State Senator Illuzzi wants independent counsel for GMP-CVPS deal
By Timothy McQuiston. A prominent Vermont state senator is asking to be an intervener before the Public Service Board over the merger of Central Vermont Public Service into Green Mountain Power. But that is hardly all Vince Illuzzi wants.
The long-serving Republican wants the PSB to appoint an independent counsel to act as the public’s advocate in the merger case (Docket Number 7770) instead of Department of Public Service Commissioner Liz Miller. The DPS typically acts as the public’s advocate before the regulatory body. He also wants Vermont Electric Power Company in some way separated from control by the new entity.
“As part of the governor’s administration, the commissioner and ‘public advocate’ under the commissioner’s direction are left with marching orders from across the Fifth Floor (governor’s office). Ask any former commissioner,” Illuzzi told Vermont Business Magazine in an email, “and they will tell you that disagreeing with the governor is the same as handing in your resignation.”
In response to Illuzzi’s filing, Dorothy Schnure, GMP’s Manager of Corporate Communications said in an email to VBM: “Our experience is that the DPS vigorously exercises its role as public advocate in all proceedings involving GMP and other regulated businesses under its jurisdiction. An independent counsel is completely unnecessary.”
Senator Illuzzi, who is also an attorney, said he is most concerned with what will happen to VELCO, the Vermont Electric Power Company that owns and manages the state’s electric transmission system. VELCO itself is owned by Vermont’s utilities. With the GMP-CVPS merger, the one company will own 70 percent of power distribution in Vermont and 86.3 percent, effectively giving control of the state’s power lines to one company. Not only that, Illuzzi points out, the new utility itself will be owned by Gaz Metro, the Canadian energy company that not only owns GMP, but also Vermont Gas Systems.
"Then there is the fact that Neale Lunderville, the architect of the deal, now sits at the right hand of the governor. What rank and file employee at the Department of Public Service is going to put his or her neck on the line and challenge the governor's position on this deal?" Illuzzi said.
"These points are underscored by the unusual significance of this venture – a venture that not only would allow Gaz Metro to own and control the two largest distribution territories in the state of Vermont, but also control in some meaningful manner transmission planning, infrastructure upgrades, and grid use, as well," he said.
"This is not a ten- or 20-year HQ contract that could go wrong but will end at some point. It is not a rate case that will be superseded by newer reviews and rates at some point. This is a 'forever' deal of the utmost importance."
Illuzzi has been a critic of the merger from the beginning because he feels consumers could suffer under the new near-monopoly in electric companies. In this case, he is concerned by the de facto monopoly in electric transmission. He also questions how the state will respond if Hydro Quebec wants to build its new Boston-bound transmission line through Vermont. Hydro Quebec’s plan is to build a line through New Hampshire. There have been political problems in running it through northern New Hampshire.
There have been suggestions it might be rerouted somewhat and cut through Vermont before entering New Hampshire. There already is one Hydro Quebec line that slices through a corner of Vermont’s Northeast Kingdom. Illuzzi, from Newport and always conscious of how public policy affects his constituents, wants some assurance that VELCO and the state would be acting in the best interest of Vermonters in such cases, instead of the best interest of Quebecers or business interests based in Montreal.
While the issue of the public advocate has always been a tricky one, with the DPS commissioner having to act separately from the government, Illuzzi says this case is more problematic than most.
Commissioner Liz Miller’s boss, Governor Shumlin, took an early stand in favor of the GMP-CVPS merger and against rival suitor Fortis, also based in Canada. On top of that, Illuzzi points out, GMP had hired a senior member of Governor Douglas’s administration, former Administration Secretary Neale Lunderville.
As has been reported by Bruce Edwards in the Rutland Herald, Anne Galloway in vtdigger.com and John Dillon at Vermont Public Radio, and from information gathered from CVPS’ shareholder proxy statements related to the merger, Gaz Met/GMP first approached CVPS in November 2010, after CVPS CEO Robert Young announced his retirement in the summer of 2010, effective in May 2011. His announcement got the wheels in motion for a possible bid to merge the state’s two largest utilities.
Such a merger had been proposed many times over the years, with the lead company going one way or the other depending on the relative strength of each at the time. Over the years, governors from both parties backed such a merger because of the logical cost savings, which presumably would lower electric rates.
In recent times, the merger talk had been put on hold. Both CVPS and GMP have recently emerged from hard times, with GMP avoiding bankruptcy by selling its headquarters and severely downsizing before eventually being sold to Gaz Met in 2007. Meanwhile, CVPS shook off a restructuring that caused its bonds to sink to “junk” status. Young has been credited with helping the company regain financial buoyancy.
But with CVPS ship-shape and Young stepping down, GMP, and as it turns out other suitors, saw it as the right time to again propose a merger. Lunderville became the point man from GMP’s end. He not only knew the intimate workings of state government, he was well connected to the Republican Party. This was important because Rutland is one of the last great GOP strongholds in Vermont in what, not that long ago, was that nation’s most Republican state.
Rutland County itself was the seat of power for not only the Republicans but for the Proctor family, who controlled the governorship in the first half of the 20th century. CVPS as an institution held on to its old roots. The CVPS board was reluctant to go with the GMP offer initially for several reasons beyond politics. It sought the best value for shareholders, as well as a clear path through the stormy waters of the regulatory process.
