Executive Summary

Under the Connecticut Choice Plan, every consumer in the state would have the unrestricted freedom to choose the electric services and suppliers it wanted as of July 1, 1998. The Plan represents our best opportunity to reduce substantially the extremely high prices that Connecticut consumers pay for electricity, prices that are among the highest in the nation.

At the same time, full retail competition will be an avenue to significant service innovations in how electricity is produced, packaged and delivered that will stand in sharp contrast to the "business as usual" approach that is the hallmark of all monopolies. Finally, the Plan will bring to an end the unproductive investments in additional strandable costs.

Quite simply, the Plan reflects the fact that the existing approach to the generation and sale of power is obsolete. There is no longer any rational basis for sheltering electricity suppliers - and blocking customers - from the forces of the marketplace that many other commodities in our economy, including such previously regulated services such as telecommunications, natural gas and air and rail service, thrive on.

To ensure that all suppliers have the same access to our electricity delivery system, the Plan calls for an independent entity with no connection to any supplier to operate the transmission system. The current owners of the distribution system will operate and maintain that system as in the past. The rates they charge will be regulated by the DPUC. Today's vertically integrated utilities will be encouraged to divest themselves of their generation assets. Prior to divestiture, they will be required to separate their sales operations from their transmission and distribution functions (which will remain a monopoly).

The Plan establishes criteria that fairly deal with the issue of stranded costs. The Plan also provides for legitimate public policy objectives, including consumer protection, energy efficiency and environmental protection.

In sum, the Connecticut Choice Plan will guide our state to the retail competition marketplace with a minimum of dislocation and a maximum of opportunity.

Goal Statement for Connecticut

1) Affordable, high quality electric services that meet the needs of residents and businesses in the state are necessary and vital to the welfare and development of our society;

2) The efficient provision of electric services by multiple providers in a competitive system will promote economic development in the state;

3) expanded employment opportunities for residents of the state in the provision of electric services benefit the society and economy of the state

It is, therefore, the goal of the state to:

(a) ensure the universal availability and accessibility of high quality, affordable electric service to all residents and businesses in the state,

(b) promote the development of effective competition as a means of providing customers with the widest possible choice of services,

(c) utilize forms of regulation commensurate with the level of competition in the relevant electric service market while protecting customers from abuse of market power and anti-competitive behavior through appropriate regulatory and consumer protection institutions,

(d) facilitate the efficient development and deployment of an advanced, reliable electric infrastructure, including open networks with maximum interoperability and interconnectivity,

(e) encourage shared use of existing transmission and distribution facilities and cooperative development of new facilities where legally possible and technically and economically feasible,

(f) ensure that providers of electric services in the state provide high quality customer service and high quality technical service, and

(g) minimize the environmental impacts of the generation and delivery of electric power.

A) Connecticut Needs Electric Industry Restructuring

1) Connecticut's Citizens and Businesses Pay Par Too Much for Their Electricity

Connecticut's electric rates are far too high across the board, far above the national average. (According to the Interim Report issued by the Restructuring Task Force in February of 1996, Connecticut rates exceed the national average by 30% for residential rates, 27% for commercial rates and 63% for industrial rates. Interim Report at 16.) As a result, Connecticut ratepayers pay hundreds of millions of dollars more annually than they would pay if the state's electric bills fell to the national average. (These figures are based on a weighting of the rates charged by The Connecticut Light and Power Company ("CL&P") and The United Illuminating Company ("UI"), along with national data from the Edison Electric Institute.)

According to a 1996 National Association of Regulatory Commissioners ("NARUC") study of residential electric rates for 180 companies, for a 500 kWh/month customer, CL&P was 23rd highest in the nation and UI was 13th highest.

CL&P and UI bills to customers are not only high, but they have grown faster than the national average. The NARUC study also indicates that CL&P's residential bills increased 21.69% from 1990 to 1995, while UI's residential bills increased 18.00% over this period. The national average for residential electric bill increases over this same period was 9.35%. Thus, recent residential bill increases have been far higher in Connecticut.

Like all of our neighboring states (each of which is well along with plans to allow retail competition), Connecticut needs electric industry restructuring to bring the state's electric costs more in line with the national average. Connecticut families and businesses cannot afford to continue paying hundreds of millions of dollars, year-in and year-out, in excess electric costs. This unjustified and unnecessary burden hinders Connecticut's ability to compete in the global economy, and lowers the quality of life in our state.

2) The Monopoly Era in Electricity is Over

For most of the twentieth century, the electric industry (in Connecticut and elsewhere) has been organized through territorial franchises granted to vertically integrated companies such as CL&P and UI. The justification for this regulatory approach has been (in part) economies of scale --that is, the notion that larger electric generation units decrease the cost of power for each customer class, combined with the assumption that the generation and delivery of power was a "natural monopoly." These franchised utilities sold power at rates set by a regulatory commission based on the utilities' cost of service.

