiaries. In connection with both petitions, the Attorney General presented the testimony of Timothy Newhard, a financial analyst with the Regulated Industries 1
i Division of the Attorney General's Office. Briefs were filed on Febmary 26,1999, by Boston Edison. Commonwealth Electric, DOER, the Agencies. Entergy, and Plymouth. A brief was filed by the Attorney General on March 1,1999. Reply briefs were filed on March 5,1999.
The petition to intervene in D.T.E.98-126 of Cape & Islands Self Reliance (ECISR")
2 was denied (Hearing Officer's Ruling on Petition to Intervene of Cape and Islands Self Reliance Ganuary 19, 1999)). CISR's appeal of the hearing officer ruling was also denied. D.T.E. 98-119/126 Interlocutory Order Denvine CISR's. MCSE's and CURE's Anneals of Hearine Officer Ruhng (March 19. 1999).
3 Although the Department granted the motion to consolidate D.T.E.98-119 and D.T.E.98-126, it declined to consolidate D.T.E.98-118 with D.T.E. 98-119/126.
Nonetheless. th Department determined that all three proceedings would have one evidentiary record for the purpose of hearings (Tr.1. at 5).
D.T.E. 98-119/126
"'Yage'~4 ~ ~
by Bostor. Edison. Entergy, the Anorney General, the Agencies and Commonwealth Electric.
The record consists of 344 cxhibits and 75 responses to record requests.d 11.
$1Q!DARD OF REVIEW The Legislature has vested broad authority in the Department to regulate the ownership and operation of electric utilities in the Commonwealth. Su, g,L, G.L. c.164, f 76. The Department's authorit'y was most recently augmented by General Laws Chapter 164. (the
-Restructuring Act" or "Act").8 Boston Edison Company. D.P.U./D.T.E. 96-23, at 9 (1998). The Restructuring Act requires that each electric company organized under the provisions of Chapter 164 file a plan for restructuring its operations to allow for the introduction of retail competition in generation supply in accordance with the provisions of Chapter 164. G.L. c.164 i 1 A(a). Among other things, the Restructuring Act requires that all restructuring plans contain a detailed accounting of the company's transition costs and a description of the strategy to mitigate those transition costs. Id. One possible mitigation strategy is the divestiture of a company's generating units. G.L. c.164. I 1.
In reviewing a company's proposal to divest its generating units, the Department considers the consistency of the prcposed transactions with the company's restructuring plan.
or in some cases the company's restructuring settlement, and the Restructuring Act. A A subset of documentary responses to information requests (some of which were later marked as exhibits) and to record requests were determined to qualify under G.L.
- c. 25. 9 5D. When cited here. these documents are denoted " proprietary".
An Act Relative to Restructuring the Electric Utility Industry in the Commonwealth.
Regulating the Provisions of Electricity and Other Services, and Promoting Enhanced Consumer Protections Therein, signed by the Governor on November 25.1997.
St.1997, c.164
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divestiture transaction will be determined to be consistent with the company's restructuring plan or settlement and the Restructuring Act if the company demonstrates to the Department that the " sale process is equitable and maximizes the value of the existing generation facilities being sold." G.L; c.164, i I A(b)(1). A sale process will be deemed both equitable and f
i structured to maximize the value of the existing generating facilities being sold, if the. company establishes that it used a " competitive auction or sale" that ensured " complete, uninhibited,
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non-discriminatory access to all data and information by any and all interested parties seekirig
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to participate in such auction or sale." G.L. c.164. l I A(b)(2).
The Restructuring Act provides that all proceeds from any such divestiture of generating facilities that inure to the benefit of ralepayers, shall be applied to reduce the amount of the selling company's transition costs." G.L. c.164, { 1 A(b)(3). Where the Department has approved a company's restructuring plan or settlement as consistent or substantially compliant with the Restructuring Act, the Department will approve a company's proposed ratemaking treatment of any divestiture proceeds if the company's proposal is consistent with the company's approved restructuring plan or settlement.
111.
DESCRIPTION OF THE DIVESTITURE TRANSACTION A.
Overview 1.
Purchase and Lle The entire divestiture transaction is embodied in a Purchase and Sale Agreement
("P&S") signed on November 18,1998, and exhibits thereto, executed by Boston Edison and Entergy. atul eight other closely related acreements. These agreements include tlie following:
D.T.E. 98-119/126 Page 6 (1) Guaranty - Entergy International Holdings, LLC: (2) Interconnection and Operation Agreement between Boston Edison and Entergy; (3) PPA between Entergy and Boston Edison; (4) PPA between Entergy and Commonwealth Electric; (5) PPA between Entergy and Montaup; (6) Founh Amendment of Power Sale Agreement between Boston Edison and Commonwealth Electric; (7) Third A*=-nt of Power Sale Agreement between Boston Edison and Montaup; and (8) Panial Assignmem of Municipal PPAs between Entergy and Boston Edison (Exhs. BE-5A; BE-5B). On March 18,1999, Boston Edison filed with the Department and served on intervenors and limited participants the Fourth Amendment of the Power Sale Agreement between Boston Edison and Montaup.*
The proposed divestiture transaction consists of the sale cf Pilgrim to Entergy for the purchase price of 580 million, subject to several adjustments, including changes in inventory and nuclear fuel, depending on the timing of the actual closing (Exh. BE-5A at { 2.6).7 The On March 18.1999. Boston Edison filed a motion seeking to reopen the evidentiary record and admit as exhibits the following: (1) the Fourth Amendment to the Pilgrim Power Sale Agreement between Boston Edison and Montaup, dated Match 9,1999.
and (2) the Agreement between Boston Edison and Plymouth concerning property taxes, dated March 16,1999. Boston Edison states that there is no objection to this filing. Accordingly. the Department grants the motion and marks and admits the Montaup amendment and the tax agreement as exhibits BE-5B, Tab 11R and BE-17 respectively.
For example, if the closing occurs before the scheduled May 8,1999 refueling outage.
the purchase price remair.s $80 million, but Boston Edison will reimburse Entergy for Entergy's actual costs of the refueling outage. up to $40 million (Exh. BE-5A at 6 5.16), if the closing occurs after the refueling outage. the purchase price will remain S80 million, but Boston Edison will deduct the unamortized portion of the refueling outage costs from the bid proceeds, and consequently the amount ratepayers receive will be reduced by the unamortized portion of Boston Edison's refueling outage costs (hL at s 2.6(a)(v)).
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D.T.E. 98-119/126 Page 7 specific assets being sold include the Pilgrim nuclear power plant, the Chiltonville Training Cemer, and approximately 1;700 acres of land on which these facilities are located j
i (id at i 2.1).'
a Boston Edison will retain assets defined as transmission, distribution and telecommunication assets (16 at i 2.2).' Bocton Edison will also retain any right it may have for damages relating to a claim of breach by the United States Department of Energy
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(*US-DOE") of its obligations to take spent nuclear fuel (it). Entergy will assume"alsi
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indemnify Boston Edison against certain liabilities relating to the assets being sold, including unknown environmental liabilities and remediations other than off-site liabilities (Exh. BE-5A at i 2.3). Certain liabilities of Boston Edison are specifically excluded from the sale. -
including any liability arising out of the municipal contracts (Exhs. BE-5A at i 2.3:
AG-BECo 2-5).
2.
Decommissioning Tmst As part of the divestiture transaction. Entergy will assume all liability for the decommissioning of Pilgrim. Specifically. Emergy will assume all liabilities relating to the following: (1) the decommissioning of Pilgrim following permanent cessation of operations:
(2) the management, storage, transportation and disposal of spent nuclear fuel: and (3) any 8
The property sold by Boston Edison to Entergy is more particularly described in the P&S and related agreeme es filed with the Department and included as extiibits BE-5A and BE-5B. It is the transfer of the property as described therein that the Department approves.
However. the existing Pilgrim ring bus and switchyard are included as part of the sale (Exh. BE-SA at ( 2.2).
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D.T.E. 98-119/126 Page 8 other post-operative disposition of Pilgrim (Exh. BE 5A at i 2.3(c)). Boston Edison has agreed to transfer approximately $466 million at closing to fully fund a trust to provide Entergy with funds to address these decommissioning liabilities (-Decommissioning Trust").
The amount to be funded by Boston Edison and transferred to Entergy will be adjusted depending on applicable tax laws or regulations and the date of the closing (Exhs. BE-7.
at 19-20: BE-5A at 6 5.21).
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To account for the effect of state and federal taxation on the transfer of the decommissioning funds to Entergy, $70 million of the Decsmimissioning Trust will be set aside in a separate Provisional Trust. If there is an amendment of the federal tax code or regulations prior to December 31,2002, allowing the funds to accumulate more rapkily than under the current tax laws, the amounts of the Provisional Trust will be reduced accordingly and rebated to Boston Edison (Exh. BE-5A at i 5.21).* In addition. Boston Edison and Entergy seek to have the transfer of the Decommissioning Trust occur on a tax-neutral-basis."
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Under the current federal tax code, regulated utilities may accumulate cenain i
decommissioning funds in a " qualified" trust which is taxed at a reduced rate.
26 U.S.C. { 468A. The favorable tax treatment for qualified funds allows the trust to grow faster than if the entire trust were taxed at normal corporate tax rates (Exh. BE-7. at 28). Because Entergy is an unregulated entity, the provisions of the tax code regarding the qualified trust are not currently available to it (Tr. 2. at 225).
Boston Edison and Entergy are currently seeking legislative changes that will allow Entergy to maintain as much of the Decommissionin5 rust as possible on a qualified T
basis (Exh. BE-7. at 29-30).
Under current tax law. Boston Edison's qualified portion of the decommissioning fund is -disqualified upon transfer to Entergy and may be treated as a distribution of assets to Boston Edison and thus as taxable income. Such treatment would cause Boston
l D.T.E. 98-119/126 Page 9 Boston Edison's current decommissioning fund has approximately $190 million accumulated through retail ratepayer contributions. contract customer contributions and
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interest earned (Exh. BE-7, Att. GOL-2, at 1-5). Boston Edison intends to prefund the balance of the Decommissioning Trust through securitization and additional contract customer
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contributions (gg Exh. DTE-BECo 1-35)."
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Power Purchase Arreements Boston Edison currently sells approximately 25.73124 percent of Pilgrim's output to-16 wholesale contract customers under long term or life-of-the-unit contracts (Exh. BE-7, at 13).
Two contract customers, Commonwealth Electric and Montaup, are investor-owned electric companies. Each of these two companies purchases eleven percent of Pilgrim's capacity and output under similar life-of-the-unit contracts (hL). The fourteen other contract customers are I
municipal electric departm' nts. In the' aggregate, these fourteen municipals purchase 3.73133 e
Edison to incur approximately 560 million in taxes (Exh. DTE-BECo 1-35). Both Boston Edison and Entergy have made a joint filing to the Internal Revenue Service for private letter rulings that will allow for a tax-free transfer of the Decommissioning Trust (Exh. BE-7. at 28: RR-AG-16). If a favorable tax ruling cannot be obtained.
Boston Edison states that "the [ divestiture] will not be consummated" (Exh. DTE-BECo 1-35).
'2 For example, if the closing date is April 1,1999, the amount of funding in the Decommissioning Trust will be 53% million, and the amount of funding in the Provisional Trust will be 570 million, for a total funding of 5466 million. If the closing date is June 30, 2000, the amount of funding in the Decommissioning. Trust will be S418 million, and the amount of funding in the Provisional Trust will be 570 million for a total funding of $488 million. If the closing date occurs between April 1.
1999. and June 30. 2000, a daily adjustment factor will be computed based on the difference in funding required. Regardless of the actual closing date. the amount of funding in the Provis%i Trust will remain S70 million (Exh. BE-SA at 6 S.21(a)).
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-,.m D.T.E. 98-119/126 Page 10 percent of Pilgrim's capacity and output under long-term contracts (.hL at 14)." All 16 wholesale contracts are Federal Energy Regulatory Commission ("FERC") regulated and are cost-of-service based (ii).
As pan of the divestitute process, Boston Edison would either terminate or assign these 16 wholesale contracts. Both Commonwealth Electric and Montaup have entered into contract amendments with Boston Edison and have executed new PPAs with Entergy for their respective eleven percent shares of Pilgrim's output (" Commonwealth PPA" and -Mon'taup~
PPA. respectively) (Exhs. BE-5A: BE-58)." Commonwealth Electric and Montaup have
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agreed to fund a D.r.Q f.AIA share of the decommissioning funds being provided to Entergy and to contribute a proportional share of the net unrecovered plant investment. In return.
Commonwealth Electric and Montaup will each receive eleven percent of the Pilgrim sale proceeds."
The fourteen municipal customers are: Boylston Municipal Light Depanment, City of Holyoke Gas & Electric Department, Hudson Light and Power Department, Littleton Electric Light & Water Departments, Marblehead Municipal Light Department.
Middleborough Gas and Electric Depanment. Nonh Attleboro Electric Department.
Peabody Municipal Light Plant, ShrewsMry Electric Light Plant. Templeton Municipal Light Plant, Wakefield Municipal Light Depantnent. West Boylston Municipal Lighting Plant. Westfield Gas & Electric Light Department. and Reading Municipal Light Department.
Under the Commonwealth PPA and the Montaup PPA. the price for the output of Pilgrim follows a specified schedule ranging from S35.00/Mwh in 1999 and rising to S47.22/Mwh in 2004 (Exh. BE-7 at 26).
On February 5.1999. Montaup filed a Petition for Declaratory Order Anprovine Proposed Amount and Treatment of Purchased Power Acreement -Buvdnwn Costs, seeking regulatory approval of these transactions from FERC (Exh. BE-17).
D.T.E. 98119/126 Page 11 Despite negotiations, Boston Edison was unable to secure the municipal electric departments' assent to a termination of its municipal contracts. Accordingly, Boston Edison assigned the physical delivery obligations under the existing contracts to Entergy in 14 partial assignments to become effective upon closing (Exhs. BE-5A; BE-5B). To meet its retained obligation to supply the municipal contracts. Boston Edison entered into a separate PPA with Entergy for 3.73313 pettent of Pilgrim's capacity and output (" Municipal PPA') (Exh.
BE-5B, Tab 7). The term of the Municipal PPA is coterminous with Boston Edison's" obligation to provide capacity and energy from Pilgrim to the municipals under the existing PPAs (Exh. BE-7, at 26). The continuation of these existing municipal contracts is subject to FERC approval.'"
As an additional component of the divestiture transaction, Boston Edison has entered into an agreement to buyback from Entergy 74.26876 percent of Pilgrim's capacity and output for a period of time to be used primarily to supply Boston Edison's standard offer customers.
Or. December 24,1998, Boston Edison filed a request for a declaratory order from FERC on the following issues: (1) that ine contracts between Boston Edison and the manicipals remain in effect after the sale of the plant and that the panial assignments of Ge physical delivery obligations under these contracts to Entergy is valid: (2) that the
{
recovery of costs under the municipal contracts is not affected by the sale to Entergy I
and that Boston Edison will continue to recover costs as if Pilgrim had not been sold:
and (3) that the municipals are obligated to reimburse Boston Edison for the decommissioning payment which Boston Edison is making to Entergy as part of the sale of the plant (Petition for Issuance of Declaratory Order. EL 99-22 (December 24 1998)). In the event that FERC accepts jurisdiction over this matter, the Depanment has sought to intervene. Scc Motion to intervene of the Massachuwtts Department of Telecommunica. ions and Energy, EC 99-18. EL 99 22. ER 99-1023 (March 11.1999).
c:
a m.w w.
.n D.T.E. 98-119/126 Page 12 I
(" Boston Edison PPA-) (Eths. BE-SB. Tab 6; BE-7. at 25)." In the aggregate, the j
)
Comrnonwealth Electric PPA the Montaup PPA. the Boston Edison PPA and the Municipal PPA provide for the purchase of 100 percent of Pilgrim's capacity and output in 1999, declining to 50 percent of Pilgthn's capacity and output by 2004. when the PPAs (other than the Municipal PPA) terminate (Exh. BE-7. at 25). Boston Edison and Commonwealth Electric have both proposed to include any above-market costs associated with the PPAs as transition
~~
costs (as 66 IV(F)-(H). below). In addition, to the extent that the municipals'sharc of decommissioning costs and net unrecovered plant investmerd are not paid at closing. Boston
]
Edison seeks to include these amounts as transition costs to be recovered from its retail ratepayers. Boston Edison's and Commonwealth Electric's proposed ratemaking tmatment of the proceeds from the divestiture will be discussed in i V, below.
B.
