Advancing the Cause of Cape Wind in a Utility Merger Proceeding

San Francisco Chronicle
September 25, 2011

Merger May Impact Nation’s 1st Offshore Wind Farm
Jay Lindsay
Associated Press

Cape Wind, the nation’s first offshore wind farm, needs to find additional buyers for its power in order to obtain the financing to build the $2.6 billion project, which is located in Nantucket Sound in Massachusetts. The project, comprising 130 wind turbines, is scheduled to begin operating in 2013. National Grid, the largest utility in Massachusetts, agreed to buy half of Cape Wind’s power for an average price of about 24 cents per kilowatt hour over 15 years. Another likely customer for Cape Wind’s electrical output is NStar, the second largest utility in Massachusetts, which is in the process of merging with Northeast Utilities. The pending merger has provided a possible pressure point to get NStar to buy Cape Wind power. Since the merger was announced, the Massachusetts Department of Energy Resources successfully argued that the standard to be applied by regulators in granting approval of a merger should go beyond the historical “no harm” standard (i.e., whether consumers are harmed by the merger) to include a consideration of benefits to consumers, such as by advancing the clean energy goals of Massachusetts (including the development of offshore wind). In 2008, Massachusetts enacted the Green Communities Act, which required that utilities enter into long-term contracts to buy a portion of their electricity supply from renewable sources. NStar has met that requirement thus far by buying far less expensive land-based wind power, and has resisted purchasing from the Cape Wind project due to its higher cost. The merger proceeding is being used as leverage to pressure NStar to buy power from Cape Wind, which raised the ire of none other than Robert Kennedy, Jr., an environmental attorney who has long opposed the Cape Wind project. Mr. Kennedy argued in an Op-Ed piece in the Wall Street Journal that “the state administration is trying to hold hostage the proposed NSTAR-Northeast Utilities merger unless the two electric companies agree to buy Cape Wind’s power.”

The Cape Wind project has benefited from high-profile federal and state backing, but still needs to find additional buyers of its relatively expensive output in order to proceed with the project. Not surprisingly, a merger proceeding is being used to advance the state’s clean energy agenda, including support for the nation’s first offshore wind project. Who will bear the costs of the higher-priced Cape Wind power if NStar agrees to purchase a portion of the project’s output? The ratepayers of the combined NStar-Northeast Utilities entity (assuming the merger is then approved), as the costs will simply be rolled into the rates along with the costs of other power resources relied upon by the utility. Is this a fair outcome? That’s up to the regulators in Massachusetts, who have considerable discretion in determining whether the “public interest” is served in a proposed merger, and in ruling on the conditions that are attached to a proposed merger. As the nation’s first offshore wind project, Cape Wind has a prominent profile in demonstrating the U.S. commitment to the development of renewable energy sources. Offshore wind needs to be a significant contributor to the nation’s energy strategy going forward, and the fact that shrewd investors such as Google are willing to spend billions to develop the infrastructure to support offshore wind confirms the perceived role of this potentially valuable resource. Cape Wind is on the cutting edge (or “bleeding” edge, as some would say) for domestic offshore wind projects, and future projects can be expected to benefit from the lessons learned in the development of Cape Wind and as offshore wind technology improves. The project has come to symbolize the nation’s commitment to renewable energy, thereby increasing the stakes in its success.

It is hardly new or remarkable that utility merger proceedings are used as the forum to press the agenda of the various participants to the proceeding. This author has been regulatory counsel for utilities (and/or their buyers) in seven such deals (including Macquarie’s acquisition of Puget Sound Energy and MidAmerican Energy Holdings Company’s acquisition of PacifiCorp, among others), and the vague “public interest” standard for merger approval provides huge opportunities for stakeholders to advance their causes by proposing conditions to be attached to merger approvals. Kudos to the Department of Energy Resources in Massachusetts for taking advantage of this opportunity to potentially provide a means for bringing the Cape Wind project one step closer to reality. NStar should step up to the plate, commit to a portion of the Cape Wind output, and thereby eliminate a basis of opposition for the proposed merger with Northeast Utilities. That’s the way the utility merger game is played, and the broadly defined “public interest” would be served by such an outcome.