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					                   STATE OF CONNECTICUT

                     DOCKET NO. 05-07-21


                     JOINT TESTIMONY OF

                    GEORGE J. ECKENROTH


                    RICHARD A. SODERMAN

                       ON BEHALF OF

                       AUGUST 29, 2005
                                         TABLE OF CONTENTS


I.   INTRODUCTION ....................................................................................................... 1

II. OVERVIEW OF SECTION 9 OF THE ACT .............................................................. 2

III. LENDER SELECTION AND KEY TERMS FOR RFP ............................................... 3


V. BILLING SERVICES ............................................................................................... 10

VI. COST RECOVERY ................................................................................................. 13


GJE-1                       BIOGRAPHICAL INFORMATION

RAS-1                       BIOGRAPHICAL INFORMATION


                                                         Testimony of George J. Eckenroth
                                                                      Docket No. 05-07-21
                                                                         August 29, 2005
                                                                                   Page 1


 2   Q.   Mr. Eckenroth, please state your full name, your business address, and

 3        your position with NU.

 4   A.   My name is George J. Eckenroth. I am the Director of Financial Policy for NU.

 5        My business address is 107 Selden Street, Berlin, Connecticut. Additional

 6        biographical information is found in Exhibit GJE-1.


 8   Q.   Mr. Soderman, please state your full name, your business address, and

 9        your position with Northeast Utilities (“NU”).

10   A.   My name is Richard A. Soderman. I am Director of Regulatory Policy and

11        Planning for NU. My business address is the same as Mr. Eckenroth’s.

12        Additional biographical information is found in Exhibit RAS-1.


14   Q.   What is the purpose of your testimony?

15   A.   The purpose of our testimony is to discuss The Connecticut Light and Power

16        Company’s (“CL&P” or the “Company”) recommendations regarding

17        implementation of Section 9 of Public Act 05-01; June Summer Session, An Act

18        Concerning Energy Independence (the “Act”). The testimony will address the

19        key terms to include in the request for proposals (“RFP”) to potential lenders, and

20        related issues, as contemplated by Section 9(a) of the Act; the buy-down

21        mechanism contemplated by Section 9(b) of the Act; and billing services to be

22        provided by the Company, including cost recovery and related issues, as

23        contemplated by Section 9(c) of the Act.
                                                          Testimony of George J. Eckenroth
                                                                       Docket No. 05-07-21
                                                                          August 29, 2005
                                                                                    Page 2

 2   Q.    What are the requirements of Section 9 of the Act?

 3            o Section 9(a) of the Act requires the Department of Public Utility Control

 4               (“Department”) to select one or more persons to provide long-term

 5               financing for customer-side distributed resources and advance power

 6               monitoring and metering equipment purchased or leased by customers of

 7               electric distribution companies (hereinafter, “DG projects”).

 8            o Section 9(b) requires that the Department implement a buy-down

 9               mechanism to reduce the effective annual interest rate of the loan to a

10               level no greater than the prime rate in effect on the date that the buy-

11               down begins.

12            o Section 9(c) requires the Company to provide billing services with respect

13               to the payments due to the lender and permits the Company to recover all

14               reasonable costs incurred in implementing Section 9, including the costs

15               associated with the buy-down, as federally mandated congestion charges

16               (“FMCC”).

17         While the Act does not specify a particular size for the DG projects to be funded,

18         based on the Company’s prior experience with distributed resources, CL&P

19         anticipates that some projects may be in the $1 million to $10 million range.

20         Numerical examples of such projects and the estimated buy-downs are

21         presented in Attachment-1 to this testimony.
                                              Testimony of George J. Eckenroth
                                                           Docket No. 05-07-21
                                                              August 29, 2005
                                                                        Page 3

 2   Q.     How will lenders be selected?

 3   A.     Section 9(a) of the Act requires the Department to conduct a competitive bid

 4          process. The Company anticipates that the Department will issue an RFP

 5          outlining key terms and conditions required of potential lenders.


 7   Q.     What attributes should the Department look for in a lender?

 8   A.     The Department should look for a highly rated lender that is willing to commit a

 9          sufficient amount of capital to finance the DG projects.


11   Q.     Will CL&P submit a bid to provide long-term financing for customer-side

12          distributed resources pursuant to Section 9(a) of the Act?

13   A.     No. Section 9(a) specifically prohibits electric distribution companies from

14          providing such financing services. In addition, CL&P does not expect that any of

15          its affiliates will seek to serve as the financing entity.


