TransActions - June 1999 (Vol 399)

"History in the making"...... that’s how the utility restructuring efforts are being referred to by many, both within and outside of the industry these days. Is it just a passing fad - taking hold only in spotty locations - or is it the start of a new business proposition that will spread throughout the country?

Regardless of how one chooses to answer this question, we can all agree that the events currently taking place in New England are having a profound impact on that region’s electric utility industry. Traditional functions, responsibilities and relationships between the local power companies (investor-owned, cooperatives, municipals, etc.) and their regulators, customers, and other key stakeholders are being challenged to the core. The consequence…a new market paradigm is emerging.

WHAT DOES IT MEAN TO YOU?

So what does this mean and how might it impact you? In this edition of GDS’ Transactions, we summarize some of the key issues now being confronted and resolved in New England. By expanding your understanding of these ongoing activities, we hope that you will be better positioned to tap opportunities and navigate obstacles that may be similar to those emerging in your area.

Promises of Lower Rates
The northeast is served by a large number of investor-owned utilities and municipal electric systems. Price pressures from some of the highest energy rates in the nation, coupled with an existing base of sophisticated independent generation owners and consequences from past utility investments have accelerated movement toward retail choice in the northeast region.

Immediate rate reductions in the range of 10% to 15%+ are being promised. These savings are being achieved through a variety of ways including: generation asset divestitures; major mergers, acquisitions, and numerous efficiency improvements and other cost cutting methods. In various New England states, electric utility bills have been dis-aggregated into generation, transmission, distribution, and transitional charges including stranded investment recovery, renewables and energy efficiency components. Currently, it’s the generation component that has been opened up to full retail competition.

Divestiture of Utility Generation Assets
Most states in New England are requiring or encouraging their regulated investor-owned utilities to voluntarily divest themselves of their generation assets. Many of these assets have already been sold, and at prices well above book value. Boston Edison, Central Maine Power, Commonwealth Energy, Eastern Utility Associates, and New England Electric Company have all either completed or announced the pending sale of their fossil generation plants. And in Massachusetts, Boston Edison’s pending sale of its Pilgrim nuclear power plant to Entergy is making headlines and blazing new trails across the country. The net result of these divestiture activities has been a significant reduction in stranded investment recovery requirements and the elimination of anti-competitive issues and claims in the new retail generation market.

Customer Choice
We’ve heard it before, most commonly in the long-distance telephone industry. But now retail electricity customers in many of the New England states also have the ability to choose their electric generation provider. The opening up of competitive generation at the retail level, although slow to develop due to artificially low initial pricing arrangements, has resulted in the introduction of many new market actors. In addition to the already thriving independent power generation industry that exists in the northeast, power marketers, brokers, merchant plant developers and municipal aggregators have begun to develop solid footholds in the region. Some of the new players include: AllEnergy, Duke, Enron, Ensearch, Entergy, Green Mt Energy, NORESCo, Southern Company, Sythe.

At the present time, the traditional electric utilities are continuing to provide the generation commodity to customers under "standard offer" and "default service" arrangements. Once these pricing arrangements rise to true market levels, the flood gates will open and retail competition will begin in earnest. Customers will leave their traditional utilities’ standard offer services and switch to competitive suppliers. In light of this inevitability, electric utilities in New England are now actively in the process of redefining themselves and their new roles as regulated transmission and distribution companies (i.e. a "wires" business).

Redefining of Utilities as T&D Business
Changing the mindset of a region dominated by numerous vertically integrated electric utilities is no small task for an industry that has built its culture and expectations over the past 100 years around a vision of bricks and mortar, smokestacks and power plants. Many utility managers in the region are experiencing tremendous shrinkage of their asset bases and are searching for innovative ways to maintain the viability of their companies and their remaining assets.

On the micro level, this means careful review and improvement of all operation and maintenance practices and better utilization of existing transmission and distribution assets. Research and implementation of new technologies and efficiency procedures will be key to the new T&D utilities’ success in these areas.

