Perspectives on Municipalization Jim Robb Senior Vice President, Planning and Development March 13, 2012

Summary Perspectives 1. CL&P supports policy measures that improve system performance while minimizing costs for customers 2. Massachusetts’ Department of Energy Resources recently completed a comprehensive study of municipalization using LaCapra Associates; that study found the benefits and costs of forming new municipal utilities was entirely case specific and while a few general conclusions could be made, there was no compelling evidence to promote municipalization as a state policy 3. While we understand that municipalities may view utility ownership as a vehicle to control storm response accountability, we believe the changes being instituted (service quality standards, system hardening, and best practice emergency preparedness and response processes at CL&P) will result in Connecticut having the best performing utility system in the Northeast. 4. We believe existing Connecticut statutes provide an adequate process for municipalities to own and operate their own electric system

Can’t Empirically Compare Existing Municipal Utilities with New Municipal Utilities 3 Rate ElementSources of Difference (Existing Muni vs IOU) New Muni vs. IOUConclusion Generation (8.44 c/kwh) Access to cost advantaged generation Owned (depreciated) Federal Preference Power Spot versus laddered market purchases Both would acquire from market; IOU may be modestly cost advantaged due to credit and load diversity No compelling reason to municipalize Transmission (1.69 c/kwh) None – Transmission is a regional service operated by ISO-NE No differenceNo compelling reason to municipalize Distribution (4.37 c/kwh) Wage rates Financing costs Depreciation rates Economies of scale Muni wage advantage likely offset by higher crew/staffing requirements on average New muni financing would be based off a higher original value than IOU (acquisition premium) Entirely case specific, though IOU scale advantages often dominate, especially relative to small munis Public Policy Costs (2.20 c/kwh) Existing munis are exempt from state energy policy charges and property taxes 35% of CL&P’s distribution tariff funds local taxes and public policy programs ($15.43/mo for an average customer) State influence over energy policy and funding policy choices is diminished with municipalization

Local Control versus Economies of Scale > Municipal utilities give local authorities and interests more influence over investment and policy decisions (e.g., Boulder, Colorado rationale) and in some regions give munis access to federally subsidized public power (e.g, BPA, WAPA in west, TVA in south) > However, investor owned utilities have certain structural advantages that municipal utilities cannot easily replicate ›Fixed cost allocation across large customer base ›Customer billing and service ›Administrative costs, including liability insurance ›Inventories (spares, tools, equipment) ›Resources and technologies to enable high performance storm response and work management ›Expertise (engineering, operations, and system planning) > Because of the cost and uncertainties of municipal acquisition, we believe it is appropriate that evidence of popular support be acquired to authorize the municipality to proceed 4

Valuation Challenges > The decision to sell utility property should remain that of the utility’s shareholders – there is no obligation for the utility to sell its property. > As with any other sale of private property, the utility’s fiduciary obligation will be to obtain a control premium in a transaction, whether with a municipality or another private owner > That premium would almost certainly offset any financing advantage a municipality would have, if the municipality has the debt capacity to begin with 5

Public Interest > PURA will need to approve any sale of investor owned utility property based on their assessment of such a sale as being in the public interest > It will not be generally clear that such sale is in the public interest as the sale of any particular municipal system may ›Result in costs being shifted to other (remaining) IOU customers ›Weaken the State’s influence over energy policy ›Clean Energy Programs ›Renewable Portfolio Standards ›Conservation and Load Management 6

As a consequence, after feasibility studies completed, most municipalities elect not to proceed under 25k customers 1 Annexation (SMUD) Jefferson Cty, WA Toledo, OH 2 in MA (Lexington and Russell) Boulder, CO Santa Fe, NM Chula Vista, CA

8 Our Conclusions > Municipalization is well studied at the generalization level > Economics will be driven by unique local circumstances, typically requiring lengthy and costly feasibility studies > Small fraction of feasibility studies actually lead to a consumated transaction