DR 97-241
                    Connecticut Valley Electric Company
        Fuel Adjustment Clause and Purchased Power Cost Adjustment 
         Order Setting FAC and PPCA Rates Temporarily at Existing
        Rates, Approving Proposed QF Rates, Finding Imprudence For
       Not Terminating Power Purchase Contract and Setting Date for
                Hearing on Appropriate Level of Power Costs
                            to Include in Rates
                         O R D E R   N O.  22,815
                             December 31, 1997
         APPEARANCES: Kenneth Picton, Esq. for Connecticut
     Valley Electric Company; Ransmeier and Spellman by Dom S.
     D'Ambruoso, Esq. and John T. Alexander, Esq. on behalf of
     Connecticut Valley Electric Company; McLane, Graf, Raulerson and
     Middleton by Steven V. Camerino, Esq. on behalf of the City of
     Claremont; Kenneth Traum for the Office of Consumer Advocate for
     residential ratepayers; and, Robert Frank, Esq. for the Staff of
     the New Hampshire Public Utilities Commission.
               On November 26, 1997, Connecticut Valley Electric
     Company, Inc. (CVEC or the Company), filed with the New Hampshire
     Public Utilities Commission (Commission) its proposed Fuel
     Adjustment Clause (FAC), Purchased Power Cost Adjustment (PPCA)
     and Short-Term Energy Purchase Rate.  The filing included
     proposed tariff pages to be effective for bills rendered on or
     after January 1, 1998: 15th Revised Page 17, 12th Revised Page
     18, 10th Revised Page 50, and 7th Revised Page 51.     
               In addition, the Company's proposal includes revised
     Pilot tariffs due to changes in the costs upon which the FAC and
     PPCA charges are based so that Pilot customers are neither
     advantaged nor disadvantaged with respect to regular bundled
     tariff customers.  Revised Pilot tariff pages are: 4th revised
     Page 53, 54 and 55; 3rd revised Page 56, 57, 58, 59, 60, 61, 62,
     63, 64, 65 and 66.  The Office of Consumer Advocate (OCA) is a
     statutorily authorized intervenor. 
               On November 17, 1997, the City of Claremont filed a
     complaint against CVEC and a petition for a reduction of electric
     rates.  On December 10, 1997, the Commission consolidated the
     complaint proceeding, which had been initially docketed as     
     DC 97-244, with the FAC and PPCA proceeding.
               At the hearing, the Commission heard arguments
     concerning the scope of the proceeding, based on a Motion to
     Dismiss by CVEC, which the Commission denied.  Four Central
     Vermont Public Service (CVPS) witnesses testified on behalf of
     CVEC: Peter Damien Lena, Ph.D., Principal Consultant -
     Forecasting; Charles A. Watts, Senior Marketing Analyst;  C.J.
     Frankiewicz, Financial Analysis Coordinator; and, Scott R.
     Anderson, Regulatory Compliance Facilitator.  
               After the hearing, CVEC filed a record request which
     adjusted its proposed FAC and PPCA rates due to a revised 1998
     sales forecast.  On December 24, 1998, the Company, based upon a
     request of Staff, submitted a letter to the Commission which
     described how CVPS intends to respond to a December 17, 1997
decision by the Federal Energy Regulatory Commission (FERC) in
docket ER97-3435 concerning CVPS's request at the FERC for
stranded costs based on the Commission's February 28, 1997
restructuring order for CVEC.
     A.   CVEC
          CVEC proposes to increase its currently effective FAC
rate from $0.0059 per kWh to $0.0072 per kWh and to increase its
PPCA rate from its Interim PPCA rate of $0.0023 per kWh to
$0.0133 per kWh effective on all bills rendered on or after
January 1, 1998.  The increase in the FAC rate would result in an
annual increase in overall revenues to CVEC of $219,554 or 1.3%. 
The PPCA increase would result in an increase to CVEC's revenues
of 11.0% or $1,857,768 on an annual basis. 
          CVEC's 1998 FAC rate is based on forecasted 1998 RS-2
of $2,987,348 and SPP energy costs of $4,202,800.  Adjustments
for interest, franchise tax and the over collection from 1997
result in a net estimated energy cost for 1998 of $7,097,667. 
