Commentary: Public Power: Another Costly Big Government Headache? (May, 2016)

by John McClaughryJohn McClaughry

Three times in modern history Vermonters have witnessed a political battle over public power. In the 1960s young liberal Democratic governor Philip Hoff tried to break the political influence of the (largely Republican) investor owned utilities, CVPS and GMP. The Republican legislature rejected his proposal for a state power authority to import power from the St. Lawrence Seaway and Canadian sources.

One immediate result of Hoff’s failed campaign was the creation by CVPS and GMP of the 600 MW Vermont Yankee Nuclear Station in Vernon. Their thinking was that Yankee would give Vermont “energy independence” and defeat liberal demands for imported public power. It went online in 1972.

The issue arose again in 2003, when USGen slipped into bankruptcy. The company owned six dams on the Connecticut River, two small dams on the Deerfield River in Vermont, plus other dams and three fossil fuel plants in southern New England.

In 2004 the legislature created a Vermont Hydroelectric Power Authority to bid in the bankruptcy court for the USGen “package”, with the expectation that the Authority could offload the non-Vermont assets to partners. After careful study of the issue, the VHPA submitted a bid of $303 million, but lost out to a $505 million bid of a company called TransCanada. It took over the USGen assets in 2005and the VHPA expired in 2007.

Now we’re into yet another debate on the subject. In March TransCanada put the same assets up for sale. Again the “public power” cry was heard in the Statehouse, now under full Democratic control. In April Gov. Shumlin and his legislative leaders appointed a working group to chart a path toward that goal. Last Wednesday it called, not surprisingly, for a resurrection of the VHPA.

David Brown, a retired information technology executive in St. Johnsbury, has analyzed the prospects of a new state power authority purchasing just the eight dams, with a total rated capacity of 541 MW.

Brown notes that the eight dams have only enough water flow to provide short-term “peaking power”, not steady long-term baseload power. When the New England grid operator (ISO-NE) foresees a shortage a day ahead, it calls on all of the region’s peaking power units to offer amounts and prices. If the dam system wins the bidding, its selected dams open the flow through their turbines, bearing in mind that they have to close them down when their water levels get too low.

The Vermont Yankee nuclear plant, now gone forever, had a capacity factor of over 90%; that is, over an 18-month fuel cycle the plant produced full power steadily over 90% of the time. The capacity factor of the eight Connecticut and Deerfield River dams is around 26%, which is even lower than that of well-sited wind turbines.

Far from supplying steady, reliable power to Vermont homes, farms and businesses, Brown says, the dams will be competing to sell their power – hour by hour –into the New England grid – not specifically into Vermont.

What assurance would there be that the revenue earned from winning those auctions would be sufficient to operate and maintain the dams, pay property taxes to 25 Vermont towns, and make the payments to bondholders who financed the system’s purchase – let alone produce profit to pay for other state government spending? Or be used to subsidize politically-favored businesses in the name of economic development?

Would the Authority’s bonded debt finance a public purpose, and thus be Federal tax exempt, or would the bond interest be taxable?

Would the bonds be full faith and credit obligations of the state, and thus putting the state’s coveted bond rating in jeopardy? Or would they be riskier “moral obligation” bonds, which bear higher rates of interest?

Would state control over 541 MW of peaking power give Vermont a stronger bargaining position with HydroQuebec, whose giant dams will provide one sixth of Vermont’s electric load – all baseload – in 2017 (reduced from 31% by pressure from the Shumlin administration to make room for more electricity from heavily subsidized in-state wind and solar)?

Would the 25 Vermont towns which now haggle with TransCanada over property tax payments have better luck haggling with the new owner, the chronically strapped state of Vermont, over Payments In Lieu Of Taxes?

Would a resurrected Vermont Hydroelectric Power Authority be likely to quickly get up to speed as a small player in the complex New England power market?  The Shumlin Administration’s never ending $200+ million struggle with Vermont Health Connect is certainly not reassuring.

Large publicly-owned baseload hydropower, such as the New York Power Authority at Niagara Falls, can work efficiently. But the skeptics view a state-owned peaking-power-only generating authority based on the Connecticut River dams as an ideologically-driven lurch into more incompetent Big Government, whose quite possible inability to earn enough to pay its bondholders could require an infusion of tax dollars to salvage the state’s bond rating.  They may be very hard to convince otherwise.

- John McClaughry is vice president of the Ethan Allen Institute (www.ethanallen.org).

 

{ 1 comment… read it below or add one }

Ralph Meima May 18, 2016 at 2:20 pm

Dear Sir,

This is an impressive article: factual and with incisive logic. I am not entirely comfortable with some of its key premises because I work in the solar industry and believe that feed-in tariffs and net metering with a credit “adder” were and still are necessary supports for an infant industry that needed to get up to a scale where costs could be pushed down to more competitive levels and capital could be efficiently mobilized (yes, industrial policy with subsidies) – a major motive being society’s persistent inability to fully price in the environmental externalities of fossil and nuclear energy.

Having said that, I agree with much of this article. The IOUs (largely singular now) do wield considerable political power, more investor-centric than public-benevolent. No question. It’s also unfortunately true that publicly owned enterprises that generate significant revenue can fall victim to crony favoritism and insider cross-subsidies; this is a test of the transparency and integrity of a state’s political culture, and the author is rightfully skeptical of Vermont’s ability to pass this test, especially in the wake of the EB5 scandal.

Here’s what I would like to know more about:

1. Was it really a historical liberal position to want to import clean power, vs. a Republican position to seek in-state base-load sources? Perhaps I have misunderstood this. But, today, more in-state distributed renewable generation appears to be a steady goal of liberals.
2. Is it true that “the dams” collectively cannot be relied on for base-load power? This was a basic premise of the proponents who wanted Vermont to buy the dams in 2003-2004.
3. If they are good for nothing more than spot-market-driven peaking power sales, with the associated market risk, then the public weal should stay well away from investing in them.
4. It does seem reasonable for some entity to have enough bargaining power to offset the market weight of Hydro Québec and GMP, at whose mercy Vermont’s ratepayers are. Vermont does enjoy the second-lowest retail electric rates in New England, but that’s not saying much because New England’s rates are by far the highest in the US. And no one can claim with a straight face that the PSB is fully up to this task.
5. Why does the New York Power Authority work well? What are they doing right, in a big, complex state with plenty of its own market failures and insider manipulation?
6. Is climate instability, with periodic droughts that draw down reservoir levels, likely to add even more risk to the operation of the dams?
7. Would the author consider a regional TVA-like “New England Hydropower Authority” instead? The risk would be spread across multiple states, and hence more diverse with a deeper fiscal base. Or maybe that’s insane.

Thanks for a stimulating analysis!

Ralph Meima, Brattleboro

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