New England Electric System

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New England Electric System

25 Research Drive
Westborough, Massachusetts 01582
U.S.A.
(508) 366-9011
Fax: (508) 366-9011, extension 2698

Public Company
Incorporated: 1926 as New England Power Association
Employees: 5,666
Sales: $1.86 billion
Stock Exchanges: New York Boston Pacific Cincinnati Philadelphia

New England Electric System (NEES) is a public utility holding company that derives its revenues from electric power that its generating company subsidiary, New England Power Company, sells to its retail subsidiaries. These, in turn, sell electricity directly to residential and industrial customers. The retail subsidiaries are Massachusetts Electric Company, Narragansett Electric Company in Rhode Island, and Granite State Electric Company in New Hampshire. NEES’s market share of state electricity sales is 73.2% in Rhode Island, 35% in Massachusetts, and 6.1% in New Hampshire; in terms of the six-state New England region, NEES’s market share is about 20%. Other NEES subsidiaries include a second wholesale generating company, three transmission companies, a service company, and an oil and gas exploration and fuels company.

The company traces its origins back to 1906, when Malcolm Chace and Henry Harriman obtained charters from Vermont and New Hampshire to construct a dam and hydroelectric generating plant at Vernon, Vermont. Even in 1910, when the Vernon plant began to transmit electric power to industries in central Massachusetts, the structure of the Chace-Harriman operations was complex. There was a company formed under the more liberal corporation laws of Maine, the Connecticut River Power Company of Maine, and a holding company, the Massachusetts Company, as well as two operating companies, the Connecticut River Power Company of New Hampshire and the Connecticut River Transmission Company. The Massachusetts Company, not subject to the regulations on public utilities, was able to issue and hold securities and therefore had greater flexibility in financing. Within a few years Chace and Harriman expanded their hydroelectric operations to include one plant on the Connecticut River at Bellows Falls, Vermont, and several plants along the Deerfield River in Massachusetts. The New England Power Company was established to develop the Deerfield projects and to manage the electricity transmission lines in Massachusetts. The combined operations of the companies became known as New England Power System during this period.

As neither the Connecticut River nor the Deerfield River had a sufficiently large flow of water, especially during the summer months, to serve as a single, reliable source of electricity, Chace and Harriman decided to secure additional sources from thermal units, in which steam-driven turbines, rather than falling water, produced electricity. In the early years, they did this through sharing arrangements with the thermal plants of local lighting companies in Massachusetts and Rhode Island. Later, they purchased or constructed their own steam-generating plants.

In 1926 the New England Power System, the Northeastern Power Corporation, Stone & Webster, and International Paper Company formed New England Power Association (NEPA). This Massachusetts voluntary association had sufficient funds to purchase a number of smaller electric and gas companies in New England. By the 1930s, NEPA controlled 26 hydroelectric stations, 17 steam-generating plants, and more than 2,000 miles of transmission lines.

The Great Depression and the World War II years were difficult for NEPA financially. Annual earnings from 1933 through 1937 were lower than those of 1932, although sales rose, and full preferred dividend amounts were paid only three times between 1935 and 1946. Part of the problem lay in the fact that state authorities would not allow the retail companies to increase their charges for electricity, and the complicated network of holding companies prevented operating company mergers that could have resulted in economies of scale in production and distribution.

In 1942, the Securities and Exchange Commission (SEC) ordered NEPA to simplify its corporate structure. An acceptable reorganization was not worked out until 1947, when NEPA emerged as New England Electric System, a new holding company that replaced five former holding companies and reduced 18 different classes of securities to 2. NEES at this time was the largest electric utility system in New England, with 10,000 employees serving a population of 2.5 million.

The postwar years, and especially the 1960s, were a period of prosperity and reorganization for NEES. Electricity demand increased at an annual average of 7.7% in New England, and NEES revenues from electricity sales, and from the distribution and sale of manufactured and natural gas in Massachusetts, rose from $160 million in 1961 to $251 million in 1969. During this period the company gradually sold off a number of its generating units. In 1960, it operated 22 hydroelectric plants and 13 steam-generating plants, and in 1970, only 13 hydroelectric plants and 8 steam-generating plants. The number of employees in 1970 had fallen to 7,000. The main change in its retail operations involved the merger of a number of small electric companies to form the Massachusetts Electric Company in 1961. Some of this reorganization resulted from federal regulation. In 1957 the SEC ordered NEES to divest its minority interest in a number of small electricity subsidiaries and, in 1958, opened hearings regarding the company’s natural gas distribution and sales outlets. NEES appealed the commission’s 1964 order that it dispose of these up to the U.S. Supreme Court, which upheld the SEC ruling in 1968. The company subsequently sold off its eight gas companies gradually over the next few years.