Monopoly pricing has been expensive. In many cases, the cost of service model provided a substantial financial inducement for large capital investments (on which a profit could be earned), but provided little or no financial inducement to deliver low cost power. Artificial restrictions on competition -- such as franchised monopolies and regulation -did not come into being because they were found to be superior to competition. Instead, they were created (and continue to be justifiable) only where competition was thought to be impractical.

Times have changed. Legislative changes and technological developments have eroded the initial justifications for the generation monopoly; insulating utilities from competition no longer has any logical foundation.

Legislative changes. The Public Utility Regulatory Policies Act of 1978 ("PURPA") brought significant non-utility generation capacity into production across the nation. PURPA was based partly on federal government concern over the electric industry's apparent inability to construct new generation facilities cost-effectively. The safe and reliable operation of many generation facilities under PURPA by non-utilities effectively broke the utility monopoly on power generation. The Energy Policy Act of 1992 ("EPAct") represents a further legislative. step away from the monopoly on power generation enjoyed by traditional electric utilities by broadening the categories of authorized non-utility generators. Spurred by EPAct, the Federal Energy Regulatory commission ("FERC") completed the national movement to wholesale competition among electric generators when it issued Order 888 this past Spring. Order 888 requires all electric utilities under its jurisdiction to file non-discriminatory open-access transmission tariffs that will enable any power generator to purchase transmission service from a utility and sell it to an electric retailer.

To date, the federal government has left to the several states the challenge of bringing the benefits its of open access to retail sales. our neighboring states of New York, Massachusetts and Rhode Island are meeting this challenge by establishing aggressive legislative and regulatory plans to allow full retail competition in 1998. New Hampshire and Maine have also taken affirmative steps toward the same goal.

Technological developments also have undermined the tradition of a generation monopoly for electrical supply. During the 1970s and 1980s, numerous large central station electric generation facilities were built, in Connecticut and elsewhere. These units, especially the nuclear plants, suffered such severe cost overruns that they actually tended to increase the cost of electric power for all customers (not decrease it, as traditional "economies of scale" thinking anticipated). These cost overrun problems were especially severe at the Seabrook nuclear unit in New Hampshire and the Millstone III nuclear unit in Connecticut. CL&P and UI are part owners of these and other nuclear units, and that ownership is the most important single source of the current high rates which these companies charge.

Today, thanks in part to the innovation spurred by PURPA and EPAct, generation plants based on the combined cycle gas turbine are efficient at much smaller plant sizes than has been the case in the past. Typical installation costs of gas units today range from $500 to $800 per kilowatt, compared with approximately $3000 per kilowatt for nuclear facilities. In addition, relying on greater numbers of smaller generation units distributed closer to loads reduces the need for new transmission lines and provides a numerical diversity that minimizes the consequences of an outage at any one unit. The ability of independent power producers to generate electricity reliably at fixed prices has demonstrated that monopoly ownership of generating units is unnecessary.

Thus, the monopoly era is over in the electric industry. In recent years, the natural gas and telecommunications industries have been forced to abandon their status as conventional utilities subject to traditional monopoly-based cost of service regulation. Substantial de-regulation has been experienced in the airline and transportation industries as well. The same process of emergent competition is underway in the electric industry. Connecticut should embrace this development so that its consumers can enjoy the same benefits in price reductions, service innovations and market responsiveness that electric consumers in other Northeastern states will soon enjoy.

3) The Time is Ripe for an Alternative to the Present System

Moreover, there is little correlation between the level of system reliability and the existence of a utility monopoly on generation. The Connecticut Department of Public Utility Control ("DPUC") , in a 1988 investigation, found that power outages are caused primarily by delivery (transmission and distribution) failures, not by generation failures. Further, concluded the DPUC, the pressure on CL&P caused by its Millstone 3 cost overruns led directly to cost-cutting initiatives in transmission/distribution which undermined service reliability.

Pressure for changes in the structure of the electric power industry in Connecticut has been building for some time. For instance, large industrial consumers of electricity have demanded and received special rate discounts from CL&P and UI, through secret contracts or flexible rates. Only by allowing all consumers -- not merely the largest or those with the most clout -- retail choice of electricity supplier can the benefits of market competition reach the mainstream consumer.

4) Restructuring Can Improve Connecticut's Economic Future and Quality of Life

Electric industry restructuring is proceeding apace in most New England and Mid-Atlantic states. For instance, both the Massachusetts Department of Public Utilities and the New York Public Service Commission have indicated their intention to introduce full retail competition in the electric industry in those states by January 1, 1998. Rhode Island has enacted legislation that phases in retail choice between 1997 and 1998. Connecticut will thus be surrounded by states that have recognized and embraced the benefits that market forces can bring to the electric industry. Nor are our neighbors unique. New Hampshire has passed legislation opening retail markets as of January 1, 1998. Maine, Vermont and Pennsylvania also are moving ahead in electric restructuring.