Base energy revenues of $5,876,961 are subtracted from the
$7,097,667 forecasted net energy costs to reflect the energy
costs, $1,220,706, to be recovered through the FAC.  Those costs
are then divided by the forecasted retail sales of 168,888,000
kWh to derive a FAC rate of $0.0072 per kWh for all bills
rendered in 1998.  CVEC points out that the FAC sales and
revenues are neutralized for the New Hampshire Retail Pilot
          The increase in the FAC rate for 1998 is due to higher
RS-2 energy charges which CVEC purchases from its parent company,
CVPS, and from lower expected retail sales and higher costs from
the New Hampshire/Vermont Solid Waste Project, a QF located in
Claremont, New Hampshire which sells all of its output to CVEC at
Commission approved long-term avoided cost rates.  The higher
projected FAC costs for 1998 are offset by $154,953, the over
collection in the FAC expected at the end of 1997 which are
$144,741 greater than was forecasted in the 1997 FAC filing.  The
effect of the proposed FAC rate increase would be to increase a
residential customer's monthly bill by $0.66, assuming 500 kWh of
electricity usage.
          The PPCA increase is calculated by adding the estimated
1998 RS-2 costs and the SPP capacity costs, $9,024,008 and
$36,300, respectively, removing the effects of the New Hampshire
Pilot program, adding interest and franchise tax to arrive at a
total 1998 PPCA cost of $9,114,185.  The 1997 PPCA under-
collection of $275,285 is added for a net total of $9,389,470. 
Base capacity revenues of $7,248,765 are then subtracted to yield
the 1998 estimated PPCA costs of $2,239,812 which is divided by
estimated 1998 retail sales of 168,888,000 to derive the PPCA
rate of $0.0133 per kWh. 
          The PPCA increase reflects an expected under-collection
of 1997 PPCA costs of $275,285 due to increased purchased
capacity costs of CVPS which are passed on to CVEC, increased
production costs of CVPS-owned generation, slightly increased
transmission costs and the reflection that the actual 1996 PPCA
over collection was $166,878 less than forecasted.  
          The under-collection is added to the PPCA costs CVEC
expects to incur in 1998.  Those costs include an increase in the
RS-2 capacity costs of $281,273.  The increased costs are caused
by higher net purchased capacity costs of $147,000, higher
production capacity and transmission allocation factors result in
a $66,000 increase for CVEC, increased costs for CVPS-owned
production results in a $36,000 increase for CVEC and
transmission related costs result in approximately $57,000 of
increased PPCA costs.  The Company points out that most of the
increase in the PPCA is due to lower revenues in 1997 as a result
of refunds for over-collections and that only 4% of the 11%
increase is a result of cost increases.
          In a letter dated December 23, 1997, CVEC revised its
sales forecast for 1998 upward by 1.7% or 2,881,000 kWh. The
revised sales forecast results in a slight decrease to the FAC
and PPCA rates originally proposed on November 25, 1997.  The FAC
would decrease to $0.0071 per kWh, a $0.0001 per kWh change, and
the PPCA would drop by $0.0003 per kWh to $0.0130 per kWh. 
          Concerning CVEC's purchases from its parent company,
CVPS, under FERC approved wholesale rates, CVEC argues that this
proceeding should not address the issues related to CVEC's FAC
and PPCA rates that were raised in the City of Claremont's
Petition for a Reduction in Electric Rates. CVEC believes the
issues belong in DR 96-150, the generic docket on New Hampshire
electric restructuring.  To address them in this proceeding would
be needlessly duplicative in CVEC's opinion.  CVEC also believes
the City of Claremont's Petition is premature in that the
Commission's directive to terminate the RS-2 contract is subject
to a pending motion for rehearing and is therefore not yet final. 
During the hearing, CVEC stated that if market-based rates were
the only costs allowed to be recovered by CVEC and CVPS continued
to bill and receive payment from CVEC under the RS-2 contract,
CVEC would not recover approximately $5-$6 million of RS-2 costs
and would be in default of its financing agreements.  
