Order 15520 - Narr. Elec.: Standard Offer Pricing & Last Resort Power Supply

REPORT AND ORDER

On October 10 and November 7, 1997, the Narragansett Electric Company (the "Company" or "Narragansett") filed proposed Standard Offer rates and Last Resort Service rates with the Public Utilities Commission ("Commission") pursuant to R.I.G.L. Section 39-3-10, to become effective January 1, 1998. The filing was made to satisfy the Company's obligations under the terms of a settlement agreement dated May 30, 1997 amongst the Company, New England Power Company ("NEP"), the Division of Public Utilities and Carriers ("Division") and the Commission ("Settlement Agreement"). The Settlement Agreement, which was filed with, and approved by the Federal Energy Regulatory Commission ("FERC"), in relevant part, provides for the termination of the all-requirements wholesale electric power contract between NEP and Narragansett and the implementation of Rhode Island's Utility Restructuring Act of 1996, as amended, ("URA"). The general objective of the URA is to deregulate electric power supply and allow the development of a competitive market for the purchase of electricity.

Public hearings were held on November 20, 21, and 24 and December 11, 1997.

The following appearances were entered in this proceeding:

FOR THE COMPANY                       Ronald T. Gerwatowski

Craig L. Eaton

FOR TEC-RI                                       Andrew Newman

Rubin and Rudman LLP

Alan D. Mandl

Ottenberg, Dunkless, Mandl & Mandl

FOR ENRON CAPITAL AND

TRADE RESOURCES ("Enron")         Frank P. Pozniak

Rubin and Rudman LLP

FOR NEV EAST L.L.C.                      Richard W. Benka

Foley, Hoag & Eliot LLP

FOR PROVIDENCE ENERGY

CORPORATION                                Dennis J. Duffy

Partridge, Snow & Hahn

FOR THE DIVISION                          Allan M. Shoer

Special Asst. Attorney General

FOR THE COMMISSION                 Adrienne G. Southgate

General Counsel

Lindsay Johnson

Special Counsel

I. INTRODUCTION

Narragansett is a wholly owned subsidiary of New England Electric System ("NEES"), an integrated public utility holding company. Narragansett is engaged primarily in the distribution of electricity to approximately 330,000 customers located in 27 Rhode Island cities and towns. Narragansett has purchased all of its energy requirements from the New England Power Company ("NEP"), NEES's wholesale generating and transmission subsidiary. The power has been purchased under the terms of a long-term all-requirements contract, the terms and prices of which have been regulated by FERC.

The Settlement Agreement terminates the all-requirements contract between the Company and NEP and replaces it with a new contract ("New Contract") with lower rates  [1 The rates are initially lower. See Section II.C.2 for a discussion of the costs under the New Contract.], as contemplated by the URA. The Settlement Agreement requires the Company, in turn, to reduce its retail rates and implement Retail Access effective January 1, 1998.

The URA allows competition by mandating Retail Access to alternative suppliers of electricity. The URA defines Retail Access as "the use of transmission or distribution facilities owned by an electric transmission company or an electric distribution company to transport electricity sold by a nonregulated power producer to retail customers ..."  [2 R.I.G.L. Section 39-1-2(7.6).]  More simply put, Narragansett is required to allow its customers to purchase electricity from other suppliers of electricity and is required to transport any such purchases on its lines from the supplier to the customer.