Connecticut should endorse these signs of regional progress in electric industry restructuring. Otherwise, our economic future and qualify of life will suffer. Full market competition is obviously the most powerful force to give society what it wants. If the marketplace demands lower cost electricity supplies, the market will do a much better job than regulation of producing this result. If other states in the region proceed with electric industry restructuring while Connecticut does not, those states will enjoy the benefits of competition, including lower priced power, while Connecticut will be left behind.

Lower electric prices that result from industry restructuring will benefit Connecticut in myriad ways. When retail electricity prices drop, the income of all consumers is effectively raised and the costs of production go down for many businesses. Thus, restructuring simultaneously improves both the state's quality of life and its business climate. The open, competitive electric market that proper restructuring will bring to the state not only promises lower rates, but also greater diversity in electrical services, increased reliability, and new opportunities for efficiency and innovation.

In this light, the question no longer is whether Connecticut should restructure its electric industry, but how it should do so. It is this question that the Connecticut Choice Plan answers.

B) Overview of Proposed Industry Structure

1) Premises

Electric industry restructuring in Connecticut should promote effective competition in all aspects of electric supply. In competitive elements of the restructured industry, all relevant entry barriers for new participants must be removed. In monopoly elements of the restructured industry, all barriers to effective competition (e.g., transmission access which is directly or indirectly restricted or which is discriminatorily priced) must be removed.

Electric industry restructuring in Connecticut should meet the needs of all electric customers, including residential, commercial and industrial, particularly through lower electric bills in the near term and over time. At the same time, electric industry restructuring in Connecticut should serve the public interest, particularly with respect to the reliability of electrical service and the quality of the state's environment.

2) Investor-owned Utilities

Connecticut's two investor-owned utilities, CL&P and UI, together serve about 94% of the state's electrical load (taking account of their PPP power purchases, which represent about 8% of Connecticut's electrical load). CL&P and UI are vertically integrated monopolies, supplying generation, transmission (from generation to load centers) and distribution (to end users) of electricity in a single operation.

Under the Connecticut Choice Plan, for both CL&P and UI, these distinct functions will be disaggregated. Generation will become a fully competitive element of electrical service. All customers will have the right to purchase their electricity from any one of a number of suppliers. Transmission and distribution will remain as monopoly functions in this industry, generally regulated by federal and state authorities, respectively. Further, these several disaggregated functions will be priced separately for the consumer.

3) Municipal Electric Utilities

Connecticut has seven municipal electrical systems, united for power purchase purposes as the Connecticut Municipal Electric Energy Cooperative ("CMEEC") , which together serve about 6% of Connecticut's electrical load. Currently, the electric rates charged by these municipal systems are considerably lower than those charged by CL&P and UI.

Under the Connecticut Choice Plan, each of the state's municipal electrical systems will be encouraged to participate in restructuring, but ultimately will have the option of whether to do so. If a municipal system decides not to participate, it will continue to deliver electricity to its customers much as it does today. If a municipal system decides to participate in restructuring, it would be allowed to sell generated power at retail outside of its current territory, and would be reciprocally required to allow its present customers to choose generation supply on a competitive basis.

4) Public Interest Aspects

Public interest concerns associated with the electric industry will be better served under the Connecticut Choice Plan than is the case today. Public policy programs, including low-income protection and energy efficiency programs, will be administered by the local distribution company. The reliability of electrical service will be improved, given the separation of generation from transmission/distribution. Lower electric rates will be available to all customers. For those retail customers who do not choose a competitive generation supplier or whose supplier fails to provide service, a default basic generation supply will be available.

C) Generation and Supply

1) All Customers

Under the Connecticut Choice Plan, all retail customers will have full retail access to competitive electrical generation no later than July 1, 1998. All customers (individually or in selfselected groups) will be able to negotiate for direct (bilateral) retail access with any energy supplier licensed to conduct business in Connecticut. Customer choice will include interconnected distributed generation or self-generation as well.

Subject to transmission reliability constraints, Connecticut buyers and sellers of electricity will be free to enter into whatever transactions meet their needs. These could include a variety of differentiated electric services (e.g., purchases at spot market prices, guaranteed prices or time-of-day or seasonal rates; or purchases of power generated by particular fuels).

The restructured Connecticut electric industry will treat all customers and all competitive generation suppliers fairly and equitably by treating them equally. This will help assure that the benefits of retail restructuring are broadly available on a nondiscriminatory basis. No need exists in Connecticut for "pilot" programs, since these are only of modest informational value and would delay the commencement of full retail access. Our state can learn whatever it needs from pilots already in effect elsewhere (e.g., New Hampshire) and from the progress of states which have already committed to retail choice timetables that are more aggressive than the schedule proposed in this Plan.