Descriotion oflhe Divestiture Pmcess Boston Edison began developing its divestiture program in November 1997 when its senior officers established and oversaw a team of employees (marketing key results area team or -KRA-). whose objective was to recommend the best way to maximize the value of Pilgrim (Exhs. BE-7, at 7: BE-10, at 4). The KRA team investigated four possible alternatives for Pilgrim: (1) the sale of the plant; (2) the continued operation of the plant: (3) an alliance with Standard offer service is available from 1998 through 2004 to customers who do not choose a competitive electricity supplier. The price for standard offer service rises each year. according to a :chedule provided in Boston Edison's Restructuring Settlement Agreement. D.P.U./D.T.E. 96-23 (1997). but the total price of electricity paid by standard offer service customers meets the ten and 15 percent rate reduction reyeirem:mts of the Restructuring Act.
" " ~ " *'****
D.T.E. 98-119/126 Page 13 other plant owners; or (4) plant shutdown (Gh. BE-7. at 7-11). The KRA team concluded that the "best future" for Pilgrim was a sale by way of a bid process that would likely result in the highest value for Boston Edison's nuclear assets (Exh. BE-10, at 4).
Bostc Edison's divestiture process w.as developed and implemented by its " Pilgrim divestiture team" (E).
As an initial step. Boston Edtson sent an early interest letter to approximately 175 potential purchasers indicating its interest in selling Pilgrim (Exhs. BE-10, at 9: DTE-BEco 1-4 (proprietary)). The early interest letter provided-information aimed at educating potential bidders and piquing their interest in order to generate a competitive bidding process (E)." In addition to the early interest letters. 3oston Edison continued to market Pilgrim through speaking engagements at industry conferences as well as through one-on-one marketing to leading nuclear operators (Tr. 2 at 182-183; Exhs. BE-10, The Pilgrim divestiture team was composed of: (1) Boston Edison employees:.
(2) management consultants from Reed Consulting; (3) energy consultants from the Northbridge Group: and (4) attorneys from the law firms of Ropes and Gray: Bruder.
Gentile and Marcoux; Shaw. Pittman. Potts and Trowbridge: and Miller Chevalier (Exh. BE-10. at 4). The team was subdivided into four primary sub-teams:
s!) communications: (2) tenns of sale: (3) marketing, due diligence, and bidder support: and (4) closing (Exh. BE-10. at 4).
The early interest letter provided a brief description of the nuclear facilities that were being divested as well as a general description of the New England Power Pool
(-NEPOOL-) and the establishment of an Independent System Operator, which will make NEPOOL one of the first competitive electric power markets in the United States. Boston Edison claims that this information was an important element in the marketing process, because many of the companies that received the early interest letter were located outsid-New England or even the United States (Exhs. BE-10.
at 9: DTE-BECo 14 (proprietary)).
D.T.E. 98-119/126 Page 14 at 9: DTE-BECo 1-5). Boston Edison received letters of interest from eleven e ? the approximately 175 parties initially contacted (Exh. BE-10, at 9).
After receiving responses to' the early interest letter, Boston Edison evaluated the qualifiestions of the interested parties to ensure that they would be capable of purt:hasing and operating the assets (Exhs. BE-10, at 10; DTE-BECo 1-7). Of the eteven parties expressing j
an interest, nine parties signed a confidentiality agreement and were approved by Boston Edison as qualified" (11).2' Qualified bidders were invited to submit non-binding 'itilicative bids, and based on those bids, four bidders were invited to patticipate in the final bidding
]
process (Exhs. BE-10. at 14: DTE-BECo 1-11 (proprietary)).28 After the final bids were received. Boston Edison conducted confidential discussions with the top two final bidders, and offered each the opportunity to submit a supplemental bid (Exhs. BE-10. at 18: DTE-BECo 1-15 (proprietary)). After evaluating the supplemental bids Boston Edison selected Entergy as the winning bidder (Exhs. BE 10. at 18: DTE-BECo 2 2 (proprietary): DTE BECo 2-4 (proprietary)).
IV.
REVIEW OF THE ASSET DINJSTITURE A.
Toroduction l
In its review of the divestiture transaction, the Department first reviews the auction preass and then reviews whether the proposed divestiture transaction maximizes the value to 2"
The remaining two parties chose not to continue with the bid process after reassessing their business strategies (Tr. 2. at 183-184: Exh. BE-10. at 10).
2' Qualified bidders were provided with a draft P&S and a draft PPA. Valuation of the indicative bids by Boston Edison combined bid price and any requested changes to the draft documents (Exhs. BE-10. at 14: DTE-BECo 1 11 (proprietary)).
j
1
"* "N D.T.E. 98-119/126 Page 15
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ratepayers of the assets being divested. As part of this latter review, the Department will address the claims of the Attorney General and DOER cone.erning the value of the benefits of the divestiture transaction.
B.
Eny.inE: A Aucnon Process As stated above, the Restructuring Act provides that a sale process will be deemed equitable if an electric company establishes that it used a " competitive auction or sale' that ensured " complete, uninhibited, non-discriminatory access to all data and information~by any and all interested parties seeking to participate in such auction or sale." G.L. c.164, 6 I A(b)(2). The record establishes that bidders had full access to relevant data on an equal basis, had access to Boston Edison's relevant personnel, and had the opportunity to submit questions and secure responsive answers regarding the facilities being sold (Exhs. BE-10 at Il-13,15-16: DTE BECo 1-4 (proprietary); DTE-BECo 1-8 (proprietary)).
Prior to the first round of bidding. Boston Edison issued an offering memorandum to each of the qualified bidders which provided the following: (1) a detailed description of tt.
nuclear assets for sale and the operational improvements that had been achieved in recent years: (2) an overview of the qualifications of the Pilgrim employees:22 (3) a discussion of the New England power market: (4) a summary of Pilgrim's nuclear regulatory compliance program: (5) Boston Edison's proposed terms of sale; (6) an overview of the sales process 22 Qualifications and continuity of the Pilgrim workforce are important. for Pilgrim is not just physical assets. it is a highly specialized. going enterprise. If the Pilgrim unit were not sold. or, if the sale process were not orderly, it would create a situation of uncertainty regarding the continued operation of the unit. This uncertainty would spur employees to seek work elsewhere.
i
D.T.E. 98-119/126 m Prgeal6
=*
going forward: and (7) a draft PPA for the purchase of Pilgrim output by Boston Edison for a period of time after the sale (Exhs. BE-10, at 11-12: DTE-BECo 1-4 (proprietary)). Each qualified bidder received a compact disc (or "CD") linked to Pilgrim's secure internet web site with detailed information about Pilgrim allowing the bidders easy and efficient access to documents and thereby facilitating their due diligence inquiries (Exhs. BE-10, at 12:
DTE-BECo 1-8 (proprietary)). Boston Edison also established a physical documehrrocirror the bidders' site visits (Exh. BE-10, at 12). All qualified bidders were also given the opportunity to tour the Pilgrim facilities and meet key plant personnel (11).28 Similarly, during the final bidding stage. Boston Edison provided an extensive amount of information to the bidders. Final bidders were provided with the opportunity for additional, more detailed site tours. They were also allowed to conduct corporate management meetings at Boston Edison's headiguarters. and allowed to hold conference calls with Boston Edison and Reed Consulting personnel to resolve specific issues and questions. Boston Edison and Reed consulting each dedicated an individual employee to be responsible for documenting, routing and resolving all outstanding bidder questions in a timely and comistent fashion (it at 15).
Boston Edison took measures to ensure that all information was provided in a consistent manner to all bidders. All bidders received the same information in the offering memorandum l
Plant managers made operating personnel available to conduct site tours, answer 2) questions, and provide any additional documentation required by the bidder as part of its due diligence process (Exh. BE-10. at 12). Site visits were governed by a site visit protocol and a representative from Reed Consulting was prewn during each visit to ensure that bidders were treated similarly and that the tours and discussions were unbiased (iA. each bidder received the same treatment, access to the same 1
information, and all questions were responded to in a timely manner) (11).
D.T.E. 98-119/126
' Page 17 and the CD (Exhs. DTE-BECo 1-8 (proprietary); DTE-BECo 1-10 (proprietary)). Boston Edison provided written responses to any questions to all bidders unless the responses were
~
deemed confidential (Exh. BE-10, at 13).
No party contested Boston Edison's assertions that the auction process was equitable.
- Based on the above evidence, the Departmer,t finds that the auction process used by Boston 1 dison to divest Pilgrim ensured complete. uninhibited. non-discriminatory access to all data and Information by all parties seeking to participate in the auction, and therefore w's" a
equitable. The process satisfied the requirements of G.L. c.164, i 1A(b)(2).
C.
Maximizine the Value of the Assets Sold Boston Edison evaluated the bids on the basis of the purchase price offered. and of any exceptions to its proposed sales documents (Exhs. BE-10, at 14: DTE BECo 1-11 (proprietary)). Boston Edison chose the higher of the two final bids, which was from Entergy (Exhs. BE-10, at 18: DTE-BECo 2-2 (proprietary): DTE BECo 2-4 (proprietary)).
The Restructuring Act states that the results of a competitive auction that ensures complete. uninhibited, non-discriminatory access to all data by all interested parties seeking to participate in the auction are deemed to satisfy the Act's requirement that a company demonstrate to the Department that the sale process maximizes the value of the generation facilities being sold. Cambridge Electric Linht Comnanv. D.T.E. 98-78/83, at 3-4 (1998).
shing G.L. c. IM, f I A(b)(1). An open, rational, transparent, and fairly managed auction tests the market for, and value of, an asset at the time of the offering.11 at 10. The bid results of such a market test under proven. fair conditions are :trong evidence of an asset's worth, li at 10-11.
D.T.E. 98-119/126
"*?tBl*18""***
- The record shows that Boston Edison employed several measures in its divestiture i
process to ensure that the Pilgrim assets were sold at the highest price. First, confidentiality
)
was maintained throughout the divestiture process, and therefore the bidders were uncenain of
{
1 the number and identity of the other bidders (Exh BE-10, at 10-11). Shielding bidder identity enhanced the competitiveness of the divestiture process, thus maximizing the value of the sale E at 11). In addition, s'trict bidder confidentiality contributed to ensuring that all biddiFr~s j
)
received equal treatment throughout the process % at 10-11).
Second, Boston Edison used the indicative bidding stage as an opponunity to learn about bidders' preferences. During the indicative bidding stage, bidders were invited to submit bids based on their exceptions to a draft PAS and draft PPA & at 14). The purpose
)
of soliciting indicative bids based on individual bidders' exceptions was to assess the marketplace acceptability of the P&S and the PPA and to identify the value or cost of those
)
exceptions E). Instead of issuing a substantially revised P&S to all "shon-listed' bidders, Boston Edison allowed bidders to engage in confidential discussions regarding modifications to the draft P&S so that a bidder could submit a mutually agreeable P&S with its final bid %).
Offering this flexibility to each of the 'shon listed' bidders funher maximized the value of Pilgrim by adding additional value to the final bids.
Third. Boston Edison managed the final stage of the bidding in order to produce the maximum value for ratepayers. Boston Edison conducted confidential discussions with the two bidders that had submitted -highly competitive bids.' and solicited supplemental bids from each of the two bidders & at 17-18). Throughout the negotiations Boston Edison I
i
.m.
,c,..ss c.c, o, D.T.E. 98-119/126 Page 19 l
evaluated the bids with the objective of selecting the bids that provided the highest overall value to customers, the company, and its employees (kL at 18).
The Department notes that no party contested Boston Edison's assertion that the auction process maximized the value of the assets sold. Based on the evidence above concerning the auction process and the bid selection, the Department finds that Boston Edison selected the -
higher of the two final bids from an equitable auction process." Accordingly, the Department finds that the divestiture process used by Boston Edison maximized the value of the~ generating assets for ratepayers and thus satisfies the Restructuring Act.
D.
Benefits of the Divestiture Transaction 1.
Introduction Boston Edison calculates the value of the decommissioning savings to its ratepayers resulting from divestimre to be between $250 million and $300 million (Exh. BE-7. at I!).
The Attorney General estimates the value of the entire divestiture transaction for ratepayers to he between $13 million and 575 million (Anorney General Reply Brief at 4: Exh. AG-6. at 17.
Att. 2-5).3 1
While selection of the highest bid is strong evidence of maximizing value, it is not the sole criterion used by the Department when evaluating the results of a company's auction process.
3 The Attorney General's savings estimates are premised on the Department's acceptance of all the Attorney General's proposed changes to the gross proceeds from the sale discussed in i V(A), below.
p D.T.E. 98119/126
- '*Page16 - we 2.
Positions of the Pa-ties a.
Anorney General 1
The Attorney General contends that although the proposed divestiture may produce positive economic benefits, those benefits are uncertain and will likely be much less than estimated by Boston Edison (Attorney General Brief at 8). The Attorney General argues that Boston Edison's estimates of decommissioning and post-shut down cost savings arc ~grossiy
~
inflated (1).
The Attorney General argues that Boston Edison's estimate of decommissioning savings improperly includes the cost of interim spent fuel storage which is the responsibility of US-DOE and not Boston Edimn's ratepayers (1 at 9)." The Anorney General argues that including these spent feel storage costs distorts the reported savings (E). By removing these costs from the calculation, the Attorney General argues that the appropriate amount of decommissioning savings used to determine ratepayer benefit should be $164 million as opposed to Boston Edison's estimates ranging from $250 to 5300 million (E at 9).
j b.
DOER DOER argues that Boston Edison's estimate of ratepayer savings based on Entergy's 1
bid price for decommissioning is overstated (DOER Brief at 3). DOER argues that Boston Edison's estimate of savings is based on an early plant shutdown date and, therefore, higher Interim spent ruel storage is defined as being the difference between the time US-DOE 2
is required to accept spent fuel and the time US DOE actually takes the fuel.
D.T.E. 98-!!9/126 Page 21 interim spent fuel storage costs (isL at 4)." Therefore. DOER argues that comparing Entergy's bid price for decommissioning costs of $466 million to Boston Edison's $758 million decommissioning estimate is like comparing " apples to oranges" (isL). DOER argues that by not accounting for an estimated $128 million in US-DOE liability for failure to take spent fuel. Boston Edison has distorted the reported ratepayer savings (isL at 5). Finally.
DOER argues that Boston Edison's estimate is further distorted by the fact that it includes the
{
costs of restoring the site to its original preconstruction condition and Entergy's bid may not-include such costs (isL at 4).
I c.
Commonwealth Electric Commonwealth Electric contends that the divestiture will provide tangible customer savings with the continued operation of Pilgrim (Commonwealth Electric Brief at 16).
Commonwealth Electric argues that these customer savings will be realized primarily through the mitigation of both Commonwealth Electric's and Boston Edison 4 transition costs and the elimination of future risks related to increases in decommissioning costs (Commonwealth Electric Reply Brief at 16).'
d.
Bostonf.dison I
Boston Edison argues that the divestiture of Pilgrim is the most beneficial option for repayers (Exh. BE-7. at 9). Boston Edison argues that it Pilgrim is not sold, it will prematurely shut down the plant in 2002 (igL). Boston Edison asserts that customer $ benefit DOER argues that Boston Edison's decommissioning estimate includes a 2002 shutdown date, while Entergy's bid assumes plant shutdown at the end of the license life in 2012 (DOER Brief at 4).
D.T.E. 98-119/126
" PYgD2" " "
by obtaining the maximum value from the plant through a competitive bid process, thereby minimizing the amount of stranded costs being paid through retail rates (Boston Edison Brief at 25). Boston Edison argues that, even using the Attorney General's estimate of savings, ratepayers will still realize benefits from the divestiture transaction (it at 27).
In addition to ratepayer savings, Boston Edison argues that additional benefits are associated with the Pilgrim divestiture, including: (1) employment benefits for over 600 plant
~
employees and additional jobs related to servicing the plant; (2) tax benefits paid to Plymouth: ~
~
and (3) power supply benefits from the continued availability of Pilgrim's capacity (Boston Edison Reply Brief at 4, pdting Exh. DTE BECo 1-24).
3.
Analysis and Findinas The major area in which benefits accrue to the ratepayers through this divestiture transaction is not through cash proceeds, but rather through decommissioning savings. For
)
Boston Ed%n's ratepayers. the divestiture transaction involves the elimination of future risk associated 'with the continued operation of Pilgrim, including the future risk of changes in Pilgrim's decommissioning costs. Boston Edison's projected savings are derived from comparing the estimated decommissioning payment required for an early plant shutdown with Entergy's decommissioning bid amount. This savings translates to approximately 5300 million. While the Attorney General and DOER do not dispute that the divestiture of Pilgrim is in the public interest and should be approved by the Department, with certain modifications.
they caution that Boston Edison's savings estimates are overstated and that without modifications to the transaction as discussed in i V below, any benefit from this divestiture would likely disappear (Exh. AG-6. Art. 2: DOER Brief at 5).
