Management

ompany/Industry Overview

NSTAR is Massachusetts’ largest investor-owned electric and gas utility that is responsible for transmitting and delivering electricity generated by independent, unregulated power producers to over 1.4 million households and businesses in over 100 communities in Eastern Massachusetts. A 1999 merger of Boston Edison Company and Commonwealth Energy System created NSTAR, which currently employs about 3,300 people. The company has revenues of approximately $3 billion and assets of $7.6 billion. NSTAR’s top competition is Energy East Corporation, National Grid, and Northeast Utilities. The company had a successful year in 2005, despite facing the challenge of buying reliable supplies of electricity for their customers in a market where energy prices have almost doubled over the years. While it appears that NSTAR operates as a monopoly due to the combination of customers having to pay prices that NSTAR sets and the fact that NSTAR largely controls the supply, it actually is in an oligopoly dominated by a few number of firms with very high barriers to entry.

NSTAR, being a giant firmament, responded to energy deregulation in Massachusetts by cutting its rates and selling most of its regulated electric generating assets. While it does operate in an oligopoly, NSTAR does face increased competition as a result of the deregulation. As part of the deregulation, the Department of Telecommunications and Energy (DTE) oversees all companies operating in the industry. Under these guidelines, government regulators oversee everything NSTAR does from customer service performance, safety levels and even price changes. If investigations into any activity conclude NSTAR is providing inadequate response times, generating excessive blackout periods, conducting work sites in a dangerous manner, attempting to unfairly raise prices, etc. then the DTE has the authority to levy fines or bring legal action.

Since the utility industry operates very close to a monopoly, it is watched very closely not only by the government, but by 3rd party watchdog groups as well. These groups work in conjunction with government regulating bodies to ensure environment preservation is upheld, consumer awareness is achieved, and price gouging does not take place. Partly in response to these watchdogs and partly due to proper corporate governance, NSTAR attempts to educate its customers in both energy efficiency and electric safety and offers various programs such as Energy Efficiency World, ENERGYsmart Library and ENERGYsmart University as well as offering rebates.

Market Structure

As a result of deregulation in Massachusetts, NSTAR is now only responsible for the transmission and distribution of electricity. While prices for the generation of electricity are competitive, NSTAR operates in the part of the market that is still regulated and must seek approval from the Massachusetts Department of Telecommunications and Energy (DTE)1. Currently, the company transmits and delivers electricity supplied by the consumer’s choice of suppliers or, if none is chosen, by whomever is selling electricity at the lowest wholesale cost to over 100 Eastern Massachusetts communities2.

The intent of deregulation was to create a robust market in which multiple suppliers and distributors would compete to serve customers. Barriers to entry and regulations, however, make the delivery aspect of utility service lucrative for a handful of companies. The market continues to see smaller companies purchased by larger ones, with few new companies attempting to enter. Since pricing among companies is nearly uniform, differentiation is achieved through rebates, programs, and services. For its part, NSTAR has focused on exploring new technologies and creating energy efficiency programs designed to reduce overall use and lower electric bills. As customers demand more in the way of services, larger companies such as NSTAR are poised to lead the way and continue to gain market share3.

NSTAR’s major competitors within the Massachusetts electricity market include Massachusetts Electric, UNITIL, and Western Massachusetts Electric Company (WMECO). Massachusetts Electric, a subsidiary of National Grid, currently serves 1.2 million customers in 168 Massachusetts communities4. National Grid is an international energy delivery business with principal activities in the regulated electricity and natural gas industries. In the United States, National Grid transmits and distributes electricity and natural gas to nearly 4 million customers across 29,000 square miles of Massachusetts, New Hampshire, New York, and Rhode Island5. Unitil is a registered public utility holding company headquartered in Hampton, New Hampshire. Organized in September 1984, Unitil and its six subsidiaries вЂ" Unitil Energy Systems, Inc., Unitil, Unitil Power Corp., Unitil Realty Corp., Unitil Resources, Inc., and Unitil Service Corp. вЂ" provide electric service in New Hampshire, electric and gas service in Massachusetts, and energy services throughout the region6. Western Massachusetts Electric Company (WMECO), a subsidiary of Northeast Utilities, has provided innovative energy solutions to its customers for over a century. Headquartered in Springfield, Massachusetts, WMECO serves over 200,000 customers in 59 communities throughout western Massachusetts7.

Eleven investor-owned companies currently distribute electricity in the region вЂ" all of whom are regulated by the DTE. Any new company intending to enter the market is subject to government approval and oversight. To further complicate the situation, NSTAR and its major competitors already servicing the region have infrastructure in place. Therefore, while options legally exist for competition, it is very difficult for new companies to successfully enter the market. In fact, if current trends hold, consolidation within the industry will continue, shrinking the number of firms operating in the market8.

As proof of consolidation within the industry, National Grid recently announced a $7.3 billion deal to buy KeySpan, the largest distributor of natural gas in the Northeast and the fifth-largest in the United States вЂ" making the company the country’s third largest energy distributor9. With this acquisition, National Grid’s new service area completely surrounds NSTAR’s вЂ" making NSTAR a potential target for future merger and acquisition activity10.

The utilities’ pricing matrices have many variables that affect final costs, both external and internal. External factors that impact pricing include the cost of gas, transportation services, taxes, and environmental awareness/action