A request for approval of the merger of Central Hudson Gas & Electric Corporation (Central Hudson) and Fortis, Inc. (Fortis) is currently under review by the New York Public Service Commission (Commission) in PSC Case 12-M-0192. See Proposed Central Hudson/Fortis Merger Offers Little for Consumers; Shutoffs Up 171% Since 2005, PULP Urges Reforms.
After a period for discovery and exchange of information, testimony for and against the merger was filed. Staff’s testimony recommended $95 million in “positive benefit adjustments,” most of which would be in the form of deferred accounting credits in favor of customers to write off current and future claims of the utility for money due from customers.
Then, a statement of material facts in dispute to be decided at a scheduled evidentiary hearing was filed by Department of Public Service (DPS) Staff. The issues for the hearing identified in the DPS Staff material issues statement are:
• Will the use of Central Hudson resources for other Fortis affiliates be at Central Hudson ratepayer expense?
• Are the rulings of the Canadian Securities Administrators equivalent to the provisions of the Sarbanes-Oxley Act (SOX)?
• Does an independent audit of internal controls as contemplated under SOX provide a value of benefit to Central Hudson ratepayers?
• In 2008, did Iberdrola or any of its affiliates provide shared services to its regulated U.S utilities?
• Is Fortis’ goodwill post-merger a risk only to Fortis Shareholders?
• What was the level of goodwill on Iberdrola’s books under US Generally Accepted Accounting Principles post merger?
• What would be the projected level of goodwill on Fortis’s books post merger under Internal Financial Reporting Standards?
• Is there a risk that Central Hudson rates may be excessive post-Merger?
• If a rate increase is deemed “ warranted” for a specific rate year based on additional costs and expenses, does that necessarily mean that there must be a corresponding rate increase during that rate year?
• If there is deferral treatment for many of the rate drivers for a specific rate year that would “warrant” a rate increase, do ratepayers remain responsible to pay for these drivers at some later point in time?
• Are there transaction risks requiring Public Benefit Adjustments?
• Are risks requiring Public Benefit Adjustments fully neutralized or mitigated?
• Are the proposed benefits of the Merger fully responsive to the risks of the Merger?• Are there risks associated with this Merger?
• Can all risks of this Merger be mitigated or neutralized?
• Do the risks of this Merger outweigh the alleged benefits?
• Was the “Reduction of Alternative Transaction” amount of $135 million in the Petitioners’ Comparative Analysis (see Mosher Rebuttal Testimony, pg. 7) scaled to the delivery revenues of NYSEG and RGE as compared to KeySpan NY and LI?
• Are the alleged foregone carrying charges on capital expenditures a benefit to Central Hudson rate payers without considering an updated ROE for the time period of the rate freeze?
• Does maintaining the various performance mechanisms, targets and metrics provide a benefit to Central Hudson ratepayers?
• Is it proper to include alleged synergy savings into Petitioners’ PBA comparative analysis?
• What is the age of the holding company Fortis Inc.?
• What were the various credit ratings of Iberdrola in 2008?
• Reliability Forecasts – Should reliability forecasts be developed independently from sales forecasts and be based on a minimum thirty years of weather data?
• Capacity Asset Management – Should shareholders benefit through a sharing mechanism from the release of excess capacity that is paid by ratepayers?
• Is there excess capacity?
• Transportation and Balancing Procedures and Charges – Should the weighed cost of commodity for gas injected into storage during the non-winter season be utilized to more accurately estimate the actual storage price paid by all sales customers?
1. Whether Petitioners’ proposed rate freeze has no value, asStaff urges, or substantial value, as Petitioners urge?
2. Whether Petitioners’ proposed corporate governance andfinancial protection conditions, efficiency savings,benefit funds, proposed voluntary change to the EarningsSharing provision, and the value of Petitioners’ proposedrate freeze, produce positive net benefits?
3. Whether Fortis is more risky than Iberdrola, as Staff urgeson the basis of Staff’s three reasons, or less risky asPetitioners urge?
• A proposed freeze on Central Hudson electric and gas delivery rates through July 1, 2014
• A promise of $9.25 million in savings to ratepayers over five years
• Write-offs in the amount of $35 million to be applied against future rate increases
• A one-time funding of $5 million for a Community Benefit Fund for economic development, $500,000 of which would be used for low-income consumer assistance purposes.
1) Uncertainty and risk. Any “net” public benefit analysis is inherently subjective and miscalculations of downside risks would more negatively impact economically vulnerable populations than they would financially stronger parties. Therefore, any impact on low and fixed income people should receive a heightened review and greater weight should be given to proposals to protect their beneficial interests, and which would provide concrete, ascertainable benefits.
2) The one-year “rate freeze” is not a significant benefit. Characterizing a one-year rate freeze as a “positive benefit” is illusory, as Central Hudson did not file any rate case seeking to change existing rates when the current rate plan expires. If new rates were filed tomorrow rates would remain frozen at the current level for eight months after the current rate plan expires, before any new rates would become effective. Therefore the “freeze” is something that would for the most part occur with or without the merger and thus its “public benefit” should be discounted.