The URA provides for a phase-in of Retail Access as follows: On July 1, 1997, Retail Access was made available to large commercial and industrial customers and accounts in the name of the State of Rhode Island. [3 On July 1, 1997, Retail Access was made available to (i) all new commercial and industrial customers, including new manufacturing customers ... with an anticipated average annual demand of two hundred (200) kilowatts or greater; (ii) all existing manufacturing customers with an average annual demand of fifteen hundred (1500) kilowatts or greater; and (iii) all accounts in the name of the State of Rhode Island. See R.I.G.L. Section 39-1-27.3(a).]  On January 1, 1998, Retail Access was to be extended to manufacturing customers with an average annual demand of two hundred (200) kilowatts or greater, and all accounts in the name of the cities and towns in Rhode Island. And finally, Retail Access is scheduled to be made available to all other customers within three months after Retail Access is available to forty percent or more of the kilowatt-hour sales in New England including kilowatt-hour sales in Rhode Island, but in no event later than July 1, 1998. Pursuant to the terms of the Settlement Agreement, however, Retail Access became universal on January 1, 1998.

The URA also requires each electric distribution company to arrange with a wholesale power supplier for a standard power supply offer to sell electricity to all customers at a stipulated rate. More specifically, the URA provides:

Within three (3) months after retail access is available to forty percent (40%) or more of the kilowatt-hour sales in New England and extending through year 2009, each electric distribution company shall arrange for a standard power supply offer ("Standard Offer") to customers that have not elected to enter into power supply arrangements with other nonregulated power suppliers. The power supply contract required for the standard offer shall be awarded by public competitive bidding to the lowest priced power supplier....  [4 R.I.G.L. Section 39-1-27.3(d).]

The URA provides compensation to all-requirements wholesale suppliers for costs arising out of the transition to competition. In order to compensate them for such costs, the URA designates as a "Transition Charge" 2.8 cents  [5 All rates are for each kilowatthour of usage.] of retail rates to be paid to the all-requirements wholesale suppliers as a contract termination fee to recover their estimated costs.  [6 R.I.G.L. Section 39-1-27.4(a).]  The URA provides for subsequent adjustments to the Transition Charge to true up this estimate to reflect the actual gains and losses that are incurred.  [7 R.I.G.L. Section 39-1-27.4(g).]  This would include any gains or losses from the valuation of the utility property  [8 Id.]  ("Residual Value Credit"). In addition, the URA allows the recovery of any "estimated revenue lost by the wholesale power supplier as a result of retail access during the period prior to completion of such valuation" ("Revenue Loss").  [9 Id.]  The Company's witness expected the Residual Value Credit to exceed the Revenue Loss by a substantial amount which would reduce the Transition Charge below 2.8 cents.  [10 The Company has entered into a Purchase and Sale Agreement for its non-nuclear generating facilities. Mr. Zschokke expected the transaction to generate a substantial Residual Value Credit. Tr. 11/20/97, pp. 71, 192, Tr. 11/21/97 pp. 78, 83, 94, 112, 159. Also, See Comm. Ex. 3.]

The major issues presented to the Commission are how and when the Company's rates should be reduced to reflect the reduced costs under the New Contract.

II. RETAIL ACCESS AND STANDARD OFFER

A. Narragansett's Proposal

Mr. Peter T. Zschokke, Manager of Retail Rates for New England Power Service Company, presented testimony in support of the originally proposed rates. Mr. Zschokke testified that Retail Access would be available to all customers under the proposed rates and that the rates reflected an early implementation of the Standard Offer required by the URA. [11 See Ex. NEC-1, pp. 6-8. All references to NEC-1 page numbers are to the numbers appearing in the lower right-hand corner of the page.]

The originally proposed rates were designed to reflect the reduction in the cost of power purchased by Narragansett from NEP. Mr. Zschokke testified that under the New Contract NEP reduced Narragansett's purchased power costs by 22%.  [12 See Ex. NEC-1, p.9.] The lower rates made available by NEP, before any extraordinary adjustments for changes in fuel prices, are as follows:  [13 Id.]

The above wholesale rates increase at an average annual rate of 7.5%  [14 Tr. 11/21/97, p. 184.] to encourage customers to purchase from alternate suppliers. In essence, therefore, the rates were designed to price Narragansett's energy services out of the market eventually.  [15 Mr. Zschokke testified that "it's not [the Company's] goal to stay in that business." Tr. 12/11/97, p. 150, and "we tried to design a construct where the price stays high for standard offer customers in the hope that the suppliers will come in and take them away from the standard offer." Tr. 11/21/97, p. 40.]

