Niagara Mohawk proposes distribution rate cut to offset higher commodity prices

In a filing seeking to win approval of their merger, the UK's National Grid Group PLC and Niagara Mohawk Holdings Inc. proposed to cut electricity distribution rates 7.85% or $132 million, followed by a 10-year price freeze. The delivery rate reduction proposal was filed Wednesday with the New York State Public Service Commission (PSC). Niagara Mohawk provides transmission and distribution delivery service to its customers at regulated prices.


In a filing seeking to win approval of their merger, the UK's National Grid Group PLC and Niagara Mohawk Holdings Inc. proposed to cut electricity distribution rates 7.85% or $132 million, followed by a 10-year price freeze.

National Grid offered to buy Niagara Mohawk in a cash and stock deal valued at $3 billion in September. It will also assume Niagara�s $5.9 billion debt.

The delivery rate reduction proposal was filed Wednesday with the New York State Public Service Commission (PSC). Niagara Mohawk provides transmission and distribution delivery service to its customers at regulated prices.

However, delivery prices exclude the cost for the commodity, which the companies said are rising fast. The companies said in a statement the proposed reduction in electricity delivery rates will soften anticipated increases in electricity commodity prices.

Based on forecasts of market conditions, commodity costs alone are likely to cause average total price increases of 8-12% over today's prices, according to Niagara Mohawk. The expiration of some supply contracts, increases in charges by the New York Independent System Operator, and fuel costs, are projected to increase commodity costs.

The commodity is now open to competition, with prices subject to market conditions. Some of Niagara Mohawk's customers purchase their supply needs at market rates, while others take their supply service from Niagara Mohawk.

Under Wednesday's proposal, Niagara Mohawk also offered to forego 1% transmission and distribution price increases in 2001 and 2002, under the company's existing rate agreement with the state.

The companies asked the PSC to approve their proposed merger by June 1, so its benefits can be brought to customers by Sept. 1, when increases in the commodity portion of the bill are expected to take effect for most Niagara Mohawk customers.

If approved, the merger is expected to save $970 million over the next 10 years, when compared to the rates Niagara Mohawk forecasts it would have had to charge without the merger. Niagara Mohawk Power Corp. will become part of National Grid's US operations.

Lawrence Reilly, senior vice-president and general counsel of National Grid USA, said the merger will allow "us to reduce delivery costs. We have recently experienced high generation market prices. The long-term rate proposal we submitted today will, if approved, reduce the impact of these price increases.''

If approved, Niagara Mohawk estimates residential customer delivery rates would decline 7.8%; commercial customers' rates, 3.8%; mid-sized industrials, 6.4%; and large industrials, 13.4%. After the initial reduction, Niagara Mohawk said delivery rates will be fixed for 10 years subject to changes in taxes, laws, regulation or accounting practices; high inflation; and transmission revenue adjustments.

Niagara Mohawk will be National Grid's third US acquisition, after New England Electric System and Eastern Utilities Associates, which were both acquired in 2000. The combination will create the ninth largest electric utility in the US with 3.3 million customers.

In addition to New York regulators, the merger is subject to approval by the Federal Energy Regulatory Commission, the Securities and Exchange Commission, and other regulatory agencies.

Wednesday's filing also proposes:

� Price-stabilized commodity service for residential and commercial customers for several years, providing those customers with protection from severe fluctuations in the generation marketplace.

� Extension by 1 year of a multiyear gas rate settlement resulting in gas delivery rates remaining locked through August 2004.

� Extension of the Low Income Customer Assistance Program, which was expanded under Niagara Mohawk's existing regulatory agreement with the PSC.

� Establishment of a service quality program, under which Niagara Mohawk would receive annual rewards or penalties of up to $22 million based on its customer service performance. Results would be measured by criteria approved by the PSC.

� Establishment of a congestion reduction program to help ease or prevent congestion on the bulk power transmission network in portions of New York state, thereby reducing power supply costs.

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