When the merger between Northeast Utilities and NStar is finalized, two mid-size companies will transform into the largest utility in New England.
And that company has big plans.
Thomas May — who will take over as Northeast Utilities CEO after the merger — envisions NU as a large company taking over smaller competition. Just like Bank of America started absorbing community banks, Northeast Utilities will be the acquirer in the market.
“Consolidation is the name of the game,” said May, a member of Bank of America’s board of directors.
The market is particularly ripe for natural gas, not only through utility acquisitions but simple expansion, May said. The majority of New England homes use heating oil, even though natural gas costs half as much and burns cleaner. As natural gas prices stay low and oil prices increase, Northeast Utilities can seize the moment and start converting the region’s customers.
Post-merger, Northeast Utilities will have six natural gas and electric subsidiaries serving 3.5 million customers. That clout should give the company a significant voice in shaping regional and national energy policy.
“Our policymakers really have the ability to put the thumb on the scale and really move us toward natural gas,” May said.
The intended $4.3 billion merger between Hartford’s Northeast Utilities and Boston’s NStar was announced in October. Although the transaction still must clear regulatory hurdles — most importantly the Massachusetts Department of Public Utilities — the deal is expected to close before September.
May, 64, is the chairman, president and CEO of NStar, starting work there in 1976. Post-merger, he will be CEO. Charles Shivery, the current Northeast Utilities chairman, president and CEO will serve as chairman for 18 months before May takes over that role as well.
May, a Hartford native, sees this new beginning as a homecoming; but state officials have raised concerns about a Massachusetts-based executive overseeing Connecticut’s largest utility and the company’s plan to have dual headquarters in Hartford and Boston.
The state shouldn’t worry, May said. Leaders manage where the people are, and Northeast Utilities will grow in Connecticut.
Northeast Utilities has two subsidiaries in the state — electric utility Connecticut Light & Power and natural gas utility Yankee Gas — as well as electric utilities in Western Massachusetts and New Hampshire. NStar has an electric utility and a natural gas utility in Greater Boston.
As a larger company, Northeast Utilities will be involved in larger projects, particularly in the underdeveloped transmission system, May said. NStar and Northeast Utilities already are partners on the $1.1 billion Northern Pass transmission line into Quebec; and Northeast Utilities started a $2 billion transmission project last year to increase system reliability.
The new Northeast Utilities will have plenty many project opportunities, May said. The merger married Northeast Utilities’ expertise in transmission with NStar’s high cash balance to perform those projects.
And natural gas offers more opportunities for expansion, May said.
As oil prices increase, natural gas prices drop. This past winter, a home using heating oil paid $2,201 for fuel while those with natural gas paid $1,153, according to the U.S. Energy Information Administration.
Increased natural gas drilling in shale formations in Pennsylvania and New York turned natural gas into a domestic fossil fuel, earning the backing of politicians hoping to reduce the country’s dependence on foreign oil. The large supply of shale gas has depressed prices.
EIA predicts the residential price of natural gas will rise 6.5 percent by 2012, but, in comparison to oil, high supply will keep prices relatively low. As more rigs drill for high-priced oil, they will collect natural gas as a byproduct.
“A lot of the rigs drilling for oil will continue to produce natural gas,” said Phil Budzik, EIA operations research analyst. “That will tend to keep natural gas prices down.”
Natural gas has enormous potential in New England, which relies heavily on heating oil. In Connecticut, 52 percent of homes use heating oil, compared 9 percent nationally.
Natural gas demand grows in Connecticut, said Rodney Powell, president and chief operating officer for Yankee Gas. The utility customer base increases 1 percent annually, reaching 206,000 this year.
The main issue preventing further expansion is Yankee Gas doesn’t have the infrastructure to meet the higher demand, Powell said.
The company invested $108 million in a Waterbury storage facility in 2007 and another $58 million for a transmission line between Waterbury and Wallingford to increase system reliability. But the investments must increase for a significantexpansion, Powell said.
Because of the problems with distribution infrastructure, operators of the major pipelines feeding New England’s natural gas supply perceive the region as having a low demand, Powell said. That makes suppliers hesitant to invest in a costly pipeline expansion.
Yankee Gas is pushing for the state to offer incentives to upgrade the distribution infrastructure more affordably. Then, the market for natural gas will increase in Connecticut, alleviating the pipeline operators’ concerns.
“There’s a big opportunity for us to bring the cost benefits of natural gas to New England,” Powell said.
May said Northeast Utilities will use its post-merger clout to increase the standing of natural gas in regional and national energy policy. It emits 45 percent less carbon dioxide than coal and 30 percent less than fuel oil.
Even though most Connecticut homes aren’t heated with natural gas, the state wants natural gas to be the primary source of electricity, part of the reason Connecticut’s electricity prices are the second highest in the nation. The state loses businesses to places such as Georgia, which generate their electricity from cheaper, dirtier coal.
To reward New England for its commitment to a cleaner future, May favors the creation of a national carbon tax, where power producers in places such as Georgia must pay a tax for generating greenhouse gases.
The federal government needs to develop an energy policy, May said. Two-thirds of the states have renewable portfolio standards, increasing electricity costs to reduce emissions; but nothing is uniform across the U.S.
Even among the states with renewable goals, the standards vary. There’s disagreement over what counts as a renewable energy source, especially with hydroelectric and nuclear. States vary on how much power should come from renewables, and by when.
Connecticut calls for 20 percent of the state’s electricity to come from renewables by 2020. It does not count nuclear or major hydroelectric as renewable sources, even though they are low-carbon fuels. Meeting these goals is expected to cost $2.9 billion by 2020, according to the state Department of Public Utility Control.
This is an aspiration goal, without any concrete plan or regard to cost, May said.
States should think about true goals behing these plans, May said. Solar and wind are expensive and drive up prices. The cost of the technology is dropping, but much more expensive than fossil fuels.
If the goal is to reduce carbon emissions, then switching power plants to natural gas from coal and oil reduces greenhouse gases significantly.
The Northern Pass transmission project will bring in hydropower from Canada, reducing the need for more power plants in New England.
“I would like Northern Pass to count toward our renewable energy goals,” May said. “It will remove more carbon than any other project that has been done in this region.”
Compromises will help New England reach its goals for a cleaner environment while keeping energy costs at a minimum, May said.
In a filing to Massachusetts DPU, Northeast Utilities and NStar said the merger saves $780 million over 10 years through company consolidation. The transaction will create a powerful company capable of acquiring the competition and shaping America’s energy mindset.
“The one thing about energy, if you look back five years ago, you never could have guessed where we were going to be today,” May said.