The originally proposed rates also included a number of other changes that would have caused customer bills to increase. Time-of-use rates were eliminated. In addition, a number of discounts and special rates, including Cooperative Interruptible Service, Credit to Promote Manufacturing, Service Extension Discount and Economic Development Rates, were eliminated. The Residential Water Heater Control Rate was also closed to new customers as of January 1, 1998.  [16 The loss of these discounts increased the revenues from the G-33 rates by $4,923,802, the revenues from rate G-63 by $850,193 and total revenues by approximately $6,000,000. See Ex. NEC-1, p. 134, Comm. Ex. 5, Record Request No. 8.]

In its filing, the Company considered four alternative methods of designing retail rates to incorporate the wholesale power cost changes under the New Contract. First, the Company examined the alternative of charging all customers a flat rate of 3.2 cents per kilowatt-hour (the "Uniform Price"). While the Company favored this approach for many reasons, it also resulted in substantial increases in some customers' bills. Approximately 6,624 or 2.9% of the Company's customers would have received bill increases under this method.  [17 Comm. Ex. 5, Record Request. No. 7.]  The majority of the increases were less than 4%, but some ranged as high as 30%. [18 Id.]  Although the Company favored the Uniform Price because all customers would be paying the cost of supply and competition would presumably be promoted, the Company did not want to adopt the Uniform Price without the implementation of other measures to mitigate the impact on customers' bills.  [19 See Ex. NEC-1, p. 12.]

Second, the Company developed alternative rates by reflecting the 22% reduction in power costs for all rate classes ("Designed Pricing"). The benefit of Designed Pricing is that it would minimize the number of customers receiving bill increases. Only 166 customers or .05% of the Company's customers would receive bill increases using this method. Approximately 90% of the increases would be less than 4%, and none would be higher than 12%. The drawback of Designed Pricing, however, is that it would result in each rate class paying a different price for the service even though Narragansett's cost for the power is uniform. [20 Id.]  Moreover, Mr. Zschokke acknowledged that this method would make it more difficult for non-regulated power suppliers to compete for the business of many of the Company's high usage customers because the proposed Designed Pricing rates for these customers would be low.  [21 See Ex. NEC-1, p.19.]   This, in turn, could very well slow down the development of competition in this market.  [22 Id.]

The third approach proposed adopting Designed Pricing initially, but then implementing Uniform Prices at the time the Residual Value Credit becomes available to reduce customer bills.  [23 The Residual Value Credit will be available when NEP's divestiture sale becomes effective. See Ex. NEC-1, p.11.]  This method is reflected in the "Standard Offer Rates" filed by the Company. The Residual Value Credit would largely offset the increase caused by the change to the Uniform Price. Under this approach, the Designed Pricing would be in effect only temporarily to provide rate stability. When the Uniform Price becomes effective simultaneously with the implementation of the Residual Value Credit, approximately 37 customers, or .01% of the Company's customers would receive bill increases. The largest increase would be approximately 16%.

In response to concerns raised by the Commission at an Open Meeting on December 2, 1997, the Company made a supplemental filing on December 5, 1997, which eliminated all bill increases.

 [24 See Ex. NEC-20.]  To accomplish this, the Company modified the proposed Designed Pricing rates to (i) retain time-of-use rates, (ii) continue the Cooperative Interruptible Service credits, and (iii) implement Equalization Credits to eliminate any remaining bill increases. The Company proposed that the revenue loss arising from the continuation of the Cooperative Interruptible Service credit be recovered from an overrecovery of costs under the Company's Purchased Power Adjustment Clause under review in Docket No. 2500.