17   Q.     How should the pre buy-down interest rate for the loan be determined?

18   A.     The interest rate will presumably be set by the lender in a manner that is

19          acceptable to the Department. Generally speaking, lenders set an interest rate

20          that reflects the risk of nonpayment of the loan. For higher risk borrowers,

21          lenders will require higher interest rates; for lower risk borrowers, lenders will

22          require lower interest rates. As described more fully in the next section, pursuant
                                                           Testimony of George J. Eckenroth
                                                                        Docket No. 05-07-21
                                                                             August 29, 2005
                                                                                      Page 4
 1        to Section 9(b) of the Act, the loan will be bought down to the prime rate using

 2        funds provided by customers. Therefore, all else equal, customers would benefit

 3        from lower risk borrowers because the pre buy-down interest rate will be lower,

 4        which results in a reduced cost of buying down the loan to prime. For this

 5        reason, the Department may wish to consider setting a cap on the interest rate

 6        spread over the prime rate.


 8   Q.   Can the lending program be structured in a way that the lender will agree to

 9        an interest rate cap?

10   A.   We believe that an interest rate cap could probably be structured in a way that is

11        acceptable to the lender. The risk of the loan will be affected by the

12        creditworthiness of the borrower, i.e., the party seeking financing for the

13        distributed generating resources or other qualifying equipment under Section

14        9(a) of the Act (each such party, a “DG customer”). If a minimum standard of

15        creditworthiness is established, then the interest rate can be capped at the

16        appropriate level for any DG customer that meets, but does not exceed, that

17        minimum level.


19        Another way to potentially reduce the buy-down costs would be for the

20        Department to require the lender to underwrite each DG customer individually

21        and set the interest rate based on its creditworthiness, not a single rate for all

22        DGs customers. In this way, more creditworthy DG customers would have
                                                          Testimony of George J. Eckenroth
                                                                       Docket No. 05-07-21
                                                                           August 29, 2005
                                                                                    Page 5
 1        interest rates below the cap, thereby reducing the amount of the buy-down

 2        payments. If the Department adopts this approach, it should review the

 3        proposed interest rate between the lender and the proposed DG customer to

 4        ensure that the agreed upon interest rate is reasonable.


 6   Q.   Under such an arrangement, how could the Department evaluate

 7        alternative lenders with respect to their respective interest rate

 8        requirements?

 9   A.   The lender could presumably offer a reasonable method, subject to the

10        Department’s approval. One possible approach is for the potential lenders to

11        provide a grid showing the amount above prime that it would charge DG

12        customers at various levels of creditworthiness.


14   Q.   How is creditworthiness determined?

15   A.   Each lender will likely have in place a set of underwriting standards for

16        determining creditworthiness based on the financial condition of the DG

17        customer, using various financial ratios to determine the sources of funds for

18        repayment of the loan principal and interest and judgment.


20   Q.   Are there other ways to mitigate the risk of the loan in order to reduce the

21        amount of the buy-down for the benefit of all CL&P customers?
                                                        Testimony of George J. Eckenroth
                                                                      Docket No. 05-07-21
                                                                         August 29, 2005
                                                                                   Page 6
 1   A.   Yes. The loan can be structured with amortizing principal payments similar to a

 2        conventional mortgage or a note with fixed sinking fund payments. This would

 3        afford greater protection to the lender than a loan structured with the entire

 4        amount of principal due at the end of the term of the note, because the value of

 5        the distributed generation asset will presumably depreciate over time. In

 6        addition, under this proposed structure, the interest portion of the loan payment

 7        would decline over time, which would gradually reduce the amount of the buy-

 8        down, thereby benefiting all customers. Finally, the loan should be secured by

 9        the assets that are the subject of the loan. These protections would lower the

10        lender’s risk, and should therefore result in a lower interest rate, all else equal,

11        and correspondingly lower the buy-down amount.


13   Q.   Does it matter whether the interest rate on the loan is fixed or variable?

14   A.   Yes. Interest rates should be fixed to ease the administration of the buy-down

15        mechanism set forth in Section 9(b) of the Act.


17   Q.   Do you have an expectation as to how much would be borrowed under this

18        program?

19   A.   The actual amount will depend upon participation levels by customers. However,

20        to give a ballpark figure, we believe that for every 100 MWs of DG, the loans

21        could amount to $120 million, assuming a loan amount of $1,200/ Kw.

                                                   Testimony of George J. Eckenroth
                                                                Docket No. 05-07-21
                                                                   August 29, 2005
                                                                             Page 7
 1   Q.   Should CL&P be a party to the loan agreement?

