Monday, July 18, 2011

Leverage

Here's one to watch.  The Globe:
The Patrick administration is seeking to delay approval of the merger between Boston’s NStar and Connecticut-based Northeast Utilities until at least next year - a move that, if successful, could unravel the deal to create one of the nation’s largest utility companies.

The administration, through the Massachusetts Department of Energy Resources, last week filed a request with state utility regulators to put off action on the merger until NStar completes a formal review of its rates, which could begin as early as May but could take several months. That means regulators may not be able to take up the case again until late next year, well beyond the April 2012 date the utilities originally set to reassess the deal if regulatory approvals were not in place by then.

Caroline Allen, an NStar spokeswoman, said yesterday that such a “substantial delay’’ could ultimately jeopardize the deal.

“It’s unfortunate because this seems inconsistent with the Patrick administration’s desire to improve the business climate in the Commonwealth,’’ Allen said in a statement. “Here are two Massachusetts companies, coming together to form a Fortune 250 company, keep jobs local, and result in $784 million in customer savings over 10 years.’’

Mark Sylvia, commissioner of the state Department of Energy Resources, said, “We’re not attempting to kill any deal. What we’re trying to do is our job and our due diligence.’’

The state, he said, simply needs more information about NStar’s rate structure so it can best protect consumers as the merger goes forward.
So the Patrick Administration wants to push off a huge business deal for as much as a year, so that it can take a closer look at the proposed merger.  Sounds reasonable.  More:
This latest move was prompted, in part, by concerns over the impact of the merger on NStar’s business and residential customers, Sylvia said. NStar’s electricity rates are among the highest in the state. and its residential customers pay on average of $7 to $19 a month more than customers of National Grid, according to data from the Department of Public Utilities.
Sylvia asked if there are going to be additional costs to ratepayers if the merger goes through. That’s difficult to assess, he said, because it has been 25 years since NStar last went through a full-blown rate case, in which utilities open their books to a full financial review by regulators, and then offer testimony and other evidence to justify rate requests and address concerns of customers and other interested parties.
 Now it sounds really reasonable!  The Patrick Administration is just looking out for consumers, don'cha know.  But hang on a second.  Has anyone else looked at this proposed deal?  According to the Globe, yes, "[t]he partnership received approval from the Federal Energy Regulatory Commission this month..."  That'd be the FERC, otherwise known as the federal agency with jurisdiction over, among other things, electricity rates. Oh, and Attorney General Martha Coakley, who negotiates utility rates on behalf of Massachusetts consumers on a regular basis, is supportive of the merger too - specifically on the cost issue.  According to her spokesman, "This merger could lead to substantial savings... and we continue to advocate that these savings need to be passed on to consumers."

Ordinarily it is unusual to find the state's utility regulator at odds with the feds, or so significantly behind in their approval timeline.  And it is strange to see such polar opposite stances from the Governor and the AG on an issue like this one. There must be something extraordinary about this deal...

"Ready for your full-blown rate case?"
Skip back to that last block quote.  The Patrick Administration proposes to put NSTAR through a "full-blown rate case," during which "utilities open their books to a full financial review by regulators, and then offer testimony and other evidence to justify rate requests and address concerns of customers and other interested parties."  If you think that sounds a bit like the regulatory equivalent of a two-fisted enema, you aren't wrong.

I wonder if there is an unspoken "unless" clause in the Patrick Administration's position... something NSTAR could do to convince the MDER to set aside its rubber gloves.  I'd bet big bucks there is...

You see, the Patrick Administration really, really cares about consumer electricity rates... except when it doesn't.  It wasn't too long ago that Patrick and Co. were casually brushing off critics of Cape Wind who pointed out, correctly, that by pushing it through the Governor was essentially imposing an electricity rate hike on Massachusetts consumers.  Cape Wind, the Governor told us, "is all about our energy future."  When it's "all about our energy future," considerations of present cost fall quickly to the wayside.

