EXECUTIVE SUMMARY OF THE TESTIMONY FILED ON BEHALF OF THE RATEPAYER ADVOCATE I

EXECUTIVE SUMMARY OF THE TESTIMONY FILED ON BEHALF OF THE RATEPAYER ADVOCATE I/M/O THE PETITION OF ATLANTIC CITY ELECTRIC COMPANY, AND CONECTIV COMMUNICATIONS, INC. AND NEW RC, INC. FOR APPROVAL UNDER N.J.S.A. 48:2-51.1 AND N.J.S.A. 48:3-10 OF A CHANGE IN OWNERSHIP AND CONTROL

Filed May 11, 2001, BPU Docket No. EM01050308, OAL Docket No. PUC-04036-01

Introduction

On May 11, 2001, Joint Petitioners Atlantic City Electric Company ("ACE"), Conectiv Communications, Inc. ("CCI") - both subsidiaries of Delaware corporation, Conectiv - and New RC, Inc. ("New RC"), a recently formed subsidiary of the Potomac Electric Power Company ("Pepco"), located in the District of Columbia ("D.C.") and Virginia, filed a petition before the New Jersey Board of Public Utilities ("BPU" or "the Board") requesting approval for merger between Conectiv, Pepco and New RC. In this proposed merger, New RC would become a registered public utility holding company and the owner of Conectiv and Pepco, and thereby the indirect owner of ACE and CCI. Final regulatory approval of this merger would constitute the second change of control of ACE since Conectiv obtained Board permission to acquire both ACE and the Delmarva Power & Light Company ("Delmarva") - a regulated public utility entity serving customers in Delaware, Maryland and Virginia - by Order dated January 7, 1998, Docket No. EM97020103. Pepco is headquartered in D.C. and distributes electricity to approximately 700,000 customers in D.C. and Maryland.

On September 21, 2001, the Division of the Ratepayer Advocate ("Ratepayer Advocate") filed the written testimony of expert consultants David Peterson, Barbara Alexander, James Rothschild and the joint testimony of experts David Schlissel and Bruce Biewald in response to the petition submitted by the Joint Petitioners. Administrative hearings are scheduled before the Office of Administrative Law in Newark, NJ on November 13-20, 2001. A Public Hearing for comments from consumers will be held on the evening of either Tuesday, November 27 or Wednesday, November 28, 2001.

The Ratepayer Advocate opines that the proposed merger should not be approved unless it is conditioned upon several commitments from the Joint Petitioners. The Petitioners must state, comprehensively, the estimated costs and savings of the merger, how New Jersey ratepayers will benefit and not be harmed, how there will be no adverse impact on rates, competition, or New Jersey employees, and Petitioners must also prove that safe, adequate and proper service to ratepayers will continue to be provided. The Petitioners must demonstrate how New Jersey ratepayers will benefit and not be harmed by the disproportionate representation of Conectiv on the New RC Board of Directors. Additionally, the Petitioners must implement service quality standards that will protect New Jersey ratepayers from deterioration in service reliability and encourage service quality improvement as a result of the merger. Finally, the Ratepayer Advocate is concerned that market concentration and market power issues have not been adequately addressed by the Petitioners' filing and further analysis should be required prior to Board approval.

Testimony of David Peterson

Mr. Peterson is a public utility rate consultant at Chesapeake Regulatory Consultants, Inc. He has appeared in 75 proceedings before 16 different state regulatory commissions and the Federal Regulatory Energy Commission addressing topics including but not limited to capital structure, affiliate transactions, mergers and acquisitions, and cost-tracking procedures.

Mr. Peterson addressed the general regulatory policy concerning the Petition and, specifically, rates, employees and the accounting order regarding the tracking of merger-related costs that ACE has requested of the Board.
Mr. Peterson focused on four specific questions:

1. Will the merger provide benefits for New Jersey ratepayers not possible without the merger?

2. Will New Jersey ratepayers see benefits contemporaneous with the merger or at a later time?

3. Does the merger agreement give adequate protection to ACE workers?

4. Will the merger impede Board regulation?

Question 1. Benefits

Petitioners have alleged that the merger meets the no harm standard. However, the position of the Ratepayer Advocate is that positive benefits should be the standard -- after all, utilities use this standard when evaluating construction, research & development, investments -- and the Board should look at this $2.2 billion merger with no less scrutiny.
There has been no positive benefits calculation performed. This requires detailed assessment of:

1. The potential for synergy savings

2. Transaction costs

3. Transition costs

There has been no comprehensive study that quantifies merger-related savings and no comprehensive estimate of transition costs, only "sketchy" estimates. The Board needs to know this to determine if the costs are legitimate and reasonable.
There has been no estimate of transaction costs from the merger. However, pursuant to Board policy, transaction costs are not recoverable from ratepayers. Also, Petitioners have not provided an estimate of transition costs, which they will seek to recover from New Jersey ratepayers.
There has been no synergy savings study, and this is critical to meet the positive benefits or no harm standard.

