STATE OF VERMONT
PUBLIC SERVICE BOARD
Docket No. 6140
Investigation into the Reform of Vermont’s )
Electric Power Supply
)
POSITION PAPER OF WASHINGTON ELECTRIC COOPERATIVE, INC
In it’s order opening Docket 6140, the Public Service Board has asked utilities and other
respondents to address whether strategies for reducing above market energy costs can be
implemented with or without moving to retail competition. We believe that the fact that the
Board has posed this question in this way in and of itself significantly increases the likelihood of
actually lowering above market costs. At the recent Board-sponsored forum on August 27, 1998,
a number of invited speakers gave examples from other states where above market costs had
been lowered significantly. We note that many of these actions did not require that the state open
the electricity business to retail combination, although the political atmosphere created by the
deregulation debate may certainly have contributed indirectly. It was the sense of WEC
representatives who attended the forum in Montpelier that there was significant agreement
(perhaps even consensus), that some cost-reduction efforts could move ahead without
implementing retail competition. No doubt, the debate over retail competition will continue, but
we do not need to wait for retail competition in order to make progress on existing above market
power supply.
It has been WEC’s position from the beginning of the debate about utility deregulation, that the
issue of reducing above market costs is to a great extent a separate issue from retail competition.
In reducing above market costs, we are attempting to correct decisions that were made in the
past. Retail competition is a way to restructure the industry looking into the future. Many will
argue that it is a way for ratepayers to avoid paying for power supply mistakes such as we are
presently dealing with. But moving to retail competition is a long-term decision that will have
numerous impacts for many generations to come. It should not be done merely to get out from
under the burden of the specific above-market power supply contracts affecting Vermont utilities.
We have seen examples from other states where a combination of strategies including strict
contract enforcement, renegotiations, buyouts and regulatory pressure resulted in significant
lowering of costs.
Docket No. 6140, WEC position paper, page 1
Reducing Above Market Costs Requires Joint Action
The most significant above market power supply contracts affecting WEC also affect numerous
other Vermont utilities. These sources are Vermont Yankee, Hydro Quebec and the Independent
Power Producers. The power WEC receives from the McNeil plant is also above market.
Although each of these are very different, it is obvious that lowering costs must involve all
participating utilities, as well as the suppliers, perhaps other parties, regulators, and perhaps
additional roles for state government. Especially for smaller utilities such as WEC, it is unlikely
that these power suppliers would consider renegotiating separately.
(The one above market power source that WEC has which is ours alone is the Wrightsville hydro
facility. WEC has taken actions to decrease costs through refinancing and through operating
efficiencies, to increase output, and to maximize the value of that output.)
Regarding Hydro Quebec
WEC is an active participant in directing the participant’s legal and other strategies concerning
Hydro Quebec at this point. We note that we have learned some lessons about the structuring of
any future large-scale power supply contracts that we might consider jointly with others. Firstly,
we wish to remind the Board and others that WEC voted “no” on the crucial lock-in vote in
August 1991. We were aware that the contract was becoming uneconomic, and through this “no”
vote and other means attempted to extricate ourselves from the participants’ agreement during
that summer. Had we succeeded, or had the majority of participating utilities also voted “no,”
WEC would not have any above market costs associated with Hydro Quebec.
We also note that the “step up” provision in the contract did not, at that time, contemplate the
possibility that one or both of the state’s largest utilities might be the ones defaulting on their
obligation. If, as a result of regulatory action, this scenario does unfold, the remaining smaller
utilities, mostly consumer-owned, cannot possibly step up without themselves facing bankruptcy.
Such a scenario raises serious questions about the enforceability of the Hydro Quebec contract at
that point.
Vermont Yankee
WEC’s obligation to take power from Vermont Yankee ends in 2002. Our current forecasts show
a reduction in total power costs beginning at that time, enough to levelize revenue requirements
even with all other existing long term power supply contracts remaining in effect. WEC is aware
of proposals to close the plant earlier than its decommissioning date, as well as suggestions to
extend its operating life. With the end of WEC’s obligations on the near horizon, we have not
done analysis about the impact for our members of closing the plant early. With the questions of
decommissioning costs and other liabilities such as waste disposal remaining unanswered in our
opinion, we remain concerned about what additional costs will be passed on to ratepayers and/or
the public in the future.
Docket No. 6140, WEC position paper, page 2
Independent Power Producers
These contracts were negotiated and agreed to at a time when energy costs were projected to
continue rising dramatically. As with other above market sources, the historical justification is
not an excuse for inaction, but we must nevertheless note that there are values derived from this
particular energy source that Vermont should not lose. The independent power producers’
facilities create renewable energy, they create local employment and other economic multipliers.
WEC believes strongly that maintaining and increasing a mix of well-priced Vermont-based
power is a key part of a strategy for reforming our power supply. We believe that small scale
diverse ownership, local ownership, and keeping earnings working in the Vermont economy are
values that Vermont as a state should continue to support, and one which Vermont ratepayers and
citizens also will support. These contracts need to be renegotiated because they are too expensive
compared to the market. But Vermont must carefully consider what it stands to lose as well. The
prospect of contract buyouts by speculating power marketers with no long-term commitment to
Vermont is not an attractive one to us. The benefits of these existing facilities should be kept in
Vermont to the greatest extent possible. Furthermore, WEC believes it is wise public policy to
not only promote renewable energy sources, but to encourage it to be locally produced and
locally owned to the greatest extent possible.
