May 20, 2012

NStar, Northeast Utilities merger agreement includes Cape Wind provisions, planned rate freeze — but no upgrades to power lines and poles

By SCOTT VAN VOORHIS | New England Center for Investigative Reporting | 20 May 2012

BOSTON – Power giants NStar and Northeast Utilities won a green light from Massachusetts’ regulators for their multibillion-dollar merger while avoiding serious questions about the catastrophic outages that darkened vast swaths of southern New England last fall, a review of merger records shows.

State utility regulators spent most of their time working out a deal under which the new, combined company, now the largest in Massachusetts and in all of New England, would buy power from the controversial Cape Wind project.

The final agreement includes multiple provisions related to Cape Wind and a planned rate freeze for customers, but no requirements to either upgrade creaky lines and poles or maintain adequate levels of front-line storm personnel, a review by the New England Center for Investigative Reporting has found.

That stands in contrast to Connecticut regulators who demanded $300 million in upgrades to lines and poles, though that money will come out of ratepayer pockets, not corporate coffers.

Regulators on both sides of the Massachusetts-Connecticut border may have missed a rare opportunity, through their power to approve the massive merger, to press the two utilities on how they plan to avoid another round of catastrophic outages in the future, critics say.

The newly-merged Northeast Utilities empire includes most of Connecticut and a vast swath of Massachusetts, combining NStar and its eastern Massachusetts-Cape Cod base with Western Massachusetts Electric Co.

The combined company controls most of New Hampshire’s electric grid, which includes towns like Windham, Derry and Londonderry in the southern tier. Public Service of New Hampshire is a subsidiary of Northeast. New Hampshire regulators declined to review the merger at all, citing jurisdiction issues.

“It seems like a glaring oversight not to use that opportunity to create the incentives to make sure power outages are not happening like they were and, if they are, they are getting corrected,” said Deirdre Cummings, legislative director at consumer group MassPIRG.

NStar and Northeast Utilities announced plans to merge their companies in October 2010, triggering a review by state utility regulators in both Connecticut and Massachusetts. It was in the midst of the merger review that last fall’s outages struck, leaving well more than a million homeowners and businesses without power for up to a week, first at the end of August with tropical storm Irene and then two months later with the “Snowtober” blizzard of Oct. 30.

The storms outraged homeowners, businesses and local officials and immediately raised concerns about whether NStar, Northeast Utilities and other power companies in both states, had adequately prepared for the emergencies.

Last fall’s storms, in turn, are part of a quadrupling of major outages in Massachusetts over the past five years involving NStar, Western Massachusetts Electric and other major utilities, federal statistics show.

Massachusetts’ Department of Public Utilities and the office of attorney General Martha Coakley last fall both launched ongoing investigations into the epic outages in the Bay State, focusing not just on NStar, but also on Western Massachusetts Electric and National Grid, the state’s other big power company.

The findings are due out this summer, with NStar and other utilities facing potential fines and other penalties.

The final merger settlement between NStar, the DPU and Coakley’s office includes little reference to the storms and the power reliability issues they raised. (NStar can’t try to collect from ratepayers the tens of millions of dollars in costs piled up during last fall’s storms until 2014, according to the settlement.)

The only requirement related to reliability is that the combined company must provide safe and reliable service, with potential penalties for failing to meet unspecified customer service benchmarks.

The vast majority of the settlement and supporting documents deal at length with an agreement by the new, combined utility to buy power from Cape Wind and plans for a four-year rate freeze for NStar and Western Massachusetts Electric customers in Massachusetts.

NStar agreed to buy just under a third of Cape Wind’s electricity over the next 15 years, at a premium over conventional power prices of more than $940 million.

The company also agreed to a roughly $200 million rate freeze over the next four years, though NStar is free to come back in two years to try and recover an estimated $40 million in costs related to last fall’s storms. (For its part, Western Massachusetts Electric piled up more than $20 million in storm costs last year.)

“As a stronger company, we are better positioned with the resources necessary to deliver outstanding reliability and service,” Thomas May, the chief executive and president of the newly-combined Northeast Utilities, said after the merger was approved by regulators in both states. “Our customers will also benefit from significant investments in upgrades to our infrastructure.”

May, in an interview last week with the Associated Press, also said he is reassuring regulators that Northeast Utilities has learned from last year’s big outages; “We just have to win back the hearts and souls (of our customers),” he said.

But others question why the power behemoth, given the increase in major outages over the past few years, was not forced by regulators in the Bay State during the merger review to back up its reliability pledges with hard numbers.

“It is fair to assume an even larger investor-owned utility would have the potential to be even more out of touch and even more lacking in responsiveness and accountability,” said Geoff Beckwith, executive director of the Massachusetts Municipal Association. “This is an issue we are watching.”

State Rep. Dan Winslow, R-Norfolk, contends the Patrick administration was simply more concerned with getting the Cape Wind deal done than grappling with gritty reliability issues.

“I think it’s really a question of priorities,” said Winslow, whose district in the southern suburbs of Boston was hammered by last fall’s outages. “The Patrick Administration has made it clear that wind power, at any cost, was their priority. My priority is reliable power. To me, the status quo is unacceptable.”

