The latest injection of financial support for offshore renewables is coming from an unlikely and overlooked source: electric utility mergers. In February 2012, the offshore wind industry reaped substantial benefits from two utility mergers. In Maryland, the state’s offshore wind development fund will pick up $32 million courtesy of Maryland Public Service Commission order issued in February 2012 approving a merger between Exelon and Constellation Energy that includes a commitment to fund offshore wind. Meanwhile, just up the East Coast, Massachusetts extracted an agreement from NStar Utilities to sign a 15-year contract with Cape Wind to purchase27.5 percent of the project’s output as a condition of state approval for its acquisition of Northeast Utilities. NStar’s purchase along with a previous purchase by National Grid means that 77 percent of Cape Wind’s capacity is spoken for, which should lay the groundwork for Cape Wind’s financing.
So how do offshore renewables come into play in merger proceedings? Actually, on the federal level, offshore renewables aren’t all that relevant in merger approval proceedings at the SEC or FERC. Both of those agencies focus on largely financial issues such as anti-competitive impacts, economies and efficiencies and rates.
But the situation is different at the state level. For starters, state utility commissions have more at stake when a local utility like BGE or Northeast Utilities is gobbled up by a behemoth company halfway across the country or even overseas. These types of acquisitions can result in the departure of jobs and tax revenues, and diminish states’ regulatory control over the newly merged company. For that reason, states will often play hardball in merger proceedings to extract the best possible benefits from companies to offset potential losses and to mitigate adverse impacts.
The states’ approach is perfectly legal: generally, most state laws authorize states to apply a broad public interest standard in deciding whether to approve a merger, taking account of a wide array of factors such as anti-competitive effects, impacts on jobs, potential harm to ratepayers and overall benefits to the state. States also have the power to override a merger that’s been approved by federal agencies since federal law does not preempt state review.
Companies recognize that states can veto a multi-billion dollar transaction. Though companies won’t willingly offer up voluntary concessions, if pressed by the states and intervenors, they’ll do what it takes to push the deal through. It’s just another cost of doing business, after all.
It’s against this backdrop that offshore renewables – or to date, offshore wind – come into play. Even though a state may lose jobs when a hometown company leaves the state, the losses can be offset through investment in offshore renewables, thus allowing the state to stake a claim in a new industry with a promising future. Moreover, long term contracts with offshore wind developers, along the lines of what NStar has accepted with Cape Wind can actually reduce rates in the long run by acting as a hedge against the volatility of buying and selling electricity on the spot market. Finally, offshore wind can also mitigate potential market power since introducing additional power sources into a market puts downward pressure on price simply because there’s greater supply.
Admittedly, most of the benefits of utility mergers have gone to offshore wind rather than MHK. Still a rising tide lifts all ships and development of a robust offshore wind industry in the U.S. will clear a path for MHK. Moreover, there may be future opportunities for MHK since experts predict that utility mergers will continue at least through 2012.
At the same time, the squeaky wheel (or turbine, in MHK parlance) is the one that gets the grease. Many renewable groups lack the resources to stay abreast of merger approvals at the state level and if the issue of supporting offshore renewables isn’t raised, it may go unnoticed. For that reason, OREC will keep you up to date on these state developments and to leave no stone unturned in identifying new and innovative funding sources for the MHK industry.