December 4, 2011
Reasons to Stop a Utility Merger
Rob Cox and Robert Cyran
Regulators in Massachusetts are currently deciding whether to allow Northeast Utilities to merge with (or, more accurately, acquire) NStar, the second largest utility in Massachusetts. The failure of Connecticut Light & Power (CL&P) to respond adequately to the late October snowstorm that swept the Northeast, and the outages due to tropical storm Irene two month earlier, has drawn into question whether it is in the public interest to allow CL&P’s parent, Northeast Utilities, to acquire NStar. According to today’s NY Times, a report commissioned by the State of Connecticut and conducted by a consultancy run by James Lee Witt, a former Federal Emergency Management Agency director, found myriad inadequacies in CL&P’s preparation, response and communications before and after a snowstorm swept over the Northeast on Oct. 29. According to Rob Cox and Robert Cyran, it is difficult to square the need to implement the report’s 27 recommendations for Northeast Utilities to improve its planning, procedures, training, and performance – which would require investment – with Northeast Utilities’ plans to squeeze $784 million of savings from its combination with Nstar. The solution, according to these authors: Stop the merger by refusing to grant regulatory approval, and thereby assure that “end users [the utility’s customers] aren’t shortchanged.”
There’s a better solution, however. Simply rejecting the merger is a heavy-handed approach that is inconsistent with the rights of utility investors to be able to freely alienate their property (_i.e., _sell their utility to another through a merger) unless such a transaction can be demonstrated to be “inconsistent with the public interest,” or a “no harm” standard. In this case, the potential harm is that NStar customers will become victims of the same unacceptable “planning, procedures, training and performance” practices that were apparently followed by CL&P under Northeast Utilities’ ownership, and which apparently contributed to CL&P’s poor performance in recovering from power outages caused by storms. But that potential harm can be effectively addressed through conditions that Massachusetts regulators could impose in connection with their approval of the merger. The regulators in Massachusetts have considerable discretion in determining whether the “public interest” is served in a proposed merger, and in imposing conditions on the merging parties that address the perceived risks associated with the transaction. This author has been regulatory counsel for utilities (and/or their buyers) in seven such deals (including Macquarie’s acquisition of Puget Sound Energy, MidAmerican Energy Holdings Company’s acquisition of PacifiCorp, and MDU Resources Group’s acquisition of Cascade Natural Gas Company, among others). The vague “public interest” standard for merger approval provides huge opportunities for stakeholders to fulfill the “no harm” standard by proposing conditions to be attached to merger approvals. It is fairly common, in this author’s experience, to include extensive service quality metrics as merger conditions, accompanied by significant financial penalties for failure to satisfy these metrics. For example, if the Witt report (commissioned by the State of Connecticut) includes 27 recommendations for Northeast Utilities to improve its “planning, procedures, training, and performance” with respect to storm outages, this list of recommendations provides a good starting point for fashioning merger conditions that would address the perceived risks for NStar customers associated with the transaction. That CL&P, under Northeast Utilities’ ownership, demonstrated such a miserable performance recovering from the storms provides some basis for concern about deteriorating service quality for NStar customers if the merger is approved. Imposing merger conditions that address these risks is the well-established means for protecting the public interest in these transactions. Simply denying the merger approval, while attractive from those with a “we’re from the government and we’re here to help” attitude, would unfairly infringe upon the property rights of utility investors.