Eversource Finds a Loophole
Yesterday’s announcement of an Eversource/DONG Energy joint venture for offshore wind development should send shivers up the spine of anyone who recalls the strategy behind restructuring the Massachusetts electric industry almost 20 years ago. This massive effort with deep impacts on the marketplace is exactly the kind of transaction the law was designed to prevent. Yet Eversource points to a loophole in the restructuring act that appears to allow it.
The restructuring law prohibited electric distribution companies from owning generation except through an unregulated subsidiary. The Legislature provided this exemption to allow utilities to play in the wholesale competitive market and put shareholder money at risk, but the idea was clearly to have these investments compete in the competitive market with no financial transactions with the regulated side of the business. That’s not the scenario playing out now with the Eversource/DONG deal, which is pursuing contracts for offshore wind under new legislation mandating long-term contracts with utilities.
The scenario presented by this joint venture raises the clear conflict the law was designed to prevent, i.e. self-dealing and deals which cross that line between the regulated utility and an unregulated subsidiary. The differences between this deal and what is allowed by state law are stark. Under what was contemplated by the law, an unregulated utility subsidiary would be putting its generation into the regional competitive market and competing on a level playing field against all other resources. Here, Eversource and DONG are competing in a technology carve-out specifically anointed by the Legislature. As of now, it appears as if there are only two other possible competitors.
Second, its regulated subsidiary would be signing a contract that ensures a 20-year revenue stream to the winner, which could be an affiliate of the subsidiary. That’s not the same as competing in the competitive market.
This deal raises many other troubling issues. Eversource touts its transmission expertise and the key role it will play in the deal. That expertise was developed and paid for by customers, including the nonprofits and government entities we serve. What part of the regulated organizations’ resources will be used to pursue this private venture? There are human resources, software, hardware, rights of way, etc. which will be used in this transaction that all were, and are, being paid for by customers. How will this be parsed out, and how can we be assured of transparency? The answer is we can’t. If Eversource wants to participate in this deal as a merchant transmission company, then it should pursue it as such. But equity investment in the entire venture should be prohibited.
Finally, we should not lose sight of the fact that Eversource is about to file its first full-blown rate case in 30 years. Its current earned rate of return on equity is over 13 percent—not a bad profit. That compares to the allowed rate of return of 9.9 percent recently awarded to National Grid by the Department of Public Utilities in its rate case. Is Eversource teeing up an argument that its utility business is now riskier because of the $500 million-dollar exposure it would have in the DONG venture? This can’t be examined in isolation.
The offshore wind procurement plan is a tremendous undertaking and, regardless of how the cost compares to alternatives, it will be substantial. It is critical that the process be transparent and credible. How we conduct the procurement is important, and we should not bend rules that don’t have to be bent to make it happen. This is a bad start.