Less, not more, better for New England utilities

November 3, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist, and a Northeast Utilities customer. The opinions expressed are his own.

The moneyed folk inhabiting the Connecticut environs of hedge fund town Greenwich wield plenty of power. But many of them have lately been powerless. For the second time in barely more than two months, a huge swath of the two million captive customers of Northeast Utilities – which covers territory from the Constitution State up through Western Massachusetts and into New Hampshire – have spent too many days without electricity.

In an echo of the financial crisis, it turns out that better risk management and stronger regulation of the utility could have made the fallout much less bad. This raises serious questions about Northeast’s competence – and whether it should be allowed to complete a $4.7 billion takeover of Massachusetts utility NSTAR.

The first blow was Hurricane Irene in August. Then came a once-in-a-generation pre-Halloween blizzard. Both were highly unlikely and unpredictable events, utilities argue, so when uprooted trees and snow-heavy branches took down power lines, the responsibility lay mainly with God.

But giving Northeast, specifically its Connecticut Light & Power subsidiary, a pass is like absolving Lehman Brothers <LEHMQ.PK> of any blame for its demise in 2008. Like financial firms, utilities need to manage risks. And they have it relatively easy: much of the task simply involves clearing overhanging trees and other hazards from power lines.

Yet according to regulatory filings, CL&P slashed its maintenance spending by a whopping 26 percent from $130 million in 2008 to just $96.5 million last year. Put simply, that meant one in every four trees that could have been trimmed was left hanging.

The utility showed the same kind of tin ear as some banks, too. Even as customers still faced a week without electricity after Irene struck, CL&P boss Jeff Butler suggested any restoration costs should be covered by increasing electricity rates – when Connecticut’s power is already the most expensive in the continental United States. Butler later backtracked. But this week he suggested the weekend snowstorm came without warning – words he was again forced to eat.

There’s even a near-perfect model of how CL&P could have done the job better. The 40,000-strong city of Norwich, Connecticut has owned its own electric utility, as well as those for sewage, gas and water, for 107 years. Norwich Public Utilities’ customers pay, on average, a bit less than CL&P’s. Yet after this past weekend’s snow dump, power was out for only about 450 of its 22,000 customers – and for no more than an hour. Nearly half a million CL&P customers were still waiting for the lights to go on as of Thursday morning.

That’s not luck, either. After Irene hit, just 13 percent of the city’s customers lost their power for more than a day. Within three days, the whole of Norwich had been restored. It took more than a week for CL&P to fully restore power to its customers.

That makes it seem odd that, at least through Thursday, Connecticut Governor Dannel Malloy has tended to appear alongside CL&P’s Butler and to support the utility, even though far more customers lost power than should have, and restoration proceeded too slowly. There’s solid numerical evidence that justifies Malloy berating CL&P and calling for Butler’s head on behalf of the citizens of his state.

In contrast to CL&P, Norwich’s electric unit last year increased operations and maintenance spending by 11 percent to $2.9 million. To put that another way, in 2010 Norwich allocated about $132 per customer. CL&P spent $96.5 million, or around $78 per client, on maintenance.

It helps that the Norwich utilities aren’t slaves to the profit motive – though they hand 10 percent of gross revenue to the city. Last year, before paying this slice to the city, the electricity division made just a 3.6 percent operating profit margin on its $52.3 million of revenue. The CL&P division of Northeast, meanwhile, booked $3 billion of revenue last year and reported an operating margin nearly five times the size of Norwich’s.

But it surely also helps that Norwich Public Utilities’ general manager, 12 linemen and five commissioners live in the community, drive the local roads, see the overhanging branches and bump into their customers at the Norwich town Mall.

Absent more help from the governor, the example of Norwich and similar municipally-owned utilities in Groton and Wallingford, Connecticut communities fed up with the lights going out might consider emulating the city of Boulder. Citizens of the Colorado college town this week voted to study a plan to buy back their local utility assets from Minnesota-based mega-utility Xcel Energy.

Meanwhile, the Massachusetts Department of Public Utilities should be paying close attention. Northeast’s purchase of NSTAR has been pending the approval of the department’s three commissioners for a year now. If they want the residents of their state to avoid the cold and darkness experienced by hundreds of thousands of Northeast’s customers next time the wind shifts, they may need to resist the persuasive powers of big business trying to get bigger still.

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