Responds Sandra Ahearn, spokesperson for Western Massachusetts Electric Co., “There were exhaustive public hearings in both states. There were verycomprehensive opportunities to submit questions. The review processlasted over a year. I guess I’m puzzled as to why anyone would decideto raise objections now or raise issues that would have been moreappropriate for the hearing process.”

Barbara Kates-Garnick, the state’s undersecretary of energy, says there were good reasons why the outage issues were not explored during the merger review.

First, according to Kates-Garnick, the DPU’s and attorney general’s investigations are sufficient to handle the outage issue. In addition, NStar pledged not to lay off staff after the merger, taking away concerns that payroll cuts could lead to a decline in linemen and other key personnel, Kates-Garnick contends.

And, Kates-Garnick, who is a former DPU commissioner, says she isn’t concerned about funds being diverted or cut from maintenance by the utility as it works to make good on pledges to find hundreds of millions of dollars in savings.

The newly-combined Northeast Utilities has pledged to wring out more than $785 million in savings over the next decade. “It would be very difficult for them to divert dollars,” Kates-Garnick said.

In Connecticut, reliability issues were mentioned in the merger agreement, but ratepayers, not the company, are the ones who will bear vast majority of costs of the upgrades planned.

Connecticut’s Public Utilities Regulatory Authority secured a pledge by Northeast to spend $300 million upgrading lines and poles. It came after state regulators initially declined to review the merger at all, reversing course after a lawsuit by the state’s Office of Consumer Counsel.

All of that money will come out of ratepayer pockets, not corporate coffers, however.

Critics contend Massachusetts regulators may have missed an invaluable opportunity to pressure the utilities to ramp up efforts to prevent more major outages.

Regulators enjoy considerable leverage when they review mergers, with companies under pressure to move ahead as quickly as possible to combine operations and cut costs.

“That is a tremendous opportunity for regulators to require some performance improvements and to provide better protections and benefits for consumers,” said Tyson Slocum, energy director for Washington, D.C.-based advocacy group Public Citizen.

Winslows argues that addressing the issue of power reliability in the merger would have provided a way to get ahead of problems instead of investigating past outages. “You are chasing failure; you want to get ahead of the situation,” he said.

Meanwhile, Cummings pins the lack of in-depth analysis on the move to deregulate the power industry in Massachusetts more than a decade ago. She contends there is far less scrutiny now of power companies and their decisions, leaving the details of staffing and spending on maintenance in the companies’ own hands.

With a rising tide of major outages, this hands-off approach is proving to be problematic, Cummings argues.

Overall, there have been eight storms in Massachusetts since 2007 that have left at least 50,000 homes and businesses in the dark, compared to just two during the previous five-year period, industry filings with the U.S. Department of Energy show. (This does not include the recent NStar transformer explosion that plunged a swath of downtown Boston into darkness for two days.)

“If we keep going on this path, we will have more weeks out of the year where we don’t have power and consumers will end up paying more,” Cummings said.

Kates-Garnick contends such calls for more in-depth analysis during the merger are misguided. Regulators will eventually look at the reliability issue in detail when the company comes forward in the future with a rate request, she said.

That will likely not be for another four years given the rate freeze in effect, but Kates-Garnick argues the timing could actually prove to be advantageous. By that point, the merged company will have figured out how much money it can save and where, she said.

By then, the company also will have a more accurate picture of the amount of money needed for linemen, maintenance and upgrades, Kates-Garnick contends. If regulators had forced the company to commit to numbers now, they would have been inaccurate and possibly overly expensive for ratepayers, she said.

Even if Northeast opts not to file for a rate increase, it will still have to offer up a detailed report on reliability of service since the merger, as well as details on cost cutting and savings by April 15, 2015, under the terms imposed by DPU for approval of the merger, Kates-Garnnick noted.

“You would rather wait until the companies are combined to get an accurate picture of what the savings are going to be from the merger,” Kates-Garnick said.

Waiting years to look fully at the outage issue – and structural changes that may be needed – could be risky given the spate of major outages, MassPIRG’s Cummings believes.

“You want to fix the roof before the rain; you want to correct the problem now before we get into another season of crazy weather,” she said.

The decision by state regulators not to push NStar on the outage issue is also raising concerns among those who lived through last fall’s big power failures.

Ken Akroyd, a retiree who moved to Cape Cod from Washington, D.C., notes he has lost power three times in six years. Akroyd says he was so angered after losing power for three days in the wake of storm Irene that he submitted a complaint to state regulators investigating the outage.

“On Cape Cod, we are like a third-world country. We get power and electricity sometimes and sometimes we don’t,” he said.

Akroyd contends NStar didn’t have enough front-line staff to restore power in Barnstable, where he lives, with few if any repair trucks to be found in the area the first day after the storm. He said he fears what could happen if the next storm is a full-fledged hurricane and not just a tropical storm, like Irene in August.

“The thing that concerns me most is this was not a direct hit from a hurricane,” Akroyd said. “If we do get a direct hit, we could be out for weeks and weeks.”

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