National Grid Usa Business Information, Profile, and History

Company Perspectives:

Our mission is to be a U.S. energy delivery leader through innovation and continuous improvement in safety, service quality, and efficiency, and by operating in an environmentally and ethically responsible manner to the benefit of customers, shareholders, and employees alike.

History of National Grid Usa

National Grid USA was formed when London-based National Grid Group plc acquired New England Electric System (NEES) in 2000. The company's main operations include the transmission and distribution of electricity--National Grid USA maintains 84,000 miles of overhead and underground transmission and distribution lines. Through its subsidiaries, the company provides electrical services to approximately 3.2 million customers in upstate New York, Massachusetts, Rhode Island, and New Hampshire. Its Niagara Mohawk subsidiary, which was acquired in 2002, provides natural gas delivery. The company also builds high-speed fiber optic telecommunications networks through its NEES Communications Inc. subsidiary and provides consulting services through Wayfinder Group Inc.

Early History

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.

NEPA Emerges As the New England Electric System: 1947

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 two. 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 percent 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 eight 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.

Reducing Dependence on Foreign Oil: Late 1970s-Early 1980s

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 percent 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 ten percent 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 coalfired 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 percent, and by 1990 the company's fuel mix was 22 percent oil, 42 percent coal, 19 percent nuclear, 8 percent hydroelectricity, 3 percent natural gas, and 6 percent alternative energy sources. The latter included 32 lowhead hydroelectric plants, 79 wind or solar generators, four 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 percent to 1.9 percent. 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 P.M. to 8 A.M.--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.

Problems with Nuclear Power

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 percent of the region's power, more than double the national figure of 12 percent. 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 percent and 15 percent, 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 Seabrook plants in New Hampshire. Construction of Pilgrim II was canceled in 1981, but Millstone 3, in which NEES had a 12.2 percent share, became operational in 1986. The Seabrook project, however, had serious problems, with estimates of construction costs for Seabrook 2, some 17 percent 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 ten percent interest in Seabrook 2 but to retain its interest in Seabrook 1, then 70 percent 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 I 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 five percent 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 percent in 1989, down from 5.4 percent 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.

Adding Natural Gas as a Fuel Source: Late 1980s-Early 1990s

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 percent 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 coordinated 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 percent to 4 percent of the region's energy needs. NEES had 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. but continued to transport coal to NEES's generating stations. Revenues were also up.

Deregulation Leads to New Ownership: Late 1990s and Beyond

The landscape of the electricity industry began to change dramatically during the mid- to late 1990s. Deregulation and restructuring in the industry had long since been topics of discussion among consumers, government officials, and company executives. Indeed, deregulation became a reality with the passing of the Rhode Island Utility Restructuring Act in January 1998, which was the first act in the U.S. that enabled customers to choose their power supplier. Massachusetts became the second state to pass similar legislation in March 1998.

As deregulation promised to increase competition, and thus stimulate competitive pricing for consumers, NEES began to restructure to position itself as a leading electricity distributor. NEES was the first U.S. utility to set plans in motion to sell its non-nuclear generation business. In 1997, the company sold its 15 hydroelectric and three fossil fuel plants to U.S. Generating Company, a subsidiary of PG&E Co., for $1.6 billion. A September 1997 Electric Light & Power article commented on the deal, claiming it was the first "major move in the power plant trend that is hitting the U.S. investor-owned electric utilities." The article went on to report that "so far, the trend is concentrated in New England and California, but it promises to spread to other regions. It is driven by the desire to make electricity markets more competitive. That requires the elimination, or at least the reduction, of generation market domination by a few large companies."

NEES continued to strengthen its position in the distribution market and in late 1998 announced that it agreed to be acquired by London-based National Grid Group plc, an electricity concern with operations in England and Wales. At the time, National Grid was looking to gain a foothold in the U.S. electricity market--a market it deemed crucial to its expansion efforts. The $4.1 billion union was completed in 2000. NEES adopted the National Grid USA name.

By focusing on distribution, National Grid USA had its work cut out for it. Demand for electricity in the U.S. grew by 14 percent from 1995 to 2000. Capacity, however, grew by just 13 percent during the same time period. National Grid USA used cutting-edge technology, including lasers and software, to avoid problems as well as track electricity usage.

During 2000, Eastern Utilities Associates was merged into National Grid USA's operations. That year, National Grid Group also announced its purchase of New York-based Niagara Mohawk Holdings Inc. That purchase, completed in January 2002, doubled the size of National's Grid U.S. business and catapulted National Grid USA into the top echelon of U.S. power distributors, securing it as the ninth-largest in the nation.

National Grid USA proved to be highly successful for its parent. During 2001, the U.S. concern accounted for 60 percent of National Grid's revenues and 43 percent of its profits. During 2002, its parent merged with Lattice Group plc to form National Grid Transco plc. As a subsidiary of what was now the largest energy utility in the United Kingdom, National Grid USA stood well positioned for future growth. In fact, Transco planned to make additional purchases in the United States, which would leave National Grid USA a step ahead of many of its competitors.

Principal Subsidiaries: Niagara Mohawk Power Corp.; Massachusetts Electric Company; Narragansett Electric Company; Granite State Electric Company; Nantucket Electric Company; National Grid Transmission USA; New England Power Company; National Grid Transmission Services Corp.; New England Electric Transmission Corp.; New England Hydro-Transmission Corp.; New England Hydro-Transmission Electric Co.; National Grid USA Service Company Inc.; NEES Communications Inc.; Wayfinder Group Inc.

Principal Competitors: Energy East Corporation; Northeast Utilities; NSTAR.

Chronology

• Key Dates:
• 1906: Malcolm Chace and Henry Harriman obtain charters from Vermont and New Hampshire to construct a dam and hydroelectric generating plant in Vernon, Vermont.
• 1926: The New England Power Association (NEPA) is formed.
• 1947: NEPA emerges as the New England Electric System (NEES).
• 1961: The Massachusetts Electric Company is formed.
• 1979: The company begins to reduce its dependence on foreign oil; conversion from oil-fired generation plants to coal burning plants begins.
• 1989: NEES Energy gains SEC approval to expand its business and to participate in cogeneration projects.
• 1990: The Seabrook I nuclear plant begins commercial operations.
• 1998: NEES sells its non-nuclear generation business to focus on distribution.
• 2000: National Grid Group plc acquires NEES; the company adopts the name National Grid USA.
• 2002: Niagara Mohawk Holdings Inc. is acquired; National Grid Group plc merges with Lattice Group plc to form National Grid Transco plc.