Northeast Utilities(NU) is the largest utility in New England, operating in Connecticut, Western Massachusetts, and New Hampshire. The company's regulated businesses distribute electricity and natural gas, while its competitive business generates power for sale to other distributors. As of June 2008. NU served over 2,000,000 electric and natural gas cutomers.]Northeast Utilities(NU) is the largest utility in New England, operating in Connecticut, Western Massachusetts, and New Hampshire. The company operates electric utility services, natural gas services, and also some competitive electric generation services. As of June 2008. NU served over 2,000,000 electric and natural gas cutomers.
Since NU operates in regulated industries, the company faces little competition, but is instead susceptible to the prevailing regulatory winds. Utilities regulators set rates for utilities by setting an allowed rate of return on a set of the company's assets, called the "rate base". Between 2006 and 2008, the regulatory agencies in the states where NU operates were favorable towards the company, consistently increasing permitted rates of return - in 2007, for example, Connecticut’s regulatory body, the Connecticut Department of Public Utility Control, increased NU’s rate of return from 5.9% to 10.1%, an increase of over 70%. The favorable regulatory environment has helped temper problems caused by rising prices for energy commodities like coal, which powers a significant amount of NU's electric generation facilities and is one of the company's primary operating costs. Nearly 90% of NU’s revenues are from electric services, and variations in the use of electricity are largely dictated by temperature and weather patterns that drive the use of home air conditioning.
Northeast Utilities is a utility holding company. It fully owns five different subsidiaries. The Connecticut Light and Power Company, the Public Service Company of New Hampshire, the Western Massachusetts Electric Company are three of the subsidiary and they are each electric utilities. A fourth subsidiary, Yankee Gas, is a regulated natural gas company. The final and only unregulated subsidiary is NU Enterprises.
In 2005, Northeast Utilities had significant losses in its Enterprises segment. In the following year, Northeast Utilities began divesting these businesses, which included the sale of its retail marketing business to Amerada Hess. As a result, between 2005 and 2006, operating revenue decreased by $469 million while net profitability returned. Further divestitures within NU Enterprises resulted in a decline in operating revenue of $1.06 billion between 2006 and 2007. A main divestiture that occurred slightly later in 2006 was the sale of NU's electric generation infrastructure in Connecticut and Massachusetts for $1.34 billion on July 24, 2006. Specifically, the assets included 15 electric generation plants with a cumulative energy output of 1,442 megawatts. As a result of the sales in 2006, NU earned an after tax gain of $314 million, explaining why 2006 net income surpassed 2007 net income by $224 million.
The Connecticut Light and Power Company (CL&P)
CL&P is an electric utility that operates in Connecticut. The utility does not own any power generation facilities; its business activities include purchasing, transmitting, and selling electricity to customers. As of December 31, 2007, the company delivered electricity to 1.2 million people in Connecticut.
On October 1, 2007, Connecticut adopted a renewable portfolio standard, which requires electricity generators and distributors to have 27% of their electricity from renewable energy sources. This includes technologies such as solar power, fuel cell, and ocean thermal.
Public Service Company of New Hampshire (PSNH)
PSNH is an electric utility that operates in New Hampshire. As of December 31, 2007, the company served about 491,000 customers. PSNH is involved in both the generation and purchase of wholesale electricity. It also delivers and sells the electricity.
On May 11, 2007, a renewable portfolio standard was adopted in New Hampshire which requires that 23.8% of PSNH's electricity be from renewable energy sources by 2025. In 2007, 409 megawatts, or 80% of PSNH's total generation capacity, came from steam-turbines, which run primarily on coal and natural gas. 5% of its generation capacity came from hydroelectric plants and the remaining 15% came from jet-fueled power plants.
Western Massachusetts Electric Company (WMECO)
WMECO is an electric utility that operates in Western Mass. As of December 31, 2007, the utility served 206,000 customers. Like the Connecticut Light and Power Company, WMECO does not generate any of its own electricity. It is involved only in the purchase, delivery, and sale of electricity.
In 1997, Massachusetts enacted a renewable portfolio standard, which requires all electric companies, such as WMECO, to generate 4% of its electricity from renewable sources by 2009. Each year after that the requirement increases by 1%. As of 2008, WMECO generates 43,000 kilowatt hours of electricity every year from solar power.
Yankee Gas Services Company (Yankee Gas)
As of 2008, NU Enterprises consisted of a subsidiary, Select Energy. Select Energy is an unregulated, competitive provider of electricity that operates in northeastern states that have deregulated utility markets. While most of Select Energy's assets have been sold off, a few wholesale energy marketing contracts remain. In 2005, NU Enterprises faced a significant loss of $398.2 million in 2005, which was primarily due to mark-to-market charges on wholesale contracts. These charges occurred because the market value of the contracts declined and recording changes such as these on the balance sheet is known as mark-to-market accounting. The decline in the value of these contracts came in large part because of incorrect estimates of the electricity load that would be demanded. In the following year, net income was up significantly, which was the result of the sale of NU Enterprises' competitive business. As a result, both revenue and earnings were significantly lower in 2007 than in 2006. As of 2008, NU Enterprises managed wholesale electricity contracts which are set to expire in 2012.