D.T.E. 98-119/126 4.
Baga 43.
Boston Edison concedes that not all benefits of the divestiture transaction are subject to precise analysis (Boston Edison Reply Brief at 2). Decommissioning savings are based on estimates and forecasts and; therefore, the exact amount of the savings can be debated. The Attorney General argues that the forecasts are inflated, while Boston Edison argues that it is just as likely the estimates are ur lerstated. Neither Boston Edison nor the Attorney General disputes that decommissioning costs are escalating, and that some savings will accrue.to Boston Edison ratepayers from this divestiture transaction as a resuh of the transfer of_
decommissioning liability. For example, low level waste burial cosis are escalating due to the dwindling availability of burial sites (Exhs. BE-13: DTE-BECo 1-33R). In addition, because of uncertainty about when and whether US-DOE will accept spent fuel for permanent storage.
the cost of interim spent fuel storage is significant (hL).
The Attorney General argues that Boston Edison's estimates of decommissioning savings fail to account for the fact that US-DOE may face some liability for its failure to accept Pilgrim's spent nuclear fuel (Exhs. AG BECo 5-1: AG-BECo 5-6; BE-13). While other utilities have pending suits against the US-DOE for damages due to its failure to begin disposing of spent fuel, the record indicates that actual damage awards have yet to be made and claims for damages thus remain contingent (Exh. AG-BECo 5-7). Even if Boston Edison's estimates of decommissioning savings are inflated because they do not account for even the possibility of a future damages, if any, from US-DOE. this does not negate Boston Edison's final analysis of the overall benefits of he transaction. Under the terms of the divestitt're transaction. Boston Edison retains its claim against US-DOE. and amounts
D.T.E. %119/126 Page 24 recovered from US-DOE would be credited to Boston Edison's customers to lower the effective net amount paid fon decommissioning (Exhs. BE-SA at { 2.2(g); BE-7. at 30-31).
Although an exact figure cannot now be known, the studies and c<timates which are part of the record in this case show that Boston Edison rcepayers will receive a significant benefit from j
the divestiture transaction due to the elimination of future risk associated with
. decommissioning Pilgrim (Exhs. BE-7. Att. GOL-It BE-13). Based on the Attorney General's and Boston Edison's estimates, the benefits for ratepayers from decommissioning savings are -
expected to be between $164 million and $300 million.
In addition to decommissioning savings, when assessing the overall benefit of the divestiture transaction, the Department may also consider collateral benefits such as the continued employrnent of approximately 600 persons, and the economic benefits to Plymouth including indirect jobs, the payment of taxes when payments in lieu of property taxes expire, and the sale of the unit to an entity tuat has a great deal of first hand experience in the operations of nuclear power plants. Indeed it is obvious that the Restructuring Act itself is replete with such considerations; and the Department would be remiss to overlook them.
Chapter 164, i 1(A), gL seg, Furtherrnore, the sale of Pilgrim finalizes Boston Edison's exit from the electric generation business, which is consistent with the goals of Boston Edison's restructuring settlement agreement, Boston Edison Company. C.P.UJD.T.E. %23. (1997)
(-Settlement Agreement"), and with the Restructuring Act. Accordingly, the Department finds that the divestiture transaction provides both direct and indirect benefits to Boston Edison 1
ratepayers through the mitigation of Pilgrim-related transition costs.
D.T.E. 98-119/126 i== M 5,===.w==
E.
Liability For Future Decommissionine 1.
Introduction Entergy is a subsidiary of Entergy International Holdings, LLC ("Entergy Holdin()
(Tr. 5, at 699-700; Exh. BE-5A, Tab 4). Entergy and Emergy Holding are " members of a group of related corporations and entities, the success of any on: of which is dmndent in part upon the success of the other members" (Exh. BE-5A, Tab 4). Entergy Holding 4 expects 40 receive substantial indirect benefits" from the purchase of Pilgrim (ii).as The divestiture j
transaction does not contain a guarantee by Entergy Holding to provide funding to offset any potential future shortfall in the Decommissioning Tnist.
2.
Positions of the Parties a.
Attorney Ge,cgral The Attorney General argues that the Department has an obligation to ensure that adequate funding is available for the decommissioning of Pilgrim as part of its obligation to i
protect Massachusetts' consumers (Attorney General Reply Brief at 2 riing commonwealth i
Electric Comnany v. Department of Public Utilities. 397 Mass. 361,369 (1986)). The Attorney General claims that Boston Edison's transfer of decommissioning liability may produce certain liabilities for the consumers of Massachusetts, arguing that Entergy will be an entity of few assets and will be financially isolated from Entergy Holding (Exh. AG-6, at 18).
This language appears in a " Guaranty" to Boston Edison wherein Entergy Holding guarantees all obligations which Entergy enters into "with or for the benefit" of Boston Edison prior to closing (Exh. BE 5A, Tab 4). This Fuarantee is limited to the sum of
$50 millior. and terminates upon the closing (ii).
I i
D.T.E. 98-119/126 Page 26 The Attorney General argues that this financial isolation will prevent Entergy access to any needed capital for plant operations or decommissioning, increasing the potential of a sudden
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plant shutdown (ii). In the event of a premature shutdown, the Attorney General claims that the cost of decommissionmg will be higher due to the cost of interim spent fuel storage, and -
i f
therefore, the amounts in the Decommissioning Trust may be inadequate (Attorney General Brief at 11. Eiling Exh. AG-6. at 18). The Attorney General cornends that, in order to i
w complete the decommissioning, the federal government would likely approach Boston Edison ratepayers, if not federal and/or state taxpayers, to cover any remaining costs of the
~
decommissioning (Exh. AG-6, at 18).
~
N To ensure that sufficient funding is available for a safe and timely deconunissioning of Pilgrim, the Attorney General recommends that the Department condition its approval of the Pilgrim divestiture upon Entergy Holding making " appropriate and enforceable" commitments to provide funding to offset any shortfall in the trust to meet all decommissioning requirements (Attorney General Brief at 11). The Attorney General maintains that absent these commitments, the savings of the proposed. transaction may prove illusory as a premature shutdown or a substantial increase in the cost of decommissioning could lead to a trust shortfall borne by the residents in the vicinity of the plant, Boston Edison ratepayers, or federal and/or state taxpayers (ii). Finally, the Attorney General argues that any review by the federal Ni: car Regulatory Commission (-NRC") of Entergy's financial condition is i
l nsufficient to safeguard the public interests that the Department is mandated to protect (Attorney General Reply Brief at 2 3).
o
D.T.E. 98-119/126
**%g d A
b.
Enternv Entergy disputes the Attorney General's claim that it will be an " entity of few assets" (Entergy Reply Brief at 1). Entergy states it will be provided with additional financial l
assurances (from Entergy Holding) of up to $50 million and argues that it will generate significant profits during its first five years of operation (11). Emergy further argues that it is unlikely there would be a decommissioning shortfall due to its: (1) substantial itilnal.cquity" infusion: (2) substantial retained earnings; (3) decommissioning trust fund of approximately.
$466 million, which is in excess of the NRC minimum: and (4) expertise in decommissioning nucicar power plants in a cost effective manner (ii rt 2, citing Tr. 6, at 762-763)."
Entergy contends that the Attorney General's position is based on the faulty conclusion that the NRC will fail to perform its statutory obligation to assure the fm' ancial qualification of newly formed nuclear ~ entitles (Entergy Reply Brief at 2). Entergy further argues that, even in i
the unlikely event of a decommissioning shortfall, there is no evidence to support the Attorney General's claim that Massachusetts ratepayers would be held directly liable (ii). Entergy submits that the " legislative and judicial branches (of the federal governmem] will afford sufficient protection to prevent such an outcome" (id.).
The P&S requires Boston Edison to fund at least the NRC minimum tumiing amount for decommissioning (Exh. BE-5A at i 5.21). At the time of the signing of the P&S.
the NRC minimum funding amount was approximately $514 million. In December 1998. new rules for calculating the NRC minimum funding amount were introduced that yield a minimum funding amount which is approximately 5327 million (Exh.
DTE-BEco 143R).
)
D.T.E. 98-119/126 Mge48.
Entergy opposes the Attorney General's proposal to condition the sale of Pilgrim upon a commitment by Entergy Holding to guarantee any shortfall in the Decommissioning Trust, arguing that such a condition would fundamentally change the bargained for terms of the transaction and would change the fundamental economic basis upon which the transaction was bid and priced (ii). In addition, Entergy argues that as a registered holding company, Entergy Holding is subject to regulation by the SEC which restricts the amount of-investments, including guarantees, that it may have in its unregulated subsidiaries (it at 2-3, sating i
l 15 U.S.C. I 79z-Sa 17 C.F.R. I 250.23). Because there is no way to quantify the value of the Attorney General's proposed guarantee. Entergy argues that the Attorney General's, proposal is " unworkable" and could not be adopted without " substantial risk of violation of law" (Entergy Reply Brief at 3).
I c.
Boston Edison j
Boston Edison argues that the Department should not attempt to modify the terms of the Pilgrim divestiture by requiring that Entergy Holding be contingently liable (Boston Edison Reply Brief at 7). Boston Edison maintains that any alleged financial isolation of Entergy from Entergy Holding is a non-issue as the NRC reviews a company's financial portfolio and its financial ability to oper.ite a nuclear power plant before allowing a transfer of license to a new owner (Boston Edis n Brief at 17. n.18). Boston Edison argues that the transfer of license is based. in part, on a required finding by the NRC that Entergy is financially qualified (Boston Edison Brief at 17: Boston Edison Reply Brief at 7, giung 10 C.F.R. { 50.33(f)(3)).
j Boston Edison argues that the NRC requires a minimum decommissioning fund to be
I
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e D.T.E. 98-119/126 Page 29 maintained and that the Attorney General presents no evidence to show that any decommissioning shortfall is.likely to occur (Tr. 6, at 775, 792-798: Boston Edison Reply i
Brief at 8).
I Finally, Boston Edison argues that Entergy's bid would have been "significantly different" if the Attorney General's proposed contingent liability was a requisite part of the deal. Boston Edison contends that if the Department were to impose the condition as proposed by the Attorney General, this would prove " fatal" to the transaction (Boston Edison. Reply.
Brief at 7).
3.
Analysis and Findines To implement the Attorney General's proposal to condition the approval of the divestiture transaction on the contingent liability of Entergy Holding for any future decommissioning shortfall, the Department would, in effect. be restructuring the divestiture transaction. Entergy's bid is the product of a competitive process, and to condition the sale on a guarantee by the parent company would change the bargained for terms of the transaction.
The Restmeturing Act's divestiture provisions are grounded in the premise that a fair and open market test is a better determinant of asset value than an administrative determination ~. We
- have had such a test for Filgrim. Only upon the most compelling showing would_the
,/
Department supplant the results of a market-test. On the evidence developed here, no such showing has been made.
Further, the issues raised by the Attorney General, namely a company's financial qualifications to own and operate a nucicar plant in a safe and reliable manner, are within the TOTAL P.37
we D.T.E. 98-119/126 Page 30 jurisdiction of the NRC. The NRC will not authorize the transfer of the plant's operating 1
license unless it finds that Entergy is financially qualified to operate the plant. The NRC requires an applicant for a nuclear power plant operating license to demonstrate its financial qualifications to carry out the activities assoc.it.:ed with such license. 10 C.F.R. I 50.33.
Specifically, !" C.F.R. I 50.33(f)(3) requires that each applicant for a nuclear license ssbmit the following: "(i) the legal and financial relationships it has or proposes to have with its stockholders or owners: (ii) its financia! ability to meet any contractual obligation to the ekity which they have incurred or proposed to incur; and (iii) any other information considered necessary by the [NRC) to enable it to determine the applicant's financial qualification." In addition, the NRC may request additional or more detailed information with respect to an applicant's ability to continue the conduct of the activities authorized by the license and to decommission the facility.10 C.F.R. 6 50.33(f)(4).
The Attorney General does not cite to any law or precedent to support his claim that.
aller closing, the federal government would directly approach Boston Edison ratepayers.or Commonwealth of Massachusetts' taxpayers for any shortfall in decommissioning funds (Tr. 6. at 772). As discussed in { IV(D), above the principal benefit of the divestiture transaction, as proposed, is the transfer of the decommissioning liability at a cost that is less than what would likely have been experienced by Boston Edison ratepayers in the future if Pilgrim were not sold. The record contains insufficient evidence to show that a guarantee by Entergy Holding is necessary to safeguard ratepayer interests in this area. In fact, if such a i
D.T.E. 98-119/126
' Page 31 condition were imposed by the Department, the record indicates that it is likely that the divestiture transaction, as currently described, would not proceed and the benefit of the '
transfer of decommissioning liability would be lost.
F.
Purchw Power Aernement - Bmtan Edison 1.
Introduction As described in f III(AX3), above, Boston Edison emered into a PPA with Entergy to purchase 74.26867 percent of Pilgrim's capacity and output in 1999, declining to 35.26857 percent in 2004, when the contract is scheduled to terminate (Exh. BE-5B. Tab 6). Under the Boston Edison PPA, the price for the output from Pilgrim is $35.00/Mwh in 1999, rising to
$47.22/Mwh in 2004 (Exhs. BE-7. at 26; BE-5B Tab 6, at Article 4). Boston Edison proposes to account for any losses or gains resulting from the resale of the Pilgrim purchases through the variable component of its transition charge.
2.
Positions of the Parties 1.
DOEB DOER does not object to the PPA because. it states, the Boston Edison PPA is a "necessary cost' to sell Pilgrim since all bids were contingent upon a guaranteed customer for
' Pilgrim's output in the short term (DOER Brief at 9). The DOER asserts that it is unclear from Boston Edison's petition whether Boston Edison intends to continue to use the Pilgrim output to serve the base load portion of standard offer set vice or whether it will sell this power in the open market (jsL). DOER expresses concern that if Boston Edison uses Pilgrim to 1
supply the base load portion of the standard offer load and solicits supply from other providers 1
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D.T.E. 98-119/126 Page 32 for the remaining standard offer load then standard offer service will be more expensive because potential suppliers will factor into their bids the rid; of having to supply more or less power depending upon Pilgrim performance (ji). DOER states that if Boston Edison solicits bids for standard offer supply, it must require bidders to submit bids for both the entire standani offer load and for the standard offer load less the portion supplied by the Boston Edison PPA, and that it be required to select the least cost option (i1). Further. DO'ER.
recommends that the ponion of Pilgrim output that is not used for standard offer service -
6 should be sold in the spot market (ii).
ii.
Boston Edison Boston Edison states that the Boston Edison PPA is an integral and necessary 1
component of the Pilgrim divestiture and should be approved by the Department (Boston Edison Brief at 58). Boston Edison plans to use the output from this PPA to serve its standard offer customers (Tr. 2, at 135-136; Exh. DTE-BECo 1-20). Boston Edison argues that it should be permitted to maintain flexibility in order to obtain a least cost power supply for standard offer service (Boston Edison Reply Brief at 18). Without such flexibility Boston Edison argues that bid prices for standard offer service might actually increase (jst at 19).
3.
Analysis and Findings.
Any electric company seeking to recover transition costs shall mitigate any such costs.
G.L c.164, i IG(d)(1). In order to determine whetha the Boston Edison PPA satisfies the Restructuring Act's requirement to mitigate transition costs, the Depanment must consider the effect of the PPA. When considered on its own. the Boston Edison PPA is forecast to be an i
above market contract which has certain costs to Boston Edison's ratepayers W ne might i
y D.T.E. 98-119/126 Page 33 argue that this, in effect, creates a r.. v :tranded cost. However, the effect of the Boston Edison PPA should not he considered in isolation, but r ther as a part of the larger divestiture transaction.
Boston Edison's ability to sell Pilgrim was contingent on the buyers being able to sell power back to Boston Edison for a period of time after the closing (Tr. 2 at 142-143,185:
Exh. BE 7. at 14-15, 25). While Boston Edison stated that its preference was to sell Pilgrim without an above-market purchase, after discussing this issue with a number of potential '
bidders, Boston Edison detennined that a buyback contract was necessary for the sale (Tr. 2.
at 142-143,185). The record shows that the Boston Edison PPA is an essential component of the overall divestiture transaction. As discussed in i IV above, the overall divestiture transaction is likely to achieve rarepayer savings and is otherwise in the public interest. The Boston Edison PPA. as an essential component of the divestiture transaction, is, therefore.
approved.
