USA: National Grid, KeySpan Deal Opposed by Regulators

by Jim Polson
National Grid Plc's planned $7.3 billion takeover of New York-based natural-gas distributor KeySpan Corp., should be rejected unless KeySpan sells its largest power plant and the buyer agrees to other consumer protections, state regulatory staff said.

The divestiture may prevent market manipulation and is reasonable because London-based Grid promised not to acquire New York power plants when it bought upstate electricity distributor Niagara Mohawk in 2002, the state's chief regulatory economist and two others said in a recent filing with the New York Public Service Commission, which must approve the purchase.

The takeover, announced a year ago, would combine National Grid's U.S. operations with the gas and electricity business of KeySpan, the biggest gas supplier in the Northeast and the main power-producer for Long Island. Because National Grid plans to finance the entire purchase with debt it may be unable to keep a promise to restrain rates for 10 years, staff said.

``Grid's ownership of KeySpan, as envisioned by the proposed transaction, creates an unusually high number of future risks and uncertainties for New York ratepayers and utility investors,'' the three staff said in testimony. National Grid already wants ``excessively high profits'' by earning a return on the $2.7 billion premium promised KeySpan shareholders, they said.

Terms acceptable to New York may force National Grid to withdraw its offer, the officials said.

Confident National Grid
``The issues that the staff has raised can be addressed and resolved,'' National Grid spokeswoman Jackie Barry said today in an interview. ``This merger will deliver significant benefits to customers.

National Grid will file a detailed response to the staff's comments by March 7, she said. The commission's schedule calls for hearings before an administrative law judge next month, with his recommendation due around June 15.

The testimony was filed by Thomas Coonan, a utility supervisor for natural-gas rates at the New York Department of Public Service, Warren E. Myers, the state's chief of regulatory economics and John D. Stewart, an accounting section chief in the Department of Public Service. Debt at London-based Grid would rise $11.4 billion to finance the purchase, an amount that threatens its credit rating unless the state agrees to ``unreasonably high rates'' for gas customers, according to the testimony.

KeySpan must be required to sell its 2,310-megawatt Ravenswood power plant in the New York City borough of Queens as a condition for the takeover, and National Grid must agree to further divestitures if there's evidence it has gained the ability to push up power prices, staff said.

FERC Approved Deal
The position is at odds with that of the Federal Energy Regulatory Commission, which approved the takeover Oct. 19, declaring ``the combination of their electric generation resources is not likely to harm competition in any relevant market.''

Federal Regulators also found no harm to competition from the biggest U.S. utility takeover ever proposed, Exelon Corp.'s $17.8 billion purchase of Public Service Enterprise Group Inc., owner of New Jersey's largest utility. That deal collapsed in September when the companies refused to meet demands by New Jersey regulators concerned that the combined company could push up power prices.

Niagara Mohawk
National Grid won the New York commission's approval to buy Niagara Mohawk in part by agreeing to restrain rates for 10 years and is making a similar offer at KeySpan.

``The quality of Niagara Mohawk's electric service has deteriorated since it merged with Grid,'' the staff said.

The commission should require the company improve service at Niagara Mohawk and agree to terms that will avoid a service decline to KeySpan customers in New York City and on Long Island, the staff said. Shares of Keyspan fell 15 cents to $41.06 in New York Stock Exchange trading. Shares of National Grid have risen 31 percent, to 782.5 pence in London, since the first reports it had had agreed to buy KeySpan. BLOOMBERG

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