The deal, if approved by state and federal regulators, would create one energy company for thousands of customers across Rhode Island.

08:39 AM EST on Friday, February 17, 2006

BY TIMOTHY C. BARMANN
Journal Staff Writer

PROVIDENCE -- National Grid has agreed to buy the Rhode Island operations of New England Gas Co. in a deal that would create a mammoth utility company that controls delivery of electricity and natural gas to virtually all customers in the state.

Westboro, Mass.-based National Grid USA said it will acquire the natural gas business and assets of New England Gas from Southern Union for $498 million in cash, plus the assumption of $77 million in debt. Southern Union, of Wilkes-Barre, Penn., is the parent company of New England Gas. National Grid is owned by National Grid Plc of London.

The combined company would provide electricity service to 477,000 customers in 38 communities, and natural gas to about 245,000 customers in 33 communities. The two companies had combined revenues in Rhode Island last year of $1.24 billion.

(The only other electric company in Rhode Island is Pascoag Utility District, a municipal operation that has about 5,000 customers in Burrillville.)

The agreement does not include the New England Gas facilities in North Attleboro and Fall River that serve about 45,000 customers. New England Gas will continue to own those operations.

And New England Gas would continue to bear responsibility for some environmental contamination problems in Rhode Island, including a hazardous waste site in Tiverton, and a mercury spill in Pawtucket.

The gas distribution company would likely be renamed National Grid. Other than that, customers would not notice any change in service, National Grid said.

The deal needs the approval of Rhode Island utility regulators, and it must undergo an antitrust review by the U.S. Department of Justice, the company said.

National Grid said it hoped to close the deal by the end of this summer.

"We're very pleased about this transaction," said Michael E. Jesanis, president and chief executive officer of National Grid's U.S. business, at a news conference at National Grid's Providence offices.

"We think it makes perfect sense because it's an excellent fit with both our mission as an energy delivery company, but also because of its location here in Rhode Island."

Southern Union said it wanted to sell the Rhode Island operation to help finance its $1.6-billion acquisition of Sid Richardson Energy Services of Fort Worth, Texas.

Rhode Island regulators and elected officials said they will scrutinize the National Grid acquisition to make sure it is in the best interest of Rhode Islanders.

"I'm going to make sure that electric ratepayers don't subsidize gas services and vice versa, and make sure that in any merger, there's no degradation in the quality of service," said Thomas Ahern, administrator of the Division of Public Utilities and Carriers, the state agency that has the authority to approve or reject the proposed acquisition.

He said that many details of the deal are unknown at this point because the companies have yet to file their proposal with state regulators.

Attorney General Patrick C. Lynch said his office will represent the interests of ratepayers in the proceedings.

"I assure everyone we'll be very much involved to see if it is the right thing to do," Lynch said.

One concern the attorney general's office has is whether National Grid will continue the program in which New England Gas buys gas several months or even years before it will be used. That program, according to assistant attorney general Paul Roberti, is one of the best in the country and has saved ratepayers millions of dollars.

National Grid hopes to demonstrate to Rhode Island regulators that the acquisition will benefit customers, chiefly by the savings associated with combining operations of both companies, Jesanis said.

A lot of that savings will come from consolidating "back office" duties -- administrative functions, billing and meter reading, said Jesanis, the National Grid CEO.

The new company will also save money by reducing the work force, he said. New England Gas now employs about 600 in Rhode Island, while National Grid employs 500. But National Grid plans to achieve that reduction through voluntary measures, such as early retirement offers, rather than layoffs, Jesanis said.

"The good news for employees of New England Gas is we have agreed to offer employment to every single New England Gas employee through National Grid," he said. National Grid also will honor the labor contracts in place with unions that represent New England Gas workers, he said.

Jesanis said he could not yet estimate what the overall savings will be. And exactly how those savings flow back to customers will be negotiated with state regulators, he said.

The savings could be used to freeze distribution rates over a certain period of time. Or they could finance a conservation program for gas customers, support a discounted rate for low-income gas customers, provide a credit on customers' bills, or a combination of these options.

Jesanis said the deal is unlikely to bring relief to the part of gas and electricity bills that has spiked in recent months: the cost of energy itself. Both companies now act as buying agents for customers, and they pass on the costs of buying gas and electricity.

Any additional buying power National Grid might gain from the acquisition is not likely to have any significant impact on the energy component of rates, he said.

National Grid is already in the natural gas business, with 11 million customers in the United Kingdom, and about 565,000 customers in upstate New York. The company delivers electricity and natural gas to about 521,000 customers in New York state.

There are several areas of the country where a single company delivers both electricity and natural gas to the same customers, said Steve Scialabba, chief accountant for the Division of Public Utilities and Carriers.

Some of National Grid's predecessor companies in Rhode Island once delivered both gas and electricity.

Henry Shelton, coordinator of the George Wiley Center in Pawtucket, and a longtime advocate for low-income utility customers, said the acquisition could be a positive development for the poor.

"We're hoping it will make it easier to get the percentage-of-income-program through the Rhode Island legislature if there's one company to deal with rather than two," Shelton said. For the past three years, Shelton and others have been promoting such a program in which a low-income customer would pay no more than a set percentage of their income for utility service.

John Farley, head of TEC-RI, a coalition of large Rhode Island electricity users, said it could be good for customers if the companies can capitalize on their respective strengths and reduce their weaknesses.

"I think National Grid has a better track record when it comes to energy efficiency, and low income [customers]," Farley said. "New England Gas has done a better job with [buying gas]."

"It's up to the state and federal regulators to make sure we get a good deal," he said.

tbarmann@projo.com / (401) 277-7369

Utilities consolidation

National Grid's proposed purchase of Southern Union's Rhode Island operations is the latest in a long line of local utility mergers.

1884: Narragansett Electric Lighting Co. established in Providence.

1898: Narragansett Electric bought East Greenwich Electric Light and Westerly Gas and Electric among others.

1899: Narragansett Electric took over Tiverton Electric Light Co.

1906: Westerly Power Co. acquired by Narragansett.

1918: West Glocester Light and Power acquired by Narragansett Electric.

1927: Narragansett Electric acquired by the New England Power Association and became part of the New England Electric System, or NEES.

March 1990: National Grid created when Great Britain begins to transform its electric industry.

December 1998: New England Electric announced its sale to National Grid Group PLC of England for $4 billion.

February 1999: New England Electric struck deal to pay $634 million for Eastern Utilities Associates, owner of Blackstone Valley Electric and Newport Electric. Eastern Utility Associates became part of the company sold to National Grid.

October 1999: Fall River Gas Co. agreed to be sold to Southern Union Co., then of Austin, Texas, for $75 million.

November 1999: Southern Union announced deal to buy Providence Energy Corp., owner of Providence Gas Co. and North Attleboro Gas Co., for $400 million.

December 1999: Southern Union struck deal to buy Valley Resources of Cumberland, parent of Valley Gas and Bristol-Warren Gas, for $160 million.

October 2005: National Grid eliminated the Narragansett Electric name and gave the National Grid name to its U.S. utility subsidiaries.

Feb. 16, 2006: Southern Union agreed to sell the Rhode Island operations of its New England Gas Co. subsidiary to National Grid for $498 million. Southern Union said it will retain its New England Gas operations in Fall River and North Attleboro.

-- David McPherson