You asked for a description of bonding and similar financial security requirements that apply to electric suppliers in Connecticut and other states that have restructured their electric industries to permit competition in the retail market. This memo discusses requirements in northeastern states that are either part of the existing New England market or the larger market that would be served by the proposed northeastern Regional Transmission Organization.

SUMMARY

A variety of entities require suppliers to provide bonding or other forms of financial security to participate in the electric markets in the northeast. The entities that administer regional wholesale markets (where most suppliers buy their power) impose financial security requirements on suppliers and other market participants that do not meet their credit standards. Connecticut and several other northeastern states, including New Jersey and Pennsylvania, impose their own requirements as a condition of obtaining a supplier license. Other states do not, or only require certain types of suppliers to provide financial assurance. Finally, some local distribution companies (LDCs) impose their own requirements, which vary by company.

REGIONAL REQUIREMENTS

The northeast is served by three independent system operators (ISOs) that administer regional wholesale markets in New England, New York, and the Mid-Atlantic states. These entities impose broadly similar requirements on suppliers and other participants that buy and sell power on the market. The Federal Energy Regulatory Commission, which regulates the ISOs, has proposed merging the three entities into a Regional Transmission Organization serving the northeast.

Generally, the ISOs require market participants to demonstrate their creditworthiness or to provide financial assurance. Currently, to participate in the New England market without providing a bond or other forms of financial security, the participant's credit rating, as measured by one of the major rating firms, must be investment grade. Recently adopted rules, which will go into effect in approximately 90 days, will substantially tighten the requirements for creditworthy firms. For the New York ISO, the participant must have a Moody's rating of BBB or a Standard & Poor's rating Baa2 or better to avoid being required to provide financial assurance. The same is true for market participants in the PJM territory (Pennsylvania, New Jersey, Maryland, Delaware, and parts of neighboring states). In all three regions, a participant who does not pass the creditworthiness tests must provide the ISO with financial assurances. These can take the form of a bond, letter of credit, or in some cases a guaranty from a corporate parent. The amount of assurance that the participant must provide is set by a formula that considers the participant's electric sales revenues and other variables.

STATE REQUIREMENTS

The Connecticut Department of Public Utility Control requires suppliers to provide security in the amount of $ 250,000 or 5% of annual sales, whichever is less. The security can be used if the supplier fails to supply electricity as required under its contracts or other arrangements with its customers or if it fails to pay its taxes.

The Maine Public Service Commission only imposes financial assurance requirements on suppliers serving residential and small business customers. Such suppliers must post a bond or letter of credit for $ 100,000 or 10% of their sales to this market, whichever is less. Suppliers that serve only large business customers (i. e. , those with a demand meter) do not have to provide financial assurances.

The New Jersey Public Service Board requires suppliers to post a $ 50,000 bond or provide similar security.

The Pennsylvania Public Utilities Commission requires suppliers to post security of $ 250,000 or 10% of annual sales, whichever is less. The commission is considering amending its regulation to require that the security be the greater of these figures. The security can take the form of a bond or letter of credit; corporate guarantees are not accepted.

The Rhode Island Division of Public Utilities and Carriers requires applicants for a supplier's license to provide evidence of financial soundness such as surety bonds, a recent financial statement, or other mechanism as it specifies. There is no bonding requirement per se.

LDC REQUIREMENTS

Some LDCs impose their own financial assurance requirements on suppliers. Presumably, such requirements help protect the LDC if the supplier fails to pay the utility for the delivery and other services it provides. Connecticut Light & Power is an example of an LDC that imposes such requirements. For a firm seeking to enter the market the amount of the assurance is based on projected sales; for established firms it is based on actual sales. The assurance can take the form of a bond or letter of credit. All of the LDCs in New Jersey have security requirements, which increase with the number of customers a supplier has.

On the other hand, the LDCs in Massachusetts, Pennsylvania, and Rhode Island do not impose such requirements. A company's policy may in part reflect its billing arrangements. For example, in Connecticut, United Illuminating (UI) does not require bonds or letters of credit from suppliers. This is because the customer's payment goes first to UI, which performs metering, billing, and collection services for the suppliers. UI deducts the fee it imposes for these services when it remits the payment to the supplier.

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