In addition, because the Boston Edison PPA is an essential component of the divestiture transaction. any above-market component should be treated in the same manner as other divestiture costs. In the bidding process for the divestiture of Pilgrim, the marketplace had an opportunity to value the Boston Edison PPA, including any above-market portion of the contract obligation. Because Boston Edison included the obligation to enter into the Boston Edison PPA with the assets being divested, the bidders have included contract mitigation potential in the price offered for the assets being divested. As discussed in i IV above, the divestiture process was equitable and maximizes the value of the assets being sold.
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With respect to issues raised by DOER, the Depanment notes that DOER does not object to the Boston Edison PPA. rather DOER is concerned with the least-cost procurement of the standard offer supply. Although DOER presents one recommendation for selling Pilgrim's capacity above the standard offer, there are other options. For example, Boston ~
Edison could estimate Pilgrim's minimum capacity and then purchase the standard offer for the remaining requirement for its standard offer customers. Under this scenario, any amount of capacity that Pilgrim produces above the estimated minimum could be sold in the open-market.
The Department will not impose conditions or restrictions that might reduce Boston Edison's flexibility in procuring power to serve its standard offer customers. Boston Edison is already obliged to procure standard offer supply in the least cost manner.
G.
Purchase Power Aereement - Commonwealth Electric 1.
Introduction Commonwealth Electric has purchased eleven percent of Pilgrim's capacity and output since 1972 under a life-of-the-unit contract (Exhs. COM-3, at 5 6; BE-5B. Tab 8). As part of the divestiture transaction. Commonwealth Electric pmposes to end this contract and replace it with a contract to buy a smaller share of Pilgrim's output beginning in 2002. The replacement
~ contract would end in 2004 (Exh. COM 3. at 16-17). Pursuant to this PPA. Commonwealth j
Electric's entitlement for the output of Pilgrim will decline from eleven percent m 1999, to 5.5 i
D.T.E. 98-119/126 Page 35 percent in 2004 (Exh. BE-5B. Tab 8). In consideration for terminating the life-of-tle-unit contract, Commonwealth Electric has agreed to pay Boston Edison eleven percent of the sum of the following three items: (1) the balance of Pilgrim's net unit uvestment and related regulatory asset balances, less a contract adjustment of $3.5 million: (2) decommissioning costs less payments made by Commonwealth for decommissioning; anxi (3) any liabilities Boston Edison say incur arising from its ownership and operation of Pilgrim prior to the closing date (E.
MM-3, at II). Commonwealth Electric states that the buyout charge,' ~
accounted for u an adjustment to its RVC, ranges from $99.4 million to $107.2 million, depending on the closing date (Exh. COM-4, Arts. I-3, at Sch. 6). As a rr..: ult of the buyout and associated PPA. the overall transition costs that Commonwealth Electrk nmd otherwise be required to collect from its customers are reduced by approximately $33.5 to $37.1 million, on a net present value basis (Commonwealth Electric Brief at 14, citmg Exh. COM-3, at 8-9).
Commonwealth Electric proposes to include the cost of the buyout agreement in the expenses to be recovered from its customers through the transition charge, and seeks to include any above-market value of the Commonwealth Electric PPA with Entergy as an adjustment to its transition charge.
2.
Analysis and Findings The Restructuring Act requires electric companies to seek to mitigate transition costs.
including as one mitigation method the renegotiation of above-market power purchase contracts. G.L. c.164. i IG(d)(1)-(2). The Restmeturing Act further provides that if a negotiated contract buyout is likely to achieve savings to ratepayers and is otherwire in the
ou ~cn eraa r.wcc D.T.E. 98-119/126 Page 36 public interest. the Department is authorized to approve the recovery of the costs associated with the contract buyout. G.L. c.164, 5 IG(d)(2)(ii).
The Department notes that no pany contested Commonwealth Electric's assertion that the contact buyout and the replaa.a.d contract, with the associated savings, is consistent with its obligations under the Restructuring Act to mitigate its transition costs. The record shows that Commonwealth Electric's Pilgrim contract buyout, with the associated replacement contract, is likely to achieve savings of approximately $35 million for Commonwealth Electric's ratepayers. The contract buyout will also eliminate Commonwealth Electric's future potential risk associated with the continued operation of Pilgrim. Accordingly, the Department approves the contract buyout as in the public interest. In addition, the Department allows Commonwealth Electric to include any above-market components of this PPA 'in the variable component of its transition charge.
H.
Purchase Power Anreement - iWunicloal Customers 1.
Introduction As discussed in i III(A)(3), above, because Boston Edison was unable to negotiate a termination of its 14 municipal contracts. it would assign the physical delivery obligations under the existing contracts to Entergy in 14 partial assignments. To meet its retained obligation to supply the municipal contracts, Boston Edison entered into a separate PPA with Entergy for 3.73313 percent of Pilgrim's capacity and output. Boston Edison proposes to include the above-market costs related to the Municipal PPA in the variable component of its transition charge.
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l 2.
Position of the Parties l
a,
. Attorney General The Attorney General argues that the Settlement Agreement limits any Pilgrim stranded cost recovery to the retail customers' 74.26867 percent share of the plant (Attorney General Brief at 13, citing Settlement Arreement. Att. 3. (( 1.1,1.5(a),2.6). The Attorney General i
states that despite this provision of the Settlement Agreement, Boston Edison has proposed to
~
collect from retail customers any stranded costs associated with the contract cussomers that it does not ultimately collect from those contract customers (Attorney General Brief at 13). The Attorney General argues that Boston Edison's retail rates have been determined based on a retail cost of service that excluded the contract customers' proportionate share of the plant's costs, including allowable " cost of service adjustments" (11 at 12-13). Arguing that Boston Edison's proposal is contrary to the Department's "long-standing ratemaking treatment" of these PPA costs as well as contrary to the language of the Settlement Agreement, the Attorney General states that the Department should reject Boston Edison's attempt to recover the above-market costs that may arise from this PPA entered into "for the sole purpose of continuing to provide power' to the municipals (it at 1314).
b.
Boston Edison Similar to the Boston Edison PPA. Boston Edison argues that entry into the Municipal PPA was an essential element of the divestiture and should be treated in the same manner as 1
I other divestiture costs (Boston Edison Brief at 59). For the same reasons discussed in i
Q IV(F)(2)(ii), above. Boston Edisor_ argues that Department should approve the Municipal-i
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- r. m u D.T.E. 98-119/126 Page 38 PPA and the inclusion of the above-market costs associated with this PPA in the variable component of its traruition charge (hL at 58-60).
3.
Analysis nati Findings Any electric Company seeking to recover transition costs shall mitigate any such costs.
G.L. c.164, i 1 A(d)(1). Mitigation efforts that an electric company shall engage in include good faith efforts to renegotiate, restructure, reaffirm, terminate, or dispose of existing contractual commitments for purchased power. Massachusetts Electric Comoanv, "
D.P.U./D.T.E. 97-94, at 31 (1998). The Municipal PPA, like the Boston Edison PPA, is forecast to be above-market. And as with the Boston Edison PPA. one might argue that this Municipal PPA creates a new stranded cost. However, disposition of the municipal's 3.73313 pettent share is a part of the larger requirement to buyback 100 percent of Pilgrim's capacity and output as a condition of the sale (Tr. 2. at 142-143.185). As Boston Edison was unable to negotiate a termination or buyout of the existing municipal PPAs, the new Municipal PPA to meet Boston Edison's retained obligation to supply the municipal contracts is an essential component of the overall divestiture transaction. The divestiture transaction, as a whole, mitigates Boston Edison's stranded costs. Although we assess the individual features of this transaction, we cannot lose sight of the whole. Any one component of a transaction may not in the abstract be optimal, but that component may be a requirement of the transaction taken as a whole. One must practically assess the cost of seeking optimality in any one component against sacrince of the whole of the transaction for one of its parts. As the overall divestiture
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Page 39 transaction is likely to achieve ratepayer savings and is otherwise in the public interest, the Municipal PPA. as an essential component of the divestiture transaction, is approved."
The Attorney General's arguments against approval of any above-market costs associated with the Municipal PPA are intertwined with his arguments concerning recovery of the municipals' share of Pilgrim decommissioning and net unrecovered plant investment which are discussed in i V(A)(2), below. While it ls clear that one purpose of the Municipal PPA was to fulfil Boston Edison's obligation to serve the municipal customers under their existing contracts, this was not its " sole" purpose, as argued by the Attorney General. As discussed '
above the Municipal PPA was an essential component of the overall divestiture transaction and, therefore, any above-market component should be treated in the sane manner as other divestiture costs. Boston Edison offered the municipal customers the "same basic buyout offer" as it had offered Commonwealth Electric and Montaup (Exh. BE-7, at 16). In addition.
the municipal customers were provided access to the divestiture information provided to the Pilgrim bidders (it). The record evidence shows that Boston Edison made a good faith effort to renegotiate with the municipals (Exh. BE-7, at 15-17,37-39; RR-DTE-2 (proprietary)).
The Department finds that the Municipal PPA is consistent with the Restructuring Act's The price for electricity paid by the municipals to Boston Edison is considerably higher than the price that Boston Edison will pay Entergy for that electricity. For example, in the year 2000, the price paid by the municipals to Boston Edison is projected to be 6 cents per KWH (Exh. DTE-BECo 1-19). while the price paid by Boston Edison to Entergy will be 3.8 cents per KWH (Exh. BE-SB. Tab 7. at 585). The price paid by the municipals to Boston Edison includes recovery of decommissioning costs and unr, : overed investment in Pilgrim. as discussed in i V( A)(2).
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.D.T.E. S8-119/126 Page 40 requirement to mitigate transition costs and allows the recovery of any above-market costs associated with the Municipal PPA in its transition charge.
V.
RATEMAIGNG TREATMENT OF PROCFRnS FROM DIVESTITURE A.
Adiserd to Gross Prae =I<
1.
Intmduction
- The gross bid price of 580 million to be paid to Boston Edison by Entergy is adjusted for several items provided for in the P&S or the Settlement Agreement. Each such ad[ustment' is addressed below.
2.
Inclusion of Mumcipal Contract Costs
{
a.
Introduction In the event of plam shutdown, the municipals' current PPAs with Boston Edison require the municipals to pay a 3.73133 percent share of the decommissioning costs and net unrecovered investment in Pilgrim. However, the PPAs do not address recovery of de decommissioning costs and net unrecovered investment in the event of the sale of the unit.
Boston Edison estimates the municipals' share of Pilgrim's decommissioning costs to be 513.2 million, assuming a closing date of March 31,1999 (Exh. BE-7, Att. GOL-2.
at 4-5). Boston Edison estimates the municipals' share of the net unrecovered investment in Pilgrim to be 530.6 million (ii). Boston Edison currently has a filing before FERC in which it seeks full recovery of these costs from the municipal customers. In the event these amounts are not recovered prior to closing, Boston Edison proposes to include the total costs (543.8 m!!1 ion) as transition costs to be recovered from all retail ratepayers through the fixed 3
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D.T.E. 08-119/126 Page 41 component of the transition charge (Exh. BE-7, at 37-39). In the event that all or a portion of these costs are later recovered from the municipals, Boston Edison will return the funds to its a
retail ratepayers (Tr. 2, at 145),
b.
Position of the Partin i.
Attorney. General The Anorney General argues that Boston Edison is attempting to " saddle" retail
\\
customers with the municipal customers' stranded costs (Attorney General Bricf at 12-14.
Attorney Ceneral Reply Brief at 5-6). The Attorney General states that, historically. retail 1
rates have only included Boston Edison's 74.26867 percent share of the plant's costs including allowable cost-of-service adjustments (Attorney General Brief at 12-13). The Attorrsy General also argues that the Settlement Agreement '!!mits expressly" any Pilgrim stranded cost recovery to Boston Edison's share of the plant (11 at 13. Elling Settlement Actreement.
Art. 3. Il 1.l(iii).1.5(a),2.6). In addition, the Attorney General argues that if the Department a!!ows Boston Edison to include these costs in its transition costs (and w securitize these costs in D.T.E.98-118) then Boston Edison will no longer have any incentive to pursue aggressively the recovery of these costs on behalf of its retail ratepayers from the municipals (Exh. AG-6. at 13),
ii.
Commonwealth Electric Commonwealth Electric argues that Boston Edison has properly included the transition costs associated with the Municipal PPA as an adjustment to its residual value credit (Commonwealth Electric Brief at 23). Commonwealth Electric states that to the ex:ent that the
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blY 424 2/33 P.14/47 D.T.E. 98-119/126 Page 42 municipais are even partially successful at FERC in challenging their future liability for decommissioning and net unrecoved investment in Pilgrim, such costs would be stranded (id, at 24). According to Commonwealth Electric the Settlement Agreement was silent on the sale of P:lgrim (ii at 25). Commonweahh Electric asserts that this " gap" in the Settlement-Agreement associated with the specific treatment of the sale of Pilgrim should be resolved in the context of " principles of fairness" and the previous ratemaking treatment afforded to Boston Edison associated with the Pilgrim facility (11 at 25-26). Commonwealth EleEtric I argues that Boston Edison's retail customers were historically responsible for the full revenue requirement of Pilgrim and obtained the full benefit of any wholesale sales credits attributed to Pilgrim through the revenue credit mechanism adopted by Boston Edison in 1983 (i1 at 26).
Therefore, Commonwealth Electnc argues that those same retail customers should be responsible for the transition costs that arise out of the sale of Pilgrim (ii). In addition.
Coramonwealth Electric states that the Department has previoasly found that the Pilgrim wholesale contracts served t!r f aterests of Boston Edison's retail customers (16 at 26 27.
siligig, Boston Edison Comoany, D.P.U.1350, at 54 (N83)).
Regarding Boston Edison's incentive to pursue the recovery of these costs from the
'nunicipais, Commonwealth Electric argues that the incentive mechanism to mitigate the access charge included in Boston Edison's Settlement Agreement provides Boston Edison with an ample incentive to recover as much as possible from the municipais (Commonwealth Electric 1
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iii.
Boston Edison Boston Edison contends that all amounts owed by the municipals, to the extent they do i
not pay the ibil amount owed at closing, are transition costs of Boston Edison that may be recovered from Boston Edison's ratepayers (Boston Edison Brief at 52). While Boston Ed' son i
agrees that it would need to deviate from cernin provisions of its Settlement Agreement in order to permit recovery of the municipals' costs Boston Edison argues that its proposed 1
ratemaking treatment is nevertheless consistent with the " objectives" of the Settlement l
Agreement (it 14,36-37). In addition Boston Edison states that without variance from the
" literal application" of certain provisions of the Settlement Agreement, the divestiture tr.ensaction could not occur (i6 at 36-37). Boston Edison asserts that the statutory obligation to rnitigate transition costs authorir.cs the Department to permit such variance, where appropriate, in order to effect a transaction that provides greater overall mitigation of transition costs than the reasonably available alternatives (ji at 37).
J' Commonwealth Electric states that the access charge mitigation incentive mechanism
. provides Boston Edison with a higher rate of return on common equity where it is able to lower the overall accumulated access charge on a rolling average basis (Commonwealth Electric Brief at 27). Commonwealth Electric asserts that the potential to csrn a higher return on common equity provides Boston Edison with an incentive to recover as much of the Pilgrim related municipal costs as possible (ii).
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617 424 2733 P;16/47 D.T.E. 98-119/126 wa w w. wor m ru=== w Page 44 Boston Edison does not dispute the Attorney General's claim that the language of the Settlement Agreement separately allocates the municipals' cost responsibility (it at 49)."
However, Boston Edison roposes to " revenue credit" the wholesale power contracts in order to resolve this situation (hL). Boston Edison asserts that this proposed revenue credit method would be consistent with the historic treatment of revenues associated with the municipal contracts (id.). In addition, Boston Edison argues that allowing recovery through the revenue credit mechanism would result in greater and more certain mitigation of stranded costs by ~ -
allowing the sale to proceed, rather than delaying it due to uncertainty as to cost recovery at FERC (it at 49-50).
Boston Edison states that in order to sell Pilgrim, it Incurs a risk of non-recovery of the municipals' share of the Pilgrim costs (11 at 49). Absent the decision to se!! the unit, Boston Edison argues that the likelihood of iccovery of such costs would be particularly high in the event of a plant shutdown and, therefore, the risk of the non-recovery is essentially created by the sale decision (hl)." In addition Boston Edison argues that ratepayers have a significant interest in concluding the sale and may be willing to incur additional risk of recovery through Under the proposed revenue credit method, all of the relevant costs for Pilgrim would be assigned to retail customers and any revenue received from the wholesale contracts would be credited to retail customers (Boston Edison Brief at 49).
As noted above, while the municipal contracts contain language that assures full recovery of decommissioning costs and net unrecovered investment in the event of plant shutdown. the contracts do not contain contingencies for the sale of the unit (Exh. BE-7. at 38). As a result of this situation. Boston Edison argues that if the municipais are unwilling to renegotiate their contracts, recovery of the Pilgrim costs becomes dif0 cult (ii). Boston Edison states that recovery of these costs would need to be pursued at FERC. which could involve several yeats of litigation (ii).