B. Testimony of the Division

The Division presented the testimony of Dr. John K. Stutz, Vice President of the Tellus Institute. In general, Dr. Stutz supported the Company's filing. He did, however, have the following objections to the details of the filing:  [25 See Div. Ex. 1.]

1. The percentage differential between the ordinary residential and low-income Standard Offer rates had not been maintained.

2. New customers would not be eligible for Standard Offer Service.

3. The Company should give Cooperative Interruptible Service Customers an opportunity to participate in the Performance Interruptible Credit Program.

The Company agreed to the changes proposed by the Division.

C. Testimony of Enron Capital and Trade Resources

Enron presented the testimony of Richard La Capra of La Capra Associates. Mr. La Capra testified on the difficulties in attempting to establish a market price through regulation and on the merits of the alternative pricing options.

Mr. La Capra first discussed the impact of the proposed rates upon the development of a competitive market. [26 See Ex. ECTR-1.]  He testified that there is a basic problem with the rate design that will make it difficult for alternative suppliers to compete. Specifically, he observed that the 6.0 cents total power charge reflected in rates is made up of the 2.8 cents Transition Charge stipulated in the URA and the 3.2 cents energy charge stipulated in the Settlement Agreement. He suggested that the 2.8 cents Transition Charge established by the URA, which is charged to all customers regardless of whether they purchase electricity from Narragansett or an alternative supplier, is arbitrary in amount. As a consequence, the resulting 3.2 cents Standard Offer, which is the price an alternative supplier must compete against, is below the prevailing market price. In short, Mr. La Capra was of the opinion that the proposed rates would inhibit competition because alternative suppliers could not beat the 3.2 cents Standard Offer rate. He suggested two remedies. First, the Legislature could change the Access Charge. Second, because the sale of the Company's generating assets is "well along", the Company should consider applying the anticipated Residual Value Credit to lower the Access Charge. This would then allow the Company to increase the Standard Offer price without increasing customer bills.

D. Testimony of TEC-RI

Mr. Roger Buck testified on behalf of TEC-RI. Mr. Buck presented his observations, objections and opinions on a wide range of issues.  [27 TEC-RI Ex. 2.]  First, he was of the opinion that customers with hourly metering should pay for Last Resort service on an hourly basis and that the average hourly rates for each day should not exceed the 3.2 cents Standard Offer rate.  [28 TEC-RI Ex. 2, p. 2.]

Next, Mr. Buck supported the Company's adoption of the Designed Pricing on a permanent basis because this method resulted in all customers receiving a reduction of 22% in power costs. As an alternative, he suggested that:

At such time as the residual value credit from the sale of the generating assets is made applicable, the Commission could consider an alternative which recognizes the current cost allocations by implementing reductions in the access charges on a class specific basis. In that instance, the Standard Offer prices for each rate class could be established at a uniform rate of 3.2 cents.  [29 TEC-RI Ex. 2. P. 4.]

Next, Mr. Buck was of the opinion that no customer should receive a rate increase under the proposed rates. Mr. Buck based his argument on his interpretation of the URA which caps rates at the level in effect for the twelve months ending September 30, 1996, adjusted annually for 80% of the increase in the consumer price index.  [30 R.I.G.L. Section 39-1-27.3(d).]  To the extent the Company lost revenues from the implementation of the cap, Mr. Buck was of the opinion that these lost revenues should not be recoverable from the other customers.  [31 TEC-RI Ex. 2, p. 5.]

Alternatively, Mr. Buck argued that if the proposed rates did not constitute a Standard Offer under the URA, the rates should be rejected and the reduced purchased power costs realized under the New Contract should be flowed back through the existing purchased power clause.  [32 TEC-RI Ex. 2, pp. 4-5.]

Finally, Mr. Buck was of the opinion that customers currently receiving service from alternative suppliers should be allowed to elect to switch back to Standard Offer service if the customer notified the Company of such intent within 60 days from the Commission's Order.  [33 TEC-RI Ex. 1, p. 6.]