But there is a problem with Cape Wind.  It has only managed to contract out half of its anticipated power production - to NSTAR's main competitor, National Grid.  And National Grid (which is to say, its customers) is going to pay a premium for that great Cape Windy feelin'.  As reported by CBS Boston a couple of months back: "National Grid estimates its deal with the Cape Wind offshore wind project will cost ratepayers $1.2 billion above the projected market price of comparable energy by the time it’s done," at a rate of about 18.7 cents per Kilowatt Hour, with contractual annual increases of 3.5 percent. 

Why?  Why oh why would National Grid agree to such a thing?  Well, for one thing a law passed in 2008 requires Massachusetts utilities to get a certain percentage of their power from renewable sources.  So a charitable view would be that NGRID is just looking to fill its politician-mandated quota.  Except... NSTAR found another way.  CBS Boston again:
NStar’s deals with land wind farms in Massachusetts, New Hampshire and Maine provide 109 megawatts, about 1.6 percent of NStar’s demand, leaving it with power to purchase to meet state requirements.

NStar won’t disclose its pricing, but energy experts, including New York-based consultant Bill Short, have made estimates. He said his calculations put the three projects’ average cost at 9.4 cents per kilowatt hour. The price remains flat during the contracts, which run 10 to 15 years.

National Grid directly negotiated its deal with Cape Wind. NStar requested bids — eventually receiving 74 qualified proposals — as part of a standard, state-approved process that put heavy emphasis on lowest price.
So NSTAR is going to get its renewable power - from wind, no less - at roughly half the cost at which NGRID has agreed to buy half of Cape Wind's power.  And meanwhile, Cape Wind still has no taker for the other half of its premium-priced juice.

No likey.
Gov Patrick no likey.

By utter coincidence (surely!), it was around the time of NSTAR's decision to turn down Cape Wind's invitation to gouge its customers in service to "our energy future" that the Patrick Administration first determined to put its big regulatory foot down in the middle of the NSTAR-Northeast Utilities merger.  And just by coinkey-dink, some of those "other interested parties" who are queued up to weigh in to the NSTAR enema - er, rate case - include project developer Cape Wind Associates LLC and project supporters Cape Light Compact and the Conservation Law Foundation.

As soon as the Administration evidenced its intention to insert its snout into the NSTAR deal with more than ordinary enthusiasm, Cape Wind opponents publicly suggested that there might just be an "abuse of regulatory authority" afoot, in service to the Governor's pet wind project.  The Administration's response was rich:
The state does not act as sales representative for any power generator, said Lisa Capone, spokeswoman for the Massachusetts Executive Office of Energy and Environmental Affairs.

“That said, it is well known that Governor (Deval) Patrick considers Cape Wind an important project in terms of clean energy and jobs for the commonwealth, and that the contract between Cape Wind and National Grid establishes terms that satisfy the attorney general and have been approved as cost-effective by the Department of Public Utilities,” she said.
Talk about a pregnant "that said..."  'The state does not take regulatory hostages to leverage compliance with its policy agenda... that said...'

No less a liberal luminary than Robert F. Kennedy said it explicitly today in a Wall Street Journal op-ed:
In only the latest example of how heavy-handed Cape Wind's backers are, Massachusetts has suddenly agreed to change the rules for utilities as they apply to mergers and the reduction of greenhouse-gas emissions. In effect, the state administration is trying to hold hostage the proposed NSTAR-Northeast Utilities merger unless the two electric companies agree to buy Cape Wind's power.
So to sum up:

The Patrick Administration just moved to delay a proposed merger between NSTAR and Northeast Utilities, which the feds have approved and the AG has determined would lead to consumer savings, due to wholly unsubstantiated concern that the deal might actually raise consumer electricity rates. 

At the same time, the Patrick Administration is fully behind NGRID's contract with Cape Wind, which they openly acknowledge will result in a substantial increase in consumer electricity rates.

And finally, it is no stretch to suppose that if NSTAR were to reverse itself tomorrow and agree to buy that second half of Cape Wind's output, with its associated rate premium and consumer price hike, the Administration's desire for a "full-blown rate case" would suddenly melt away - along with all this talk about consumer electricity costs. "Our energy future" and what-not.

Ladies and gentlemen, I give you Massachusetts.

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