An Unconditioned Merger of NU and NSTAR Poses a Threat to Competition

By Cynthia A. Arcate 27 October, 2011

Much has been argued in the proceeding before the Department of Public Utilities (DPU) about the appropriate standard of review for the merger of Northeast Utilities (NU) and NSTAR.

Initially, the companies filed their case under the long standing precedent of “no net harm” to ratepayers. Later the Department of Energy Resources advocated for a change in the standard to providing a “substantial net benefit” to ratepayers. The DPU resolved the debate by changing the standard to a requirement of providing a “net benefit” (not substantial) to ratepayers.

But whatever happened to good old-fashioned analysis about impact on the competitive energy market, which means so much to businesses, institutions and consumers? No standard is more applicable than the long-standing test for any merger, in any industry: that the combined entities should not negatively affect competition in the markets.

The New England Power Generators Association (NEPGA) raised this issue in terms of the intent of these two utilities to get back into the electricity generation business – which could significantly hurt competition. NEPGA recommended the merged company be prohibited from lobbying or otherwise seeking to change laws that prohibit the distribution companies from re-entering the generation business.

Fourteen years after restructuring, which expressly got the distribution companies out of the business with divestiture, it is amazing how many people in this industry have forgotten why we did what we did. NEPGA’s witness, the eminent economist Dr. Susan Tierney, lays it all out. One of the primary goals of restructuring was to shift the risk of generation investment away from customers and place it on the merchant generators. Letting utilities back into the business, even for cherished renewable projects, shifts the risk of these projects back to customers and lets utilities dip their toes back in the generation waters – with significant potential business advantage to them as a result.

The Green Communities Act mandates some level of generation involvement by the distribution companies. But we need to ensure that these two companies are prevented from pressing further by seeking to have projects like NorthernPass become ratepayer supported and greater ownership of generation, particularly in New Hampshire and Connecticut.

The marriage of these companies will create a formidable force for making the kinds of legislative changes necessary to allow that to happen. They will be able to bring their substantial clout over transmission and retail service areas to regulators and legislators in three of the six New England states to achieve their goals. The electricity delivered by the combined companies will be more than half of the electricity consumed in the region. The concerns raised by NEPGA are not paranoia – they are very real, and justified.

The burden of utility ownership of generation or long term contracts for electricity ultimately fall on retail customers and raise significant issues related to cost recovery. How a company in the delivery business recovers the cost of generation poses difficult rate design issues because the costs must be recovered in the delivery charge instead of the supply component. Yet, the complexities of wholesale market operations require that the generation be matched with the usage of customers. I’ve already gotten too much into the weeds for this discussion. Suffice it to say, the larger the resource commitment, the bigger the charges and the greater the desire to try and shift those costs onto all customers – even the ones on competitive supply. This could cause a re-examination of the retail competitive regime, undermining retail competition. If there is not robust retail competition, there cannot be robust wholesale competition. They work together.

The barrier against utility ownership of generation includes long-term contracting for generation such as a purchase from Hydro Quebec. Much of the stranded costs of utilities upon restructuring, which all customers paid, came from above-market long-term contracts. We should not allow utilities to be in a position to make the same mistakes again and, in their drive to create a more profitable merger, place undue risks on customers.

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