E. Findings

1. "Standard Offer"

The most basic issue presented is whether the Company's proposed rates constitute a Standard Offer as defined by the URA and, if so, whether the filing complies with the requirements of the URA. The Company's position on this issue was not clear. Specifically, Mr. Zschokke testified:

Under Section 39-1-27.3(d) of the URA, the Company is not required to arrange for Standard Offer service until retail access is available to forty percent or more of the kilowatt-hour sales in New England. Hence, the terms of that Section do not yet apply to the Company. However, as a result of the FERC settlement, the Company is essentially implementing an early "Standard Offer" service beginning January 1, 1998.  [34 Ex. NEC-1, p. 8.]

The URA provides:

Within three (3) months after retail access is available to forty percent (40%) or more of the kilowatt-hour sales in New England and extending through year 2009, each electric distribution company shall arrange for a standard power supply offer ("Standard Offer") to customers that have not elected to enter into power supply arrangements with other nonregulated power suppliers. The power supply contract required for the standard offer shall be awarded by public competitive bidding to the lowest priced power supplier.  [35 R.I.G.L. Section 39-1-27.3(d) (Emphasis added)]

The Legislature clearly intended that the power supply contract be put out to bid before a Standard Offer was arranged with the wholesale power supplier. The Company has acknowledged that it has not begun the bidding process for the Standard Offer and does not expect to begin the process until late in the first quarter of 1998.  [36 Ex. NEC-1, p.26.]  Accordingly, the Commission finds that the proposed rates do not comply with the public competitive bidding requirement of the URA, and therefore, do not constitute a Standard Offer within the meaning of Section 39-1-27.3(d) of the URA. To avoid confusion, we direct that such rates shall be referred to as "Interim Service Rates."

Our finding that the proposed rates do not constitute a Standard Offer within the meaning of the URA makes it unnecessary to decide at this time how the Standard Offer Price Cap provision of the URA  [37 See R.I.G.L. Section 39-1-27.3(d)]  is to be interpreted and applied.

2. Competitive Markets

A number of Intervenors argued that the basic objective of this proceeding is to establish a competitive market for electricity. These Intervenors maintained, based upon Mr. La Capra's testimony, that an Interim Service Rate of approximately 3.8 cents is necessary to promote competition. In their view, a rate of less than 3.8 cents would be below the prevailing market rate, and alternative suppliers would not have a reasonable incentive to compete with Narragansett's Interim Service Rates.

Several Intervenors argued that the Interim Service Rate could be increased to a level closer to Mr. La Capra's estimated market price, without increasing customer's bills, by reducing the Transition Charge by an estimate of the Residual Value Credit. The essence of this argument is that mere valuation of NEP's non-nuclear generating assets is sufficient to trigger the application of the Residual Value Credit as contemplated by the URA, [38 R.I.G.L. Section 39-1-27.4(g).] and that an actual sale is not required. The Intervenors contend that, because NEP has entered into a purchase and sale agreement ("Purchase and Sale Agreement")  [39 Asset Purchase Agreement dated as of August 5, 1997, as among NEP, Narragansett, and USGEN New England, Inc.], the requisite valuation has been performed and that the Commission should apply the anticipated Residual Value Credit from such sale to reduce the Transition Charge as contemplated by the URA.