In 1967 the three major electric utilities in New England, NEES, Boston Edison Company, and Northeast Utilities, began merger talks; Northeast Utilities later withdrew from these negotiations and was replaced by Eastern Utilities Associates. A corporate affiliation plan was drawn up in mid-1968 and presented to the SEC. The Justice Department opposed the merger, but an SEC hearing officer approved it in 1972, subject to certain conditions; the three utilities objected to these and the proposal was referred to the full SEC, which denied the application early in 1975.

In the 1960s electricity generating plants burning oil were fairly inexpensive to build and run and had cleaner emissions than those burning coal. By 1969 all NEES steam-generating plants were burning oil, including several that had previously burned coal, and, in 1971, the company announced the construction of a new large oil-fired power plant in Salem, Massachusetts. By the mid-1970s, oil was providing 78% of NEES’s energy requirements, and the company ranked third among U.S. electric utilities in its dependence on oil. It was therefore very vulnerable to the effects of the oil price and supply crises of this period and concerned about government proposals to levy import fees on foreign oil.

In 1979 to counter this threat, NEES President Guy Nichols, later credited with building NEES into one of the region’s strongest utilities, announced a 15-year plan to reduce the company’s use of foreign oil and to keep customers’ electricity costs to a minimum through conservation measures and load growth management. To lower the share of oil in its energy requirements to less than 10% by 1996, the company decided to convert some of its oil-fired generating plants to coal burning. The Environmental Protection Agency (EPA) granted a temporary waiver of pollution-control rules in 1979 to permit the conversion of NEES’s biggest generating station at Brayton Point in Somerset, Massachusetts. The conversion of three of its Brayton Point units to coal burning, which was completed in the early 1980s, was the first large-scale conversion of an oil-burning generating plant by a U.S. electric utility. NEES then proceeded with a second major conversion of three of its oil-burning units at Salem. To ensure coal supplies for its plants, NEES contracted for the construction of its own coal-carrying ship in 1980. Energy Independence, the first coal-fired ship built in the United States since 1929, began carrying coal up the eastern seaboard to Brayton Point in 1983.

NEES also reduced its dependency on oil by using, on a small scale, alternative energy sources for electricity generation, such as wood, windmills, solid waste, and small hydroelectric projects. To secure oil for the steam-generating units it could not convert to coal burning, NEES established a partnership with Noble Affiliates, an independent oil producer, to drill and develop domestic oil wells. By 1984 the percentage of oil used for NEES energy requirements had fallen to around 25%, and by 1990, the company’s fuel mix was 22% oil, 42% coal, 19% nuclear, 8% hydroelectricity, 3% natural gas, and 6% alternative energy sources. The latter included 32 low-head hydroelectric plants, 79 wind or solar generators, 4 trash-burning plants, and 24 cogenerators—facilities producing thermal energy and electricity from the same source.

To meet the second goal of keeping customers’ electricity bills to a minimum, NEES focused on slow growth. Peak load capacity—the amount of generating capacity that an electric utility needs to satisfy residential and commercial demand at its highest point in the day—determines the amount of generating capacity that the utility must have. The NEES slow-growth strategy involved an extensive conservation and load management (C&LM) program designed to reduce the annual peak load growth for the mid-1990s from the previous forecast of 3.1% to 1.9%. Achieving this would reduce the need for constructing additional generating capacity by the 1990s; it would also eliminate the need for rate increases for customers to pay for plant construction. The C&LM program included rate discounts to large industrial, commercial, and residential users for off-peak—9 PM to 8 AM—use of electricity; the dispatch of energy audit teams to customers to give them free energy-saving tips; the promotion, through rate incentives, of the installation of heat and/or cooling storage systems; the holding of large public programs on energy conservation; and the initiation of a solar project.

For additional generating capacity to meet the lower peak load growth, NEES intended to rely on nuclear power, hydroelectric projects, and natural gas-burning plants. Nuclear power was a significant source of energy in New England in the 1970s, and its seven nuclear power plants supplied about 28% of the region’s power, more than double the national figure of 12%. New England Power, the NEES generating company subsidiary, was a stockholder in the Massachusetts-based Yankee Rowe, Vermont Yankee, Connecticut Yankee, and Maine Yankee nuclear power plants completed between 1961 and 1972. Its ownership in these varied between 30% and 15%, and it purchased electricity in accordance with these ownership percentages.

In 1974 NEES announced plans to build a nuclear power station in Charlestown, Rhode Island. The Three Mile Island accident in March 1979, however, resulted in new safety requirements for nuclear plants, making them much more expensive to build and operate. Late in 1979, NEES canceled plans for the Charlestown plant. At the time, it still had a stake in three nuclear projects scheduled for completion in the 1980s: the Millstone 3 plant in Waterford, Connecticut; the Pilgrim II plant in Plymouth, Massachusetts; and the two Sea-brook plants in New Hampshire. Construction of Pilgrim II was canceled in 1981, but Millstone 3, in which NEES had a 12.2% share, became operational in 1986. The Seabrook project, however, had serious problems, with estimates of construction costs for Seabrook 2, some 17% complete, having risen from $900 million in 1972 to $5.24 billion by the early 1980s.

