SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report: August 29, 1997
CONSOLIDATED EDISON COMPANY OF NEW YORK, INC.
(Exact name of registrant as specified in charter)
New York 1-1217 13-5009340
(State of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
4 Irving Place, New York, NY 10003
(Address of principal executive offices)
Registrant's telephone number: (212) 460-4600
- 2 -
INFORMATION TO BE INCLUDED IN THE REPORT
ITEM 5. OTHER EVENTS
PSC SETTLEMENT AGREEMENT
The New York State Public Service Commission ("PSC"), by order issued and
effective May 20, 1996 in its "Competitive Opportunities" proceeding, endorsed a
fundamental restructuring of the electric utility industry in New York State,
based on competition in the generation and energy services sectors of the
industry. On March 13, 1997, Con Edison, the PSC staff and certain other parties
to the proceeding entered into a settlement agreement, dated March 12, 1997,
with respect to the proceeding. On August 20, 1997, the PSC requested the
parties to negotiate certain modifications to the March 1997 settlement
agreement.
On August 29, 1997, Con Edison and the PSC staff entered into a modified
settlement agreement (the "Settlement Agreement"). The Settlement Agreement is
subject to PSC approval. A PSC order with respect to the Settlement Agreement is
expected in September 1997.
The Settlement Agreement provides for a transition to a competitive
electric market by instituting "retail access", a rate plan for the five-year
transition period of the Settlement Agreement (the "Transition"), a reasonable
opportunity to recover prior utility investments and commitments that may not be
recoverable in a competitive electric market (often referred to as "strandable"
costs), the divestiture by Con Edison to unaffiliated third parties of at least
50 percent of its New York City fossil-fueled generating capacity and, subject
to Con Edison shareholder and other approvals, a corporate reorganization into a
holding company structure.
The Settlement Agreement reflects the following significant modifications
to the March 1997 settlement agreement:
- the reductions to generation-related revenues that Con Edison will
provide over the Transition will increase from $655 million to
approximately $890 million. (These amounts are exclusive of
additional revenue reductions from lower gross receipt taxes.)
- the additional depreciation that Con Edison will provide for its
generating units will be reduced from $395 million to $110 million.
- the retail access program has been accelerated to begin with up to
500 megawatts of customer load within nine months (rather than 12
months) after PSC approval of the Settlement Agreement and to make
it available to all of its customers by the earlier of 18 months
(rather 24 months) after the ISO (defined below) becomes fully
operational or December 31, 2001 (rather than 2002).
- 3 -
- the generation capacity divestiture program has been modified to
require Con Edison to submit a detailed divestiture plan to the PSC
within six months (rather than 12 months) of the PSC's approval of
the Settlement Agreement and to initiate the divestiture process
with respect to at least 30 percent of its New York City
fossil-fueled generating capacity within 90 days after the later of
PSC approval of the divestiture plan or implementation by the ISO of
certain rules related to New York City capacity. In addition, the
Settlement Agreement requires that net gains from sales of
generation up to prescribed amounts be utilized to further reduce
rates during the Transition, rather than after the end of the
Transition.
In August 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board ("FASB") published its consensus that utilities subject to plans
that, like the Settlement Agreement, use a transition period to recover stranded
costs must discontinue the use of Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation,"
for the separable portions of their businesses that are being deregulated and
apply the standards in SFAS No. 101, "Regulated Enterprises-Accounting for the
Discontinuation of Application of FASB Statement No. 71." Con Edison is still
reviewing the consensus, and is unable to determine the extent to which it may
become ineligible to apply SFAS No. 71 to certain portions of its business under
the Settlement Agreement. However, assuming the PSC approves the Settlement
Agreement, Con Edison does not expect that discontinuation of SFAS No. 71 for
the separable portion of its business that is being deregulated will have a
material adverse effect on Con Edison's financial position.
The following is a summary of the material provisions of the Settlement
Agreement, including those provisions that remain unchanged from the March 1997
settlement agreement, and is qualified in its entirety by reference to the
Settlement Agreement, a copy of which is filed as an exhibit to this report.
Retail Access. Con Edison will implement an energy and capacity retail access
program that will permit its customers to choose alternative energy suppliers.
The delivery of electricity to customers will continue to be through the
Company's transmission and distribution systems. The program will begin with up
to 500 megawatts of customer load within 9 months following PSC approval of the
Settlement Agreement. This schedule is contingent upon timely approval of a
retail access implementation plan and retail access tariffs to be filed by Con
Edison with the PSC and the Federal Energy Regulatory Commission ("FERC"), as
applicable. The program will be expanded in increments and Con Edison will
target the phase-in of retail access to make it available to all of its
customers by the earlier of 18 months after an independent system operator (the
"ISO"), which is to administer the wholesale electric market in New York,
becomes fully operational or December 31, 2001. This schedule is subject to
adjustment as circumstances warrant. In general, Con Edison's delivery rates for
retail access customers during the Transition will equal the rate applicable to
other comparable Con Edison customers less a rate representing the market value
of the energy and capacity being supplied for customers by the other sellers.
