The battle lines have been drawn in the proposed merger of the state’s three major electric utility companies. New England Electric System of Westborough, Mass., the parent company of Narragansett Electric Co., is retreating from some of the changes in electric rates it has proposed as part of its pending $634 million merger with Boston-based Eastern Utilities Associates, which owns Blackstone Valley Electric Co. and Newport Electric Corp.
But New England Electric is drawing a line in the sand over its controversial request to the state Public Utilities Commission that customers here kick in roughly $110 million to pay for the portion of the merger involving Rhode Island.
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New England Electric is paying $260 million more for Eastern Utilities than the latter company is worth on paper. New England Electric figures Rhode Island’s share of the difference, called an acquisition premium, comes to $93 million including the impact of taxes. Customers here would also have to chip in $16.5 million for merger expenses such as investment banking fees. Massachusetts customers are being asked to pick up part of the tab as well.
Shareholders vs. Rate Payers
The company argues that the merger would produce savings for customers that exceed the acquisition premium and transaction costs, but attorneys and consultants representing industrial firms, regulators and the state attorney general say New England Electric’s shareholders should get the bill for the merger instead.
Blackstone Valley Electric and Newport Electric would be folded into Narragansett Electric a few months after the merger of the parent companies goes through.
Narragansett Electric Co.’s general counsel, Ronald Gerwatowski, said the deal is contingent on Public Utilities Commission approval of its request to recover the acquisition premium and transaction costs from customers.
“It doesn’t make business sense for us to do this unless we can get a reasonable opportunity to recover some of that investment back,” Gerwatowski said. “If we can’t have a sharing like that with customers then we’re not going to do the merger.”
And denied the expense reductions expected from the merger, Narragansett Electric might need to seek a rate increase from the PUC, Gerwatowski said.
The company estimates it could save $11 million a year or so from the merger beginning in 2005, although not all of that savings is earmarked for customers.
The acquisition premium and transaction costs passed along to rate payers at the time would offset the merger savings by $5.6 million a year. The company would then pocket a chunk of the remaining savings, leaving Rhode island customers with a net savings of about $3.7 million a year.
David Effron, a consultant hired by the Division of Public Utilities and Carriers to dissect New England Electric’s proposed changes to electric rates, agreed that the projected savings appear to be sufficient to absorb the costs passed along to customers. But, in testimony submitted to the commission, he faulted the company’s plan for failing to nail to down the savings.
“The companies would not be required to establish that the merger has actually generated any savings at all,” Effron testified. “Rather, it would simply be assumed that the savings exist.”
The Energy Council of Rhode Island, a group of heavy electricity users opposing the company’s plan to recover the acquisition premium from customers, doesn’t like New England Electric’s plan no matter how much savings the company can prove.
“This is not a cost to put in new transmission lines or meters,” noted the group’s attorney, Andrew Newman of Rubin and Rudman LLP of Boston. “This is a transfer of wealth from the New England Electric shareholders to the Eastern Utilities shareholders and really has nothing to do with rate payers at all.”
Narragansett Electric’s Gerwatowski likens the issue to a company paying $7.3 million a year for a new computer system that it expects to cut administrative expenses by $11 million a year. Since electric rates are set based on the cost of providing service, the argument goes, isn’t it worthwhile for customers to make that investment?
Newman has his own analogy. He compares the situation to an investor buying a stock for his retirement account and then later noticing that the current worth of the company’s assets, or its “book value,” is less than the total market value of its stock.
“Can you write to the board of directors and say, ‘Pay me back the acquisition premium that I paid over book value’? The answer is no,” Newman quipped. “They’d probably want to commit you to an insane asylum.”
Attorney General Sheldon Whitehouse doesn’t like acquisition premium any better than The Energy Council of Rhode Island.
“We have clear concerns about that,” said Assistant Attorney General Paul Roberti, “concerns as to why the rate payers in Rhode Island should have to finance the merger transactions and guaranty recovery of those costs.”
The U.S. Navy also is opposing the company’s plan to bill customers for the cost of the merger.