2) Aggregation

In the Connecticut Choice Plan, formation of customer aggregators is strongly encouraged and facilitated. Such intermediaries (which could be business or municipal associations, municipalities or other private entities) would specialize in purchasing wholesale power and re-selling it to groups of retail customers. Thus, cities and towns which presently do not operate municipal electric departments could provide load aggregation services.

Such load aggregation will be a key component of the new competitive market for electrical generation. Load aggregation will be subject to the rights of individual customers to contract directly for electric service.

3) Access to Customer Information

At present, almost all consumers of electricity in Connecticut are customers of CL&P or UI. Under the Connecticut Choice Plan, various suppliers will compete to serve these customers. To assure fair competition, this playing field must be level. This means that all customer history and usage information as well as mailing list data must be available to competitors on a timely basis and in a format that is readily useable by standard computer systems.

Distribution of such information will be carried out both on an aggregated and on an individualized basis. Competitors should have access to all customer information on terms equal to or better than the terms of access enjoyed by any electric utility or utility affiliate. Regulations will be adopted to reconcile customers' expectations of privacy with the dissemination of information needed for a competitive marketplace.

The incremental costs of distributing this information shall be borne by those competitors seeking the information. Customers shall be entitled to any available information about their loads or usage at no cost. Also, licensed competitors of CL&P and UI will be allowed access to CL&P and UI bill inserts for distribution of their own promotional material.

4) Environment

Environmental and other regulation will apply consistently to all providers and will not unfairly disadvantage new entrants. It is important that the benefits of restructuring do not come at the cost of increased air pollution. Existing generation plants that received their original air quality permit before 1980 should reduce their emissions toward the standards that apply to new plants over a reasonable transition period. This requirement should be reviewed to prevent undue impact on electricity costs in Connecticut. States in which fossil-fueled generating units whose air emissions affect Connecticut air quality are located should be encouraged to reduce such emissions to levels that enable Connecticut to attain environmental standards in a cost-effective manner. Connecticut should actively participate in regional and national pollution reduction initiatives and employ policy options within its jurisdiction to make sure that the state's air quality is enhanced.

Distributed generation (which can reduce transmission and distribution costs) should be given a fair opportunity to compete, including with respect to interconnection requirements and backup services. Commercialization of new renewable generation resources should be provided for in a restructured electric industry. Cost-effective market transformation/market driven energy efficiency programs must be provided for.

5) Siting

Under restructuring, generation will be unbundled and subject to the competitive market. At the same time, regulatory siting review for generation will continue in connection with environmental planning considerations. Although the continuation of stringent siting criteria is important to serve environmental and related public interests, siting regulators must be careful not to impose unnecessary barriers to new market participants.

D) Transmission and Distribution

1) Transmission

Transmission will continue to be regulated by the FERC. See Section E of the Connecticut Choice Plan, below, for further discussion of related issues.

2) Distribution

Under the Connecticut Choice Plan, the local distribution company ("LDC") will be obligated to provide connection and distribution services to any customer in its geographic service area seeking such service. This LDC may provide billing services for competitive generation suppliers, subject to reasonable regulation. Regulation of consumer protection issues, including all LDC and competitive supplier billing and termination procedures, will continue to be provided for in a manner appropriate to a competitive environment.

The LDC will administer a variety of mandated public policy programs, subject to reasonable regulatory standards and oversight. Such programs will include low-income protection programs, demandside management initiatives and commercialization programs for renewables or other innovative technologies and may include other consumer protection efforts.

It is anticipated that all such public policy programs will evolve, as further experience with the restructured electric industry is obtained.

The costs of these public policy programs are expected to be modest. For instance, the DPUC has estimated that the current conservation, hardship and economic development programs of CL&P and UI, taken together, represent less than 3% of the revenues of these companies. There is no apparent need, in pursuit of the lower electric rates which Connecticut needs, to terminate or severely cut these types of public policy programs.

The costs of these public policy programs will be recovered through a non-bypassable system benefits charge administered by the LDC.

3) Facilitating Customer Choice

LDCs will be required to facilitate customer choice of generation supplier in a variety of ways. They will establish fair procedures for customer exercise of choice. They will provide nondiscriminatory open access to the distribution system, for all customers and suppliers (including reasonable provision for interconnection standards, distribution backup service, wire upgrade requirements and access to information) . The LDC also will establish procedures for tracking energy and power flows within the distribution system, for purposes of settlement and balancing as well as billing. The incremental costs of such initiatives will be assessed to all suppliers providing power into the system.