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- c. mm D.T.E. 98-119/126 Page 45 closing the sale before the municipal contract issue is resolved at the FERC (id at 51).
Boston Edison contends that shareholders do not receive a " commensurate benefit" from the sale and would be harmed by proceeding with the sale before the municipal contract issue is resolved (ji). Finally, Boston Edison states that the access charge mitigation incentive and the mandate of the Restructuring Act to mitigate fully its stranded costs, ensure that it will aggressively pursue the recovery of these costs at FERC on behalf of its retail ratepayers (Boston Edison Brief at 53-55).
c.
AnalyslamLFindings When considering the propriety of including the costs associated with the municipals' share of the decommissioning and net unrecovered investment in Pilgrim in Boston Edison's transition costs, the Department must consider whether it is consistent with Boston Edison's
~
Settlement Agreement and with the Act. As part of this analysis, the Department will consider whether the overall benefits that will be achieved by the sale of Pilgrim outweigh any potential costs incurred by Boston Edison's ratepayers as a result of the sale.
~
- In January 1998, the Department approved Boston Edison's Settlement Agreement.
The language in the Settlement Agreement did not require that Boston Edison divest Pilgrim (Settlement Anreement, at { V.C.2(b)). The parties agree that the wording of the Settlement Agreement precludes Boston Edison from recovering from its retail ratepayers any portion of Pilgrim related costs associated with Boston Edison's wholesale contract customers (Boston Edison Brief at 49: Commonwealth F.lectric Brief at 25-26: Attorney General Brief at 13). The parties, however, disagree whether the Settlement Agreement anticipated the sale of Pilgrim and, therefore, whether its language should be strictly applied in that context.
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There are conditions under which the Department can and should allow electric companies to depart from prgviously approved settlement agreements. In fact, the Depanment i
has previously exercised this discretion to alter provisions approved as part of a restructuring plan. In Massachusetts Electric Comnanv. D.P.U./D.T.E. 97-94, at 12 (1998), the Department approved changes to the terms of the contract termination charge that previously had been approved as part of Massachusetts Electric's restructuring plan. The Depanment
~ ~ ~ ~ " ~ ~
approved the proposed modifications as consistent with the Restructuring Act and with the '
Department's goals of "near term rate relief, rate stability, and ensuring an orderly and er.peditious transition to competition." Massachusetts Electric Company. D.P.U./D.T.E.
97-94, at 37 (1998).
The Depanment notes that a significant or material change in circumstances may warrant a depanure from a previous ruling or determination." For example, in Boston EdisnD H
The Depanment is mindful of the dictates expressed in Boston Gac Comnany v.
Denanment of Public Utilitigg, 367 Mass. 92.104 (1975), wherein the Supreme.
Judicial Coun ("SJC") stated:
A pany to a proceeding before a regulatory agency such as the Department has a right to expect and obtain reasoned consistency in the agency's decisions.
This does not mean that every decision of the Depanment in a panicular proceeding becomes irreversible in the manner of judicial decisions constituting rgi iudicata but neither does it mean that the same issue arising as to the same party is subject to decision according to the whim or caprice of the Department every time presemed.
Sta aho, New Encland TelenhondTehranh Co. v. Denartment of Public Utilities, 371 Mass. 67. 84 (1976) (-When a major change in the mgulatory standard is in prospect. there should ordinarily be warning sufficient to enable the Company to adjust both its practices and its proof to the new situation *) and Boston Gas Comnanv v.
Denanment of Public Utilities. 405 Mass.115.120-121 (1989)("It is generally
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- r. w w gemswusster=wremesme D.T.E. 98-119/126 Page 47 Comnany v. Denartment of Public Utilities,417 Mass. 458,464-65 (1994), the SJC held that the Depanment may properly refuse to revisit decisions where the change in circumstances was anticipated. Where the change is " extraordinary," it may be appropriate for the Departrnent to reconsider an earlier decision." Ba='an Felican Cen--ev v. Ihrtment of Public Utilitiec,419 Mass. 738,747-748 (1995). A recent application of this principle can be found in our decision in Petition of MCI WorldCom Cornoration, D.T.E. 98-85, at 13 (1998).
-where we determined that Bell Atlantic must implement intraLATA presubscription Ly Apbl 20.1999, rather than upon entry into the interI.ATA market, as previously ordered by the Department in NYNEX. D.PsU./D.T.E.96-106 (1997). In doing so, we stated that it "would be unfair to Massachusetts consumers if the Department failed to swassess the tisr.m' g question given the significant change in circumstances." [L The Attorney General relies on the argument that the Settlement Agreement precludes Boston Edison's proposed treatment of the costs related to the municipal contract custcmers, l
The Settlement Agreement is undeniably tmportant, but it was approved as consistent with the unacceptabic for an agency to announce a new standard in its final decision in an 1
adjudicatory proceeding and then rule, often not surprisingly, that a party who had no notice of that standard failed to meet it").
We further note that in Boston Gas Corna=ny, the SJC suggests that the principle of r.c1 ludicata need not be strictly applied to agency decisions. 367 Mass. 92,104; gg als0 Stowe v. Bolonna,32 Mass. App. Ct. 612,616 (1992). Eiling Ramnoni v. Board of Selectmen of Wevmouth. 26 Mass. App Ct. 826. 839-830 (1989). In Stowe, the court stated that " administrative decisions. even if adjudicatory in the sense that they determine rights and duties of specifically named persons, frequently have a regulatory component that may warrant reexamination in the light of changes in regulation.
purpose. later decisional law. or applicable on-the-ground facts." 32 Mass. App. Ct.
612, 616 (1992).
1
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Page 48 Restructuring Act because it was substantially compliant with the Act. The Settlement Agreement could not have provided for every contingency in the array of multi-party transactions that make up electric restructuring. There is no integration clause in the Settlement Agreement that precludes the Department from considering and approving Boston Edison's proposed treatment of the costs related to the muaicipal contract customers. Without some flexibility on this point a Pilgrim sale generally berzficial to ratepayers may not,have The Department notes that Boston Edison conducted the first successful competitive bid process for the sale a nuclear plant in the nation. The Cy-iugnt finds that the success of this process creates significant. extraordinary, changed circumstances, the occurrence of which could not have been anticipated at the time the Settlement Agreement was signed. This change in circumstances is sufficient to warrant that the Department use our discretion to alter the 1
application of the sections of the Settlement Agreement that preclude recovery of the-municipals' share of the Pilgrim transition costs because such treatment is necessary in order to obtain the greater mitigation available through Pilgrim's sale to Entergy.
In order to sell Pilgrim Boston Edison incurs a risk of non-recovery of the municipal customers' share of Pilgrim contract costs. This risk of non-recovery is essentially created by the decision to divest, because the existing municipal contracts allow recovery in the event of a plant shutdown, but are silent in the event of a plant sale. If the municipal customers are successful in challenging their obligation to pay their future obligation for decommissioning and net unrecovered plant investment, such costs would be stranded. Requiring Boston Edison to forego recovery of the municipal costs as specified in the Settlement Agreement may disrupt
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Au ou utLU LtteG blY 424 dVJJ P.21/47 D.T.E. 98-119/126 Page 49 I
the sale, and in turn damage the mitigation efforts of Boston Edison (Tr. 2, at 161-166). This f
damage could result in higher transition charges for Boston Edison, which. in turn, would mean higher rates for ratepayers.
Concerning compliance with the Restructuring Act, G.L. c.164, IIG(d)(1) states that i
in order for an electric company to recover transition costs, the Depshoc.; must first issue an e
order finding that the electric company has demonstrited that it has taken all rea$nable steps l
to mitigate these costs to the maximum extent possible. The Department finds that Boston
~
Edison has made and continues to make reasonable efforts to mitigate the costs related to the municipal contracts ihrough attempted renegotiations of the PPAs and through seeking recovery of these funds through its pending filing at FERC.3* As steud in our reque't to s
participate in the FERC proceeding, the Department has an interest in ensuring that stranded costs are borne by those customers for whom those costs were incurred. Motion to Intervene of the Massachusetts Dce-L= of Telaca==*= tons and Enerny, EC 99-18, EL 99-22, ER 99-1023. at 2 (March 11,1999). In addition, the Department findt that the mandate of the Act for maximum mitigation of stranded costs and the access charge mitigation incentive contained in Boston Edison's Sculement Agreement are sufficient incentives to encourage Boston Edison to pursue aggressively the recovery of these costs from the municipals. Boston Edison is directed to provide the Department with updates regarding all efforts to recover these costs from the municipals. Such updates shall be filed with the Department every six rnonths from the issuance date of this Order, until this issue has been resolved.
'a For a description of the FERC proceeding, gg n.16. above.
1 I
j
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617 424 2733 P.22/47 D.T.E. 98-119/126 Page 50 The Restructuring Act does not require electric companies that own nuclear generating
)
I assets to divest those uniu. The Act did not and could not foresce all of the ramifications of j
the shift to a restructured electric utility industry. The costs at issue here are but one aspect of the divestiture of the Pilgrim, and subsequent mitigation of transition costs related to Pilgrim.
The sale of Pilgrim provides many benefits to ratepayers and the exclusion of the costs related to the municipal contracts would disrupt the divestiture of Pilgrim and would pince these benefits in jeopardy. Because mitigation of stranded costs is one of the train tenets of the _
j Restructuring Act and the divestiture of Pilgrim achieves the goal of mitigation, the Department finds that the inclusion of the costs associated with the municipal contracts in Boston Edison's transition charge is consistent with the Act.
The Department finds that the overall benefit to ratepayers of the divestiture transaction
- outweighs the cost of possible non-recovery of the $43.8 million, or portion thereof, associated with the municipal contracts. In the event that Boston Edison is successful in recovering all or a portion of these costs from the municipals, Boston Edison shall fulTy reimburse its ratepayers for these costs. For the reasons stated above. the Department finds that Boston Edison is permitted to include the $43.8 million associated with the municipals' potential liability for the decommissioning costs and net unrecovered investment in the Pilgrim unit in the fixed component ofits transition charge.
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3.
Invento-v and Nuclear Fuel a.
Introduction Boston Edison proposes two adjustme7ts to the bid price to account for inventory of materials and supplies ("M&S") and for nuclear fuel at closing (Exh. BE-7, Att. GOL-2, at 1). For inventory, the purchase price is to be increased by the net book value of inventory as of the closing date less $20,053,272 (Exh. BE-5A at i 2.6/,sXi)). If the net t5k value of'
~
inventory less $20.053,272 is negative, the purchase price will be decreased by that amount' (it). Similarly, the purchase price is to be increased by the amount that the net book value of
- Boston Edison's nuclear fuel exceeds $67,934,706 (10
)
b.
Positions of the Parties
{
i.
Attorney General l
The Attorney General recommends that Boston Edison's proposal to base the adjustment on the net balances (or the gross amount less the amount amortized) be rejected, because the amount amortized may be differeint from the amount collected from ratepayers.
resulting in a net book value that may be different from the amount left to be recovered from ratepayers (Attorney General Brief at 16). Funher, if the Department approves the divestiture, the Attorney General recommends that the Department require that the adjustment for inventory and nuclear fuel be based on the gross amount less the amount already collected from ratepayers through base rates and the transition charge (10
rew-eWf) 16606 BECU LEGAL 617 424 2733 P.24/47 D.T.E. 98-119/126 l
Page'52 ii.
Boston Edison I
Boston Edison asserts that the Attorney General's proposal results in a reconciliation that is unnecessary and would duplicate reviews that have been or will be conducted (Boston Edison Reply Brief at 15-16). Boston Edison states that nuclear fuel costs wem recovered i
through its fuel charge umil the initiation of retail access, and since then through the performance-based ratemaking ("PBR") mechanism 01 at 16). According to Boston Edison.
any balance is being recovered from Entergy per the terms of the P&S (ii). BostoT5' ison
~ ~ ' ~
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argues that the portion recovered through the fuel clause was reviewed as part of fuel charge l
Clings, and the amount recovered through the PBR mechanism will be reviewed as part of the
{
transition charge reconciliation proceeding (ii). Therefore, Boston Edison contends that there is no value to an additional review in this proceeding (ii).
Similarly. Boston Edison states that the inventory charged to expense will be reviewed as part of the transition charge reconciliation proceeding, and Entergy is paying Boston Edison r
{
the difference between the gross amount and the amount already expensed (ii). Further.
Boston Edison claims that the Attorney General did not raise this issue in the sale of the fossil 1
generating units even though the issue was presented in that proceeding QL).
c.
Analysis and Findings The amounts that Boston Edison is showing as expensed or already collected from ratepayers will be reconciled in its next transition charge reconciliation proceeding. If the actual amounts collected from ratepayers for inventory and nuclear fuel expenses are different from those Boston Edison has used in this proceeding, the Department will require Boston
. co e.c6 m am o e uttu teau 6W 4d4 z w P. W 47 ersetecumnuww 4
D.T.E. 98-119/126 Page 53 I
l l
Edison to refund the additional amounts. In this way, the Department will ensure that there is no double recovery of inventory or nuclear fuel expenses. Because these amounts will be resolved in the transition charge reconciliation proceeding, the Department finds that it is not necessary in this proceeding to reconcile the amounts used by Boston Edison in its calculations with the actual amounts. Therefore, in the transition charge seconciliation proceeding, the Department directs Boston Edison to reconcile the amounts shown in this proceed ng as recovered in the transition charge to the actual amounts recovered.
4.
Pilarim Goine Forward Costs a.
Introduction Under terms of the Settlement Agreement, as long as Boston Edison cominued to operate Pilgrim from the retail access date through December 31,2000, its operating costs were to be recovered through a PBR (Settlement Anreement, Att. 3. I 2.7). According to the PBR mechanism,25 percent of Pilgrim's reasonable operating costs, excluding the contract customers' portior, of the costs, less revenues from the sale of 25 percent of Pilgrim's energy and capacity were to be recoverw :hrough the transition charge (11).
In the current proceeding, Boston Edison proposes to adjust the bid price by J
subtracting 100 percent of the going forward costs for: (1) required nuclear expenditures; (2) uncompleted pre-approved projects: (3) low level radiation waste (-LLRW") disposal; and (4) the nuclert refueling outage (Exh. BE-7, Att. GOL-2. at 1).
r1HH-d. PAP /9 16:07 EECO LEGAL 617 424 2733 P.26/47 D.T.E. 98-119/126 Page 54 b.
Positions of the Parties i.
Attornev General The Attorney General asserts that the required nuclear expenditures, unvmpleted pre-approved projects, LLRW disposal costs, and nuclear refueling outage costs are normal operating and maintenance costs that should be shared in the ratio of 75 percent by shareholders and 25 percent by ratepayers per the PBR mechanism in the Settlement Agreement (Anorney General Brief at 17-18). The Attorney General argues that by mducing the bid proceeds by 100 percent of these costs and not sharing them in the ratio of 75/25, Boston Edison is unfairly shifting the burd:n for all of these costs to ratepayers (ii). For the refueling outage costs, the Anorney General uses the analogy of an automobile, and states that. '... [ Boston Edison] has run the automobile for two years during which time it has retained 75 percent of the benefits of those operations, and now, wiwn the tires are worn out, the oil needs changing, and the spark plugs have to be repla::ed [ Boston Edison] sells the car.
passing on the lower value of the unmaintained asset to the customers' (ji at 18). The Attorney General argues that Boston Edison benefitted from the operations of the 'plarit over the first year or two of operation, deferring maintenance, and now is leaving castomers with the lower value of the plant, which he argues is patently unfair' (isL). The Attorney General recommends that all of the operations and maintenance expenses, including the refueling outage costs, should be recovered through the 75/25 sharing mechanism (11 at 18-19).
ii.
DOER I
DOER asserts that while Boston Edison portrays the proposed ratemaking treatment for the divestiture as neither benefitting nor harming shareholders, the proposed treatment does
i r1HH-dd-1WJ 16 W IECO LEGAL 61'l 424 2733 P.27/47 4Pegu89e*4er N emer48 D.T.E. 98-119/126 Page 55 in fact benefit shareholders at the expense of ratepayers (DOER Brief at 5). DOER states that the PBR mechanism resulted in a 75/25 (shareholders /ratepayers) sharing of any profit or loss from the operation of Pilgrim, but the calculation of the RVC shifts all the costs to ratepayers l
(it at 6).
Referring to the adjustment for uncompleted pre-approved projects, DOER states that Boston Edison's proposed ratemaking treatment deducts the entire 56.7 million of these costs from the bid proceeds (ii). Arguing that these costs are for projects that are necessary for the continued operation of Pilgrim, DOER states that if Boston Edison continued to operate the plant. ratepayers would have had to pay only 25 percent of the 56.7 million (ii). Similarly.
