Northeast Utilities CFO: Significant reduction in base ROE would have ‘chilling effect’ on transmission investment

A significant reduction in the base return on equity (ROE) for New England transmission owners (NETOs) would have a “chilling effect” on transmission investment, James Judge, Northeast Utilities (NYSE:NU) executive vice president and CFO, said on May 2.

“We continue to believe that FERC’s decision in this complaint will be viewed widely as an important statement on efforts to promote transmission development across the United States,” Judge said during the company’s 1Q13 earnings conference call. “We and others in the industry believe that a significant reduction in the ROE for New England’s transmission owners would have a chilling effect on transmission investment throughout the country and would run counter to FERC’s very successful policy since 2005 of encouraging transmission investment as a means to make the grid more reliable and secure.”

As reported, the NETOs argued in their pretrial brief filed on April 30 that lowering the base ROE in ISO New England (ISO-NE) would be tantamount to returning the transmission industry to pre-2005 conditions, when rates of return were too low to encourage investment. FERC has set for hearing a proceeding in which complainants have requested the ISO-NE base ROE be lowered from its current rate of 11.14% (FERC Docket No. EL11-66). FERC trial staff and complainants have requested a base ROE of 8.93% and 8.9%, respectively.

The NETOs’ pretrial brief focused on FERC’s agenda to encourage the development of electric transmission, the historical underinvestment in transmission, which Congress directed FERC to redress in the Federal Power Act of 2005, and the resultant transmission incentives, which the NETOs argued have been successful in encouraging transmission construction.

An initial decision from an administrative law judge is scheduled for September and a decision from FERC commissioners is expected in mid-to-late 2014, which could be followed by requests for reconsideration and an appeal process, he said.

Focus on storm restoration – again

Judge also said that storm restoration was again a focus of attention, noting that a major blizzard dubbed Nemo caused extensive damage to NSTAR Electric’s southeastern Massachusetts service area.

Nemo’s restoration resulted in about $100m of deferred storm costs, combined with the approximately $570m of deferred storm costs from 2011 and 2012, mostly at Connecticut Light and Power (CL&P),

“we now have about $670m of costs we need to recover,” Judge said.

In March, NSTAR Electric filed a request with Massachusetts state regulators for recovery of about $35m of costs related to Tropical Storm Irene and the October 2011 snowstorm over a five-year period beginning on Jan. 1, 2014.

NSTAR Electric is also expected to file for 2012 and 2013 major storm costs later this year.

Also in March, CL&P filed a request with Connecticut state regulators for recovery of restoration costs associated with major storms that occurred in 2011 and 2012. The request seeks recovery of $414m of deferred costs over a six-year period beginning on Dec. 1, 2014, and that amount reflects a reduction of $40m that the company agreed to forego as part of the Connecticut merger settlement agreement.

Connecticut’s energy strategy

Judge noted that the final version of Connecticut’s energy strategy was released in February and includes a series of policy proposals that aim to expand energy choices, improve environmental conditions, create clean energy jobs and enhance the quality of life for customers.

The strategy includes a multi-year initiative for expanding natural gas use with the goal of providing nearly 300,000 utility customers with access to natural gas and building an estimated 900 miles of new natural gas mains.

Furthermore, the strategy calls for significant expansion of energy efficiency investment and a review of Connecticut’s renewable energy portfolio standard with a potential for including Canadian hydroelectric generation as a qualifying resource under certain circumstances.

Various legislative proposals concerning redefining and expanding renewable resources, expanding energy efficiency programs and encouraging installation of natural gas heat have been reported favorably out of a state legislative committee, Judge added.

Those proposals are likely to be considered by the full Legislature before its session ends in June.

Leon Olivier, executive vice president and COO of Northeast Utilities, said during the call that one of the cornerstones of the Connecticut strategy is to develop a new approach to increase the penetration of natural gas in the state.

Northeast Utilities’ Yankee Gas is preparing a proposal in that regard to be filed with the state in the next couple of months, he said.

Distribution investments

Olivier said the company expects to invest about $670m on its electric infrastructure and $170m on its natural gas distribution facilities this year.

In the first quarter, Northeast Utilities invested $126.5m in its electric distribution system and $25.5m in its natural gas delivery system.

“We continue to see increased demand from residential and non-residential customers to convert their space heating systems from oil to natural gas,” and the company expects about 9,100 new space heating customers this year, he said.

Earnings report

Northeast Utilities on May 1 reported 1Q13 earnings of $228.1m, or 72 cents per share, compared with earnings of $99.3m, or 56 cents per share, in 1Q12. Results for both years reflect costs related to the April 2012 merger of Northeast Utilities and NSTAR. Those costs totaled $1.8m, or 1 cent per share, in 1Q13 and $1.1m in 1Q12. NU also said that its 1Q13 results include earnings from NSTAR, while those from 1Q12 do not.

About Corina Rivera-Linares 3152 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 15 years. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines. She can be reached at clinares@endeavorb2b.com.