4) Metering

All customers would be required to have metering which is at least comparable to the current requirements for their rate class. As an initial matter, the LDC will continue to have the responsibility to maintain and read the meters. The LDC will also retain ownership of all of its meters. If a supplier or a customer wishes to install time of day or more sophisticated metering, they may own the meter and bear the costs. Such a meter must meet reasonable technical specifications and would be maintained and read by the LDC.

Cost responsibility for electricity deliveries will be allocated to suppliers on an hourly basis using (i) actual readings of. meters which record hourly usage and (ii) load profiles of customer classes or subclasses for all other customers. Responsibility will be determined on an aggregate basis based on the number of customers of each supplier served in a load control area.

Strong consideration should be given to unbundling customer service. Meter reading and maintenance would be bid out or suppliers could assume these responsibilities, subject to audit procedures to ensure accuracy.

5) Default Generation Service

The LDC will be required to administer a basic generation service for all retail customers. The minimum terms and conditions of any basic service offering will be established by the DPUC. This service will be available to customers who have not designated a competitive generation supplier, or whose designated competitive supplier fails to deliver to them.

The right to make this basic generation offering will be bidout periodically, subject to regulatory supervision. Potential bidders would be subject to threshold qualifications, but thereafter bidding would be based solely on price for this generation service. To assure that this electrical load will be served on a competitive basis, consideration should be given to requiring the LDC to select more than one supplier of basic generation service.

All retail customers may use or reject the basic generation offer without special entrance/exit charges being imposed upon such use/rejection.

E) Reliability and the Regional Wholesale Market_Structure

SPECIAL NOTE: This section is included in the Connecticut Choice Plan as a recommendation to achieve a more effective and robust wholesale marketplace in New England. The elements of the restructured electric industry discussed in this section are expected to be subject to state level regulation only minimally and indirectly. FERC will continue to exercise its exclusive jurisdiction over electricity transmission to reform so-called "tight" power pools, such as NEPOOL.

As may be seen, the Connecticut Choice Plan envisions that NEPOOL must be replaced. A mandatory power exchange (such as NEPOOL today or some future "Poolco"), particularly if affiliated with, or controlled by generators, is antithetical to a competitive electric generation market.

However, these regional reforms will take time, and cannot be determined by Connecticut acting alone. Thus, the initial implementation of the Connecticut Choice Plan can proceed before any specific changes in NEPOOL.

1) Independent System operator

A truly independent system operator ("ISO") will be established to facilitate a fully effective and robust marketplace. The ISO will not be affiliated with or controlled by owners of generation or owners of transmission/distribution. The purpose of such independence will be to assure impartiality in the policies, rules and operations of the transmission system. Equitable access to ISO services will be assured for all market participants.

To ensure the adequate performance and independence of the ISO, the right to serve as ISO will be subject to periodic review and, if necessary to improve performance, rebidding. ISO control over transmission assets in the relevant geographic territory will be based on leases of such assets. owners of transmission assets will be required to enter into such leases, on terms subject to regulatory review.

2) Responsibilities of ISO

The ISO will manage deliveries over the transmission system. The ISO will be responsible for system reliability and safety, including emergency responses, constraint allocations and maintenance. System reliability will be maintained consistent with national and regional reliability standards, and with the willingness of customers to pay for varying levels of service firmness. The ISO will have authority over participating generation units sufficient to assure the safety and reliability of the grid, in both normal and extraordinary circumstances.

3) Reliability

The ISO will ensure physical delivery of power to meet real-time demand. Market-based reliability mechanisms will be implemented wherever practical. For instance, the efficient scheduling of power deliveries to load will be a critical ISO function. This could be facilitated through a requirement that retail generation suppliers schedule the amount of power they estimate their customers will use, on an hourly basis, and actually deliver the scheduled amounts. If such a supplier underestimates its customer load and thus under-delivers power, it would be required to pay the appropriate fees to the ISO. These fees would cover the ISO's costs of procuring back-up power through any one of a number of means, including exercising pre-existing "call" rights on certain generation resources. Thus, suppliers would have an incentive to forecast their customer loads accurately and to insure delivery of adequate amounts of power to the system.

The financial reliability of market participants will be assured through the supplier licensing process.

4) Market Concentration

The entire underpinning of this Plan is the establishment of a fully effective and vigorous market in which multiple suppliers vie for customers' business. Today, nearly 100% of the retail load in the state is served by utilities (although, in many cases, the power consumed is generated by a non-utility or an out-of-state utility). Utilities also own most of the existing generation capacity and will continue to do so unless and until these assets are divested. Finally, the ability of Connecticut to import power is restricted by the capacity of existing transmission lines, also owned by the incumbent utilities.

