National Grid and KeySpan filed their merger application with the New York State Public Service Commission Thursday promising no layoffs and $500 million in permanent customer savings over 10 years through cost reductions from operational efficiency gains. However, they said the savings will be used to reduce proposed rate increases attributed to rising property taxes, environmental clean-up of brownfield sites and increased pension costs.

“National Grid and KeySpan are delivering on our promise to bring savings and additional benefits to customers in New York and on Long Island,” said National Grid USA CEO Michael E. Jesanis. “Our plan will allow us to better meet customers’ needs, operate more efficiently, and provide safe and reliable service through investments in the energy infrastructure.”

The $7.3 billion purchase of KeySpan by National Grid was announced in February (see Daily GPI, Feb. 28). The transaction, National Grid’s fifth U.S. acquisition, would create the third largest energy delivery utility in the United States, with electricity and gas businesses serving nearly eight million customers in the New York State and New England regions.

The companies said the combination will operate more efficiently, will be better able to manage energy supply costs and will expand programs to help reduce energy use. Additional benefits, they said will include improved low-income and supplier choice programs, and accelerated infrastructure improvements.

“It is only through our acquisition by National Grid…that we are able to provide these additional benefits to our customers,” said KeySpan CEO Robert B. Catell. “Through our innovative plan, we are able to reduce the costs to our customers and are even better equipped to surmount the energy challenges of the future.”

The companies said they plan to provide $131 million in savings to Long Island energy gas customers, including $64 million in business operations efficiency and $67 million in gas supply management savings. Additional savings, the said, will be available to the 1.1 million electric customers of the Long Island Power Authority in the event LIPA ultimately approves the transfer of its existing contractual arrangements from KeySpan to National Grid.

In addition, they promised $173 million in savings to KeySpan customers in New York City (Brooklyn, Queens, Staten Island), including $109 million in business operations efficiency and $64 million in gas supply management savings . Another $218 million in savings will go to National Grid customers in upstate New York (former Niagara Mohawk service territory), including more than $14 million in gas supply management savings.

All those cost savings, however, will be used to mitigate proposed rate increases, the company said. Catell said that KeySpan customers have not had a delivery rate increase in 10 years. “KeySpan has been experiencing dramatic increases in these areas outside of our control and was preparing to file a new rate plan when the opportunity to produce costs savings through a merger with National Grid emerged,” Catell said. “Through the efficiencies of combining with National Grid, the customer impact of these familiar rising costs will be reduced.”

KeySpan said that instead of requesting a 10% rate hike, which would have been required, the merger will allow the company to avoid increasing rates for about 18 months. After that the company expects modest rate increases spread out over the 10-year rate plan. On average, from 2007 to 2017, the rate plan is expected to result in an estimated increase of 1-1.5% annually. The companies said a typical residential customer in Brooklyn would experience an estimated $25 to $37.50 annual increase in delivery charges on an average yearly bill of $2,500. Those charges exclude the actual commodity charges, which will continue to fluctuate with market conditions and be passed through without markup.

The two companies said some job consolidations will be necessary to achieve cost savings but they expect to achieve staff reductions through attrition and voluntary programs rather than layoffs.

Other actions associated with the merger include implementation of an alternative supplier referral program in KeySpan’s territory. Such a plan already has been implemented in National Grid’s territory in Upstate New York. The companies also plan to accelerate steel pipe replacement on Long Island and provide larger discounts to 90,000 of KeySpan’s low income customers.

In May, National Grid and KeySpan filed the merger application with the Federal Energy Regulatory Commission. A filing with the New Hampshire Public Utilities Commission is expected in the coming weeks.

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