You are paying too much for electricity. At least that’s the opinion of three consultants hired by state Attorney General Sheldon Whitehouse to scrutinize Nar-ragansett Electric Co.’s blueprint for acquiring Blackstone Valley Electric Co. and Newport Electric Corp.
The company’s plan to pass on merger costs to customers and to bring the three separate sets of electric rates closer together already has sparked opposition from consumer advocates, heavy energy users and the attorney general.
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But Narragansett Electric’s initial offer to freeze electric rates once the merger is completed has raises another question: Are electric rates in Rhode Island appropriate right now?
The attorney general’s consultants don’t think so.
In testimony to the state Public Utilities Commission, which is scheduled to begin weighing the merger plan this week, the consultants argue that the trio of electric utilities together are overcharging customers to the tune of roughly $12 million a year.
The PUC sets electric rates based on the cost of providing service. Utilities are permitted to recoup those costs plus a set amount of profit.
The attorney general’s consultants contend that the three electric companies are claiming more expenses than they can justify, which would mean customers are paying too much for electricity.
One issue spotlighted in the testimony concerns the allocation of expenses among the utilities and their affiliated companies. The state’s three major electric utilities are subsidiaries of holding companies based in Massachusetts, and those holding companies also own many unregulated subsidiaries.
For example, Narragansett Electric’s parent company, New England Electric System of Westborough, Mass., has a subsidiary that provides billing and other administrative services to the company’s regulated electric utilities and to its many unregulated businesses. For accounting purposes, the subsidiary’s expenses are divided up among the companies it provides services to.
But a disproportionately large share of the subsidiary’s expenses are assigned to Narragansett Electric, which increases the utility’s cost of providing electric service and, thus, drives up electric rates, according to Bruce Oliver of Revilo Hill Associates Inc. in Fairfax Station, Va.
Oliver, one of the attorney general’s consultants, argues that the mechanism used by New England Electric to divvy up the subsidiary’s costs doesn’t fairly weight the amount of administrative services the unregulated businesses require today. He points to New England Electric’s burgeoning electricity and natural gas sales subsidiary, AllEnergy Marketing Co., as a prime example.
“It’s a good size operation, and if you look at the revenue, they’ve been growing very impressively, almost exponentially, over the last couple of years,” Oliver said in a telephone interview. “It takes a lot to support an activity that’s growing that quickly. You have to constantly have your thumb on the pulse of the company.”
New England Electric officials didn’t respond to questions about the appropriateness of its electric rates by press time.
Another case of electric customers in Rhode Island picking up the tab for a utility’s side businesses–known as a cross subsidy–can be found just beneath the streets, according to Oliver.
Narragansett Electric’s underground power lines are threaded though protective pipes called conduits. Installing and maintaining those conduits is a normal cost of providing electric services and, as such, is reflected in electric rates. But Narragansett Electric has begun leasing space in those conduits to NEES Communications Inc., its unregulated telecommunications affiliate, for fiber optic telecommunications cables.
If a portion of a conduit is used for any purpose other than providing electric service, Oliver figures, the utility should stop charging electric ratepayers for that segment of the conduit.
“I can’t find clear evidence that they’re doing this. The company gives you an offhand response that, ‘Oh, that’s not significant,’ ” Oliver said. “Telecommunications activities are growing rapidly, and before the end of the period that’s relevant to this merger, there’s going to be a large amount of activity. That needs to be accounted for.”
The attorney general’s consultants also have questioned how the three utilities finance their operations, which is considered a cost of providing electric service. Like any business, the electric companies can raise capital by borrowing money or by attracting money from investors, which is to say they finance their operations through some combination of debt and equity.
Narragansett Electric, Blackstone Valley Electric and Newport Electric have increasingly looked to investors for cash at a time when low interest rates have driven down the cost of debt to about 8 percent. By comparison, the costs associated with equity, such as paying dividends to shareholders, is closer to 14 percent including the impact of taxes, Oliver said.
Too much debt is risky, he conceded, “But you don’t have to get up to the levels of equity that they’re currently at to have a reasonable balance between the risk and cost considerations.”
One of the attorney general’s other consultants, Richard LeLash, found that Narragansett Electric’s capital structure is composed of more than 58 percent equity although comparable utilities generally get half of their financing or less from investors.
“While the companies claim they are among the most efficient in the region, the financing of Narragansett, by far the largest of the three, has not achieved a least-cost capital structure,” testified LeLash, an independent consultant based in Redding, Conn.
The third consultant, Andrea Crane of The Columbia Group in Ridgefield, Conn., figures the amount of profit the utilities are permitted to pocket under current regulations is too high given the changing cost of capital.
She said the profit levels set by the PUC need to be adjusted from time to time to reflect the changing cost of debt and equity. The three utilities are currently authorized to earn an 11 percent profit, but Crane is recommending the commissioners trim that number back to less than 10 percent.
The PUC is scheduled to begin debating the merits of New England Electric’s merger plan this week. The $634 million deal would combine New England Electric, the parent of Narragansett Electric, with Eastern Utilities Associates, the Boston company that owns Blackstone Valley Electric and Newport Electric. A decision is expected in late January or early February.