DOER states that ratepayers would nave paid only 25 percent of the refueling outage costs if Boston Edison continued to operate the plant compared to 100 percent of the refueling outage costs that ratepayers are being asked to pay according Boston Edison's proposal (ji 6-7).
Regarding the costs for LLRW disposal DOER states that to the extent these costs represent an on-going operational expense, they should be divided in the ratio 75/25 bet'wcen shareholders and ratepayers (1 at 7). If however, these costs have already been collected I
from ratepayers. DOER recommends they should not be deducted from the bid proceeds (E).
l DOER estimates that Boston Edison's proposed treatment of these costs msults in a windfall" for Boston Edison's shareholders ranging from $21 to 526 million depending on the closing date for the sale of Pilgrim (11 at 8). DOER raommends that the Department allow Boston Edison to deduct only 25 percent of the uncompleted pre-approved projects, the refueling outage costs, and the LLRW disposal costs only if they are ongoing expenses (ii).
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iii.
Commonwealth Electric Commonwealth Electric asserts that the Settlement Agreement explicitly states that the PBR mechanism is applicable while Boston Edison continues to operate Pilgrim j
'(Commonwealth Electric Brief at 20). Commonwealth Electric contends that the PBR n~h=ni== was designed to provide an incentive to Boston Edison to operate the plant cfficiently, and therefore should be applicable "only to those expenditures undertaken by Boston Edison in furtherance ofits operation of Pilgrim" (emr.hasis in original) (it at 20-21).
Commonwealth Electric argues that the sale of Pilgrim takes the expenditures outside.the PBR I
mechanism (it at 21). According to Commonwealth Electric, Boston Edison is no longer at risk for the operation of the unit, and it is fair that Boston Edison ratepayers should bear the full costs of running and operating the plant up to the time of the sale because they get the full benefits of the sale (ii). Commonwealth Electric also states that the proposed recovery of these expenditures is similar to the recovery in other divestiture transactions where the Department approved the company's share of capital investments after December 31,199566),
iv.
Boston Edison Boston Edison states that. at present, there are no required nuclear expenditures, and therefore the issue of their recovery may be moot (Boston Edison Brief at 43). However if there were such expenditures. Boston Edison argues that they should be deducted from the bid proceeds (it). Boston Edison argues that such expenditures would most likely he incurred to satisfy NRC requirements, and if Boston Edison were to incur such an expense *out of I
.. u m, 30.ua ucw uan eu na aaa r.mv I
D.T.E. 98119. 426 Page 57 pocket' without being able to recover it through a deduction from the proceeds, it would be unfair (hL). Boston Edison further states that the proposed treatment for these expenses is similar to that for other expenses reimbursable from third parties (hL).
Regardit.g the deduction for uncompleted pre-approved projects. Boston Edison states that these costs would be incurred only when Boston Edison has not completed a project that Entergy assumed would be completed when making its bid (hL at 44). According to Boston.
Edison, the sale proceeds would be decreased because Entergy would pay less for a plant that has certain projects not yet completed (hl). Because Boston Edison would not have incurred the cost, but would simply be receiving less money from Entergy. Boston Edison states that there would not be any double recovery (ii). Boston Edison asserts that there is no unfairness or cost to ratepayers because of this adjustment (ii).
Boston Edison concedes that its proposal results in the double counting of the'LLRW disposal costs. Boston Edison has agreed to make the appropriate adjustments to its deductions from the bid proceeds to correct this problem (kL).
Regarding the treatment of the refueling outage costs, Boston Edison contends that this deduction shows the fact that the plant is worth $40 million more immediately following a refueling outage, and shows the intent of the parties that the economic effect on each party is the same whether closing occurs before or after a refueling outage (it at 44-45). Boston Edison disputes the Attorney General's claim that these costs are " normal operations and maintenance expenses" that should be recovered through the PBR mechanism (hL at 45).
According to Boston Edison, the appropriate accounting treatment of the refueling outage costs j
rea a asas 2o.uc utLU LLUHL 617 424 2733 P.30/47 D.T.E. 98-119/126 Page 58 is amonization over the following operating' cycle (isL). If the closing occurs after the refueling outage, Boston Edison proposes to account for any amortization expense between the outage date and the closing date according to the PBR mechanism and split both expenses and revenues for that period in the 75/25 ratio (Boston Edison Reply Brief at 12). Boston Edison asserts that the Attorney General's argument that the entire refueling outage expense be split m the ratio of 75/25 appears to be based on a view that outage costs consist of deferred
{
maintenance that relates to aM needs to be matched with power and revenue generaied in d'riUI penods" (emphasis in original) (11 at 13). Boston Edison claims that view is. -fundamentally flawed. completely unprecedented, and is directly contrary to the method of accounting used i
for refueling outage expenses, i&, these expenses are amortized over post-outage periods to match them with corresponding revenue, not allocated back against revenue for prior periods" CuL). Funher. Boston Edison argues that any other treatment of the refueling outage costs would create a perverse incentive' to either delay or advance the closing date in order to create a windfall for either ratepayers or shareholders (Boston Edison Brief at 45).
c.
Alp _ lysis and Findines Regarding the applicability of the PBR sharing mechanism to required nuclear expenditures, costs for uncompleted pre-approved projects. LLRW disposal costs, and refueling outage costs, the Department notes that the PBR mechanism is only applicable.
"[ slo long as Boston Edison continues to operate Pilgrim' (Settlement Ameinent, at 237, t 2.7(a)). Furthermore, we find that tb PBR mechanism was intended to provide an incentive to Boston Edison to operate the plant efficiently, and that the sale of Pilgrim takes the expenditures under consideration here out of the PBR mechanism.
aam
- m. eu otw Letoa 61'/ 424 2'/33 P.31/47 HiembMupW4* w gilgl44P D.T.E. 98-119/126 Page 59 The expenses in question relate to actions required to be taken by Boston Edison in order to adhere to NRC requirements. Therefore, the Department approves the adjustment for
' Expenses for Required Nuclear Expendimres" as proposed by Boston Edison. Similarly, the Department finds that it is reasonable for Boston Edison to deduct from bid proceeds any amounts for Uncompleted Pre-Approved Projects." Entergy's bid was based on a requirement that the projects in questioa be complete. If a project within the contemplation of the Pilgrim sale contract is not complete. the value of the Pilgrim asset is decreased and the corresponding reduction in value is properly borne by Boston Edison ratepayers. Boston Edison hr mnceded that its proposal for the treatment of LLRW disposal costs results in double co-ating. Therefore, the Department directs Boston Edison to adjust the bid price to reflect the contribution by ratepayers for LLRW disposal costs.
On the issue of the refueling outage costs, the Depanment is not persuaded that Boston Edison has benefitted from the operations of the plant over the first year or two of the PBR mechanism. has deferred maintenance, and has left the customers with a lower-valued plant.
These are unsupported assertions. Refueling outage expenses are amortized over post-outage periods, arx! are not allocated back against revenue from prior periods. Western Massachusetts Electric Company. D.P.U.85-270. at 166A (1986). In this sense, a refueling outage is not deferred maintenance. The refueling outage prepares the plant for another two years of operation and Entergy is willing to pay 540 million for the capability to run the plant for another two years. If Boston Edison incurs costs to enhance" the value of the plant for Entergy it should be allowed to recover those costs. Furthermore, we agree that disallowing
rtot-d.g-AW:r 168 00 titLU LEGAL 617 424 2733 P.32/47 D.T.E. 98 119/126 Page 60 the deduction for the refueling outage costs would lead to a perverse incentive te either delay or advance the closing date to create an advantage for ratepayers or shareholders at the expense of the other. Therefore, the Department finds that Boston Edison's tmatmem of refueling outage costs is reasonable and approves the deduction of refueling outage costs from the bid proceeds. If the closing occurs after the refueling outage, the Department directs Boston Edison to account, as it represents it would, for any amortization expcase between the i
outage date and the closing date according to the PBR mechanism and split both ex[.s ani ~
revenues for that period in the 75/25 ratio.
5.
Capaal Additions
\\
1 a.
Introduction Boston Edison proposes to deduct from the bid proceeds approximately $15 million for capital additions made since December 31.1995 (Exh. BE-i, Att. GOL-2, at 1).
b.
P.ositions orthe Parties i.
Attorney General The Attorney General concedes that the Seulement Agreement allows for recovery of capital additions in the case of the sale of a unit, but asserts that Boston Edison has not provided any evidence to support the prudence of these capital additions (Attorney General Brief at 20). The Attorney General contends that some of the capital additions, specifically the capital addition related to the generator rewind, were the result ofimprudent actions by Boston Edison or its contractor (ii). The Attorney General states that the failure of the main generator may have been caused by low oxygen content in the stator water cooling ("SWC-)
system or because of the use of an ion exchange resin in the SWC system that was not
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617 424 2733 P.33/47 D.T.E: 98-119/126 sp w w w menew Page'61 approved by the manufacturer (Exh. AG-6 at 10-11). The Attorney General recommends that the Department deny the adjustment for capital additions and defer resolution and recovery of f
these costs until Boston Edison's next transition charge reconciliation proceeding (Attorney
)
General Brief at 20),
11.
Conoucnwealth EleClris f
Citing The Berkshire Gas Commny, D.P.U. 92 210 (1993), Commonwealth Electric j
1 states that the Department requires reviewable documentation for investments that a'ny 1
company seeks to recover in rates (Commonwealth Electric Brief at 29-30). Commonwealth i
Electric states that Boston Edison provided a variety of documentation sufficient to support the I
prudence of the capital additions (11 at 29).
iii.
Boston Edison Boston Edison states that, "the record is adequate and that the prudence of each of the
)
relevant investments has been supported by information request, by testimony and by record request" (Boston Edison Brief at 45-46, n. 53). Regarding the Attorney General's specific
\\
allegation of imprudence involving the main generator failure, Boston Edison asserts that the Attorney General's argument is based on mere speculation (it at 46-47). Boston Edison refers to a detailed root cause analysis of the outage by Altran Materials Engineering, which it argues, refutes the points raised by the Attorney General (i1 at 47). Regarding the other two j
capital projects after December 31,1995 Boston Edison asserts that it has provided complete details that dennnstrate that the projects were in response to NRC imposed requirements (ii).
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c.
Analysis and Findin_s a
For costs a company seeks to recover in rates, the expenditures must be prude ~'"
I incurred. and the resulting plant must be used and useful in providing service to ratep% J.
Fitchburn Gas & Eletric Lieht Cama =av. D.T.E. 98-51, at 12 (1998), aggon Gas comnany.
)
D.P.U. 93-60, at 24 (1993). A prudence review must determine whether the utility's actions, j
based on all that it knew or should of known at the time, were reasonable and prudent in light of the circumstances that then existed. D.T.E. 98-51, at 12. A determination of reasonableness and prudence may not properly.be made on the basis of hindsight judgments.
nor is it appropriate for the Department merely to substitute its own judgment for the management of the utility. Attorney General v. benarmwnt of Public Utilities,390 Mass.
208, 229 (1983). A prudence review must base its findings on how a company reasonably f
should have responded to the panicular circumstances and whether the company's actions were in fact prudent l's light of all the circumstances that were known or reasonably should have been known at the time the decision was made. D.P.U. 98-51 at 12. The Settlement Agreement allows Boston Edison to recover its share of "undepreciated capital investments" incurted after December 31,1995 (Settlement Anreement. Att. 3. i 1.5(b)).
The record shows that Boston Edison provided an extensive amount of information sufficient to support a finding of the prudence of its requested capital additions (n. the materials cited in Boston Edison Brief at 46. n. 53). The costs of three of the capital projects.
(the motor-operated valve ("MOV-) program the Emergency Core Cooling System
(-ECCS~) suction strainer modifications, and the generator rewind) constitute 83 percent L.
em-enm its w.s ut;.LU LtLkG.
617 434 2'/33 P.35/47 D.T.E. 98-119/126 UNa of the total capital additions that Boston Edison seeks to recover in this proceeding i
(Exh. AG BEco I-11). The.MOV program and the ECCS suction strainer modifications were reouired by the NRC, and therefore, the Department finds that the costs associated with these projects were unavoidable and thus prudent expenditures (RR-AG-17; RR-AG-18). Indeed, it would have been imprudent of Boston Edison to disregard NRC requirements and not make these expenditures.
Regarding the main generator failure, record evidence shows the failure wa's'tiot cahsed by improper water chemistry or non-approved resin, thus refuting the Anorney General's allegation of imprudence by Boston Edison or its contractor (Exh. AG-BECo 5-18, at 280-281). The failure analysis for the generator states that the cause was flow restriction which. in turn. was caused by a small piece of gasket material (Lt at 280). It could not be determined how or when this material got into the cooling system for the generator winding (ii). However, there is no record evidence'to indicate that the presence of the gasket material was caused by imprudent actions by Boston Edison. Mere failure of a part in a component of a complex nuclear plant does not itself spell imprudence. Furthermore, the Department finds that Boston Edison acted prudently in analyzing the fault and repairing the generator.
Therefore, the Department finds that the costs associated with the generator failure were prudently incurred.
Based on the fotrgoing analysis. the Department finds that Boston Edison has provided sufficient evidence to establish that the three main projects, which account for 83 percent of the capital additions. were prudent. A review of other projects included in the capital additions shows these projects were necessary to maintain the safety and reliability of Pilgrim i
t1AR 999 16:09 DECO LEGAL 687 424 2733 P.36/47 D.T.E. 98-119/126 emW Page 64 l
and were, therefore, prudent (Exh. AG-BECo 1-11)." As the capital additions were prudent.
the Department approves the deductions for capital additions proposed by Boston Edison.
6.
Tr=eian Coos a.
Introduction Boston Edison proposes to reduce the bid proceeds by $5 million for transaction costs j
incurred in the sale process (Exh. BE-7, Au. GOL-2. at 1).
\\
.n.
b.
Positions of the Parties
~
~
i.
Attorney General The Anorney General claims that Boston Edison's $5 million estimate of transaction costs is large (Anorney General Brief at 20). He recommends that this estimate should be reviewed and reconciled with the actual transaction costs incurred (hL at 20-21). This review would occur during Boston Edison's next annual transition charge reconciliation filing, i
The other projects included in the capital additions are for the following items:
Annunciator Improvement, Pilgrim Room Lighting Pilgrim Pump Vibrator Monitor, Security System Upgrade. Building Improvements. Control Panel Betterinent, Cooling Water System Betterment Reactor Water Clean-up System Pipe Replacement, LTP551-10 C.F.R. I 20 Implementation, Miscellaneous Minor Modifications, Radioactive
{
Waste Filter /Demineralizer, Pilgrim Bauery Replacement. Sanitary Sludge System, Pilgrim-IV Heating Ver.tilation Air Conditioning Upgrade. Underground Fuel Storage Tank, Bleeder Trip Valves Recirculating Motor Generator Set Control. Augmented Fuel Pool. Emergency Control Panel Monitoring System, Storage Modules LLRW, Degraded Upgrades Main System Line Plug. Shop Equipment / Tools, Roof Replacement Phase I. Perimeter Barriers. Cooling Water System, Ramp New Engine Building. Diesel General Roof Replacement. Pilgrim Wireless Communication. Control Monitors, and 3D Monicore (Exh. AG.BECo-1-11).
reot-de-Ayr.s it24au etLU LList.
61'/ 4d4 2'/dd P.3W47 D.T.E. 98-119/126 Page 65 it.
Boston Edison Boston Edison states that it was necessary to provide a " good faith estimate'.of the transaction costs because the exact amount for the transaction costs will not be known until the closing (Boston Edison Reply Brief at 17). Boston Edison emphasizes that the Attorney General has not criticized the transaction costs as unr*=%Ie (idJ. Boston Edison proposes to make any changes to the transition charge based on the actual closing statements and updated closing costs for the transaction (ii). Further, Boston Edison states that the---'
transaction costs will be trued-up as part of the annual transition charge reconciliation filing I
(id.J.
c.
Analysis and Finding <
Boston Edison agrees with the Attorney General that the transaction costs of $5 million are estimated. In previous divestiture transactions, the Department has allowed a company to use estimates of transactio.1 costs for the purposes of calculating a residual value credit with a i
reconciliation to be performed in subsequent proceedings for that company. Boston Edison Company, D,T.E.97-113, at 24-25; Maunchucane Wetric Comoany, D.P.U./D.T.E. 97-94.