In 1983 NEES announced that it wanted to sell its 10% interest in Seabrook 2 but to retain its interest in Seabrook 1, then 70% complete. If it could not sell its share of Seabrook 2, it proposed that the project be canceled, and eventually it was. In 1985 the Federal Energy Regulatory Commission (FERC) ruled that NEES could charge its customers for construction costs on Pilgrim II and, in 1986, for the construction costs of Seabrook 2. The main investor in Seabrook 2, Public Service Company of New Hampshire (PSNH), however, did not fall under FERC jurisdiction, and its rates were regulated entirely by the state public utility commission. PSNH filed for bankruptcy in 1988 after the courts barred it from passing along the Seabrook 2 costs to its customers. NEES then submitted a bid to buy PSNH, exclusive of its shares in Seabrook 2, but dropped its offer when other utilities submitted higher bids.

The Seabrook 1 nuclear plant was completed in late 1986, but the Chernobyl accident in April of that year led the Nuclear Regulatory Commission to refuse to license the plant for commercial operation until emergency response measures were in place. These measures were subject to review by the states. Seabrook is located two miles from the Massachusetts border, and for four years Massachusetts refused to submit the evacuation plan the commission required. Seabrook 1 finally started commercial operations in June 1990.

NEES continued to follow its slow-growth program through the 1980s even though growth in electricity demand in New England between 1982 and 1988 generally was more than 5% per year, considerably higher than the NEES forecast. In 1985 Samuel Huntington, who had succeeded Guy Nichols as chief executive officer, announced further measures to provide an adequate supply of electricity at the lowest possible cost and to encourage customers to use electricity efficiently and economically. The company’s subsidiary, NEES Energy, began to provide energy conservation services under contracts that provided for sharing of resultant energy savings between the company and customers. In 1989, the SEC approved the application of NEES Energy to expand its business and to participate in cogeneration projects.

When high electricity demand in New England resulted in voltage reductions during the summers of 1987 and 1988, the wisdom of a slow-growth program was questioned by a rival utility, Northeast Utilities, which noted that NEES then had no spare generating capacity. The recession, however, lessened the pressure on NEES as the annual increase in electricity demand in the region fell to 2.0% in 1989, down from 5.4% in 1988.

In July 1988 CEO Samuel Huntington was killed during a lightning storm. A successor, John Rowe, was not selected until December of that year. In the interim, Chairman Joan T. Bok, long the highest woman executive in the electric utility industry, assumed CEO responsibility.

In the late 1980s, NEES decided to include natural gas as a fuel source and announced plans to expand and convert its Providence, Rhode Island, oil-fired plant to natural gas by 1995. It also planned to add the capability of burning natural gas at its oil-fired Brayton unit in Somerset, Massachusetts. In addition, in 1988 it formed the Narragansett Energy Resources Company to take a 20% interest in Ocean State Power, a general partnership established to build, own, and operate a gas-fired electric power plant in Burrillville, Rhode Island. The first unit of the Ocean State Power plant was operational in late 1990; the second was scheduled for completion in 1991.

For additional hydroelectric power, NEES tapped Canadian sources through arrangements with the New England Power Pool (NEPOOL), a consortium of New England utilities that coordinates the generation and transmission facilities of its members. In 1983 NEPOOL had made an agreement with Hydro-Quebec, the electric utility owned by the province of Quebec, to purchase sufficient surplus power generated by hydroelectric stations in the James Bay region to meet 3% to 4% of the region’s energy needs. NEES has been heavily involved in the building of many of the direct-current transmission lines and terminals required to link the Canadian and New England electric systems. The first stage in the Hydro-Quebec project went into operation in 1987; the second in late 1990.

At the start of the 1990s, NEES was doing well. The two new nuclear plants in which it had a share, Millstone Unit 3 and Seabrook 1, the Hydro-Quebec hydroelectric project, and the Ocean State Power gas plant were all in operation. Its oil and gas exploration subsidiary, which had been operating at a loss, was being wound down, and the coal-carrying ship, which it owned, had been sold to Keystone Shipping Co., which would continue to transport coal to NEES’s generating stations. Revenues were up. Whether the company would be able to continue its slow-growth policy once the recession of the early 1990s lifted in New England, however, was not certain. It also had to reduce its power plants’ emissions because of the 1990 Clean Air Act.

Principal Subsidiaries

New England Power Company; Massachusetts Electric Company; The Narragansett Electric Company; Granite State Electric Company; Narragansett Energy Resources Company; New England Energy Incorporated; New England Electric Transmission Corporation; New England Hydro-Transmission Corporation; New England Hydro-Transmission Electric Company, Inc.; New England Power Service Company.