On the macro level, this means pursuing opportunities to grow the customer base through the identification of expanded products and services (i.e. telecommunications, internet access, cable television, etc.) and/or utility mergers and acquisitions. Expanded focus on exceeding existing customer expectations and providing unparalleled service is also vital, both for positioning a utility to come out on top of any merger, and to avoid revenue erosion through potential self generation and municipalization threats.

MERGERS & ACQUISITIONS
Merger activity in New England has been predominantly focused in Massachusetts during this past year. Before the era of restructuring, there were seven investor-owned utilities operating in Massachusetts. Recently, two mergers have been announced. Boston Edison will be merging with Commonwealth Energy in mid 1999. New England Electric Systems (NEES), the owner of Massachusetts Electric and Nantucket Electric along with two other companies in New England, will merge with Eastern Utilities Associates (EUA), the owner of Eastern Edison and three other New England companies. The NEES/EUA group will itself be acquired by National Grid, a British company, later this year.

We have also seen activity in other areas, for example, the New Hampshire Electric Cooperative put in an offer to purchase the transmission and distribution assets of Public Service Company of New Hampshire. It is likely that this merger-mania will continue as the competitive retail generation markets begin to open up more broadly across the region.

Other Considerations
A number of other considerations are being addressed in the northeast region as a result of the ongoing industry restructuring movement. These include:

• System Reliability – the entire New England Power Pool structure has been revamped and an Independent System Operator (ISO – New England) has been created to ensure continued reliability through the efficient management, operation, and administration of the wholesale generation and transmission systems and power markets across the region.
• Energy Efficiency & Renewable Resources – key stakeholders in New England have expressed significant concern about environmental impacts that could result from deregulation and electric utility restructuring. In response to these concerns, many states are including specific energy efficiency goals and renewable resource development objectives within their declarations and mandates.
• Metering, Billing & Information Systems (MBIS) – who owns the meter, holds the information, and touches the customers through monthly billing is an item currently undergoing serious debate in the northeast region. At least for the short term, it appears that the new electric transmission and distribution utilities will maintain their current responsibilities in this area. However, many are jockeying for position to take over the provision of MBIS services in the future.
• Distributed Generation & New Transmission/Distribution Technologies – in this new era of electricity transmission/distribution utilities and generation providers, a redoubled attention to improving the efficiency of the region’s existing power grid is emerging. In many cases, the installation of small, distributed generation facilities will be the best solution to specific area constraints or load problems. Experimentation with innovative new technologies (i.e. superconductors, flywheels, etc.) is also likely to increase.

SO, IS IT CONTAGIOUS?
As we’ve reported in previous Transactions publications (see Vol. Nos. 199 and 398), the timeline for implementation of retail customer choice began seriously in 1997 and the number of states that have either issued commission orders or legislative mandates continues to grow. Although the concepts that support restructuring are strongest in regions where energy rates are relatively high, the current momentum and evolving markets for electric commodity spot pricing and futures trading provide additional fuel for the fire. The following map shows the status of state electric utility restructuring activities across the country as of May 1, 1999. You be the judge.

GDS has been working quite closely with utilities in the northeast region, and nationwide over the past many years. We have helped a number of clients to identify strategies and pursue opportunities as they’ve considered these issues or worked through their initial culture shocks and identity changes. Whether your region is in the midst of such changes, or potentially next on the restructuring block, solid expertise and knowledge, based on lessons learned from recent history, will best prepare you to tap the opportunities and avoid many of the obstacles that lie ahead. 

For more information on electric utility industry restructuring activities and their potential implications, please contact Scott Albert at (603) 471–0336 or Jim McGaughy at (770) 425–8100, e–mail info@gdsassociates.com.

• 1999: Six states passed and signed legislation, four in April: AR, DE, MD & NM.
• Latest Clinton Administration bill would be mandate choice for all by 2003; yet state could opt out.