 2   A.   No. The Act does not obligate the electric distribution companies to be parties to

 3        the loan agreements. Further, it is important to CL&P that there be no

 4        contractual requirement or perception that CL&P is an obligor or guarantor with

 5        respect to the principal or interest of the loan. The loan agreement must clearly

 6        state that the loans are non-recourse to CL&P or NU and be free from any credit

 7        support by either company. Instead, as noted above, the loan should be

 8        secured by the assets being financed.


10        CL&P’s Accounting Organization and external auditors, as well as the ratings

11        agencies, will review the Department’s decision in this proceeding and the loan

12        documents to ensure that they have no adverse financial effect on CL&P. If

13        there is a potential impact on CL&P or NU, their balance sheets and/or the terms

14        at which they can raise capital could be affected. For these reasons, it is

15        important that CL&P’s role be carefully limited, and that it not be a party to the

16        loan agreement. CL&P’s role should be limited to collecting the buy-down funds

17        from its customers and forwarding the funds that it has collected to the lender.


19   Q.   Should CL&P have any obligation to purchase the output from the DG

20        customer?

21   A.   No. The Act does not obligate the electric distribution companies to purchase

22        the DG customer output. Further, as explained more fully in our joint pre-filed
                                                       Testimony of George J. Eckenroth
                                                                      Docket No. 05-07-21
                                                                          August 29, 2005
                                                                                    Page 8
 1         testimony in Docket No. 05-07-18, DPUC Investigation Into the Impact of Long-

 2         Term Contracts on Electric Distribution Companies, the obligation to purchase

 3         power can translate into imputed debt in CL&P’s capital structure. Every effort

 4         should be taken to avert that possibility. If a particular DG customer wishes to

 5         sell output instead of dedicating it to internal use, the DG customer can take the

 6         appropriate steps to sell the output into the grid.


 8   Q.    If, despite efforts to the contrary, debt is imputed to CL&P, what steps

 9         would be necessary?

10   A.    If, despite best efforts, debt is imputed to the Company, CL&P would need to be

11         made whole from the resulting impacts. Potential make-whole approaches are

12         also discussed in our testimony in Docket No. 05-07-18.



15   Q.    Please explain the buy-down mechanism.

16   A.    As discussed above, Section 9(b) of the Act requires the Department to

17         implement a buy-down mechanism to reduce the effective annual interest rate to

18         the customer to a level no greater than the prime rate in effect on the date that

19         the buy-down begins.


21   Q.    If the DG customer’s borrowing rate would normally be above the prime

22         rate, how will the cost be lowered to the prime rate?
                                                         Testimony of George J. Eckenroth
                                                                      Docket No. 05-07-21
                                                                          August 29, 2005
                                                                                    Page 9
 1   A.   The lender would need to collect additional payments that have the effect of

 2        buying the loan down to the prime rate, as determined as of the date that the

 3        buy-down begins. Section 9(c) of the Act provides that CL&P’s customers will

 4        pay for the buy-down through FMCC payments. An electric distribution company

 5        such as CL&P is entitled to recover any costs that it incurs in connection with the

 6        buy-down.


 8   Q.   How should the buy-down be structured?

 9   A,   For the reasons discussed above, the buy-down should be structured in a way

10        that minimizes, if not entirely precludes, the possibility of the buy-down being

11        viewed as a CL&P obligation rather than a customer obligation. A potential

12        structure would be that, each month, after the DG customer has made the

13        appropriate principal and interest payment, CL&P would pay the amount of the

14        buy-down to the lender out of funds provided by CL&P’s customers. The

15        Company’s monthly responsibility would arise only after the DG customer made

16        its required payment under the loan agreement and after CL&P has collected the

17        necessary funds from customers, at which point CL&P would pass the payments

18        that it has received through to the lender. CL&P will evaluate whether it is

19        necessary or desirable to set up a separate account for the DG transactions.


21        Some numerical examples of DG projects with various costs, loan risk and loan

22        period, along with estimates of the buy-down costs, are shown in Attachment-1.
                                                           Testimony of George J. Eckenroth
                                                                        Docket No. 05-07-21
                                                                           August 29, 2005
                                                                                    Page 10

 2   Q.   What is CL&P’s role with respect to billing?

 3   A.   Section 9(c) of the Act contemplates that the Department-approved lender will

 4        enter into an agreement with the Company to provide “billing services” with

 5        respect to the payments due to the lender from the DG customers.


 7   Q.   Will CL&P collect funds due to the lender directly from the customer?

 8   A.   CL&P proposes that it not collect funds directly from the DG customer. CL&P

 9        would prefer not to take custody of the payments from the DG customers in

10        order to reduce the possibility of debt being imputed to CL&P. The lender may

11        also prefer that the DG customers’ funds not first go to CL&P, because DG

12        payments collected by CL&P may become subject to existing liens on CL&P’s

13        assets that could take priority over the lender’s interests.


