National Grid plc’s bid to acquire KeySpan Corp. cleared its last regulatory hurdle Wednesday, with the New York Public Service Commission (PSC) unanimously voting to accept the $11.8 billion, 100% debt-financed merger. The deal puts National Grid into the major league of natural gas and electric companies in the United States.

The order approving the deal was rife with conditions that require London-based National Grid to provide financial protections, customer safeguards, mitigation of vertical market power, adequate investment in natural gas and electric infrastructure and reliability enhancements, and orders the company to carry out a divestiture. The company could face up to millions of dollars in penalties if it fails to satisfy certain conditions and requirements.

The multi-billion-dollar deal, which was announced in early 2006, already has won approval from the Federal Energy Regulatory Commission, the Federal Trade Commission, the Department of Justice, the Committee on Foreign Investment in the United States and shareholders.

This is the “largest and most important deal of its kind in New York State,” said PSC Chairman Patricia L. Acampora. Many promises were made by National Grid and KeySpan to win approval, but “we act on guarantees, not promises,” she noted.

It is “incumbent upon us to not allow globalization to negatively impact ratepayers in New York [state],” Acampora said. The merger will “net ratepayers substantial benefits” — estimated at more than $700 million over a 10-year period — and will provide reliability safeguards, she said in giving her blessing to the transaction.

More than half of the savings ($494 million) will go to KeySpan customers on Long Island and New York City, while about $100 million will flow to National Grid’s upstate customers and $93 million will go to customers of affiliate Long Island Power Authority, according to the New York PSC.

This is a “very difficult decision,” said Commissioner Robert E. Curry Jr. Although it will provide significant ratepayer benefits, “on the detriment side, [there will be] some short and long-term risks,” he noted.

The required sale of the 2,450 MW Ravenswood Generating Stations in Queens, NY, as a condition of the merger was a “must for me,” said Commissioner Maureen F. Harris. She further noted that National Grid’s decision last week to accept many of the agency’s extra conditions, which mostly addressed the financial risks of the deal, helped to “mitigate my very large concerns.”

The benefits that will flow to ratepayers will be like having “breakfast at IHOP every month” for 10 years, Harris said.

Commissioner Cheryl A. Buley ultimately voted in favor of the National Grid-KeySpan merger, but she noted that it was a “close call.” She warned National Grid that she would “vigorously oppose” any future effort to decrease service and increase rates.

Among other things, National Grid has agreed there would be:

Through a series of acquisitions starting in 2000, National Grid has developed an eastern U.S. conglomerate that distributes electricity to approximately 3.4 million customers in Massachusetts, New Hampshire, New York and Rhode Island and natural gas to approximately 814,000 customers in New York and Rhode Island. The company also owns and operates the high-voltage electricity transmission network and the high-pressure gas transmission system in Great Britain.

In September 2000 the company announced a deal to acquire Niagara Mohawk Holdings for $8.9 billion in cash. That deal was later consummated, and it followed National Grid’s acquisition of the New England Electric System of Westborough, MA, for $4.7 billion in cash and assumed debt and its $1.03 billion cash and assumed debt acquisition of Eastern Utilities Associates of Boston.

Upon the completion of the merger, the United Kingdom firm’s grid will include KeySpan’s Boston Gas and the old Brooklyn Union Gas, and New England Gas. KeySpan has been on its own acquisition campaign during the past decade, adding major eastern utilities such as Boston Gas and Long Island Lighting.

With the acquisition of KeySpan’s 6,000 MW of power generation in the New York area, the combined company also will serve the power needs of the Long Island Power Authority. Other KeySpan assets include a 20.4% interest in Iroquois Gas Transmission, a 50% interest in the proposed Islander East pipeline and a 20% interest in Millennium Pipeline. It also has interests in New York-area gas storage facilities.

When the merger is completed, KeySpan will become a wholly owned subsidiary of National Grid and will continue to operate as KeySpan. It is the largest distributor of natural gas in the Northeast, serving 2.6 million gas customers. KeySpan is the largest electric generator in New York State as well, owning approximately 6,650 MW of generating capacity, providing power to 1.1 million customers on Long Island and supplying approximately 25% of New York City’s capacity needs.

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