In 2007, NU Enterprises contributed only $11.7 million, or 4.7%, of the NU's total net income.
Northeast Utilities is affected by state regulatory commissions that regulate the return on each utility subsidiary's rate base. The rate base is a value that a utility is permitted to earn a certain rate of return on;specifically, the rate base is typically the value of infrastructure a utility possesses in addition to the annual working capital. Utilities are natural monopolies, since the cost of infrastructure is so high that it is not worth it for multiple companies to enter the same region. The regulatory system is in place to ensure that these monopolies charge fair prices.
CL&P is regulated by the Connecticut Department of Public Utility Control (DPUC). On July 30, 2007, the company requested an increase in its regulated return on equity, or rate of return, to 11%. Although the request was not met, the rate was increased to 9.4%. Yankee Gas operates in Connecticut and is also regulated by DPUC. On July 29, 2007, The DPUC approved a return on equity increase from 5.9% to 10.1%. PSNH is regulated by the New Hampshire Public Utilities Commission (NHPUC). On January 1, 2008, the commission authorized a return on equity increase to 9.81%. The Western Massachusetts Electric company is regulated by the Massachusetts Department of Public Utilities. On January 1, 2008, the commission approved a rate increase of $3 million dollars.
As the prices of commodities, like coal, rise, the rate increases in 2007 and 2008 have helped take some of the strain off of NU. In addition, as of 2008 the rate increases indicated that the regulators were sympathetic towards NU, since the raises were fairly large. Since four out of five of NU's subsidiaries are regulated utilities, NU's revenues and net profits depend heavily on prevailing regulation, particularly with regards to the rate of return. In 2005 and 2006, the the future regulatory climate in the northeast U.S. was beneficial to utilities, which is illustrated by the fact that NU left the majority of its competitive businesses in 2006 and chose to focus in regulated industries. Future regulation, however, will dictate the direction the rate of return moves, which in turn will influence NU's decision whether or not to increase its rate base. The only other possible avenue NU has of increasing revenue is to grow its rate base, which requires the installation of costly new infrastructure.
Northeast Utilities operates its utilities in New England, a relatively concentrated area of the U.S, which makes the company susceptible to weather patterns of the region. Hotter summers cause the use of air conditioning to increase and air conditioning is typically powered by electricity. Since a majority of NU's revenues are generated from electricity, $5229.5 million out of $5,822.2, hotter summers will bode well for NU's business. In addition, many scientists believe that global warming and increased temperatures are occuring, which will potentially prove beneficial in the future for revenues. Similarly, colder temperatures cause an increase in the use of natural gas. For example, in the first quarter of 2007, winter months, NU generated revenue of $184.8 million from natural gas services. However, in the summer months of the second quarter of 2007, NU generated only $95 million from natural gas.
Of NU's three electric utilities, only Public Service Company of New Hampshire generates its own electricity. PSNH, however, generates nearly 20% of NU's operating revenues, clenching $1,036.4 million in 2007. In addition, about 80% of PSNH's electrical generation comes from steam-turbine-powered generators, which typically run on coal. Between March 2007 and March 2008, two benchmark sources of coal rose significantly in price. Coal from central Appalachia rose 93% in price and coal from the Powder River Basin of Wyoming rose 63%. If prices continue to rise, PSNH's net profitability will be seriously affected, especially as it has to continually renew coal purchasing contracts.
===Rising Natural Gas then store a significant amount of gas when the price is low. Despite the storage facility, Yankee Gas is susceptible to increasing natural gas prices, since it purchases gas on a yearly basis.
A majority of Northeast Utilities businesses are regulated utilities, so the company has minimal competition. Utilities are typically monopolies that are regulated to ensure they are charging fair prices. Utilities are an exception to monopoly laws because they require enormous capital expenditures, such as power lines and power plants, and it would be inefficient if many companies existed in the same area and duplicated all of the same facilities.
Despite these characteristics, NU is still minimally competitive with a few utilities that serve neighboring regions.
Energy East (EAS) - Energy East operates in the Northeast U.S., serving states from New York to Maine. The company possesses natural gas and electric businesses, serving over three million people.
Consolidated Edison (ED) - Con Edison operates in New York City and runs natural gas and electric services. The company also operates the largest steam system in the U.S., serving 1800 customers in Manhattan.
|Northeast Utilities||NiSource||Energy East||Consolidated Edison|
|Operating Revenue (FY 2007, USD Million)||5,822||3,263.7||5,178.1||13,120|
|Net Income (FY 2007, USD Million)||246.5||321.4||251.3||929|
|Generation Capacity in Watts||1.17B||2.91B||555M||2.44B|