BREAKING: Public Service Commission approves Fortis takeover of Central Hudson

The New York State Public Service Commission on Thursday, June 13 voted to approve the $1.5 billion takeover of CH Energy Group Inc., owner of Central Hudson Gas & Electric Corporation, by Fortis, Inc. of Canada.

The proposed merger, first announced in February 2012, came under significant local public criticism, with residents and lawmakers on multiple levels saying what the Canadian firm was offering ratepayers wasn’t enough and expressing concerns that a far-away owner of the local utility would be less responsive and less concerned with local issues.

Despite hundreds of public comments opposing the deal, as well as a recommendation against it from two administrative law judges assigned to evaluate it, the commission gave it the OK.

“After a lengthy and thorough examination and regulatory review, it has been determined that Fortis is qualified to purchase the electric and natural gas utility Central Hudson,” said Commission Chairman Garry Brown in a press release issued Thursday. “As the owner of a regulated utility in New YorkState, Fortis will now be required to meet New York’s stringent rules and regulations designed to ensure safe, secure, and reliable access to utility service for residential and business consumers, at just and reasonable rates.”

According to a Central Hudson press release, the deal’s closing is expected to occur shortly after receipt, review and acceptance of the official written PSC order.

On February 21, 2012, Fortis and CH Energy Group announced that Fortis had entered into an agreement to acquire CH Energy Group for $65 in cash per share, representing an aggregate purchase price of approximately $1.5 billion, including the assumption of approximately $500 million of debt at closing.

Central Hudson, the main business of CH Energy Group, is a regulated transmission and distribution utility serving approximately 300,000 electric and 75,000 natural gas customers in eight counties. As of Dec. 31, 2012, Central Hudson accounted for approximately 93 percent of CH Energy Group’s total assets of approximately $1.8 billion. Central Hudson accounted for approximately 95 percent of CH Energy Group’s net income in 2012, excluding the impact of acquisition-related expenses.

“Central Hudson is a well-run utility whose employees, like those throughout the Fortis federation of utilities, are committed to serving their customers and their communities,” stated Stan Marshall, president and CEO of Fortis, in the Central Hudson release. “We welcome the employees of Central Hudson to the Fortis team, and we look forward to their contribution as we continue to meet our customers’ energy needs safely, reliably and cost effectively,” he said.

“Our new association with Fortis provides substantial and lasting benefits for our customers, and the Fortis business model retains Central Hudson as a standalone company,” said Steven V. Lant, chairman of the board and president of CH Energy Group. “In our capital-intensive and increasingly consolidating industry, becoming a member of the Fortis federation of utilities ensures we are able to effectively serve our customers now and in the future. Central Hudson’s ability to make required energy infrastructure investments, which are expected to be more than $100 million annually over the next five years, is strengthened by being a part of the Fortis federation.”

Reaction from Citizens for Local Power, an Ulster-based grassroots group in the forefront of the opposition to the deal, was not immediately available. But Assemblyman Kevin Cahill, who’s been consistently opposed before its adoption, remains opposed, calling is “irrational, illegal and procedurally flawed,” and said he will fight to overturn it. “The decision by the PSC is both disappointing and of questionable legality,” Cahill stated in a release Tuesday afternoon. “Though New YorkState has seen fit to destroy the consumer protection apparatus that could have guaranteed a means to appeal, I will consult with experts and citizen activists to proceed as fully as possible to reverse this ill-considered administrative determination.”

Cahill’s release ticked off a number of what he said were flaws in the PSC’s decision:

• The PSC did not follow administrative process when they refused to conduct an evidentiary hearing on the revised proposal.
• The negotiated labor agreement and the rate freezes promised are completely incongruous and will likely result in rate hikes at the end of the restricted period.
• The commitment to freeze rates over the next two years is contrary to the companies’ own prior analyses. Conversely, rates of return in excess of 10 percent, such as those currently enjoyed by Central Hudson, are inconsistent with DPS staff recommendations in cases currently before the PSC.
• The Customer Benefit Fund to assist distressed customers, those in arrears or those who have already received shut off notices, demonstrates insensitivity to a primary obligation of a public utility in New York is the most miserly ever approved. The pittance offered here, a fraction of what those customers would need to bring even a single month’s bill up to date, couched in an overall “economic development program” is an insult to all Central Hudson customers.
• Our communities are left vulnerable to the North American Free Trade Agreement. This could impact not only regulatory issues but a wide range of commercial and labor relationships including the possibility of the utility buying its own power.
• Central Hudson’s current credit rating is considerably stronger than the company taking over, and they already possess the expertise of dealing in a uniquely New York market. The Commission was given ample evidence regarding the potential instability of Fortis and the lack of serious rate payer protection from the negative impact that might ensue.
• The PSC ruled on this matter while operating with a vacant seat.

“The Legislature established the Commission in order to ensure the existence of an entity whose mission is to uphold the public interest and the only question before the Commission today was whether Central Hudson and Fortis met the public benefit test.  They utterly failed and now so did the Public Service Commission,” Cahill continued. “Today’s approval of Fortis’ takeover of Central Hudson is irrational, illegal and procedurally flawed.”

“I thank the many local advocates including Gerald Norlander, director of the Public Utility Law Project, Manna Jo Greene, Jennifer Metzger and Susan Gillespie of Citizens for Local Power who worked tirelessly on behalf of their community. Their voices were heard and mattered to Administrative Law Judges Epstein and Prestemon. I only wish that their concern about public opposition had been shared by the commissioners.”

According to the PSC, key provisions of the deal include:

• Measures to protect the financial integrity and credit standing of Central Hudson, which include a ban on cross-default provisions, a “golden share” designed to prevent a voluntary bankruptcy of Central Hudson, and no allowance for transaction costs or goodwill costs.
• A freeze on Central Hudson electric and gas delivery rates through July 1, 2015.
• Payment by Fortis of $35 million to Central Hudson to cover expenses normally required to be recovered from ratepayers, such as storm restoration costs. The funds would be used only for expenses for which recovery is authorized by the Commission.
• A $5 million community benefit fund established by Fortis for economic development and low-income customer assistance programs.
• A guarantee of $1.85 million per year in savings to ratepayers for five years.
• A commitment to maintain Central Hudson’s active community involvement at no less than 2011 levels through 2022.
• Continuation of customer service, reliability and safety mechanisms with increased negative revenue adjustments for failure to meet targets, and addition of a new metric for violations of certain pipeline safety regulations.
• Assurance a majority of the Central Hudson board of directors will be independent  and that at least two of the independent directors will be residents of the Central Hudson service territory.
• Prohibition against relocation of Central Hudson headquarters outside the service territory without approval of the Commission.
• Assurance that there will be no layoff of Central Hudson employees for at least four years.

The approval, the commission stated, clears the way for a renegotiated contract between Central Hudson and Local 320 of the International Brotherhood of Electrical Workers, which represents 526 of the utility’s 875 workers, to take effect. That revised agreement will provide extension of the current union contract through June 30, 2017; an assurance of no layoffs through June 30, 2017; the addition of 35 new union jobs; and a commitment to hire, retain and train skilled union craftspeople.

The Commission’s decision today, when issued, will be placed online in the Commission Documents section of the PSC web site at www.dps.ny.gov and entering Case Number 12-M-0192 in the input box labeled “Search for Case/Matter Number.” Commission orders may also be obtained from the Commission’s Files Office, 14th floor, ThreeEmpireStatePlaza, Albany, NY12223.