I' at 37. Therefore, the Department will allow Boston Edison to use an estimate of the transaction costs identified in Exh. BE-7. Att. GOL-2, at 1, to calculate its RVC, but directs Boston Edison to file the actual transaction costs in the next transition charge reconciliation proceeding. At that time, based on its review of the transaction costs. the Department will require Boston Edison to make m adjustment to its transition charge so that any over or j
under-collecuons can be rectified.
f1AR-22-1999 16 10 BECO LEGAL 617 424 2733 P.38/47 D.T.E. 98-119/126 W..- - - v Page 66
- 7.
D.ther_ Costs a.
Introduction Because of uncertainty about the closing date, Boston Edison proposes to file new tariffs within three months following closing of the Pilgrim divestiture with updated schedules showing the calculation of RVC based upon actual closing statements and updated closing costs for the transaction (Boston Edison Brief at 58). Boston Edison states that closing c sts and certain issues related to the divestiture may not be identified until the actual closing (kL)[
These closing costs are in addition to the transaction costs discussed in 6 V(6), above. At present, Boston Edison identifies the following two issues: (1) closing delivery requirements related to materials contracts with General Electric Company; and (2) costs that may be incurred to obtain.Montaup's waiver of its closing condition regarding long-term financing (ist silhig Exhs. BE-5A, i 2.10(g), Sch. 2.l(e); BE-5B. Tab 11, f 10(f)).)"
Boston Edison argues that, in a complex transaction such as the Pilgrim divestiture.
there will remain costs that cannot be identified or finally resolved until closing (Boston Edison Reply Brief at 17). Boston Edison states that it has provided the Department with an initial estimate of tbse costs, where known. but understands that the amount to be actually On March 9,1999. Boston Edison filed with FERC a Fourth Amendment to the Montaup PPA (Exh. BE-5B. Tab 11R: as n. 6. above). With respect to Montaup.
Boston Edison has stated assuming that payments are made by Montaup as called for under the Fourtis Amendment... Boston Edison would not be seeking recovery for Montaup's eleven percent share of Pilgrim costs from retail customers (LL. that Montaup's share of costs would be treated as depicted in BE-7. Att. GOL-2) (Letter from Boston Edison to Department accompanying -Motion to Update !!ecord" (Merch I8. 1999)).
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617 424 2733 P.39/47 D.T.E. 98-119/126 gw evw-m e ;
Page 67 recovered from customers will be based upon final accounting and submined at the next transition charge reconciliation proceeding (ii). Boston Edison argues that these additional costs are required in order to close the divestiture transaction "either because they are necessary to effectuate a required delivery at cicsing or to close out or terminate a Pilgrim-related obligation" QL).
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Regarding the contract issues with General Electric, Boston Edison states that these represent "the resolution of contract issues associated with the fabrication and delivery of nuclear fuel over the remaining plant license, and estimated that current vendor claims to resolve this issue are in the order of $10 million" (16 at 18, n.15). Boston Edison does not provide an estimate of the Montaup-related costs (it at 18) Finally, Boston Edison states that other. not yet identified costs may arise before closing (11). It is Boston Edisun's " intention and expectation that Department approval of the Pilgrim divestiture transaction should encompass approval of the necessary costs incurred in order to close, subject to appropriate true-up and documentation" QL).
b.
Analysis and FindiDSS Boston Edison seeks an otder that gives it approval to recover from ratepayers all costs which. in its sole judgment, are "necessary costs incurred" in order to close the Pilgrim.
divestiture transaction. The Department cannot yet grant such an approval. The record contains no evidence regarding the General Electric. Montaup, or "other" closing costs. The issue of recovery of last minute" costs related to the closing was not brought to the Department's attention until Boston Edison's initial brief. By prescriting the issue of these
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ou c4 aaa e.4w47 D.T.E. 98-119/126 Page 68 other costs" for the first time through its briefs Boston Edison did not provide the Attorney General, the Department, or other parties adequate time to investigate and address this issue.
The transaction costs and other adjustments of gross proceeds discussed in i V, above. were identified by Boston Edison in its petition and described by its witnesses in direct testime. 7 Cost categories were identified, " good fa%" estimates of the costs were presented, and a rationale for recovery of the costs was argued. The Attorney General and the Department had the opportunity to examine record evidence regarding these transaction costs before kasone~d l
findings were made. In fact, when discussing the use of transition cost estimates in its RVC.
i Boston Edison argues to its advantage that "none of [the transition cost] estimates have been criticized by the [ Attorney General) as unreasonable" (Boston Edison Reply Brief at 17). An unsupported, extra-record estimate of possibl: " Pilgrim-related" closing costs cannot justify a proposed adjustment to the sale proceeds.
The Depattment is cognizant of Boston Edison't need for a reasonable amount of flexibility to deal with transaction closing costs. This flexibility is accommodated by our finding in i V(6) that allows Boston Edison the recovery of certain transaction costs based on
" good faith' estimates, and subject to a later reconciliation. However, granting appr9 val of all "necessary costs incurred to close" as requested by Boston Edison, would not be in the public interest. A general approval creates significant risk for Bomn lWison's ratepayers.
The 510 million in other costs" is already significant in re!Mion to Boston Edison's " good faith" estimate of transaction costs ($5 million) and when compared to the gross proceeds of.
the sale (SB0 million). To allow the recovery of unlimited. unexamined costs could threaten s
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D.T.E. 98-119/126 4 M'W9 N 44P Page 69 the overall benefits of sale. Accordingly, the Department rejects Boston Edison's proposal to recover "any and all costs" that may be required to close the transaction ;,ith Entergy. Boston Edison may seek recovery of these costs in its next transition charge reconciliation p{o upon a showing that they were reasonable and necessary costs incurred in order to close. The Department would also consider an earlier petition, in this docket, if Boston Edison determines that a ruling by the Department regarding these costs is necessary to complete the divestiture i
transaction.
B.
Egidual Value Credit and Transition Charte Reduction l
1.
Introduction Boston Edison proposes to credit customers with its share of the net proceeds from the sale of Pilgrim (Boston Edison Brief at 40, citmg Exh. BE-7, Att. GOL-2). To determine its share of the net proceeds, Boston Edison proposes several adjustments to the gross proceeds of
$80 million. In addition, Boston Edison is proposing to include $466 million for the' Decom issioning Trut. discussed in i V(A), above (Exh. 23E-7. Att. GOL-2, at 1). Using these adjustments and Boston Edison's 74.26867 percent share of Pilgrirn Boston Edison calculated an RVC of negative $256.6 million (based on a closing date of June 30.1999)
(Exh. BE-7. Arts. GOL-2, at 1. GOL-4. at 7)."
Boston Edison calculates a net balance for the RVC flow-back of negative S264.0 million fer a closing date of March 31,1999. and a flow-back of negative 5250.3 million for a closing date of December 31.1999 (Exh. BE-7. Arts. GOL-3.
GOL-5, at 7). Boston Edison's overall annual RVC. (including the S62 million RVC from its fossil divestiture). would be reduced to between S27 million and $29 million for most years from 2000 through 2009 (Exh. BE 7. Atts. GOL 3. GOL-4.
GOL-5. at 2).
acm w ovun. 4o. H tr.w Ltaon-617 424 2733 P.02/G2
-w D.T.E. 98-119/126 Page 70 Boston Edison's proposed RVC acts to increase the transition charge in two or three years and reduce it in the rest, compared to the transition charge approved by the Deparunent in Boston Edison's fossil divestiture, Boston Edison Company. D.T.E.97-113 (1998)
(Exh. DTE-BECo 1-48)." On a net present value basis, Boston Edison calculates that the Pilgrim divestiture would serve to reduce its total transition charges by $15 to $29 million, depending on the closing date (as RR-BECo-7).
The positions of the parties concerning the calculation of the RVC were discus' sed in I
i V(A), above, as they relate to the various adjustments to the gross proceeds proposed by Boston Edison. It is not necessary to repeat those arguments here.
2.
Analysis and Findings The Restructuring Act requires that all proceeds from the divestiture ar.d sale of generation facilities by electric companies that inure to the benefit of ratepayers, net of tax effects and other adjustmeras approved by the Depanment, be applied to reduce the amount of the selling companies' transition costs. G.L. c.164, i 1 A(b)(3). The Settlem-nt Agreement l
provides that Bosten Edison shall implement an RVC as a direct offset to the access or 2
transition charge (Settlement Arreement, Att. 3, 91.5).
The Department notes that the RVC will teduce Boston Edison's transition charge when compared to a shut down scenario, if the sale were not approved. The RVC should also reduce the overall transition charge when compared to the continued operation of Pilgrim by Boston Edison. Therefore, the Department finds that I?oston Edison's proposal to credit its I
Net of the financial effects of the proposed securitization in D.T.E.98-118.
TOTAL P.02
l rex-de-19w it2a la itLU LLtdL 617 424 2733 P.43/47 D.T.E. 98-119/126 Page 71 ratepayers with an RVC equal to Boston Edison's net proceeds from the proposed sale of
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Pilgrim, as adjusted and approved above by the Depanrr.ent, is consistent with tte i
i Restructuring Act and with the Settlement Agreement, which was found to be in substantial' compliance with the Restructuring Act. The Deparunent will review the exact amounts of the adjustment factors to the gross proceeds after the Pilgrim sale it finalized, specifically during Boston Edison's next reconciliation proceeding.
VI.
RATEMAKING TREATMENT OF COMMONWEALTH NIJCTRIC'S *
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PROCFRnS FROM THE DIVESTITURE TRANSACTION i
A.
Introduction Commonwealth Electric proposes to eliminate the portion of its variable transition
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charge related to the Pilgrim coatract and replace it with a buyout charge collected in the fixed portion of the transition charge (Exh. COM-4, at &7). The net effect of these changes is to decrease the total amount of transition charges to be collected from Commonwealth Electric's ratepayers by $33.5 to $37.1 million on a net present value basis, depending on the date of closing (ji at 7). Under Commonwealth Electric's proposal, the total transition charge would l
be lowered, for every year from 1999 through 2012. by an average of 0.11 to 0.12 cents /KWH with the exact amounts depending on the closing date (gg Exh. COM-4, at Att.1-3). Commonwealth Electric characterizes the reductions in its transition charges due d'
Because the accouming has not yet been done, a finding on the adjustment factor calculation must be deferred. Deferral of a finding on this calculation to the reconciliation proceeding filing should not and may not be construed in any way as a reservation regarding the Department's approval of the asset sale to Emergy. The approval of that sale. as compliant with the Restructuring Act and with Boston Edison's and Commonwealth Electric's restructuring plans. is final and unconditional.
3
,on cc a m au.Aa oc.w L.tLoc.,
bay 444 cf W P.44/47 D.T.E. 98-119/126 ge'72 to the Pilgrim divestiture as bemg about 4 percent initially. The reductions increase somewhat in the.er years of the current Pilgrim contract (Exh. COM-4, Arts.1-3). No other parties commented on Commonwealth Electric's proposed changes in its transition charges.
B.
Analysis and Findines The Resttucturing Act requires that all prac=k from the divestiture and sale of a
generation facilities by electric cara,a=aiec, net of tax effects and less any other adjustments approved by the huuent that inure to the benent of ratepayers, shall be applied to redtice' the amount of the selling electric cWak' trarettion cor.4. G.L. c.164, i 1 A(b)(3).
The Department recognizes that Commonwealth Electric's Pilgrim contract buyout and associated contract replacement will reduce Commonwealth Electric's transition charge by about $35 million, or at least 4 percent. Therefore, the T.partment finds that Commonwealth Electric's contract buyout and replacement contract constitute mitigation of its transition costs as required by the Restructuring Act and pursuant to Commonwealth Electric's restructuring plan. Accordingly, the Department finds that Commonw
~h Electric's contract buyout and replacement contract is in the public interest. The buyout agreement and the above-market costs of the replacement contract may be included and recovered as part of Commonwealth Electric's transition charge, in accordance with its proposal as adjusted to conform with Department findings in i V(A) above. The Department will review the exa: t amounts of the l
adjustments to Commonwealth Electric's transition charge: after the Pilgrim sale is finalized.
specifically during Commonwealth Electric's next reconciliation proceeding.
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D.T.E. 98119/126 Page 73 VII.
ORDER Accordingly, after due nodce, hearing and consideration, it is hereby ORDERED: That the asset divestiture involving the sale by Boston Edison Company of its Pilgrim Nuclear Power Station and related assets, as embodied in the Purchase ud Sale agreement and other related documems (Exhs. BE-5A, BE-5B), is approved; and it is FURTHER ORDERED: That the purchase by Boston Edison Company of pohr from tW Pilgrim ?.uclear Power Station, as embodied in the two power purchase agreenins
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between Boston Edison Cw =ny and Entergy Nuclear Generation Company (Exhs. BE-5B.
l Tab 6. Tab 7), and the "ecovery of any above-market costs associated therewith in the transition charge, is approved; and it is FURTHER ORDERED: That Boston Edison Company's pros,osed ratemaking treatment of the proceeds from the sale be and hettby is approved, subject to reconciliation and refund and iti FURTHER ORDERED: That Commonwealth Electric Company's termination and buyout of its existing obligation to purchase power from the Pilgrim Nuclear Power Station, and the inclusion of the buyout amount associated therewith in its transition charge, is approved: and it is FURTHER ORDERED: That the purchase by Commonwealth Electric Company of power from the Pilgrim Nuclear Power Station, as embodied in the power purchase agree nent between Commonwealth Electric Company and Entergy Nuclear Generation Company (Exh.
BE-5B. Tab 8) and the recovery of any above-market costs associated therewith in the transition charge, is approved; and it is
tifR-22-1999 16:12 DECO LEGL 617 424 2733 P.46/47 D.T.E. 98-119/126 Page 74 FURTHER ORDERED: That Commonwealth Electric Company's proposed ratemaking treatment of'the proceeds from the sale be and hereby is approved, subjec't to reconciliation and refund; std it is FURTHER ORDERED: Timr Boston Edison Company and Commonwealth Electric Company comply with all other orders and directives contained herein.
By Onier of the Department, Ah 9q:t Gail Besser. Chair
/3
/ w JamdiNnnehy, Comnussiop6r A true copy Atte t2 d.E a f
MARY L. COTTRELL M
g, oner Secretary 0.f n
Paul B. Vasington, issioner 1
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blY 444 d/JJ P.47/47 1
D.T.E. 98-1194126
$%18)psppy9p Appeal es to matters oflaw from any final decision, order or ruling of the Commiss taken to the Supreme Judicial Coun by an aggrieved pany in interest by the filing of a w petition prayin8 that the Order of the Commission be n:odified or set aside in whole Such petition for appeal shall be flied with the Secretary of ti:e Commission within t days after the date of service of the decision, order or rating of the Commission or within su further time as the Commission may allow upon request filed prior m the expiratio days after the date of service of said decision, onier or ru!ing. Withit; ten days after such petition has been filed, the appealing party sha!! enter the appeal in the S.!preme EdIcTaTC
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sitting in Suffolk County by filing a copy.thereof with the Clerk of said Cosat. (Sed. 5, Chapter 25, G.L. Ter. Ed., as most recently amended by Chapter 48S of the Mts of1971 s
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TOTAL P.47
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ATTACHMENTB INTER-COMPANY CREDIT AGREEMENT BY AND BETWEEN ENTERGY INTERNATIONAL. LTD LLC AND J
ENTERGY NUCLEAR GENERATION COMPANY Dated as of March 31,1999 i
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Inter-Company Credit Agreement
' Table of Contents Page Parties 2
Article I. General Provisions 2
Article II. Th Advances 5
Article III. Termination 8
Article IV. Miscellaneous 10 Signatures 11 Exhibit A -
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Exhibit B 16 l
itccsharc\\annroy\\cil cngc interco credit agree 2 doc
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INTER-COMPANY CREDIT AGREEMENT i
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This Inter-Company Credit Agreement (this " Agreement"), dated as of the 31st of March 1999, by and'between EIL Intemational Ltd LLC, a Delaware Limited Liability Company ("EIL") and its affiliate, Entergy Nuclear Generation Company, a Delaware r
Corporation ("ENGC").
ARTICLE I GENERAL PROVISIONS q
Section 1.01. Definitions.
" Authorized Officers" means the Chief Financial Officer or Treasurer of ENGC and such other officers or agents of ENGC as the Chief Financial Officer, by written notice to EIL, shall designate on the Effective Date. The Chief Financial Officer may change such designation from time to time after the Effective Date by written notice to EIL.-
"Available Credit" means an aggregate principal amount not to exceed Filly Million Dollars ($50,000,000,) at any time outstanding.
" Business Day" means a day on which banks are open for business in both the State of Louisiana and the State of New York.