The CVPS board could see the inherent problems in creating not only such a dominant electric company, but understood that the VELCO issue could give regulators pause in approving the merger. CVPS rejected Gaz Met/GMP’s initial offer. As part of its fiduciary responsibility to shareholders, it then put the company up for bid, which led to the Fortis offer.
The Fortis offer almost seemed too good to be true. It would retain all the employees, including the executive staff. The company, for all intents and purposes, would keep running as it had been. For its part, Fortis would finally get a foothold in the US market.
The large integrated energy company, officially based in Newfoundland but with most of its holdings in western Canada, seemed content on this modest purchase to add to its North American portfolio. It also got a $17.5 million breakup fee, plus another $2 million to cover expenses, if things did not work out with CVPS. According to the reports, Gaz Met wound up paying the $19.5 million.
The reason things did not work out was because Gaz Met/GMP did not take “no” for an answer. It came back with another offer that trumped Fortis’ premium offer to shareholders, the most vital feature of the sale. In selling publicly traded companies, a company must be ready for the inevitable shareholder lawsuits and showing significant shareholder value in a transaction such as this is paramount to deflect the suits.
The Gaz Met/GMP offer was not only $11 per share more than what the stock was trading for at the time, it also guaranteed dividends would be paid all the way to the conclusion of the final sale. Announced on July 12, Gaz Met would pay $35.25 per common share, a 45 percent premium over the previous closing price of $24.32.
Fortis was trumped both in the price and the dividend benefit and had to satisfy itself with that $17.5 million. The breakup fee itself brought a shareholder suit, essentially as a waste of company assets. Former PSB chairman Michael Dworkin, now a Vermont Law School professor, also was surprised at the breakup fee. He said at the time that its cost could obligate CVPS to go with Fortis even if it was not the best suitor, which, of course, turned out not to be the case.
A person close to the Fortis negotiations told Vermont Business Magazine, on condition of anonymity, that the CVPS-Fortis deal also suffered politically. The rock-ribbed Republican CVPS board was out of its element in Democratically controlled Montpelier. The Legislature is overwhelmingly Democratic in both houses and the new governor, Peter Shumlin, is also. Not only that, Mary Powell, the CEO of GMP and the presumptive CEO of the new GMP-CVPS, chaired Shumlin’s inaugural committee.
According to the reports, in order to smooth the way for the merger, Lunderville was enlisted to use his Republican connections to placate Rutland business interests and the CVPS board. While top executives and most of the board would be removed as part of the $144 million in savings over the next decadefor the new company, the new company guaranteed it would invest in the Rutland area. A new Rutland office would be located downtown. This would be a boon to the downtown area. CVPS had proposed moving its headquarter downtown several years ago but the cost got in the way.
Gaz Met/GMP would also make Rutland the state’s first “solar city,” by moving forward with its aggressive solar energy plans and focusing them on Rutland. The source said this helped placate Rutland area Republicans to some extent, but they remained concerned about the local economic impact. There is also, the source said, general concern in the community that these highly paid executives that are losing their jobs will no longer be key contributors locally, not only as consumers and investors, but also to charitable organizations and the arts, as they have been over the years. Real estate values also could suffer. That all may or may not be the case, as executive officers and board members collectively will see a windfall of $17.3 million once the sale is finalized and their stock is cashed out.
But beyond the lack of political clout was the issue of VELCO. The CVPS board saw this as a potential stumbling block for regulators. To answer that, Gaz Met/GMP included a provision that would put a large piece of VELCO into a public trust. With that, the CVPS board finally acquiesced.
But Vince Illuzzi sees the VELCO piece as still problematic, as others have. The trust would own 30 percent of VELCO and presumably pay out a million dollars. There are questions about how the trust will work and about what would happen if VELCO lost money or had a financial calamity. What would happen to the trust and the low-income ratepayers it was intended to assist, not to mention who would get stuck with the deficit: Gaz Met, the state, all ratepayers?
Illuzzi also mentions in his PSB filing that Lunderville was recently appointed by Governor Shumlin to lead the state’s recovery effort from Tropical Storm Irene. Illuzzi sees that appointment as further compromising Liz Miller’s ability to act independently, since her boss, Governor Shumlin, is so closely connected to GMP. To add to his point of real or perceived conflicts of interest, Illuzzi mentions in his filing that one of Miller’s family members (husband, Eric Miller) is a partner in a law firm (Sheehey Furlong & Behm of Burlington) that represents GMP, though Miller himself does not represent it.
For those many reasons, Illuzzi wants an independent counsel to represent the public.
Illuzzi told Vermont Business Magazine that he does not have a definitive answer to the VELCO question. He said perhaps the public trust is a good idea, but other solutions are out there, say, spinning the company off as a separate entity or making it a part of government.
In his filing to become an intervener, he mentions how the waterways and highways are public entities controlled by the state on behalf of the common good. He sees electric transmission also being at that level of importance.
In his filing, Illuzzi invoked the name of George Aiken, the former Vermont governor and US senator, who frequently tussled with the utilities in the mid-1900s. The populist Aiken successfully used the utilities as a political foil.
“At the end of the day,” Illuzzi said, “Vermonters want to know that this proposal was thoroughly reviewed under the full light of an independent public advocate and consultants before handing the ‘keys to the kingdom,’ including operational and planning reigns of our electric utility systems, to Gaz Metro. As a Vermonter, I would expect no less. To do otherwise would always leave doubt in my mind.”
Illuzzi has about 30 cosigners to his “Motion to Intervene.”
Timothy McQuiston is editor of Vermont Business Magazine.
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