The Commission is not convinced. The URA provides that the utility "shall meet its obligations under this section by leasing, selling, spinning off or otherwise disposing of the assets...".  [40 Id. (Emphasis added).]  The Commission construes this language to require not merely the execution of a Purchase and Sale Agreement, but an actual disposition of the assets. Accordingly, since the actual disposition of the assets has not occurred, the Commission finds that it does not have the authority to require the Company apply any portion of the anticipated Residual Value Credit to reduce the Transition Charge.  [41 A variation of this proposal, argued by the Intervenors in Consolidated Docket Nos. 2651 and 2653, would be to increase the Interim Service Rates and decrease the transmission and distribution charges. The problem with this approach is that it is at odds with the URA requirement that utilities unbundle their rates and "separately identify charges for use of transmission and distribution facilities". R.I.G.L. Section 39-1-23.3(e). The objective of unbundling is to separately state the various elements of cost, including cost of power, so that other suppliers can compete against the electric distribution company's cost of power. This approach would do just the opposite. It would commingle the elements of cost so that the separate charges would be arbitrary in amount. In short, "charges for the use of transmission and distribution facilities" would not be identified as required by the URA. Id. The Commission therefore rejects this approach as being contrary to the requirements of the URA.]

Finally, the Intervenors argued that the Company's Interim Service Rates should be increased, with no offsetting adjustments to any other element of the rate, to offset the liability for the Revenue Loss. As noted above, the URA allows recovery of the "estimated revenues lost by the wholesale power supplier as a result of retail access during the period prior to [the sale of the non-nuclear generating assets]."  [42 R.I.G.L. Section 39-1-27.4(g).]  All other things remaining equal, given the fact that NEP is reducing its wholesale rate to Narragansett, NEP will incur a Revenue Loss that will be subsequently recoverable from Narragansett's ratepayers.  [43 For a more detailed description of the adjustment, see Div. Ex. 3 and Ex. NEC-11, pp. 58-59.]  The Intervenors argued that the Interim Service Rates should be increased so that customers are paying the total cost of the power, including the amount of Revenue Loss that will be payable to NEP in the future. They reasoned that Interim Service Rates should be at least 3.8 cents, with no offsetting adjustment to the Transition Charge, to properly reflect the total power costs.

While this point is well taken, the proposed solution exacerbates the problem. In effect, the Intervenors intend to roll the cost of the Revenue Loss adjustment into the Interim Service Rates. Assuming that more customers would then migrate to alternative suppliers with lower rates, this would increase the amount of the Revenue Loss that must be recovered. In addition, it would unfairly shift costs from one group of customers to another. Specifically, customers migrating to new suppliers would not have to pay their fair share of this cost; the vast bulk of these costs would be borne by the customers who continue to purchase power from Narragansett. This would be unfair, and the Commission rejects it.

Essentially, these Intervenors are asking the Commission to set Interim Service Rates at the estimated future market price for electric service. The problem with this approach is that no one knows what future market prices will be. In recognition of this fact, the Commission will not attempt to set rates based upon forecast market prices. If suppliers are able and willing to sell below Narragansett's cost-based rates, there will be competition. If not, Narragansett will be the low cost supplier. The Commission recognizes, however, that this simple paradigm is made more complicated by the fact that the measurement of costs is a matter of judgment. The FERC-approved rates, which are consistent with the provisions of the URA, control both the definition and timing of the power costs incurred by the Company. While the Intervenors may reasonably take issue with this measure of cost, the Commission is bound by the law to incorporate these costs into rates.

Finally, it must be emphasized that the creation of competition is beneficial only if it produces savings for ratepayers. The payment of higher prices to create a competitive market, just for the sake of having a competitive market, is economic logic turned upside down. The Commission rejects it.

3. Rate Design

The basic objective of the URA is to lower retail electric rates in Rhode Island.  [44 See R.I.G.L. Section 39-1-1(d)]  One of the Commission's primary tasks in overseeing the implementation of the URA is to ensure that the benefits of the retail rate reductions are allocated fairly to ratepayers. While there is no way to spread the savings equally to all ratepayers, the savings should be fairly allocated. In the Commission's view, a fair allocation of these benefits should not result in a rate increase for any customer. For this reason, the Commission rejects the originally proposed Designed Pricing rates and, to implement retail access for all customers at this time, approves the Designed Pricing rates as modified by the Company's Supplemental Filing of December 5, 1997. The Supplemental Filing incorporates time-of-use rates, continues Cooperative Interruptible Service Credits, and implements Equalization Credits to eliminate any remaining bill increases. However, the Commission makes no findings or commitments on the design and implementation of the rates in the future and makes no commitment to any particular rate design method for establishing rates in the future.