          By letter dated December 19, 1997, CVEC outlined a
number of financial and accounting implications if the Commission
were to order CVEC to exercise its termination provision of the
RS-2 power contract and impose market based ratemaking.  CVEC
continues to believe that DR 96-150 is the proper docket to
address these issues and requests that the Commission fully
consider the financial and accounting effects of its decision on
CVEC before rendering a decision.  CVEC also seeks to meet with
Staff and other interested parties to discuss the effects of
terminating the RS-2 contract.  
     B.   The City of Claremont 
          Claremont's complaint against CVEC argues, among other
things, that CVEC's rates are unreasonable inasmuch as CVEC
should have terminated its wholesale power contract with its
parent, CVPS. In support of its complaint, Claremont noted that
in Docket DR 96-392, a CVEC Fuel and Purchased Power Adjustment
Charge proceeding, the Commission addressed a number of wholesale
power related issues raised by the Office of Consumer Advocate
and the Commission Staff.  Among the issues addressed in that
proceeding was whether CVEC, a wholly owned subsidiary of CVPS,
had satisfied, in accordance with Commission Order No. 22,469,
"its obligation to assess the prospective benefits and costs of
giving termination notice to CVPS for wholesale service." 
Claremont contends that the Commission found that CVEC had not
satisfied this obligation and that CVEC had an obligation to
continually assess how best to bring electric service to its
customers at the lowest cost. Claremont further contends that,
although the Commission recognized that CVEC had not assessed the
opportunity for lowering its costs and retail prices by giving
termination notice to CVPS, it found that such wholesale power
purchase obligations could be better addressed in DR 96-150, the
generic docket on electric industry restructuring. Claremont
states that the Commission made a finding in DR 96-150, Order No.
22,509 dated February 28, 1997, that CVEC should have terminated
its wholesale power purchase contract with CVPS when RSA 374-F
was passed on May 21, 1996 and that its failure to do so was
imprudent.  Under the wholesale power purchase contract with
CVPS, CVEC may terminate service at the end of a service year,
provided it has given written notice of termination prior to the
beginning of that service year.  In Claremont's opinion, if CVEC
had given written notice of termination to CVPS when RSA 374-F
was passed, its obligations to purchase power for CVPS would end
effective January 1, 1998.  
          At the hearing on December 17, 1997, Claremont noted
that New Hampshire Electric Cooperative, Inc. (NHEC) provided
termination notice to CVPS in March 1994 and exercised its 1-year
right to terminate its wholesale purchased power contract with
CVPS. One year later, CVPS won the bid to provide power to NHEC
at a considerably lower cost.  Claremont also stated that NHEC
did not incur stranded cost charges as a result of exercising its
right to terminate the wholesale purchased power contract. 
Claremont provided evidence at the hearing that it believes
supports its contention that the cost of power purchased from
CVPS is above the wholesale market value for power.  For support,
Claremont compared CVPS's RS-2 rate of roughly $84 per MWH with
1998 estimated market prices for power as provided in DR 96-150
by PSNH of roughly $38 per MWH and the La Capra estimate for 1998
of roughly $41 per MWH.  Under questioning at the hearing, Mr.
Watts admitted that $50 per MWH would be a reasonable wholesale
market price for electricity. 
          Claremont believes that, based on the above, it would
be unlawful to allow CVEC to continue to recover such imprudently
incurred above-market costs from its ratepayers after December
31, 1997. For support, Claremont cites RSA 378:7 and RSA 378:28. 
Claremont also believes that the Commission has the necessary
authority to disallow recovery of above market costs arising from
a wholesale power purchase contract, even though the contract
itself may be subject to regulation by the Federal Energy
Regulatory Commission. 
          Claremont requests that the Commission schedule a
hearing pursuant to RSA 378:7 and rule that:  CVEC's current
rates are unjust and unreasonable; the cost of power purchased by
CVEC from CVPS is above the wholesale market value for that
power; and, CVEC is not entitled to recover from its ratepayers
the above-market cost of power it purchases from CVPS after
December 31, 1997.