2) The one-year “rate freeze” is not a significant benefit. Characterizing a one-year rate freeze as a “positive benefit” is illusory, as Central Hudson did not file any rate case seeking to change existing rates when the current rate plan expires. If new rates were filed tomorrow rates would remain frozen at the current level for eight months after the current rate plan expires, before any new rates would become effective. Therefore the “freeze” is something that would for the most part occur with or without the merger and thus its “public benefit” should be discounted. Major flaws in the current rate plan include the absence of any performance standards applicable to storm damage prevention and recovery. The utility can keep as profit all savings from reduced maintenance, can collect the same amount of money even when service is off for large numbers of customers and meters are stopped for extended periods, and can later obtain 100% recovery from customers of all claimed storm damage costs. As a result of the weak existing rate plan, all of the customer benefits could be consumed if there are more major storms.
3) “Positive Benefit Adjustments” are too low. The amount of Positive Benefit Adjustments in the Joint Proposal, which sweeten the deal as it was originally filed, are exaggerated, below the benefit level of comparable prior mergers in New York, and are not sufficiently targeted towards low-income consumers, many of whom are at risk of loss of service they cannot afford. Prior to settling, DPS Staff filed corrected testimony recommending “the Petitioners be required to provide Central Hudson’s customers a total of $95 million of identifiable monetary benefits to obtain Commission approval of the proposed transaction.” Nearly all of that was proposed to be accounting deferrals to be used to write off claims of the utility for money from customers in the future. Based on calculations from prior mergers, DPS staff testified, before agreeing to settle, that a net benefit analysis would arrive at $95 million in material benefits.
4) Minimal low income customer benefits. Out of the total amount of benefits asserted only $500,000 is allocated directly towards low-income customer assistance, comprising 1% of the total claimed benefits. This is a paltry sum considering 12,704 service terminations in 2011 for bill collection purposes and that more than 20,000 Central Hudson residential customers have fallen behind more than 60 days on payments, subject to aggressive debt collection tactics that rely too much upon the interruption of service to collect bills.
5) Benefit of accounting credits questioned. Much of the $35 million dollars in “benefits” contained in the Joint Proposal are merely accounting credits to offset unscrutinized claims for deferred storm damage costs, for which customer responsibility has not been determined. See PULP Opposes Central Hudson Request for $9.7 Million Storm Damage Recovery. Risks include unreliable service due to flaws in the existing performance regulation system that should be corrected now by the PSC and not be continued for yet another year.
6) NAFTA implications. Investor friendly protections contained in the North American Free Trade Agreement (“NAFTA), available to Canadian companies such as Fortis investing in the U.S., could constrain future Commission regulatory action, such as denying or conditioning decisions to make new investments through Central Hudson or limiting its profits. Canadian economic regulation of investor owned utilities is not as robust as New York’s. As stated by Department of Public Service in its testimony filed before the staff agreed to the merger:
“Q. What is the significance of Canadian utility regulation to this proceeding?A. First, it highlights that Fortis is entering a very different regulatory environment than it has been operating under to date. Second, and perhaps more important, a credit rating agency places significant weighting on the regulatory environment when it determines a credit rating for a utility company and, as will be elaborated below, financing issues are of great importance to the Commission in merger proceedings….We also learned that the regulation those Fortis subsidiaries are subject to appears to be much less rigid than what Central Hudson is subject to by the Commission. For example, Fortis was originally formed in 1987 when the shareholders of Newfoundland Power approved an arrangement to form a parent company. However, unlike in New York, where jurisdictional companies must get Commission permission to form holding companies, PUB permission was not required for Newfoundland Power to form Fortis. Thus, Fortis has not been subject to the holding company protections that are commonly part of the conditions accompanying Commission approval of a request by a jurisdictional utility to form a holding company. Also, it appears that rate requests by Canadian utilities are also not subject to the regulatory scrutiny major utility rate filings in New York face. In its July 21, 2011 Credit Opinion for FortisBC Energy Inc. (FEI), Moody’s Investors Service stated, “We consider Canada to have more supportive regulatory and regulatory business environments than other jurisdictions globally….”
PULP raised the question whether Canadian investors might, under NAFTA, successfully protest regulatory actions of the New York PSC which deny or limit recovery from customers of the cost of new capital investments through Central Hudson, or which otherwise adversely affect Fortis profits.
7) Future upstream merger jurisdiction. Central Hudson would be owned by a US holding company that in turn is owned by the Fortis Canadian parent. In a follow-on upstream merger scenario, it is unclear whether Fortis could transfer its U.S. holding company (which would continue to own Central Hudson) to yet another entity, perhaps another out of state or foreign holding company, without PSC approval. With no change in ownership of Central Hudson, the factor that normally triggers PSC review of mergers and acquisitions, PSC jurisdiction over a future upstream transfer is in doubt. See Lisa Gayle Bradley, On The Acquisition Of Upstream Interests In New York Energy Operating Companies – An Uncharted Area?, 31 Energy Law Journal 509 (2010). This factor may benefit Fortis shareholders and increase risk to consumers without providing discernible public benefits.