Long-Term vs. Short Term Power Supply
The traditional long-range power procurement philosophy of the utility industry needed
changing. However, WEC is concerned that in the rush to lower existing power costs, we not end
up with a system that simply replaces above market costs with short-term supply at market
prices. To do so, we believe, creates significant risk. Future ratepayers must not be left
completely to the mercy of the short-term market, because we have no doubt that the market will
continue to change. Future generations should not look back on us now and curse us for our
“imprudence.” How we hedge against market volatility in the future may be different than how it
was done in the past. (Financial instruments may serve as a hedge as opposed to traditional longterm contracts, for example.) However, there is a clear public responsibility not just to knock
down existing above market costs, but to protect future ratepayers from the excesses of the
market. Power generation that does not have an assured market is more expensive to finance. In a
more mature market, the cost of that risk will again be born by the ratepayer. Industrial and
commercial ratepayers who now clamor for the absolute lowest price once placed a significantly
higher value on reliability of supply and predictability of price than they do now. WEC is not
arguing for the “good old days.” Whether we continue with the current regulatory system or
move to some form of competition, the public, through its regulators, has a significant
responsibility in assuring that ratepayers have the benefit of a power supply procurement system
that plans further than the next quarterly profit and loss statement.
Docket No. 6140, WEC position paper, page 3
Market Control
WEC is concerned with the continuing trend towards consolidation and merger and the
increasing accumulation of market power by a limited number of companies. While large
utilities, power marketers or other entities may have the resources to propose contract buyouts
that will provide immediate benefit to Vermont, the long term effects of increased market control
in Vermont must be considered as well.
Taking Advantage of the Changing Market
As a small utility, WEC has already made certain changes to allow more responsive and costeffective dispatch of power, and we expect to further benefit from coming changes in NEPOOL
rules. We have in the past pointed out that all retail customers need to be able to respond to
market signals in order to take full advantage of the changing power markets and market
conditions. In particular residential and small business customers must have access to metering
and other technology that will allow them to take full advantage of time-of-use advantages and
other market signals that large customers can now already respond to. Regulators have a
responsibility to assure that the benefits of lower power costs are fairly distributed. Development
and support of creative rate designs by regulators can be done now. Development of financing
and other incentives to bring automated metering and other responsive technologies to low
volume users is something that regulators should explore, and which may require legislative
action.
Different Circumstances of Different Utilities
The type of ownership does matter. For a cooperative, there are no investor/shareholders to
shoulder any portion of above market costs. The customers own the utility, and its ratepayers,
past and present, share in its equity. For those above market costs such as Hydro Quebec that are
shared by a number of different utilities, strategies for reducing cost must benefit ratepayers of all
utilities fairly.
WEC has in the course of the restructuring debate raised the issue of density as a factor. The
reason this is significant is because the percent of customers’ bills that is attributable to
distribution costs varies significantly around the state. When some utilities generate six or sixteen
times as much revenue per mile as others due to a combination of density and residential vs.
commercial/industrial load factors, it also means that the portion of customer’s bills attributable
to power costs is smaller. WEC is simply cautioning that regulators and public officials should
not over-simplify promises made to the public about how much their bills will be reduced as a
result of any particular strategy.
Docket No. 6140, WEC position paper, page 4
The Role of State Government
A number of comments and concerns expressed in this paper argue for an active role by state
government in lowering above market costs. While regulatory action in rate cases or other
proceedings may exert pressure or create conditions which might lead to renegotiated contracts,
the outcomes of such strategies are unpredictable and create their own risks as well. While it may
be appropriate to exert such pressure at times, WEC believes the State of Vermont can contribute
in other ways.
As stated, we are very concerned about what power supply looks like after present above-market
costs have been reduced. We are concerned about market power consolidation, and about
maintaining and increasing the supply of in state, locally owned renewable sources. We are
concerned about market volatility, and the need to protect consumers against the risks of the
market. The State of Vermont can bring value to transactions through its low cost of capital, as
well as by maintaining a longer-range perspective than investors typically do these days. WEC
therefore encourages a more active role by the State of Vermont in securing generation assets,
energy contracts and possible buy-down of above market contracts for the benefit of Vermont
utilities, their consumers and members. Such a state role could be of benefit in the existing
regulatory structure, as well as in a retail competition environment. This suggestion would of
course require Legislative action.
Summary
WEC is actively involved in attempts to lower certain above market costs through legal or
renegotiation strategies, in conjunction with other utilities and independently. Our comments
here are broad and somewhat general, either because it would not be appropriate to discuss
certain existing strategies in this forum, or because as a small utility, we do not have the
resources to propose fully developed strategies for the entire state. We look forward to reviewing
others’ suggestions and to participating constructively in this docket.
Docket No. 6140, WEC position paper, page 5