     C.   Office of Consumer Advocate
          The OCA supported the City of Claremont's proposal to
either reduce the level of payment from CVEC to CVPS, thereby
affecting shareholders of CVPS or to allow CVEC to place into
rates a lower rate than the RS-2 rate, but higher than market-based rates in order to avoid a CVEC bankruptcy. 
     D.   Staff
               Staff did not file testimony, but questioned CVEC on
     the sales forecast, the treatment of Pilot program costs in the
     FAC and PPCA rates and the costs included in the RS-2 contract. 
     Staff also questioned CVEC concerning the CVPS conditional notice
     to terminate the RS-2 contract filed at the FERC and its related
     request to obtain stranded cost recovery.
               We have reviewed the testimony, transcripts and
     exhibits in this proceeding, including the post-hearing
     submittals by CVEC and the City of Claremont.  Based on our
     review of the record, we find CVEC has acted imprudently by not
     terminating the RS-2 wholesale contract between CVEC and its
     parent company, CVPS.  We make this finding separate from any
     determination in the electric utility restructuring docket, DR
     96-150.  The issues before us relate to one of the fundamental
     principles of regulation, the provision of safe and reliable
     service at just and reasonable rates.  Based on the record, and
     in disregard for the concerns we have raised previously on this
     issue, See, Order No. 22,509 (February 28, 1997) 71 NHPUC 145,
     148 (1986), it is clear that the contractual relationship between
     the parent company and the affiliate was continued for the
     benefit of the shareholders of CVPS and that the ratepayers of
     CVEC received little to no consideration in the decision-making
     process of CVPS.  Services are provided to CVEC through a service
     contract with CVPS.  CVEC's witness, Mr. Frankiewicz, testified
     that the analysis done on the termination of the RS-2 contract
     was done strictly from the perspective of the consolidated
     company.  It would appear that termination was not contemplated,
     even in light of NHEC's 1994 termination notice of its power
     contract with CVPS, due to the conflict of interest we noted as
     far back as 1986.  
               We will direct CVEC to bill its existing FAC and PPCA
     rates to customers pending the outcome of a hearing on the rates
     that would have resulted from an appropriate market-based
     wholesale rate which would have been available no later than
     January 1, 1998 if CVEC had acted prudently in its purchased
     power decisions.  Based on CVEC's oral testimony and the letter
     of December 19, 1997, in which it raised a number of serious
     financial and accounting implications associated with the
     termination of the RS-2 contract or the non-recovery of above
     market power costs, we believe CVEC and the other parties and
     Staff should be afforded the opportunity to present evidence
     concerning those implications.  Prior to the hearing, we believe
     that CVEC's request to meet with the parties and Staff to discuss
     these matters should be granted.  We urge CVEC, the City of
     Claremont, OCA and Staff to meet at the earliest possible date to
     explore these issues before the hearing.
               Based upon the foregoing, it is hereby 
               ORDERED, that CVEC is directed to bill its current FAC
     and PPCA rates effective January 1, 1998, on a temporary basis
     pending a hearing to determine:  1) the appropriate proxy for a
     market price that CVEC could have obtained if it had terminated
     its RS-2 wholesale contract with CVPS; 2) the implications of
     only allowing CVEC to pass on to customers that market price;
     and, 3) whether the Commission's final determination on the FAC
     and PPCA rates should be reconciled back to January 1, 1998 or
     some other date; and it is
                    FURTHER ORDERED, that tariff pages 10th Revised Page 50
     and 7th Revised Page 51, the rates paid to Qualifying Facilities
     under Rate E, are APPROVED and that all other proposed tariff
     pages are SUSPENDED pending the outcome of the hearing on the
     above mentioned issues; and it is
               FURTHER ORDERED, that CVEC's Motion to Dismiss is
     DENIED; and it is 
               FURTHER ORDERED, that a hearing on the above mentioned
     issues be heard on January 28, 1998 at 10:00 a.m.  
               By order of the Public Utilities Commission of New
     Hampshire this thirty-first day of December 1997.
        Douglas L. Patch    Bruce B. Ellsworth        Susan S. Geiger
            Chairman           Commissioner            Commissioner
     Attested by:
     Thomas B. Getz
     Executive Director and Secretary