Finally, the Commission rejects the Company's request to recover the revenue loss arising from the continuation of the Cooperative Interruptible Service credits from the overrecovery of costs under the Company's Purchased Power Adjustment Clause under review in Docket No. 2500. The Company shall defer on its books the revenue loss directly attributable to the continuance of the Cooperative Interruptible Service Program after January 1, 1998 for recovery at a later date at the Commission's direction.

III. LAST RESORT POWER

In a competitive market, suppliers may not be willing to serve all customers. For example, customers with a poor credit history may not be able to obtain service. To deal with this problem, the URA provides that:

[E]ach distribution company shall, within three (3) months after retail access is available to forty percent (40%) or more of the kilowatt-hour sales in New England, arrange for a last resort power supply for customers who are no longer eligible to receive service under standard offer and not adequately supplied by the market because they are unable to obtain or retain electric service from nonregulated power producers. The electric distribution company shall periodically solicit bids from nonregulated producers for such service at market prices plus a fixed contribution from the electric distribution company .... All fixed contributions and any reasonable costs incurred by the electric distribution company in arranging this service shall be included in the distribution rates charged to all other customers.  [45 R.I.G.L. Section 39-1-27.3(f).]

Mr. Zschokke testified that the Company solicited bids for Last Resort Service from 68 potential suppliers but received no bids. [46 See NEC-9, p. 4-5.]  The Company is developing an improved request for bids, in hope that bids will be forthcoming. In the interim, NEP has agreed to supply such power to Narragansett at 3.2 cents per kilowatt-hour, the same price at which NEP will sell Interim Service to Narragansett.  [47 Id.]  In turn, Narragansett agreed to provide Last Resort Service to these customers under the rates approved in this Docket.  [48 NEC-6, p. 6. The Interim Service Rates generally deny service to customers who have received service from a nonregulated power producer after January 1, 1998. The exceptions are customers under rates A-16, A-18, A-32, A-60, and C-06 who are allowed to return to Interim Service Rates within twelve months of January 1, 1998, by notifying the Company within 120 days of taking service from a non-regulated power producer. Id., pp. 9, 14, 21, 26, 21. Accordingly, under the rates as filed, Narragansett is not required to provide service to all customers.]  The Commission approves this pricing arrangement. The filed rates, however, do not contain a tariff for Last Resort Service.

IV. IMPLEMENTATION OF INTERIM SERVICE RATES

In our Report and Order of December 24, 1997, Order Number 15489, the Commission implemented "Interim Service Rates" based on Narragansett's Designed Pricing which provided for reduced power supply costs to all rate classes. The rate design also maintained time-of-use rates and the Cooperative Interruptible Service Program. The rates were supplemented with an Equalization Credit Provision that is designed to eliminate any remaining increases in rates that would result from the Designed Pricing for Interim Service.

Our Order also altered the availability of the Residential Water Heater control Rate (rate A-18) by closing this rate to new customers effective January 1, 1998.

The Company's Non-Bypassable Transition Charge Adjustment Provision was amended for technical changes. These changes in the Tariff basically replaced the reference to an "Adjustment Factor" for Transition Costs with a "Charge" for Transition Costs.

With the advent of full retail access, the Company eliminated its Service Extension Discounts and Economic Development Discounts as of January 1, 1998. Also terminating, but not as a result of retail access, was Narragansett's Manufacturing Discount Provision that was established in 1995 for a two-year period that ended on December 15, 1997.

Accordingly, it is

(15520) ORDERED:

1. That the attached Commission Order No. 15489, dated December 17, 1997 is hereby incorporated by reference and is attached hereto as an appendix.

