Monopolies thrive when politicians go short-term

March 26, 2012

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

If there ever was a deal that elected officials should hate it’s the $17.5 billion proposal to create an electricity monopoly in New England. Last year Northeast Utilities, which wants to buy NSTAR of Massachusetts, proved to be a uniquely incompetent serial abuser of its dominant position. And yet authorities are now poised to give the merger the green light. The lesson: short-term political thinking benefits monopolies.

Hurricane Irene last August and a freak October snowstorm each left millions of Northeast’s captive customers in Connecticut without power for days while nearby rivals performed far better. An independent report painted Northeast as a hapless, unaccountable monopoly. But the power of money today speaks more loudly to politicians than the promise of greater competency tomorrow. Connecticut and Massachusetts have extracted pounds of flesh that offer significant political benefits to the two states’ governors in the short term. But they do little to ensure the new behemoth is held to higher standards of service or accountability.

In Massachusetts, Governor Deval Patrick capped electricity distribution rates for the next four years, which handily coincides with the remainder of Patrick’s second term. NSTAR will credit $21 million to customers. And, in the most political twist of the deal, the new utility will agree to buy 27.5 percent of its power from the governor’s beloved Cape Wind project off Nantucket Sound. Connecticut initially decided it had no say in the deal. But it later jumped in to wrangle a $25 million credit – about $16 per customer – and a rate freeze until December 2014, which just happens to be the month after Governor Dannel Malloy will have won or lost his second term.

These concessions might bolster the two governors’ political future. But the sum total doesn’t really amount to much. The combined $46 million in credits accounts for just 6 percent of the $784 million in synergies the firms expect to squeeze out of the merger over the next decade. And the utilities themselves concede that many of the investments they have agreed to make will be covered by higher rates down the road. The latest developments are simply “not material,” as Fitch Ratings put it in a report on the Connecticut merger settlement.

For investors, of course, this is good news. If even a proven incompetent that is loathed by its customers like Northeast can get its deal passed, there’s clearly hope for other utilities wanting to consolidate. As for customers left without a choice of providers, well, that’s another story.

Updates previous version to reflect Connecticut regulators’ preliminary approval of merger.

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