How one utility CEO stopped worrying and learned to love restructuring: The Massachusetts Electric Story

The Massachusetts Electric story, by

Retail electricity restructuring – replacing a monopoly utility system with consumer choice of electricity provider – follows a different path in each state.  This account of how restructuring happened in Massachusetts, as told by a key facilitator, is particularly interesting because it was strongly supported by the CEO of one of the state’s largest monopoly utilities.

In the mid-to-late 1990s, consumers in Massachusetts were paying some of the highest electricity rates in the country. Industrial consumers in the region were at a significant competitive disadvantage, and the emergence of independent power producers (IPPs) offering lower-cost electricity produced in highly efficient combined-cycle gas generators presented these large consumers a potential path to save money and improve their competitive position, if only they could get out from under their status as captive customers of monopoly utilities. As petitions to exit the system started to be filed with the region’s utility commissions, policymakers worried that approving these deals, even though they usually contained large exit fees, would saddle the remaining captive consumers with ever escalating costs. Nonetheless, it was becoming politically challenging to counter the argument that requiring industrial customers to remain tied to their incumbent utility would inhibit economic development and in fact might cause large employers to relocate to another state.

Republican Governor William Weld wanted to replace the utilities’ monopoly over generation with a system of retail competition, where consumers could choose between competing electricity suppliers. He understood the potential benefits for customers from increased competition, but was skeptical that he could persuade the Democrat-controlled legislature to upend the existing regulatory regime. Instead, Weld asked David O’Connor, his newly-appointed Commissioner of the Department of Energy Resources, to facilitate the restructuring of the state’s electric power industry through a collaborative, mediated process designed to build support among key industry stakeholders.

One of O’Connor’s first meetings was with John Rowe, then President and CEO of New England Electric System, and its state subsidiary, Massachusetts Electric, one of the state’s largest investor-owned electric utilities. According to O’Connor, when he visited Rowe and told him that the Governor wanted to restructure his business, breaking up the vertically-integrated utility and requiring it to sell off its power plants, Rowe went silent and grim-faced. He abruptly announced that the meeting was over. O’Connor did not need to be told that it was time to depart. He returned to his office thinking that his Governor had handed him an impossible task.

But it turned out that O’Connor and Governor Weld had planted a seed in Rowe’s mind. As Rowe contemplated the specter of competition from a growing army of IPPs undercutting the economic advantages and political support for his old and inefficient coal-burning plants, he quickly came to see that restructuring offered his company (and perhaps the state’s other electric utilities) a path to greatly reduce its risk while aligning with consumer needs and the ever more fiercely blowing political winds.

Just two weeks after O’Connor’s visit to Massachusetts Electric, Governor Weld called O’Connor into his office and told him that he had just received a call from Rowe. Rowe had told the Governor that he was interested in exploring the idea of utility restructuring, as long as the utilities would be made whole for the above-market book value of their power plants (i.e., what came to be called their “stranded costs“). With the influential Rowe as an ally, O’Connor knew that his task had become possible, if not exactly easy.

O’Connor convened a diverse group representing the state’s key electric industry stakeholders, including the utilities. Over the next six months, meeting behind closed doors, O’Connor encouraged and cajoled the group to identify trade-offs and hammer out agreements on how the state could restructure the industry with their support. At first, the state’s Attorney General and other consumer advocates were opposed to allowing utilities to recover their stranded costs. But following a variety of utility concessions, they were eventually persuaded that the negotiated agreements were beneficial for their constituencies, and a rate settlement agreement was signed by Rowe of Massachusetts Electric, the Attorney General and numerous stakeholders. It proposed to grant all of the company’s retail customers the ability to purchase power from a competitive supplier or to receive their power through what came to be called Basic Service, receiving their power through a purchase (on their behalf) by the utility. After public hearings, that agreement was approved by the state’s utility commission. Restructuring of the electric industry in Massachusetts was underway.

Over time, the other large utility in Massachusetts entered into a similar proposed rate agreement with stakeholders, which in turn was approved by the utility commission. At that point, leaders in the legislature decided it was time to take control of the restructuring process. Early in 1997, legislation was proposed that would codify the rate settlements approved by the utility commission and also addressed numerous issues that were not within the commission’s authority. That historic legislation was enacted and signed into law by then-Governor Paul Cellucci in December of 1997. Soon thereafter, both utilities sold their power plants to independent power producers and converted themselves to so-called “wires only” distribution companies. Consistent with the terms of the settlement agreements, proceeds from power plant sales were passed through to ratepayers, guaranteeing overall rate decreases for all customers for the first three years of the restructuring process.

Colorado’s investor-owned utilities are currently facing financial pressures similar to those faced by Massachusetts utilities in the 1990s. Lower-cost renewable and gas-fired generation offers considerable savings relative to their old, inefficient coal plants, rendering these plants veritable albatrosses around the necks of utilities and their ratepayers. What’s more, growing awareness of society’s need to decarbonize electricity generation is creating mounting political pressure to leave coal-fired generation behind and focus on the transition to renewables.  In this environment, utilities are rightly coming to view their coal plants as increasingly risky assets. Restructuring could offer Colorado’s utilities the opportunity to divest these expensive, dirty assets, thereby lowering their future risk profile and allowing them to focus on developing the clean, reliable, resilient electricity system of the future. Food for thought!