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itccshare\\annroy\\cil cnge interco creft agrec2 doc
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" Commitment Fee Rate" means (market rate) basis points, computed on the basis of a 365 day y-ar for the actual number of days (including the first day, but excluding the last) on all of the Available Credit remaining undrawn for any calendar quarter. The Commitment Fee Rate may be changed to the then current Market Rate by EIL upon written notice to ENGC, which change shall be effective on the first day of the immediately succeeding calendar quarter.
" Dollars" or "$" means lawful money of the United States of America.
" Drawdown Date" means a Business Day selected by ENGC upon which an advance should be funded.
1
" Effective Date" means the " Closing Date" as such term is defined in Section 2.9 of the Purchase and Sale Agreement, dated November 18,1998, between ENGC and Boston Edison Company, a Massachusetts Corporation.
" Interest Rate" means t he effective rate per annum for any calendar quarter a basic points (market rate) plus the three month LIBOR rate listed on the Bloomberg screen US0003M <Index> on the 15* day of the month of March, June, September and l
December for the immediately next succeeding calendar quarter computed on the basis of I
i a 365 day year for the actual number of days (including the first day, but excluding the last) occurring in the quarter such interest is payable. This Interest Rate shall apply to all 3
iasecshare\\annroy\\eil_enge interco credit agrec2. doc
of the principal amount outstanding during the calendar quarter. If the calculation for the determination of the market rate should change, EIL, upon written notice to ENGC may change the Interest Rate, which change shall be effective oa the first day of the immediately succeeding calendar quarter.
" Maturity Date" means: (i) the five (5) year anniversary date of the Effective J
Date; (ii) such earlier termination date as may occur pursuant to Sections 3.01, or 3.02, or 3.03 hereof; or (iii) such later date a<, may be mutually agreed by the parties hereto pursuant to Section 2.09 hereof. If the Maturity Date is not a Business Day, the next succeeding Business Day shall be deemed to be the Maturity Date.
" Note" means the promissory note of ENGC payable to the order of EIL, substantially in the form annexed hereto as Exhibit "A", evidencing at any given time the principal amount outstanding under this Agreement.
" Person" means an individual, corporation, partnership, trust or unincorporated organization, or a government or any agency or political subdivision thereof.
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" Pilgrim Plant" means the Pilgrim Nuclear Power Station at Plymouth, Massachusetts.
4 i%ecshare\\annroy\\cil_enge interco credit agrec2.dx
Section 1.02. Capitalized Terms. Tenns used but not herein defined shall have the respective meanings ascribed to said terms in the Purchase and Sale Agreement between Entergy Nuclear Generation Company anc Boston Edison Company, dated November 18,1998.
Section 1.03. Interpretation of Definitions. All definitions in the singular shall, unless the context specifies otherwise, include and mean the plural, and al!
1 references to the masculine gender shall include the feminine; and vice versa.
Section 1.04. Accounting Terms. All accounting temis not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of EIL and its subsidiaries' consolidated finaiaial statements, and any financial data submitted pursuant to this Agreement shall be
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prepared in accordance with such principles.
I ARTICLE II i
TIIE ADVANCES Section 2.01. The Advances. During the period from the Effective Date to and including the Maturity Date, EIL agrees, on the terms and conditions set forth herein, to extend credit to ENGC in the form of advances in Dollars (or other such currency upon which parties agree), such that the aggregate principal amount of all advances outstanding at anytime shall not exceed the Available Credit. During the term of thi Agreement, s
ENGC, at its option without penalty or premium, may from time to time repay all or any part of the principal amount outstanding as provided in Section 2.06 hereof, and may 5
i *"c'aa"ML'a:c ia'ere credit agree 2 doc
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reborrow any amount that has been repaid. Each advance of funds under this Agreement shall be in a minimum amount of $100,000 and, if greater, shall be in an integral multiple of $10,000.
Sectien 2.02. Request for an Advance. Each request for an advance of funds under this Agreement shall be made not later than 9:00 a.m., New Orleans time, three (3) business days prior to the proposed Drawdown Date (or upon such shorter period as the parties agree) by notice f om an Authorized OfIicer of ENGC to EIL, specifying the Drawdown Date, the amount of the advance and, a certification that such advance is for the purpose specified in Section 2.07.
Section 2.03. Interest. Interest on the principal amount outstanding shall accrue daily'at the Interest Rate. Accrued interest for each quarter shall be determined as of the close on the last day of each March, June, September and December, and an advice therefor showing the outstanding balance and the interest thereon :, hall be rendered to ENGC, and interest thereon shall become due and payable periodically, as mutually agreed upon by EIL and ENGC, but not less frequently than quarterly in arrears on the first Business Day of each April, July, October and January commencing on the Drawdown Date until paid.
Section 2.04. The Note. As soon as practicable after the Effective Date, but in any event prior to the time ENGC requests its first advance under this Agreement, 'he Note, executed by a duly Authorized Officer of ENGC, shall be delivered to EIL. The Note shall be payable to the order of EIL at its principal office in the City of New Orleans, Louisiana, and shall mature on the Maturity Date (subject to the terms of Article i
g L Asecshare\\annroy\\cil_enge interco credit agrec2. doc A
c III hereof). The principal amount outstanding as evidenced by the Note, shall accrue interest at the Interest Rate as provided in Section 2.03 hereof, which interest shall be payable as specified in Section 2.03 at the principal office of EIL in the City of New Orleans, Louisiana. Upon payment in full of the Note and all interest thereon and any other charges due thereunder or hereunder on the Maturity Date, EIL shall promptly return such Note to ENGC.-
Section 2.05. Funding and Repayment. Each advance of funds under this i
Agreement shall be made in Dollars in immediately available funds on each Drawdown
]
Date, at such place as ENGC and EIL may hereafter agree. All repayments and prepayments by ENGC of principal and all payments by ENGC ofinterest, and all other sums due under the Note or this Agreement shall be made without deduction, setoff, abatement, suspension, deferni nt, defense or counterclaim, on or before the due date of repayment or payment, and shall be made in Dollars (or such other currency as to which both parties agree) in immediately available funds at the principal office of EIL in the.
i City of New Orleans, Louisiana or at such other place as EIL may hereafter designate.
All payments received from ENGC shall be applied as follows: first, to the payment of all payments due hereunder or under the Note other than principal and interest; second, to the payment ofinterest due; and third, to the repayment of principal due on the Note.
Section 2.06. Optional Prepayments. ENGC, at its option, may prepay all or any part of the principal amount outstanding from time to time withcot penalty or premium, upon at least two (2) Business Days' prior notice (which, if oral, shall be 7
ihe"h* ban'en_ense interca credit agree 2. doc m
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l confirmed promptly in writing) to EIL. EIL, at its option, may waive such notice requirement as to any prepayment.
Section 2.07. Use of Proceeds. In order to provide financial assurance, any I
advance of the Available Credit may be used only by ENGC to meet its expenses and obligations to safely operate and maintain the Pilgrim Plant, including payments for nuclear property damage insurence and a retrospective premium pursuant to Rule 10, Part 140, Section 21 of the Code of Federal Regulations (10 CFR 140.21).
Section 2.08. Commitment Fee. A Committnent Fee on the Available Credit remaining undrawn rhall accrue daily at the Commitment Fee Rate. The Commitment Fee for each quarter shall be determined as of the close on the last day of each March, June, September arid December and an advice thereof showing the remaining Available Credit and the Commitment Fee due shall be rendered to ENGC, and such Commitment Fee shall be due quarterly in arrears on the first Business Day of each April, July, October and January commencing on the Effective Date until the Maturity Date.
Section 2.09. Extension of Maturity Date. This Agreement and the Maturity Date hereunder will be extended for successive periods of two years each upon the mutual agreement of the parties.
1 ARTICLE 111 TERMINATION Section 3.01. Termination upon Unenforceability. EIL, at its option, shall have the right to cease making advances under this Agreement, to terminate this I
i g
iAsecshare\\annroy\\cil_enge interco credit agrec2. doc
l Agreement and/cr to make the outstanding principal amount and interest thereon and any other sums due under the Note and this Agreement immediately due and payable upon written or oral notice to ENGC, but without the requirement of any further or other notice, demand or presentment of the Note for payment, if this Agreement or the Note shall at any time for any reason cease to be in full force and effect or shall be declared to be null and void while the Note is outstanding hereunder, or the validity or enforceability of this Agreement or the Note shall be contested by any Person, or ENGC shall deny that it has any further liability or obligation hereunder and thereunder.
Section 3.02. Termination Upon Cessation of Operatior.s or NRC Approval.
Notwithstanding any other provisions in this Agreement or the Note to the contrary except as provided in Section 3.03 herein, EIL agrees that it will provide the Available j
Credit to ENGC for the purposes defined in Section 2.07, and in no event shall this Agreement be terminated, nor shall EIL cease to make advances under this Agreement, until the earlier of: (i) such time that ENGC has permanently ceased operations at Pilgrim Plant; or (ii) the NRC has given written approval of the discontinuance or termination of this Agreement.
Section 3.03. Substitution of Financial Assurance. EIL can terminate this agreement upon 45 days written notice to ENGC if EIL has procured a substitute loan facility and/or Letter of Credit for ENGC that meets the financial assurance requirements of the NRC to protect the public health and safety. Such substitute loan facility and/or Letter of Credit shall remain in effect until the earlier of(i) such time that ENGC has permanently ceased operations at the Pilgrim Plant or (ii) the NRC has given written 9
i.\\secsliare\\annroyicil_enge inkt:0 credit agrec2. doc
)
4 approval of the discontinuance or termination of the substitute loan facility and/or Letter ofCredit.
ARTICLE IV MISCELLANEOUS Section 4.01. Notices..Any communications between the parties hereto, and notices provided herein to be given, may be given by mailing or otherwise by delivering the same to the Treasurer of EIL and to the Treasurer of ENGC, or to such other officers or addresses as either party may in writing hereafter specify.
Section 4.02. Remedies. No delay or omission to exercise any right, power or remedy accruing to EIL under this Agreement shall impair any such right, power or j
remedy of EIL, nor shall it be construed to be a waiver of any such right, power or remedy. Any waiver, permit, consent or approval of any kind or character on the part of EIL of any breach or default under this Agreement, or any waiver on the part of EIL of any provision or.,udition of this Agreement, must be in writing and shall be effective only to the extent in such writing specifically set forth. All remedies, either under this Agreement or by law or otherwise afforded to EIL. shall be cumulative and not alternative.
Section 4.03. Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, all of which, when executed, shall be deemed an original, but all such counterparts shall constitute but one and the same instrument.
10 iwareba"WeH>a8e in'e'co credit agree 2 doc
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IN W!TNESS WHEREOF, the panies hereto have executed this Agreement by their duly atthorized officers, as of the date first above written.
ENTERGY NUCLEAR GENERATION COMPANY t
By:
Title:
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ENTERGY INTERNATIONAL LTD LLC I
By:
Steven C. McNeal
Title:
Vice President and Treasurer 4
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4 iisecsharc\\annroy\\cil_enge interco credit agrec2. doc
i i EXHIBIT "A" INTER-COMPANY CREDIT NOTE _,1999 New Orleans, Louisiana L $50,000,000 ENTERGY NUCLEAR GENERATION COMPANY, a Delaware corporation d ("ENGC"), for value received and in consideration of the execution and delivery by -) Entergy International Ltd LLC, a Delaware limited liability company ("EIL"), of that certain Inter-Company Credit Agreement, dated as of ,1999 (the " Agreement"), hereby promises to pay to the order of EIL on the date hereof until the Maturity Date, the principal sum of $50,000,000, or so much thereof as may _be outstanding hereunder, together with interest thereon on the principal amount hereof from
- time to time outstanding at the Interest Rate as in effect from time to time. Such interest 1
shall be calculated on the last day of each March, June, September and December, and an advice therefor shall be rendered to ENGC, and shall be due and payable by the ENGC periodically as mutually agreed upon by EIL and ENGC, but not less frequently than quarterly in arrears on the first Business Day of each April, July, October and January commencing on the Drawdown Date until paid. This Note is issued by ENGC pursuant to the Agreement, to which reference is made for certain terms and conditions applicable hereto. Defined terms used in this Note 12 i \\secsharc\\annroy\\cil_enge interco credit agrec2. doc
1 l shall, unless the context otherwise requires, have the same meanings assigned to them in the Agreement. Both the principal of this Note and interest hereon are' payable in lawful money of l the United States of America, which will be immediately available on the day when payment shall become due, at the principal office of EIL, in the City of New Orleans, Louisiana. Interest shall be paid on Sverdue principal hereof and, to the extent legally enforceable, on overdue interest at the Interest Rate as in effect from time to time. The outstanding principal amount of this Note shall be increased or decreased, pro tanto, upon any increase or decrease in the outstanding aggregate principal amount as provided under the~ terms of Sections 2.01 and 2.02 of the Agreement; provided, however, that at no time shall the outstanding principal amount of this Note exceed the Available J Credit. Upon any such increase or decrease in the principal amount of this Note, EIL shall cause to be shown upon the grid portion of this Note the date and amount of such I increase or decrease, as the case may be. Upon payment in full of the principal of and interest on this Note and all other sums due from ENGC to EIL under terms of this Note and the Agreement at the Maturity Date, this Note shall be canceled and returned to ENGC and shall be of no further operation or effect. The obligation of the E"GC to make the payments required to be made on this Note and under the Agreement and to perfonn and observe the other agreements on its part contained herein and therein shall be absolute and unconditional and shall not be subject to diminution by setoff, counterclaim, abatement or otherwise. 13 i t5e'sha'*\\*aara>\\eil> arc ia'c'co creait agree 2. doc ) l
i ] Upon the occurrence of an event giving rise to a right on the part of EIL to tenninate the Agreement upon the enforceability, the maturity of this Note may be accelerated and the principal of and interest on and any.other sums due from ENGC to EIL under the terms of this Note may be declared immediately due and payable as i provided for in the Agreement. Upon the occurrence of a termination by Ell pursuant to Sections 3.02 and 3.03 of the agreement, the maturity of this Note may be accelerated and the principal of and interest in and other sums due from ENGC to EIL under this Note shall be immediately ) - due and payable at the end of the calendar quarter as provided for in the Agreement. I This Note is issued with the intent that it shall be govemed by, and construed in I accordance with, the laws of the State of New York. IN WITNESS WHEREOF, Entergy Nuclear Generation Company has caused this Note to be duly executed in its name, and its corporate seal to be hereunto affixed and attested, by its duly Authorized Officers all as of the day of. I ENTERGY NUCLEAR GENERATION COMPANY By:
Title:
lg} i Asecsharc\\annroy\\eit_enge interco tredit agree 2. doc
I l l INCREASES AND DECREASES IN OUTSTANDING { PRINCIPAL AMOUNT OF Tills NOTE J l AMOUNT OF AMOUNT OF UNPAID PRINCIPAL DATE INCREASE DECREASE BALANCE ) l 15 ikeha*nmoywitense interco credit agree 2. doc t
EXHIBIT "B" ! ENTERGY NUCLEAR GENERATION COMPANY CONFIRMATION OF REQUEST FOR ADVANCE To: Entergy International Ltd LI.C Date: This will confirm a request for an advance to Entergy Nuclear Generation Company pursuant to the Inter-Company Credit Agreement by and between Entergy International Ltd LLC and Entergy Nuclear Generation Company dated as of ( _,1999 as follows: 1 I Amount: I L Drawdown Date: Use of Proceeds: l This certifies that the proceeds of this advance will be used only for the purposes specified in Section 2.07. Authorized Officer . IF THIS CONFIRMATION IS NOT IN ALL RESPECTS IN ACCORDANCE WITH YOUR UNDERSTANDING, PLEASE NOTIFY US IMMEDIATELY. f 16 i'=*are\\a^nred_ ease interco credit agree 2. doc
IN WITNESS WIIEREOF, the parties hereto have executed this Agreement by their duly authorized officers, as of the date first above written. I ENTERGY NUCLEAR GENERATION COMPANY By: h 4(J 7 / Title /.erry/V. Yelvolton President and CEO ENTERGY INTERNATIONAL LTD LLC I By: Steven C. McNeal
Title:
Vice President and Treasurer }} c:\\ temp \\eil_enge mterco credit agrec2 doc
r l-L IN WITNESS WHEREOF, the parties hereto have executed this Agreement by l l.. their duly authorized officers, as of the date first above written. ENTERGY NUCLEAR GENERATION COMPANY By: i
Title:
J ENTERGY INTERNATIONAL LTD LLC By: A C W 1 '> fe' Steven C. McNeal
Title:
Vice President and Treasurer l l - l }\\\\poyndilglsscisecsharc\\annroyWil_enge interco credit agree 2 doc
T: l l ) l t ( l ATTACHMENT A Massachusetts Department of Telecommunications and Energy Order Dated March 22,1999 \\ i i s_}}