Gerwatowski expects the resistance to New England Electric’s plan to fade by the time the PUC takes up the matter in December.
But that may not be the end of the row.
Round Two
In a second proposed merger, National Grid Company PLC of Coventry, England, would acquire New England Electric for $3.2 billion. National Grid is itself paying a hefty acquisition premium for New England Electric, a fact the latter company proudly proclaims in large, capital letters on the first page of its annual report to shareholders for 1998.
“The merger will provide you with a 25 percent premium on your investment,” trumpets the New England Electric annual report.
That doesn’t sit well with Alan Rosenberg, a St. Louis consultant hired by the Navy. “National Grid is pursuing this transaction because it sees it as an opportunity for growth,” Rosenberg said. “So I don’t think there’s any obligation for Rhode Island customers to pay off the acquisition premium.”
New England Electric points out that the National Grid merger would serve up further savings to customers by creating a larger, more efficient company whose expenses could be spread across a greater base of rate payers.
“We’re a business,” Gerwatowski added. “We’re in business so shareholders invested in the company will make a fair return.”
It’s up to the PUC to sort through the rhetoric and strike a balance between the company’s interests and those of Rhode Island rate payers. The director of the Wisconsin Public Utility Institute at the University of Wisconsin in Madison, Susan Stratton, said state utility commissions around the country have faced the sticky issue since the wave of utility mergers began in the mid-1990s.
“There’s no right answer,” Stratton, a former utility regulator, said. “It’s been handled in a number of ways.”
Beyond the acquisition premium, New England Electric’s proposal for moving the differing prices for electric service at the three Rhode Island utilities closer together has drawn fire too.
Rate Shuffle
Moving toward a single set of electric rates for the state is no easy task. The rates charged by Narragansett Electric, Blackstone Valley Electric and Newport Electric today are composed of charges for power, long-distance transmission of power, local distribution of power and the impact of deregulation on the companies. The companies no longer control the cost of electricity, but each charges a different amount for the other three components of electric rates.
“That’s the real complexity of this case, trying to consolidate all of the customers under a single set of rates with minimum rate impact,” noted Lindsey Johnson, the PUC’s attorney.
To achieve that goal, New England Electric proposes a complex series of adjustments to each component of each company’s rates. The upshot for Rhode Island customers is savings of roughly $2.7 million a year, not quite 1 percent, from 2001 to 2004. But individual customers could see their electric bill jump by up to 30 percent under the proposed rate plan.
The company is reworking parts of its plan to eliminate such unintentional rate hikes, Gerwatowski said. “We’ve seen a few whoopses in there, got to fix this one and got to fix that one. We’re working on that.”
Critics also complain that New England Electric’s rate plan favors the customers of one utility over another in making specific adjustments.
The amount of money Narragansett Electric charges to recover its losses from deregulation, for example, is scheduled to decline in coming years. But New England Electric is seeking to freeze the so-called transition charge at its current level to help pay off higher transition costs at Blackstone Valley Electric and Newport Electric.
The cost to Narragansett customers comes to roughly $112 million from 2001 to 2009, based on the utility’s calculations, said The Energy Council of Rhode Island’s attorney.
“This is solely a Rhode Island commission decision about whether they’re going to play Robin Hood and rob Narragansett customers to pay Blackstone Valley and Newport customers,” Newman added.
The Navy, a Newport Electric customer, believes it too is subsidizing other customers through higher distribution rates. Distribution rates are the portion of a customer’s bill that pays for the local delivery of electricity.
Although the rate plan calls for Blackstone Valley Electric’s distribution rates to be cut to match those of Narragansett Electric, Newport Electric’s distribution rates would be reduced only halfway to Narragansett Electric’s.
“We could bring Newport customers right down to the Narragansett rate and then make it one state, one rate. But the effect of that is there would be an increase in rates for Narragansett customers,” Gerwatowski explains. “We don’t want to do that.”
The PUC is scheduled to begin debating the merits of the rate plan in December with a decision expected in late January or early February. Both mergers already have received required approvals from numerous federal regulators.
