For Immediate Release - September 29, 2009

Attorney General Martha Coakley's Office Pushes for Consumer Protection in National Grid's Decoupling Rate Plan

BOSTON - Attorney General Martha Coakley's Office requested that the Department of Public Utilities (DPU) significantly modify a rate plan filed by Nation Grid, including implementation of several consumer protection measures should the company be authorized to "decouple" its revenues from volumetric sales. In a brief filed with the DPU on Monday, the office has also asked state regulators to reject a variety of proposed complex cost trackers/automatic adjustment mechanisms that will make the company less efficient, less conscious of controlling costs, and, when combined with decoupling, virtually a risk-free enterprise for the company's shareholders despite a requested return on investment (authorized profit) of 11.6 percent. The brief filed yesterday focuses on issues related to National Grid's decoupling proposal and rate plan specifically. In the coming weeks, the Attorney General's Office will file an additional brief making a final recommendation regarding the company's request for a $111 million rate increase.

"While decoupling may remove disincentives to full engagement in energy efficiency measures, it also shifts substantial financial risks from shareholders to the backs of ratepayers" said Attorney General Coakley. "We fully support increased energy efficiency efforts and a balanced decoupled rate structure that includes a warranted downward adjustment in the company's return on investment as well as some limits on the recovery of revenue short falls due to factors other than conservation efforts such as the weather or the economy."

As part of a $111 million rate request, National Grid proposed the Commonwealth's first "decoupling" mechanism for an electric utility designed to break the link between volumetric sales and revenues. Regulatory decoupling aims to remove a utility's disincentive to participate vigorously in energy savings and demand side management initiatives for fear that such savings would reduce revenues and thereby harm earnings. The company's decoupling plan, however, goes far beyond the state's directives. Instead of proposing to sever the link between the amount of electricity sold from the revenues generated from those sales, the company has intricately structured its decoupling plan in a manner that will not only guarantee its annual revenues but also allow it to annually recover prospective capital costs and an annual inflation or cost of living adjustment, all at a proposed return on investment of 11.6 percent for its investors.

While supporting the DPU's decoupling initiative, the office recommended several consumer protection adjustments to the company's decoupling proposal, including among other recommendations: (1) a downward adjustment to the company's return on investment recognizing the decrease in operating risk occasioned with decoupling; (2) inclusion of restrictions to allow decoupling revenue recovery only for amounts in excess of historic declines in use per customer (or alternatively, consider limits on the total amounts that can accruals); and (3) a full review of the performance of the company's decoupling mechanism after three years.

With the adjustments proposed by the Attorney General's Office,to the Company's decoupling plan, the Company can aggressively pursue all available cost-effective energy efficiency measures as required under the Commonwealth's Green Communities Act, while affording meaningful protections to consumers from potentially large rate increases due to factors other than conservation efforts.

The Attorney General's Office also requested that the DPU reject or modify a majority of the up to 20 cost-tracking mechanisms the company has proposed, including cost-tracking mechanisms for capital investments, uncollectibles, inflation, and changes in the company's pension liability. These cost trackers allow the company to collect the actual cost associated with each of these programs annually as opposed to requiring the company to manage these costs based on a representative fixed amount that is traditionally included in distribution rates, calculated based on a historic test year. Under its proposal, the company seeks to shift virtually all the risks of operating a utility as an investor-owned company to its consumers, leaving the company with a fraction of its costs at risk. Most of the costs that National Grid wants to put into tracking mechanisms, however, under the investor-owned public utility model have always been the responsibility of the company to manage, in exchange for a return on investment commensurate with undertaking such risks. The approval of these mechanisms will result in National Grid becoming less efficient, create incentives to spend money in order to make money, and add significantly to the regulatory burden of the DPU which must review each individual filing annually - all of which will ultimately result in higher bills for customers.

If National Grid's petition is approved by the DPU, including the $111 million rate increase, it will result in an approximate 18 percent increase in distribution rates for residential customers and approximately a 12 percent increase in distribution rates for very large commercial customers. By statute, the DPU must rule on the company's petition by November 30, 2009.

Over the last several months, Attorney General Coakley's Office of Ratepayer Advocacy presented evidence to the DPU requesting that it reject much of the company's rate plan and significantly reduce the $111 million requested rate increase. In addition, the office has requested many downward adjustments to the company's rate base, adjustments to its revenue proposal, the elimination or reduction of certain expenses and a downward adjustment of the cost of equity. The Attorney General's Office also advocated for implementation of rate design that avoids a disparate impact on residential and small business customer classes and that the DPU reject a request to recover over $30 million in cost associated with restoration efforts during the December 2008 ice storm, recommending that these cost be spread out over several years to avoid impact on customers. A final recommendation on the company's $111 rate increase will be filed in the next three weeks.

National Grid USA operates two subsidiaries in Massachusetts, Massachusetts Electric Company and Nantucket Electric Company. National Grid USA is wholly owned by National Grid plc., based in London, UK, and is one of the largest investor-owned utilities in the world and the second largest utility in the United States. Massachusetts Electric and Nantucket, together doing business as National Grid, provide electric distribution service to approximately 1.2 million residential, commercial and industrial customers in 168 Massachusetts communities. Nationally, National Grid delivers electricity to approximately 3.3 million customers.

The Attorney General is the Commonwealth's Ratepayer Advocate and plays an important role in mitigating energy rate increases by representing consumers in matters involving the price and delivery of natural gas and electricity before state and federal regulators.

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