State utilities make millions of dollars each year from investments to upgrade the state’s transmission system, known as Vermont Transco.
The state’s two largest electric power companies, Central Vermont Public Service and Green Mountain Power, have made the most significant investments in Transco and also have the most to gain financially from the high rate of return, 11.5 percent on average, that regulators allow on transmission infrastructure.
Central Vermont Public Service Corp. made investments in Transco from 2006 to 2011 that returned more than $15 million annually. Green Mountain Power earns about $13 million in returns on investment annually from its share of Transco investments. Representatives from both utilities and an entity known as VELCO, which manages the transmission infrastructure limited liability subsidiary Vermont Transco, say most of this money goes toward reducing electric rates for businesses, institutions and consumers.
The high rate of return on investment for transmission lines has been the subject of recent scrutiny because a pending merger between the state’s two largest utilities would give Green Mountain Power and Central Vermont Public Service Corp. majority ownership of the transmission system and majority control over VELCO, the company that manages the system.
Some lawmakers say the state should buy up to 51 percent of Transco because ownership of the state’s transmission assets would be a profitable public investment. Partial ownership, they say, would also allow the state to have more of a say in future transmission upgrades.
Sens. Vince Illuzzi, Peter Galbraith and Tim Ashe introduced legislation earlier this year that would direct the state to hire an expert to study partial state ownership in the system. The proposal stalled in the Senate Committee on Appropriations, but finally made it on to the Senate calendar this week.
Lawmakers had planned to attach that directive as an amendment to the capital bill, Illuzzi said. He speculates that legislative leadership didn’t want it attached to a “must-pass” bill, so it ended up on the calendar on its own.
The utilities own the transmission system in relation to their share of the retail electric load. Green Mountain Power and CVPS own between 70 and 80 percent of Transco.
If the Vermont Public Service Board approved the merger without safeguards, Green Mountain Power, a subsidiary of Montreal-based Gaz Metro, would have control of all transmission decisions in the state. Under a memorandum of understanding with the state, however, the utilities have agreed to cede some seats on the VELCO board, and would retain four of the 13 managerial seats.
Most utilities oppose the idea of public ownership. Their investment in transmission upgrades that are designed to increase the reliability of the system also net some serious paybacks.
Since 2006, Green Mountain Power has invested more than $100 million in the transmission system, according to VELCO. Those investments return about 11.5 percent a year, or almost $13 million annually. Once shareholders and other investors are paid back (shareholders get somewhere around an 8 percent return), more than $4 million a year goes to reducing rates, according to VELCO.
How this money funnels down to ratepayers is, as with most utility financing, complex. The relationship between the utilities that sell power to the public and the transmission utility is also complicated.
The state’s two investor-owned utilities use a 50-50 debt-equity split. Once they pay off the loan for the investment, the “arbitrage” goes into the rate base, according to Thaddeus Omand, director of risk management and energy for VELCO. Investor-owned utilities pay back shareholders for their equity investment. The rest of the return goes to reducing rates, Omand said.
Vermont is the only state in the country that requires the return after investors are paid back to go to the rate base.
“Green Mountain Power is going to have the opportunity to earn what the Vermont regulatory rate is,” Omand said. “Above and beyond that it has to go to the bottom line for ratepayers. No other state in nation has that mechanism.”
Vermont is part of a regional transmission system. The state pays for 4 percent of transmission upgrades in New England. Other states pay the rest. The Federal Energy Regulatory Commission allows utilities to make an 11.5 percent to 12.5 percent return on these investments.
Utilities put up money for projects like transmission line upgrades or substations. Publicly owned utilities like cooperatives or municipal utilities borrow money to fund their portion and the return goes to the rate base.
For the past five years, utilities have invested hundreds of millions of dollars in the transmission system. These investments yield around $45 million in returns each year. Minus the expense of funding the investment by paying back lenders, the annual return for the state’s ratepayers, according to VELCO numbers, is around $15 million.
Randy Pratt, manager of government relations for Vermont Electric Cooperative, said if the state took partial control of the transmission system it would take away good investments made by utilities.
“If I bought Microsoft stock 20 years ago, would I want to sell it back to the state at the price I paid for it?” he said.