- 4 -
Rate Plan. The rate plan reduces the generation-related revenues that Con Edison
would have received over the five-year Transition had current rate levels
remained in effect by approximately $890 million, exclusive of additional
revenue reductions from lower gross receipts taxes. The gross receipts tax
reductions will result from lower customer billings and from a law enacted in
July 1997 to reduce the New York State gross receipts tax. Rates will be further
reduced for any net after-tax gains up to prescribed levels from the sale of
generating capacity (see "Divestiture Commitment," below). If such net gains are
achieved, the total revenue reductions over the Transition will be approximately
$1.4 billion, inclusive of gross receipts tax savings. Financing savings from
securitization of strandable costs (see "Recovery of Prior Investments and
Commitments," below) will be utilized for additional rate reductions. In
general, base electric rates will not otherwise be changed during the Transition
except in the event of changes in costs above anticipated annual levels
resulting from legal or regulatory requirements (including a requirement or
interpretation resulting in Con Edison's refunding its tax-exempt debt),
inflation in excess of a 4 percent annual rate, property tax increases and
environmental costs, or in the event Con Edison's rate of return becomes
unreasonable for the provision of safe and adequate service.
The Settlement Agreement also provides, among other things, for a
non-bypassable system benefits charge to recover, to the extent not otherwise
recovered, the costs of required research and development, energy efficiency
programs and programs to assist low-income customers, and a penalty mechanism
(estimated maximum, $26 million per year) for failure to maintain certain
service quality and reliability standards.
For any rate year during the Transition, 50 percent of any earnings in
excess of a rate of return of 12.9 percent on electric common equity will be
retained for shareholders and 50 percent will be applied for customer benefit,
with one-half of the amount to be applied to a reduction of rates or as
otherwise determined by the PSC and the balance to be deferred and applied to
reduce the Company's generating plant balances through additional depreciation
expense. The rate of return calculation will exclude any incentives and reflect
any amounts by which the rate of return for earlier Transition rate years fell
below 11.9 percent. This earnings sharing will end beginning in the year in
which Con Edison fulfills it divestiture commitment (see "Divestiture
Commitment," below) or in which 15 percent of the service area peak load
(excluding the existing load served by the New York Power Authority) is supplied
other than by Con Edison.
The Settlement Agreement supersedes the provisions of Con Edison's 1995
electric rate agreement prescribing overall electric revenue levels for the 12
months ending March 31, 1998. The Settlement Agreement also eliminates the
provisions of the 1995 electric rate agreement for incentives or penalties
related to the Enlightened Energy program and customer service performance, the
Electric Revenue Adjustment and related Revenue per Customer mechanisms (the
"modified ERAM"), earnings sharing and reconciliation of amounts included in
base rates with actual costs for pensions and other post-employment benefits,
capacity charges under Con Edison's contracts with non-utility generators of
electricity ("NUGs"), Enlightened Energy
- 5 -
program and renewable energy expenses, property taxes and research and
development expenses. The Settlement Agreement also requires the reversal of all
related balances on Con Edison's books of account at March 31, 1997, the net
effect of which is not material. An incentive-based fuel adjustment clause,
initially similar to the partial pass-through fuel adjustment clause under the
1995 electric rate agreement, will be in effect during the Transition.
Divestiture Commitment. Con Edison has agreed to divest to unaffiliated third
parties at least 50 percent of its New York City fossil-fueled generating
capacity no later than December 2002, unless the PSC determines that such
divestiture should be delayed or reduced (to maximize sales price or address
other developments). Divestiture could also be delayed under certain other
circumstances. Con Edison fossil-fueled generating units not divested to
unaffiliated third parties will be transferred to an unregulated affiliate of
Con Edison by December 2002. It is expected that Con Edison will retain
ownership of its Indian Point 2 nuclear generating unit.
Con Edison has agreed to submit a detailed divestiture plan to the PSC
within six months of the PSC's approval of the Settlement Agreement and to
initiate the divestiture process with respect to at least 30 percent of its New
York City fossil-fueled generating capacity within 90 days after the later of
PSC approval of the divestiture plan or implementation by the ISO of certain
rules related to New York City capacity. The PSC could approve the divestiture
plan as submitted or modify it to address market power or other concerns.
After-tax gains and losses from the divestiture of generation to
unaffiliated third parties or transfer to an affiliate will be deferred. Any net
gains up to prescribed levels on the sale of fossil generation will be used to
further reduce rates. (See "Rate Plan," above). Additional net gains, if any, or
net losses will be reflected in the strandable costs to be recovered following
the Transition. (See "Recovery of Prior Utility Investments and Commitments,"
below.)
Recovery of Prior Investments and Commitments. Potential strandable costs for
Con Edison are those prior utility investments and commitments that may not be
recoverable in a competitive retail electric market. Investments for which there
could be strandable costs include Con Edison's fossil-fueled generating plants
and Con Edison's Indian Point 2 nuclear generating unit. Commitments for which
there could be strandable costs include decommissioning of Con Edison's nuclear
generating operations and capacity charges under Con Edison's contracts with
NUGs.