These facts, combined with the contemplated ability of all players to sell power at unregulated rates, means that the existence and exercise of market power needs to be carefully monitored to protect consumers. The potential for anti-competitive conduct is plain. Appropriate authorities in Connecticut and in the region must put in place reasonable regulations that will avoid these problems and must further be prepared to curb any abuses quickly. The FERC already appears to be responding to these concerns on the federal level. State authorities must be equally vigilant.

5) Power Exchanges

Voluntary power exchanges may be established to operate market-based auctions for power. Such power exchanges will be completely separate from any system operation function and will have the same relationship to the ISO as do all other market participants.

F) The Transition

1) Customer Education

The transition from the present monopoly-based electric industry to full retail access under the Connecticut Choice Plan will require enhanced consumer education.

No later than six months prior to the beginning of full retail access, the customer education process will begin. Subject to reasonable regulation, this process will insure dissemination of relevant information so that customers are fully informed about the market options to come. Such information will include, at minimum, clear explanations of the new rules and obligations for utilities and competitive suppliers, and full information on how customers can exercise their right to choose a retail supplier of electricity, including their right to join with others to buy as a group. The purpose will be to assure that all customers know what to expect from industry restructuring and are able to shop intelligently.

2) Functional Separation

Prior to the beginning of retail access, and as a preliminary step prior to full divestiture, CL&P and UI will be required to fully separate all of their competitive functions from their monopoly functions. In this context, competitive functions include, at minimum, generating facilities, field sales forces, service packages, and administrative operations not directly necessary for transmission/distribution functions. These functional separations will be subject to regulatory standards and review. In this context, the regulatory goal will be to safeguard effectively against anti-competitive behavior by transmission/distribution operations, whether through improper exercise of vertical or horizontal market power, or transactions which favor the generation activities of affiliates, or otherwise. In addition, the DPUC will determine whether any measures are needed to level the playing field in light of the embedded "brand name" value of the existing suppliers or utility affiliates.

Specifically, appropriate standards of conduct will be developed and enforced to assure full separation of the competitive and monopoly functions within CL&P and UI. Utility employees in competitive functions at these companies will be required to work independently of utility employees in monopoly functions, and all employee transfers across functional lines must be reported to regulators. Distribution of information, and enforcement of tariff provisions, must occur on the same basis (a) across functional lines within CL&P and UI, and (b) between the monopoly functions of CL&P and UI and the competitive operations of non-affiliated generation suppliers, aggregators and marketers. Deviations from these standards of conduct are permitted in emergency circumstances, if necessary to maintain electric system reliability, but all such episodes must be reported to regulators within 48 hours of their occurrence.

3) Strandable Costs

Strandable costs are those costs already incurred by franchised electric companies such as CL&P and UI which are not recoverable under fully competitive market conditions. The strandable cost issue arises because most of the apparently uneconomic costs of CL&P and UI are based upon generation assets, and generation is the element of the current system which will be subject to competition under restructuring. Specifically then, strandable utility costs are those sunk utility costs which exceed the market value of the assets in question under competitive conditions.

Until markets are opened, actual stranded costs cannot be calculated. Policymakers should be cautious about early estimates of stranded costs proffered by utilities. According to a recent study by the Interstate Natural Gas Association of America ("INGA"), early estimates of interstate gas pipeline stranded costs, made before industry restructuring, were $44 billion. The total of all pipeline stranded costs filed to date is $13.2 billion. This shrinkage is logical. Once stranded costs are exposed to and tested by the market, and once utilities have proper incentives to mitigate the costs, decreases are inevitable.

In General

Under the Connecticut Choice Plan, strandable cost recovery will be based on the specific nature of utility assets, on specified regulatory procedures and on the willingness of CL&P and UI to divest themselves of generation assets. To facilitate meaningful restructuring, the Connecticut Choice Plan delineates the standards applicable to strandable costs.

Strandable asset recovery will be based on the individual merits of each case, considered on an asset-by-asset basis, with high-value assets netted against low-value ones. The burden of proof in all instances will be on the affected utility, requiring it to show, as a threshold matter, that the expense or investment for which strandable recovery is sought:

The following factors must be used by the DPUC in determining, for each asset, whether stranded cost recovery is allowed and the extent and timing of such recovery:

No strandable costs will be recoverable if incurred by the utility after January 1, 1996.

Stranded costs which are allowed will be collected for the former monopoly utility through an appropriately structured non-bypassable charge. This strandable cost charge will be imposed by the LDC on all end users of electricity, regardless of the supplier of electric generation which they have chosen. In the event that, after a netting of the value of all generation assets, there is a positive surplus of funds, this amount should be credited to ratepayers.

4) Divestiture of Generation Assets

Divestiture, the complete legal separation of the competitive and the monopoly functions of franchised utilities like CL&P and UI, is highly desirable in electric industry restructuring. only through divestiture will the state be assured that each new market participant is receiving access to the transmission and distribution system that is equal the access accorded to every other participant. If new participants must jostle with incumbents (or their affiliates) who still control the all important distribution system, a real danger arises that customer choice, open access and the attendant customer benefits will be illusory. In addition, full divestiture will assist in strandable asset valuations, regulatory streamlining, and increased system reliability.

