Growing National Grid
National Grid may be about to close an $11.8-billion deal to become the third-largest energy delivery company in the U.S., but a local company official says it will not reduce its commitment to its 1.2 million Massachusetts electricity customers or let size take precedence over customer satisfaction.
"It’s not just about size," says Robert McLaren, president of Massachusetts and New Hampshire distribution for National Grid, of his company’s pending acquisition of Brooklyn, NY-based KeySpan Corp. - the largest distributor of natural gas in the Northeast and electricity supplier to 1.1 million NY customers. "We certainly want customers to view this as an improvement."The merger is still awaiting final regulatory approval, which McLaren expects by yearend. But he expects it to have little impact for Central Mass. electric customers short-term. Consumers here may eventually share in the savings that stem from the synergies and efficiencies of the larger company, he says, which is expected to have more than double the $7-billion operating revenue that National Grid achieved in 2006. The challenge will be to implement the acquisition in a way that supports National Grid’s overall objective, McLaren says.
Power industry experts agree that the KeySpan deal should do no harm to local customers and may bring long-term efficiency benefits. The merger, the fifth that UK-based National Grid has undertaken since entering the U.S. market via its purchase in 2000 of Mass.-based New England Electric and Eastern Utilities Associates, is part of a growing consolidation trend in the power industry. National Grid is also in the midst of completing the $575-million acquisition of the Rhode Island gas distribution assets from Southern Union Company.
The bigger question, experts suggest, is not whether the reputable National Grid will continue to serve its 3.2 million New England and New York customers well, but whether the company is positioning itself for a shift in business strategy as it continues to pursue aggressive growth in the U.S.
Analysts ponder strategy questions
Susan Tierney, principal of Boston-based energy consultant the Analysis Group and a former commissioner of the Mass. Public Utilities Commission, says the KeySpan acquisition, which includes power plants that generate 6,600 megawatts of electricity for Long Island customers, questions whether National Grid will stray from its long-stated mission of specializing in energy delivery to re-enter the power generation market.
While electric utilities were forced to divest their power plants in Massachusetts with the onset of electricity deregulation in 1998, Tierney says there is a growing debate about whether they should now be allowed to own power plants again. Since deregulation began eight years ago, she notes, ISO New England, the independent nonprofit group that supervises the New England power system and manages the region’s wholesale electricity market, has become a mature oversight force. Some observers feel ISO would exercise adequate controls over wire owners that also owned power plants, should that become allowed again. What’s more, few independent power generators have chosen to invest in building plants in New England, leaving the region casting around for ways to beef up its anemic power supply to meet future growth.
That makes it a good time to invest in power generation resources in the region, Tierney says.
On the other hand, she notes, National Grid has distinguished itself as a top-notch delivery system operator both in England and in the U.S. "So their reputation is ‘Wires is Us,’" she says. The addition of KeySpan’s gas infrastructure, which serves 2.6 million gas customers in New York, Mass. and New Hampshire, meshes with that distribution focus, making it a pipes-and-wires operation like the company’s infrastructure in England.
Henry Lee, program director of the energy and natural resource program at Harvard University’s Kennedy School of Government, says the National Grid/KeySpan merger raises another interesting question about the company’s future power strategy. Several years ago, he says, England had been going through the same deregulation dilemma as New England, in which homeowners were allowed to leave behind the restrictions of electric utility monopolies and buy power from competing electricity retailers. However, few found it worthwhile to make the switch from the previously utility monopolies. Like the current climate in New England, retail competition from electricity customers wasn’t materializing.
But then National Grid, which owns gas transmission systems in Britain, began buying up electric companies and bundling its gas and electric services together in special deals to draw customers. The packaged marketing approach not only drew some 30 percent of electric customers, he says, but stimulated the competition among electricity retailers.
National Grid officials say the company has no plans to re-enter the power-generation market. National Grid will acquire the KeySpan plants only because they are a part of the deal, McLaren says. He also notes that he can’t say whether his company will look to bring added natural gas supplies into New England.
Keeping the lights on
What McLaren does say is that his company will continue to invest in maintaining and improving its electricity infrastructure in Mass. and New England, despite a concern raised by U.S. Rep. Edward Markey, D-Mass, that the KeySpan deal could jeopardize such investments.
McLaren points to a five-year, $1-billion reliability and infrastructure improvement plan the company began last year. The plan includes construction of new lines, replacement and upgrading of existing lines, tree trimming, inspection and general maintenance, he says.
National Grid has had some reliability problems in recent years, including 2005, McLaren admits. In March, a report on the quality of its service to Bay State electric customers, filed with the Department of Telecommunications and Energy, showed the company had more frequent and longer power outages in 2005, resulting in a $1.5 million penalty against the company to be paid to its 1.2 million customers.
McLaren says some of the problems in 2005 were weather related but admits there are system upgrades needed. Overall, he says, his company’s infrastructure is in good shape. National Grid has stepped up its investment in improvements in Mass. by $50 million a year despite the fact that it is committed to a stable distribution rate through 2010 under an agreement with state regulators, McLaren points out.
Both Lee and Tierney note that National Grid has a good track record in maintaining its infrastructure in the region and they would expect that to continue after the KeySpan deal. "Historically, they’ve been considered one of the best companies in New England," Lee says.
Tierney notes that the company will be a bigger player in New England and could buy up smaller energy companies here that are facing industry pressure from capital markets and would benefit from system efficiencies that continued consolidation would bring. McLaren would not comment on any acquisition speculation, including the suggestion that Mass.-based NStar could be his company’s next expansion target.
Staying in the power debate
While National Grid is an electricity distribution company, with some 72,000 miles of power lines including 16,400 miles in Massachusetts and 3.2 million electric customers overall, it has been an active voice in the debate over how to solve New England’s power supply woes.
For one thing, a proposed new pricing system under which rate hikes would be added to consumers’ electric bills to fund incentives for existing and new regional power generators will go on National Grid’s electric bills to customers. McLaren says his company wanted to make sure any such incentive plan was "no more expensive than it needed to be." And, he says, the proposal now backed by ISO New England and expected to be voted up or down by the Federal Energy Regulatory Commission by month’s end, meets National Grid’s approval.
The plan calls for added charges on New England ratepayers’ bills to fund $5 billion in incentives to encourage additional power capacity in the region, which experts say will likely run short of electricity by 2008 if something isn’t done.
As with rising electricity wholesale rates, which make up the biggest part of National Grid customers’ electric bills but on which the company makes no money, customers are liable to view the added incentive fee as being an increase from National Grid, McLaren says. He does think the incentive plan, which has been years in the making, will help bring more investment in power generation in New England.
And if the plan isn’t passed and the region runs short of power, he says, "We will also take it on the chin if the lights go out."
Micky Baca can be reached at mbaca@wbjournal.com
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