2. That the Company shall defer the revenue loss directly attributable to the continuance of the Cooperative Interruptible Service Program after January 1, 1998 for recovery at a later date at the Commission's direction.

3. That the Companies shall act in accordance with all other findings and instructions contained with this Report and Order.

EFFECTIVE AT PROVIDENCE, RHODE ISLAND PURSUANT TO AN OPEN MEETING DECISION ON DECEMBER 17, 1997. WRITTEN ORDER ISSUED JULY 10, 1998.

PUBLIC UTILITIES COMMISSION

================================================================

Appendix

STATE OF RHODE ISLAND AND PROVIDENCE PLANTATIONS

PUBLIC UTILITIES COMMISSION

IN RE: NARRAGANSETT ELECTRIC COMPANY

STANDARD OFFER SERVICE

and

LAST RESORT POWER SUPPLY

DOCKET No. 2631

DOCKET No. 2637

ORDER

WHEREAS, On October 10, 1997, the Narragansett Electric Company ("Company") filed proposed rates with the Public Utilities Commission ("Commission") pursuant to R.I.G.L. Section 39-3-10, designed to implement retail choice for all customers as of January 1, 1998; and

WHEREAS, On November 7, 1997, the Company likewise filed proposed rates with the Commission, designed to implement the Last Resort Power Supply as of January 1, 1998; and

WHEREAS, Notice of the proposed rate changes was published pursuant to R.I.G.L. Section 39-3-11; and

WHEREAS, Public hearings in both dockets were held on November 20, 21, 24 and December 11, 1997; and

WHEREAS, Briefs were filed by interested parties at the close of the public hearings; and

WHEREAS, On December 5, 1997, the Company made a supplemental filing, designed to modify the rates to eliminate rate increases to customers; and

WHEREAS, The Commission reviewed the testimony, exhibits, and briefs, deliberating at open meetings held on December 10 and 17, 1997;

Accordingly, it is

(15489) ORDERED:

1. That the Company's filing for Standard Offer Service is found not to comply with the provisions of R.I.G.L. Section 39-1-27.3, since it was not subject to public bid.

2. That the Company's filing will not be considered a Standard Offer Service filing as required under the law, and must be refiled not later than March 15, 1997.

3. That the Company's Design Pricing Standard Offer Service Rates, as amended in the supplementary filing to reestablish time-of-use rates, are hereby approved for service starting on and after January 1, 1998, with the following changes:

a. The Standard Offer Rates shall be entitled "Interim Service Rates".

b. The proposed "Interim Service Rates" shall be modified to allow new customers to receive service under these rates.

c. Rate A-60/A-61 shall be reduced to provide the same proportional discount as that provided by the current rates.

d. The Standard Offer Adjustment Provision shall not be applicable to the "Interim Service Rates" approved herein.

e. The Company shall reconcile the revenues billed to customers taking "Interim Service Rates" against payments to suppliers of "Interim Service Rates" and file with the Commission an adjustment mechanism to recover or refund any under- or over-collection.

4. The continuation of the Cooperative Interruptible Service ("CIS") program, as proposed, is hereby approved.

5. The equalization rate credits proposed are hereby approved.

6. The amended Non-Bypassable Transition Charge Adjustment Provision is hereby approved.

7. The closure of the Residential Water Heater Control rate to new customers is hereby approved.

EFFECTIVE AT PROVIDENCE, RHODE ISLAND ON DECEMBER 17, 1997, PURSUANT TO AN OPEN MEETING DECISION; WRITTEN ORDER ISSUED DECEMBER 24, 1997.

PUBLIC UTILITIES COMMISSION

James J. Malachowski, Chairman

Kate F. Racine, Commissioner[* Commissioners Racine and Gaynor concur, but are unavailable for signature.]

Brenda K. Gaynor, Commissioner[* Commissioners Racine and Gaynor concur, but are unavailable for signature.]

__________________________________________________________________________