Report: Reject CMP merger > Analysts say benefits from utility sale haven’t been quantified

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BANGOR — State utility analysts are recommending that the $957 million merger between CMP Group and Energy East Corp. not be approved as proposed.

In a 50-page report, the analysts told the Maine Public Utilities Commission that CMP and Energy East say the merger will produce cost savings in operations and for ratepayers, but the companies haven’t demonstrated that in writing.

“Apparently, CMP and Energy East have simply assured that because other similar mergers have produced savings … they could expect to achieve a similar level of savings,” wrote Joanne Stenneck, one of six PUC analysts who drafted the report on whether the merger should be approved.

“We are left with a difficult decision,” Stenneck wrote. “We must assess a rather expensive merger with a clearly defined cost — a purchase price far in excess of book value — against the unspecific likelihood that some level of cost savings will occur.”

PUC senior utilities analyst Phil Lindley said Stenneck is asking CMP Group and Energy East to “show us the numbers.”

“Everybody says there’s savings, but nobody’s been demonstrating what those savings are going to be,” Lindley said.

In June, Energy East announced its intent to purchase CMP Group for $957 million, or $29.50 for each of CMP’s 32.44 million outstanding shares. All proceeds go to shareholders.

Because CMP Group’s largest subsidiary is Central Maine Power Co., which is regulated by the PUC, the deal must receive the commission’s approval.

The report was presented late Thursday evening to the PUC’s three-member governing board. After months of testimony, it is one of the last steps in the 180-day regulatory review process before the board votes on whether to approve the deal.

That vote is expected Dec. 16. The PUC can accept or reject the analysts’ recommendations, or can impose its own conditions on the merger.

Stenneck suggested the commissioners either approve the merger given certain conditions, or reject it because the companies have not shown that ratepayers will not be financially harmed if the deal goes forward.

Stenneck wants the PUC to be able to prove to itself that it “can approve the merger because we are confident that we can set rates in the future that will be lower than they would be without the merger, regardless of whether savings materialize.”

The PUC is in the beginning stages of reviewing a proposed rate plan submitted by Central Maine Power Co., the largest subsidiary of CMP Group. That takes nine months to complete, said Lindley.

In that proposed seven-year plan, CMP offers to keep any future rate increases to 1 percent below the national inflation rate, which is the benchmark for setting utility prices, during the next three years, and to 1.75 percent below the inflation rate in the four years after that.

In its recommendation to reject the deal, the analysts stated that CMP Group had two strategies it could have taken when submitting the merger for approval. Those were to either demonstrate a likelihood of savings or propose a rate plan that would give ratepayers sufficient enough benefits to outweigh the risks they will be exposed to because of the merger.

CMP “did not file its proposal in adequate time or as part of this case to allow us to consider what benefits, if any, it provides to ratepayers to offset the risks,” Stenneck wrote.

“As a result, we must deny the petition,” she stated.

She suggested that if the PUC does reject the deal, CMP be allowed to refile it but this time include documentation on where there will be savings, both in the operations of the two companies and in customers’ rates.

CMP Group officials were unable to comment Thursday night. Many involved in the merger proceedings, including CMP and intervenors who include state public advocate Stephen Ward, and the Industrial Energy Consumers Group, did not receive the analysts’ report until after 5:30 p.m.

“We didn’t have a chance to review it to formulate a response,” said CMP Group spokesman Mark Ishkanian. “We will make our views known [today].”

CMP Group, Energy East and others involved in the merger proceedings can respond to the report by Dec. 9. Their comments will be included in the PUC’s deliberations Dec. 16.

The biggest concern of Stenneck and others who have intervened in the commission’s review of the merger is who will be responsible for paying the $470 million difference between the actual value of CMP Group and the price Energy East is offering for it. The difference is called an acquisition premium.

The intervenors, including Ward, who represents residential consumers, and the coalition of industrial, high-volume power users, have denounced the merger because they believe customers will have to pay the $470 million either in increased rates or by giving up any savings that could have been experienced because of the merger.

CMP has maintained that consumers would not be required to pay the $470 million because Energy East, through the rate proposal, plans to hold down any future rate increases to below what they actually could be.

Stenneck said the PUC could allow some or all of Energy East’s recovery of the $470 million through rates if the company could show that efficiency savings from the merger exist, that the overall effect of the merger is to reduce rates, and that ratepayers will receive a portion of the net savings from the merger.

But Ward said Stenneck correctly noted that these conditions weren’t shown in the CMP proposal.

“The examiner just about got it right,” Ward said. “Recovering the cost of the acquisition premium by CMP through rates is not a trivial issue.”

The conditions Stenneck outlined “all call for the rejection of Energy East’s request because they haven’t carried the burden of proof,” Ward said. “I think it does support dismissal of the petition.”