15   Q.   If the Department determines that the Act may require the Company to

16        collect both principal and interest from the DG customer and remit the total

17        payment due to the lender, would that cause debt to be recorded on the

18        Company’s balance sheet?

19   A.   Not necessarily. Although it would be less likely that an issue would arise if

20        CL&P did not take physical custody of the DG customer’s payments for any

21        period of time, the other protections discussed above may suffice: CL&P should

22        not be a party to the loan agreement, the loan must be without recourse to, or
                                                       Testimony of George J. Eckenroth
                                                                    Docket No. 05-07-21
                                                                       August 29, 2005
                                                                                Page 11
 1        credit support from, the Company or NU, and CL&P should have no obligation to

 2        purchase the DG customer’s output.


 4   Q.   What billing services would CL&P provide to the lender?

 5   A.   To the extent that the lender prefers CL&P to be involved in the billing process at

 6        all, CL&P suggests that it merely send a bill to the DG customers, notifying them

 7        of the periodic amount due to the lender. The DG customers would then pay the

 8        lender the amount due (principal and interest based on the prime rate) directly

 9        and the lender would confirm with CL&P that the appropriate payment was made

10        prior to CL&P paying the buy-down. For the reasons discussed above, the billing

11        agreement should be separate from the loan agreement and should be

12        developed after discussions between the actual lender and CL&P.


14        It is important to note, however, that a potential lender accustomed to providing

15        its own billing services might prefer that CL&P not be involved in the billing

16        process. Therefore, even if the Department were to conclude that the lender has

17        a right under the Act to have CL&P function as billing agent, the Company

18        suggests that the Department give the lender the option to waive such right and

19        collect the funds directly from DG customers if it prefers to do so.

                                                            Testimony of George J. Eckenroth
                                                                          Docket No. 05-07-21
                                                                               August 29, 2005
                                                                                        Page 12
 1        If CL&P is required to provide billing services, it would use its sundry billing

 2        system for that purpose (at least until early 2007, when the billing services are

 3        expected to be available in the Company’s new Customer Service System).


 5   Q.   What is the sundry billing system?

 6   A.   The sundry billing system is a manual billing system that is typically used for all

 7        nonutility service billing requests that cannot be accommodated by the Customer

 8        Service legacy system. Items billed through the system include bills for facility

 9        damage claims, health and medical insurance bills for former employees and

10        contract billing. However, the sundry system has very limited capabilities to

11        generate the type of information of interest to lender, which may provide an

12        additional reason for a lender to prefer to provide its own billing services.


14   Q.   Why would CL&P use its sundry billing system to bill DG customers on

15        behalf of the lender?

16   A.   It is important that any bills that it sends the DG customers relating to the loan

17        are separate from CL&P’s own bills to those customers in order to avoid the

18        appearance that CL&P is involved in the loan transaction. Therefore, using

19        sundry billing would help reduce the accounting and rating agencies risks

20        (imputed debt, etc.) discussed above.


22   Q.   What happens if the DG customer fails to make a required payment?
                                                         Testimony of George J. Eckenroth
                                                                       Docket No. 05-07-21
                                                                           August 29, 2005
                                                                                   Page 13
 1   A.    Subject to any cure period under the loan agreement, if the DG customer fails to

 2         make a required payment, the lender would be able exercise its rights and

 3         remedies under the loan agreement. In addition, the Company’s obligation to

 4         make buy-down payments would terminate at that time.


 6   Q.    Would the Company have any collection obligation if the customer failed

 7         to make its required payment or defaulted on the loan?

 8   A.    No. CL&P’s statutory obligation is to act as billing agent, not as a collection

 9         agent. The lender would be responsible for all collection efforts.



12   Q.    How will the Company be reimbursed for the costs it incurs in

13         implementing Section 9 of the Act?

14   A.    Section 9(c) of the Act permits the Company to recover all reasonable costs

15         incurred in implementing Section 9, including costs associated with the interest

16         rate buy-down. The Company will separately track Section 9 program costs that

17         are incremental (i.e., costs not otherwise incurred by CL&P) and present them to

18         the Department for recovery in the semi-annual FMCC proceedings. In order to

19         ensure that the costs that CL&P incurs will be recovered on a timely basis, CL&P

20         may forecast program costs to coincide with the semi-annual FMCC proceedings

21         and true up to actual costs in the subsequent FMCC proceeding.

                                              Testimony of George J. Eckenroth
                                                           Docket No. 05-07-21
                                                              August 29, 2005
                                                                       Page 14
1   Q.   Does this conclude your testimony?

2   A.   Yes, it does.

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