Control of the transmission and distribution facilities gives electric utilities the ability and incentive to discriminate against competing generating facilities. The DPUC and other utility commissions have recognized this is a serious problem that must be addressed. Thus the New York Public Service Commission earlier this year stated:

Critical to a movement toward a restructured industry is the need to avoid undue concentration of market power on the distribution side to unduly restrict choice on the generation side. Divestiture of generation and energy services is a clear way to allay concerns about vertical market power and avoid anti-competitive behavior. (NY PSC, Opinion No. 96-12, May 16, 1996 at 63.)

The DPUC expressed concerns that the market alone, through utility management, may not be sufficient to remedy this problem even with regulatory oversight:

While the DPUC concluded that the legal problems may be too formidable to order divestiture of generating facilities, it stated that, "the Department is not entirely convinced that measures short of divestiture can adequately protect against uncompetitive practices." id.

Although divestiture serves many essential interests, a divestiture occurring over too short a period of time might reduce the value of the assets or deprive the utilities of the time to form well conceived plans concerning the structure, sequence and timing of divestiture. For these Reasons, this Plan suggests that utilities should complete their divestiture within five years from the initial date on which retail choice is allowed.

In summary, the solution recommended here gives the utilities a reasonable time to divest assets while giving them incentives to vigorously pursue that objective.

Strandable asset determinations. A utility asset will not be "strandable" under electric industry restructuring to the extent that the value of that asset is recoverable by its owner in the competitive marketplace existing after restructuring has occurred. Thus, determination of the market value of potentially strandable assets is an essential element of all strandable asset recovery procedures. The best way to determine this market value is found in an actual market transaction --- that is, an actual sale, assignment, tax-free spin-off (Such a spin off could be modeled after the 1989 transaction in which NU divested itself of its gas properties (with a book value of well over $200 million) by forming a separate subsidiary which owned the gas properties and then distributing the shares of stock in that corporation to NU shareholders.) or other comparable transaction between the utility and an independent buyer or assignee.

Regulatory streamlining. Under the Connecticut Choice Plan, former monopoly utilities such as CL&P and UI will be disaggregated into competitive and monopoly elements. If complete legal divestiture of these very different elements does not occur, the common owner of same has substantial incentives to allocate company costs to the monopoly element of the business, and/or to engage in affiliate transactions which overcompensate the competitive operation or undercompensate the monopoly operation. These abuses, to the extent successful, can seriously undermine the competitive marketplace sought by industry restructuring. Thus, if divestiture does not occur, considerably more regulatory oversight over the electric industry must continue in order to protect market integrity.

Increased system reliability. The reliability of the state's electrical system has been a question under the traditional monopoly structure which CL&P and UI now enjoy. In the past, when the costs of generation became difficult for these companies to handle in the era of nuclear plant construction, reliability suffered. This result was possible due to the common ownership and control of generation and transmission and distribution. Specifically, at that time, hard-pressed utility executives directed management and financial resources toward generation and away from transmission/ distribution. Legal divestiture would prevent this result in the future. The managers of the transmission and distribution company would be enabled and required to devote their full attention to the transmission and distribution system without the distractions of generation. (Traditional utility investors may also find the transmission and distribution company to be an investment that meets their risk and income profile better than a company laden with expensive and risky generation assets.)

Divestiture will have the public interest effects just sketched only if it is permanent. That is, the LDCs off former monopoly utilities must be prohibited, at least for a considerable period of time, from reacquiring generation units which have been divested.

5) Nuclear Generation

Conceptually, nuclear generating facilities should be treated in the same fashion as other generating units in restructuring the industry. However, depending on fuel prices and other circumstances at the time market value is determined, nuclear generation may raise particular issues for Connecticut, given our utilities' heavy investments in such generation. These issues must be specifically addressed in restructuring.

CL&P is a joint owner of seven nuclear facilities, and UI has interests in three such facilities. The treatment of these plants in electric industry restructuring should encourage their safe, reliable and economic operation. The recent history of the Millstone units demonstrates that cost of service regulation does not guarantee adherence to safety standards or high levels of availability. It is noteworthy that Dr. Joseph Kalt, speaking to the Restructuring Task Force on August 21, 1996, stated that the regulatory reforms now under consideration would not affect safety or reliability in the utility industry.

The appropriate incentives can be created by making the plant owners fully responsible for the economic consequences of their continued operation. In other words, subject to the stranded cost regime already described, each plant would be free to sell its output in the competitive market, but could not pass on any future capital or operating costs which it failed to recover through sales revenues. If the economic risks of continued plant operation became too large, the owners would retire the facility.