Question 2. Rates

Petitioners do not intend to modify ACE rates due to merger. However, if the merger reduces the ACE cost of service in a measurable way, but savings are not passed on to ratepayers, then there is an adverse rate impact. In this scenario, ACE rates would not reflect the underlying cost of service and could not be considered just/reasonable.
If the Board decides that the merger would be of positive benefit to ratepayers, the Ratepayer Advocate recommends that the merger should be conditioned on the passthrough of 100% of annualized savings as reduction in distribution rates contemporaneously with the closing of merger transaction

Question 3. Employees

The Petitioners say only a small number of corporate positions will be eliminated due to redundancy.
Conectiv's disproportionate representation on the New RC Board of Directors may adversely affect New Jersey ratepayers. The Board of Directors will consist of ten (10) Pepco representatives but only two (2) Conectiv representatives.

Question 4. Regulatory Oversight

Maintaining the company headquarters in DC may be a problem for New Jersey regulators, as the distance would make Board regulatory oversight that much more difficult. This may increase audit burdens/costs for Board and Ratepayer Advocate.
We recommend that, as a condition of merger, the Board should require Petitioners to:

1. File for Board approval for the structure/creation of new post-merger service company

2. Subject themselves to Board jurisdiction for filing/review/approval of any cost allocation manual or formulas that New Service Co will use, in addition to other necessary regulatory approvals

ACE Merger Cost Tracking Request

ACE's request for this should be denied. Cost deferral is permitted only when it is "probable" that deferred costs will be recovered in future rates.

Mr. Peterson concludes that the Petitioners have not shown benefits for customers, have not stated how much savings to expect, and have not documented how much it will cost to close the merger or achieve the anticipated savings.

He recommends that the petition be re-filed with comprehensive estimates of transaction and transition costs (with documentation) and comprehensive estimates of merger savings (with documentation).

If Board allows the merger, ACE should be required to reduce the distribution rates with 100% of annualized net savings.

Testimony of Barbara Alexander

Barbara Alexander is in private practice as a Consumer Affairs Consultant, after spending almost ten years as the Director of the Consumer Assistance Division of the Maine Public Utilities Commission. Her expertise includes restructuring activities in both the electric and natural gas industries. Ms. Alexander also holds a law degree.

Ms. Alexander has two basic proposals as conditions of merger.

1. The Board should require the Petitioners to implement a Reliability and Customer Service Quality Index (SQI), referred to as the Ratepayer plan.

2. ACE must implement a universal service program similar to that of GPU/FirstEnergy agreement.

Service/Reliability Issues

The current (interim) system-wide reliability rules promulgated by the Board have no automatic enforcement/penalty provisions if reliability falls below minimum level.
The system-wide measurements are CAIDI (Customer Average Interruption Duration Index) and SAIFI (System Average Interruption Frequency Index). The rules establish a minimum reliability level of a 10 year average of CAIDI/SAIFI plus two standard deviations.
To put the Ratepayer plan in place would (1) reduce the risk of service quality deterioration with little/no cost to ratepayers and (2) complement the Petitioners' program. This would mean baseline standards and customer restitution payments for failure to maintain these standards.
The Ratepayer plan would measure key attributes of ACE's service quality and reliability of service with regard to:

1. CAIDI/SAIFI

2. Call Center performance

3. Service installation and repair time

4. Disconnection rate

With respect to reliability performance (CAIDI/SAIFI), according to the Ratepayer plan, Petitioners must maintain their current level as a minimum and the Ratepayer plan would reflect the promise of Petitioners to improve service via the implementation of "best practices" from each company and new technology.
The performance targets proposed by Petitioners are in the Petitioners' plan:
This plan contains a combination of individual customer-specific credits if certain service quality failures occur with promises to submit plans/programs with deadlines if system-wide failures occur.
Customer-specific means a missed appointment, an inaccurate bill that ACE has to adjust, an outage for more than 24 hours, etc. Individual affected customers will receive monetary reparation.
System-wide performance is subject the creation of remedial plans and programs, but no penalties or customer rebates. Their system-wide standards include Call Center performance below 70% calls answered within 30 seconds, a 10% call abandonment rate, CAIDI or SAIFI over 2 standard deviations from historical mean, and the presence of individual circuits on "worst" list for >2 years. However, in this plan there is no system-wide compensation to ratepayers. ACE would merely submit a plan for improvement to the Board.
The individual compensatory scheme of Petitioners' plan is good. However, the proposal regarding system-wide indicators (CAIDI/SAIFI and call center) are inadequate in terms of both proposed standards and the type of action that should occur if standards not met.
The difference between Petitioners' plan and Ratepayer plan:

The Petitioners' plan does not protect ratepayers from an overall deterioration in service. Whereas the Petitioners' plan does compensate individuals for individual lapses in company service, their plan does not contain a system-wide compensation plan for all ratepayers in the event that system-wide standards (i.e., CAIDI, SAIFI and Call Center standards) deteriorate. The Ratepayer plan calls for system-wide compensation when system-wide performance falls beneath a certain level. While we agree with the Petitioners' individual compensation component, this plan needs to be supplemented with a system-wide service index plan that protects ratepayers on a system-wide basis.

Universal Service Program ("USF")

On October 25, 2001, the New Jersey Board of Public Utilities rendered an oral decision to create and implement an interim Universal Service Fund to assist low-income consumers with their electric and gas bills and to educate low-income customers about the availability of this type of assistance. The interim program will provide assistance to these customers while the permanent program is established. The permanent program is to be submitted for Board review on or before March 1, 2002, with implementation to begin by July 1, 2002. The Ratepayer Advocate proposes that as part of this proceeding, in order to ensure safe, adequate and proper service to all classes of customers, including low-income, the ALJ and the Board require immediate implementation of a bill payment assistance program modeled on the Customer Assistance Program ("CAP") in effect at Pennsylvania's two GPU Energy distribution facilities. This program will be implemented per Board Order, dated October 9, 2001, as part of the GPU/FirstEnergy merger approved here in New Jersey, BPU Docket No. EM00110870.

This comprehensive program is a form of a Percentage of Income Payment plan in which the amount of assistance given is based on household income as compared to the federal poverty guidelines. The amount of the electric bill for eligible customers is a sliding-scale percentage of the annual household income. Certain eligible customers are given a monthly subsidy and debt forgiveness (if their gross household income is at or below 150% of the federal poverty guideline), while others receive debt forgiveness on a one-time basis (if their gross household income is between 151% and 200% of the federal poverty guideline). Customers can enroll in the program through local community organizations that administer LIHEAP and other aid programs.
Why should a USF be considered as part of a merger application?

- Low-income customers are more likely to suffer consequence of degraded service and reliability. These customers are more likely to seek service centers, payment options, etc.

- Low-income customers are the first to see impact of changes in internal management structure and merger-related cost-cutting. Also, low-income customers experience more frequent outages due to lack of investment in distribution facilities in their neighborhoods.

Program currently in place at ACE:

The Comfort Partners plan is in development, and is targeted to low-income customers with electricity-heated homes. This is in compliance with the Comprehensive Resource Analysis Board Order of 3/9/01. Also, the NJ SHARES Program provides crisis assistance for those in danger of disconnection. However, there is currently no bill payment assistance program for low-income customers.

The ACE USF program is very small compared with Delmarva and Pepco programs. ACE knows very little about its low-income customers.
The Ratepayer Advocate suggests that ACE integrate its Comfort Partners plan with a plan modeled on the GPU Customer Assistance Program.
The Ratepayer Advocate recommends a hot weather moratorium.
The Ratepayer Advocate recommends the aggregation of low-income customers.
ACE should have an affirmative obligation to educate customers about these programs.

Testimony of James Rothschild

Mr. Rothschild is a financial consultant specializing in utility regulation. He is president of his own consulting firm, and has an MBA from Case Western University.

This merger would add to the complexity of the corporate structure, making it that much harder to determine the true capital structure of a regulated subsidiary.
If the Board approves the merger, procedures should be implemented immediately to minimize the ability of the new company to use capital structure as "a tool to mask the true level of earnings that are being achieved by its regulated New Jersey operations."

Testimony of David Schlissel and Bruce Biewald

Mr. Biewald is the President of Synapse Energy Economics, Inc., and Mr. Schlissel is a Senior Consultant at Synapse Energy Economics, Inc. The firm is a research and consulting firm specializing in economic and policy analyses of the electricity industry.

The merger should not be approved in its current form. Petitioners have not proved that the merger will benefit ratepayers or that competition will not be harmed by the merger.
Petitioners have not presented a detailed assessment of market concentration and market power, looking at the hourly behavior of the market under a wide variety "of physical conditions, contractual situations and bidding behaviors."
If the Board approves the merger, it should require "full on-going disclosure of the activities of the Petitioners' affiliates" and create a mechanism to address market power.

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