On March 22, 1999, the Department of Telecommunications and Energy (the "Department") issued an order approving Boston Edison Company's ("Boston Edison") divestiture of Pilgrim Nuclear Power Station and related assets ("Pilgrim"). The Order addressed whether Boston Edison's divestiture transaction maximized the value of the assets being divested to customers and whether the sale process was equitable. In the Order, the Department also approved the application of Commonwealth Electric Company ("Commonwealth") to buyout its existing purchase-power contract with Boston Edison.
- Background/Standard of Review
On December 3, 1998, Boston Edison filed a petition with the Department for approval of the following: (1) the sale of 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 residual value credit ("RVC"); (3) the purchase by Boston Edison from Entergy of power from Pilgrim under two power purchase agreements ("PPAs"); and (4) the recovery of any above-market costs associated with the PPAs in the transition charge. The matter was docketed as D.T.E. 98-119.
On December 21, 1998, Commonwealth filed a petition with the Department for approval of the following: (1) to terminate and buyout its existing obligation with Boston Edison to purchase power from Pilgrim; (2) to include the buyout amount as an adjustment to Commonwealth'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. The matter was docketed as D.T.E. 98-126.
The Department reviewed the divestiture transaction and related requests for approval pursuant to its broad authority to regulate the ownership and operation of electric utilities in the Commonwealth (G.L. c. 164, § 76), as augmented by the Electric Restructuring Act of 1997 (the "Act"). The Department reviewed the divestiture application for consistency of the proposed transactions with Boston Edison's restructuring settlement agreement (the "Settlement Agreement") and the Act. The Department stated that a divestiture transaction will be determined to be consistent with a company's restructuring plan or settlement and the Act if the company demonstrates that the "sale process is equitable and maximizes the value of the existing generation facilities being sold." See G.L. c. 164, § 1A(b)(1). The Department noted further that a sale process will be deemed equitable and deemed 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, non-discriminatory access to all data and information by any and all interested parties seeking to participate in such auction or sale." Id. at § 1A(b)(2).
- The Transaction
The divestiture transaction is composed of a purchase and sale agreement ("P&S") between Boston Edison and Entergy that was executed on November 18, 1998, exhibits to the P&S, and eight other closely related agreements. The transaction consists of the sale of Pilgrim to Entergy for the purchase price of $80 million, subject to several adjustments, and depending on the time of the closing. The specific assets being sold include the Pilgrim nuclear power plant, the Chiltonville Training Center, and approximately 1,700 acres of land on which these facilities are located. Boston Edison will retain assets defined as transmission, distribution and telecommunications assets. Also, as part of the transaction, Entergy will assume all liability for the decommissioning of Pilgrim.
- Review of the Asset Divestiture
The Department noted that, during the auction process, 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. The Department found that the auction process used by Boston Edison 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 was equitable.
The Department determined that Boston Edison selected the highest bidder from an equitable auction process that satisfied the requirements of the Act. The Department noted that strict bidder confidentiality and shielding bidder identity enhanced the competitiveness of the divestiture process. Thus, the Department found that the divestiture process maximized the value of the generating assets for customers and thus satisfies the Act.
- Benefits of the Divestiture Transaction
The Department noted that the most significant benefits to accrue to customers from this divestiture are through decommissioning savings and the elimination of future risk associated with the operation of Pilgrim. Based on estimates by Boston Edison and by the Attorney General, the decommissioning savings are expected to be between $164 million and $300 million. In addition, the Department noted other benefits including the continued employment of approximately 600 persons, and economic benefits to the Town of Plymouth through indirect jobs, tax payments, and the sale of Pilgrim to an entity with first-hand experience in the operations of nuclear power plants. Finally, the sale of Pilgrim finalizes Boston Edison's exit from the electric generation business, which is consistent with the goals of the Settlement Agreement and with the Act. Finally, the Department determined that the divestiture transaction provides both direct and indirect benefits to Boston Edison's customers through the mitigation of Pilgrim-related transition costs.
