NStar/NU Merger Should Cost Shareholders

By PowerOptions Team

The proposed merger between NStar and Northeast Utilities will have a significant impact on the region’s energy marketplace. Whether it will be good for consumers – particularly the 500 nonprofit members of PowerOptions which form a backbone of the Massachusetts economy, depends largely on the conditions now being negotiated.

For months, interested parties have been gathering information and presenting testimony in hearings before the Department of Public Utilities (DPU) in advance of filings made this week by interveners. The filing deadline for these briefs was delayed by weeks of rumored settlement talks that failed to reach agreement. The rumor mill is that the talks among the companies, the Department of Energy Resources (DOER), representing the Patrick Administration and the Attorney General centered around two key issues – buying the remaining half of the output of Cape Wind and rate relief for consumers.

The briefs that were filed seem to suggest that the rumors were correct, as The Boston Globe pointed earlier this week . DOER’s brief calls for a litany of conditions – all related to increased spending on renewable energy (although not Cape Wind explicitly) and energy efficiency (although it is an increase that amounts to not much more than the rounding on an almost $1 billion, three-year budget). Attorney General Martha Coakley proposes conditions related to rates, specifically a rate freeze or a merger savings credit designed to ensure that customers get the benefit of the projected synergies from the merger of the two companies.

Utility mergers are a funny thing. I’ve been through a couple myself as both a company proponent and an intervener. It is a time for horse trading, where everyone is trying to get something they probably couldn’t get in any other forum. The lawyers for the merging companies will scream that the law doesn’t allow for what is proposed but, bottom line, those who want regulatory approval for the deal tend to deal.

That is precisely what is happening in the NStar/Northeast Utilities free-for-all. Cape Wind seeks another buyer of the power it will create, a move that would immeasurably help its financing. Cape Wind is chasing a utility which has already met half of its Green Communities Act obligation for long term contracts for renewables and appears not to have problems obtaining such power in the future. NStar conducted a competitive solicitation (unlike the National Grid/Cape Wind deal already in place) and entered into long term contacts for on-shore wind at a fraction of the Cape Wind price. Yet, both Cape Wind and DOER contend that the merged companies, I like to call them NuStar, should buy more.

The AG has rightly focused on rates. Mergers are about money – who gets it and when. There is a clear shareholder benefit and it needs to be captured, at least in part, for the consumers who pay the rates which yield the return to the shareholder.

Conditions should protect customers, not private interests of renewable energy developers. The AG has asked for a condition imposing a five-year rate freeze. Good idea but the AG acknowledges, and everybody in the industry knows, NStar is making a significant profit under the current rates. So, why freeze them?

Alternatively, the AG has proposed a merger savings credit designed to lock in the projected savings, which even the companies estimate will follow the merger. After all, mergers are really about doing more with less, ergo reduced costs. This merger credit would at least result in lowering rates as opposed to keeping them the same in the face of reduced costs off an already inflated revenue requirement.

Dealing with the rate situation is complex. The current rates were set after a settlement in 2005 that benefitted the company greatly, even then. Time has shown that it was far too rich. But the Green Communities Act and DPU pronouncements require NStar to file a decoupling case in 2012. That would set a revenue requirement that is pre-merger and would mistakenly lock in too high a revenue requirement. So, as the merger savings come to fruition, NuStar’s shareholders would keep the money saved. This is not unlike what is happening now with National Grid’s recent layoff of 1,200 workers after its decoupling case set a revenue requirement pre-reorganization. That’s what you do when you don’t like your allowed rate of return under decoupling – reduce your costs and simply keep the profits.

Conditions should extract something from the merging companies on behalf of consumers. Renewable energy and other environmental improvement goals are added on to consumer bills, not taken from shareholder profits. It’s no skin off the companies’ nose to commit to buy overpriced wind energy or increase its energy efficiency spending at this point. To date, it has only been NStar CEO Tom May’s stalwart objection to Cape Wind that has kept this deal from closing. Or is it, perhaps, a certain transmission project called Northern Pass?

Time will tell. We’ll all be watching.

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