The specific nature of Connecticut's nuclear generation facilities may require some modifications in this approach. The degree to which any such modifications are needed should be evaluated during the restructuring transition itself. Two areas for particular consideration are decommissioning costs and market valuation of the assets.

Nuclear decommissioning of the plants in their current condition is a stranded cost to the extent that prudent actual costs exceed the funds accumulated to date. Any additional costs created by future operations (e.g., the disposal of fuel consumed in the future) should be treated as an operating cost which is the responsibility of the plant owners. since it is critical that sufficient funds be available for decommissioning when nuclear plants are retired, these funds should be maintained in trusts which insulate them from creditors of the owners of each nuclear plant.

Determining the "market value" of a nuclear plant for stranded cost purposes may be difficult because of the lack of potential buyers and the loss of a guaranteed market. In addition, the NRC may require a demonstration of a revenue stream for funding safe operation. The actual sale of nuclear generation plants to private investors is now proceeding in the United Kingdom, and this process should be reviewed to determine its applicability for Connecticut. Another mechanism for market valuation of the nuclear plants would be to base such valuation on market offerings for output contracts.

6) Independent Power Producers

Connecticut's two investor owned utilities have contracts for 521 megawatts of independent power producer capacity. These contracts were required by federal and state law and approved by the DPUC before they were signed. They provide payments for kilowatt hours actually produced (as opposed to utility generators that receive payments regardless of whether they operate). Currently those payments are largely above market prices, but compared to other utilities in the Northeast or other utilities in the country with independent power contracts, the costs to CL&P and UI are below the average costs for those other utilities. In short, these contracts alone are not causing Connecticut electricity costs to be uncompetitive with other Northeast states. Courts have recognized that the United States Constitution and PURPA prohibit the forced abrogation or modification of these contracts. Nevertheless, voluntary actions in Connecticut and many other states have been effectively used to reduce the costs to consumers, and further actions to mitigate costs should be encouraged and incentives provided where cost-effective. These contracts should be assigned to the distribution utility and the costs recovered through a non-bypassable system benefits charge.

G) Future Regulation

1) Distribution

After industry restructuring has begun, electric distribution will remain a monopoly function, at least for the near term. Thus, comprehensive economic regulation of LDCs and protection of electricity consumers will continue, and will remain a state responsibility.

Regulation of the public policy program responsibilities of LDCs, and also over billing and other disputes involving the LDC, competitive energy suppliers and retail customers will continue. Regulatory and consumer protection functions will continue to be funded by an assessment upon the industry.

2) Transmission

The economic regulation of transmission will be a responsibility of the FERC or other federal regulatory authority. State authorities will monitor ISO and other transmission issues, and will act to protect Connecticut interests where appropriate.

Transmission owners and/or the ISO also will be subject to state-level siting review for transmission system construction projects. Such siting review generally will include economic need and environmental considerations.

3) Generation

Under the Connecticut Choice Plan, electric generation will be subject to far less regulatory oversight than presently is the case. Among the present regulatory activities for generation which will no longer exist under restructuring are cost of service regulation and integrated resource planning. Notwithstanding this reduced regulation of electric generation under restructuring, some regulation thereof will continue.

Consumer protection will be maintained in the form of .licensing requirements for generation suppliers, power marketers or load aggregators seeking to do business in Connecticut. Regulatory standards for licensing of prospective suppliers of retail electric generation services (including generators, aggregators and marketers) will be effective at least six months prior to the beginning of full retail access. The scope and timing of these proceedings should be similar to the procedures used for telecommunications providers.

This regulatory review will be designed to verify the financial, managerial and technical capabilities of such entities to carry out the business activities contemplaeed. If a prospective licensee has a history of serving customers in other jurisdictions, information about those past transactions may be reviewed. During the transition to a fully competitive generation market, more detailed licensing review of generators, marketers and aggregators may be required than will be the case when this competitive market matures.

During the entire restructuring transition, including after retail access has begun, regulators and consumer advocates will conduct enhanced consumer protection activities. These activities will designed to deter anti-competitive practices and to address the full range of consumer protection issues created by the restructuring of the electric industry.

More generally, state regulatory and consumer protection agencies will engage in the oversight necessary to develop and to maintain the integrity of the competitive generation market. This oversight will include monitoring of consumer protection matters, market power, horizontal and vertical, and appropriate regulatory and judicial intervention.

For utilities which have not yet divested their generation assets, specific further regulatory oversight will be required. In order to prevent cost-shifting between the competitive and non-competitive operations of such companies, continuing regulation of affiliate transactions, of the allocation of common costs, etc. will be required. The purpose of such further regulation will be to minimize or eliminate anti-competitive behavior by such companies.