The other issue for the publicly owned utility, Pratt said, is that state ownership could create a level of administration that would have to be funded in part through the returns that now go to ratepayers.
“Right now 100 percent of the dividend goes back to ratepayers,” Pratt said. “If it had to go to taxpayers in general, there wouldn’t be that direct tie between the people who invest and the return.”
Vermont Electric Cooperative gets a return of about $1.3 million annually, and around $560,000 goes to ratepayers.
The boom in transmission upgrades stemmed in part from a blackout in 2003 when Congress passed a law leading to federal reliability standards.
The buildout will not last forever, says Kerrick Johnson, vice president of external affairs for VELCO.
“It won’t be as beneficial going forward as Vermont ratepayers have been able to enjoy over the years,” Johnson said. “That net benefit will taper off.”
The state’s investor-owned utilities, GMP and CVPS, say state intervention could be disruptive.
Dorothy Schnure, a spokeswoman for Green Mountain Power, said the state shouldn’t try to fix something that’s not broken.
“Part of it is, it’s been working very well,” Schnure said. “The way it’s set up, the owners are able to invest capital as needed. It’s a stable way to do it. Why mess with success?”
But for proponents of public ownership, it makes sense for the state to move now when the makeup of VELCO is in flux.
Illuzzi said investment in VELCO is less risky than utility executives want the public to think. The real issue, he said, is putting the state in the position to determine where it wants to go with its energy future instead of letting Canadian Gaz Metro decide for it.
“Having an ownership interest in VELCO will help us to determine the future plans of the company,” Illuzzi said. “Like do we build high-voltage transmission lines through Vermont? How big are they and where do they go?”
Avram Patt, general manager of publicly owned Washington Electric Cooperative, said WEC asked in its testimony before the Public Service Board that the board consider looking into public ownership.
Patt said WEC does not have the resources to look into all the variables, like whether the rates of return on investment would continue.
“Our answer in the end is ‘We don’t know, but it’s important enough to take a look at,’” he said.
A memorandum of understanding between the Department of Public Service and Green Mountain Power ensures a higher level of public involvement than the utilities initially proposed. This diminished some concerns.
Where’s the money
Aside from the policy implications of public involvement, the state treasurer and a financial analyst say investing in VELCO could be a bad deal for the state.
Written testimony from a state-hired financial adviser lists the risks to the state should it go into the electric transmission business.
Testimony by Thomas Heustis, a partner at the New York City firm Public Resources Advisory Group, says, for one, trying to purchase half of the system would double the state’s tax-supported debt. The state would have to raise around $500 million to purchase half the transmission assets.
“Although the debt is anticipated to be initially ‘covered’ by the dividend payment from VELCO, the sheer size of the additional bonding amount and the fact that the State would be participating in a large financial venture that is has little direct experience with (and the associated risks that I discuss later in this testimony) would create stress on its existing excellent ratings,” the testimony states.
Huestis says the state could lose its Triple-A credit rating if it did so.
In addition, since the dividends that make VELCO so financially viable are set by the Federal Energy Regulatory Commission and subject to change, shifts in the regulatory environment could mean the state would not make enough on the dividend in the future to cover its costs of paying for the debt service it needs.
Despite the push by utilities and others to avoid the state ownership study idea, at least one utility investor says the idea is actually quite reasonable.
Don Campbell, a former utility investment banker, says there is private investor money available to help fund a state share of ownership in VELCO while leaving the state with the responsibility of making policy decisions.
Campbell said the current merger creates a golden opportunity for a public-private partnership with some state ownership.
“Embedded in the merger are transmission assets that would be of keen interests to a range of private equity fund and direct-investment pension infrastructure investors, who would support attractive asset valuations and a public-private partnership ownership structure clearly aligned with State governance, control and strategic objectives,” he said.
Some sort of public-private venture would allow for some type of unwinding if things didn’t work out, he said, which would be much easier that trying to revoke a certificate of public good held by a foreign corporation.
The important part of state ownership, Campbell said, would be to direct the state toward a Vermont-appropriate energy policy.
“As the Vermont energy policy moves away from centralized energy resources like that of Vermont Yankee, to alternative supply resources and a more distributive generation model consistent with its renewable energy strategy, being able to direct an appropriate transmission strategy will be essential to a timely and cost-effective transition,” he said.