- Purchase Power Agreements
As part of the Divestiture process, Boston Edison would either terminate or assign 16 wholesale contract customers under long-term or life-of-the-unit contracts. Two contract customers, Commonwealth and Montaup Electric Company ("Montaup"), entered into contract amendments with Boston Edison and executed new PPAs with Entergy for their respective 11 percent shares of Pilgrim's output. Commonwealth and Montaup have agreed to fund a pro-rata share of the decommissioning funds being provided to Entergy and to contribute a proportional share of the net unrecovered plant investment. In return, Commonwealth and Montaup will each receive 11 percent of the Pilgrim sale proceeds.
Boston Edison was unable to negotiate termination of the 14 other wholesale contracts with municipal electric departments. Instead, it has assigned the physical delivery obligations under the contracts to Entergy. Boston Edison entered into a separate PPA with Entergy for 3.73313 percent of Pilgrim's capacity and output to meet its obligation to supply the municipal contracts.
Boston Edison also entered into an agreement with Entergy to buy back 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. In the aggregate, the Commonwealth PPA, the Montaup PPA and the Boston Edison PPAs provide for the purchase of 100 percent of Pilgrim's capacity and output in 1999, declining to 50 percent by 2004 when the PPAs (other than Boston Edison's PPAs regarding municipal contracts) terminate.
The Department noted that Commonwealth's contract buyout, with the associated replacement contract, is likely to achieve savings of approximately $35 million for Commonwealth's customers and will eliminate Commonwealth's future potential risk associated with the operation of Pilgrim. The Department approved the contract buyout as in the public interest, and allowed Commonwealth to include any above-market components of the PPA in its transition charge.
The Department noted that Boston Edison's PPAs are an essential component of the overall divestiture transaction and determined that they are consistent with the Act's requirement to mitigate transition costs. The Department also allowed Boston Edison to recover any above-market costs associated with the PPAs in its transition charge.
- Ratemaking Treatment of Proceeds from Divestiture
The Department considered adjustments made by Boston Edison to the gross bid price of $80 million and determined whether such adjustments were consistent with the terms of the Settlement Agreement and the Act.
Boston Edison currently has an application before the Federal Energy Regulatory Commission in which it seeks recovery from the municipal contract customers for their share of the decommissioning costs and net unrecovered investment in Pilgrim. In the event the costs are not recovered prior to closing, Boston Edison proposes to include the total costs ($43.8 million) as transition costs to be recovered from retail customers through the transition charge.
The Department determined that the inclusion of the costs associated with the municipal contracts in Boston Edison's transition charge is consistent with the goal of mitigating stranded costs, and is consistent with the Act. The Department explained that the overall benefit to customers of the divestiture transaction outweighs the cost of possible non-recovery of the costs associated with the municipal contracts. The Department directed Boston Edison to reimburse customers fully in the event that it is successful in recovering part or all of these costs.
Boston Edison proposes two adjustments to the bid price to account for inventory of materials and supplies and for nuclear fuel at closing. The Department determined that the inventory and nuclear fuel expenses will be reconciled in Boston Edison's next transition charge reconciliation proceeding.
Boston Edison proposes to adjust the bid price by 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 nuclear refueling outage.
The Department approved the adjustments relating to nuclear expenditures, noting that they are necessary to comply with requirements of the Nuclear Regulatory Commission. The Department also approved the adjustments for uncompleted pre-approved projects, finding such adjustments to be reasonable as Entergy's bid was based on the projects being completed. The Department directed Boston Edison to modify its treatment of the LLRW costs to reflect contributions already made by customers. Finally, the Department determined that Boston Edison's treatment of refueling outage costs is reasonable, and approved the deduction of the refueling costs from the bid proceeds.
Boston Edison proposes to deduct approximately $15 million for capital additions made since December 31, 1995. The Department approved the adjustment, finding that the record supports a finding of the prudence of the requested capital additions.
Boston Edison proposes to reduce the bid proceeds by $5 million for estimated transaction costs incurred in the sale process. The Department approved the use of an estimated amount for the transaction costs, but directed Boston Edison to file the actual transaction costs in its next transition charge reconciliation proceeding.
Boston Edison sought approval to adjust the bid price for other costs that may not be identified or known until the closing. The Department noted that such request was made in Boston Edison's initial brief, and was not part of the record. The Department denied Boston Edison's request to recover these "other costs." The Department noted that Boston Edison may seek recovery of such costs, as needed, in its next transition charge reconciliation proceeding.
Please contact Bob Werlin or David Rosenzweig if you have any questions regarding this Regulatory Alert.