A pair of pending utility mergers would roll Rhode Island’s three major electric utilities into an international conglomerate including such far-flung financial interests as a Zambian copper mine, power lines in southern India and a communications network in Brazil. If the mergers go through early next year, as expected, the state’s major electric utilities, Narragansett Electric, Blackstone Valley and Newport Electric and numerous unregulated companies would be owned by New England Electric System of Westborough, Mass., which in turn would be one of the companies owned by global giant National Grid Group PLC of Coventry, England.
That sort of arrangement makes consumer advocates like Charlie Higley uneasy. An energy analyst for Public Citizen’s Critical Mass Energy Project, Higley criticizes such layers of holding companies as a mechanism for siphoning money out of regulated utilities and an obstacle for regulators trying to police transactions between the regulated company and its parents or related companies.
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Regulated companies such as an electric utility are barred from cross subsidizing unregulated affiliates. Cross subsidies are a method of passing along the expenses of unregulated affiliates to a utility’s customers.
For example, an electric company that provides office space in its building for an unregulated affiliate at no charge is cross subsidizing the affiliate. That is, the utility’s rate payers are ultimately picking up the tab for the affiliate’s office space because rates are based on the electric company’s costs.
“For a regulator trying to track the money flow, it gets even harder if there’s a multistate holding company involved,” not to mention an international one, Higley said. “Even the feds don’t have any jurisdiction over books and records in other countries. It becomes impossible to prevent these cross subsidies.”
Ronald Gerwatowski, Narragansett Electric Co.’s general counsel, doesn’t see any reason for concern. The only change in Nar-ragansett’s ownership after the merger, he noted, will be that its parent company will be owned by a foreign corporation.
“Those books are going to be open and all the charges are going to be subject to review,” Gerwatowski said. “There’s another layer of protection here that people have to realize, and that’s the Securities and Exchange Commission. The SEC is going to go over this with a fine tooth comb.”
The SEC must sign off on utility holding company mergers, but Higley said much of the day-to-day work of policing cross subsidies is left up to understaffed and overworked state public utility divisions.
“They don’t have the staff to do it. They never have,” he said.
In Rhode Island, state regulators generally examine a utility’s books for cross subsidies when it files to increase rates, said Lindsey Johnson, the state Public Utilities Commission’s attorney. The Division of Public Utilities and Carriers often relies on outside consultants to pick up on inappropriate cross subsidies, Johnson said.
The extent to which the National Grid-New England Electric merger complicates the job of regulators depends largely on the National Grid’s level of cooperation, according to Susan Stratton, director of the Wisconsin Public Utility Institute at the University of Wisconsin in Madison.
“There’s another organization to look at,” said Stratton, herself a former state regulator in Wisconsin. “There’s more to review, but if that organization is very open to the regulator, it may not be any more difficult.”
Gerwatowski said regulators have nothing to fear from National Grid.
“National Grid has provided assurances to the SEC that its books and records are going to be open even though they live across the pond,” he said.
In an order consenting to the proposed National Grid-New England Electric merger issued in June, the Federal Energy Regulatory Commission stated that its approval of the deal is based on those assurances.
Public Citizen would prefer to see regulators attack cross subsidies by requiring public utilities to spin off their regulated assets–the power lines and poles, for example–into stand alone companies with no subsidiaries and no affiliates.
At this point the PUC’s attorney doesn’t see the merger presenting any special problems for regulators. “But in these situations,” Johnson added, “you just don’t know until you get out there and find out what arises.”