During the Transition, Con Edison will continue to recover its potential
electric strandable costs in the rates it charges all customers. Con Edison will
also provide for $75 million of additional depreciation for its fossil-fueled
generating units and $35 million for its Indian Point 2 nuclear unit. In
addition, as indicated above, certain "excess" earnings will be applied as an
offset to strandable costs. (See "Rate Plan," above.)
- 6 -
Following the Transition, Con Edison will be given a reasonable
opportunity to recover remaining electric strandable costs, as adjusted for any
net gain in excess of a certain amount and any net loss from divestiture or
transfer of Con Edison generating capacity (see "Divestiture Commitment,"
above), including a reasonable return on investments, through a non-bypassable
charge to customers. For remaining fossil-related strandable costs, the recovery
period will be 10 years and for the Indian Point 2 nuclear unit, the recovery
period will be the then-remaining life of the unit. With respect to its NUG
contracts, Con Edison will be permitted to recover at least 90 percent of the
amount by which the actual costs of its purchases under the contracts exceed
market value after the Transition. Any potential disallowance after the
Transition will be limited to the lower of (i) 10 percent of the above-market
costs or (ii) $300 million (in 2002 dollars). The potential disallowance will be
offset by NUG contract mitigation achieved by Con Edison after the beginning of
the Transition period and 10 percent of the gross proceeds of generating unit
sales to third parties. Con Edison will be permitted a reasonable opportunity to
recover any costs subject to disallowance that are not offset by these two
factors if it makes good faith efforts in implementing provisions of the
Settlement Agreement leading to the development of a competitive electric market
in its service territory and the development of an ISO.
Any financing savings from "securitization" of Con Edison's strandable
costs are expected to be applied to further reduce customer rates. Subject to
satisfying any conditions of any securitization legislation enacted in New York
State, Con Edison could transfer its right to recover from customers the payment
for the strandable costs to a financing entity that would in return remit to Con
Edison the proceeds of debt issued by the financing entity. The debt, which
would be non-recourse to Con Edison, would be secured by, and repaid from, the
future customer payments.
Corporate Structure. The Settlement Agreement authorizes Con Edison to create a
holding company and establishes guidelines governing transactions among
affiliates. The formation of the holding company is subject to the approval of
Con Edison's shareholders, approval of FERC and the consent of the Nuclear
Regulatory Commission.
Upon formation of the holding company, Con Edison will become a subsidiary
of the holding company, and Con Edison's common shareholders will automatically
become the shareholders of the holding company. Con Edison's existing
subsidiaries, ProMark Energy, Inc., and Gramercy Development, Inc. will be
transferred to the holding company. ProMark Energy was formed by Con Edison in
1993 to market gas and related services, and is expanding its operations to
become a full-service energy service company. Gramercy Development was formed by
Con Edison in late 1996 to invest in energy infrastructure development projects
and the marketing of Con Edison's technical services. It is expected that
Gramercy Development will develop other opportunities in both the energy and
non-energy fields domestically and internationally. The holding company may
establish other subsidiaries from time to time, including one or more subsidiary
holding companies to hold its Con Edison stock and the stock of other
subsidiaries.
- 7 -
The Settlement Agreement limits the dividends that Con Edison could pay to
the holding company to not more than 100 percent of income available for
dividends calculated on a two-year rolling average basis. Excluded from "income
available for dividends" will be non-cash charges to income resulting from
accounting changes or charges to income resulting from significant unanticipated
events. The limitation will not apply to dividends necessary to transfer to the
holding company proceeds from major transactions, such as asset sales, or to
dividends reducing Con Edison's capital ratio to a level appropriate to Con
Edison's business risk.
Without PSC approval, Con Edison is prohibited from making loans to, or
guaranteeing the obligations of, the holding company or any other subsidiary of
the holding company, or pledging its assets as security for the indebtedness of
the holding company or any affiliate of the holding company. Con Edison and the
holding company's other subsidiaries must operate as separate entities, and
transfers of assets, services and information between Con Edison and its
affiliates are subject to certain restrictions. Con Edison and the holding
company's other subsidiaries must have separate operating employees, and
non-administrative operating officers of Con Edison may not be operating
officers of any of the holding company's other subsidiaries. Transfers of
employees from Con Edison to the holding company's other subsidiaries are also
restricted.
Litigation. Pursuant to the Settlement Agreement, Con Edison will terminate an
appeal of the November 1996 rejection by the Supreme Court of the State of New
York of a challenge to the PSC's May 20, 1996 order.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Exhibits
10 Agreement and Settlement, dated August 29, 1997, between Consolidated Edison
Company of New York, Inc. and the Staff of the New York State Public Service
Commission (without Appendices).
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONSOLIDATED EDISON COMPANY
OF NEW YORK, INC.
By: JOAN S. FREILICH
JOAN S. FREILICH
Senior Vice President and
Chief Financial Officer
DATE: August 29, 1997