Evaluation of Costs and Benefits of Combining CMP and Emera into the Maine Power Delivery Authority – a Summary

Last spring a bill (LD 1646) was presented in the Maine Legislature that sought to acquire the assets of Central Maine Power and Emera (Maine’s investor owned utilities – IOUs) in order to create the Maine Power Delivery Authority (MPDA), a quasi-governmental “consumer owned” transmission and distribution utility. (See blog article of May 14, 2019, “Maine wants to create a Power Authority: a bad idea”). The bill was held pending completion of an assessment of the costs and benefits of such an action, to be performed by a third party.  That assessment was released on February 14 and is summarized here. The most favorable reading of this analysis would conclude that the concept requires further analysis and that significant structural revision of the bill is necessary if it is to achieve any of its goals.  A less favorable conclusion is that converting Maine’s IOUs into a single government agency has very little likelihood of reducing costs or improving reliability.

The analysis, completed by London Economics International, created a “Status Quo Scenario” that assumes the current structure is maintained and an MPDA Scenario that assumes the takeover occurs as described in the bill: both scenarios use the same assumptions for load growth.  Rate payer impacts were then evaluated and compared under each scenario. In addition, the report considered the likely barriers to the MPDA Scenario; legal issues; and likely timing among other factors.

Impact on ratepayer costs

Under the MPDA Scenario, Maine ratepayers may face higher electric bills for at least the next 10 and perhaps as many as 22 years. After this initial period there is a possibility that rates would then see a savings over the Status Quo because the MPDA could have cheaper financing.

The maximum additional cost or savings to the ratepayer is no more than 5% over Status Quo.

Ratepayer savings vs tax revenue

The reduction in ratepayer bills will come partly from the tax exempt status of MPDA, foregoing paying local, state, and federal taxes.  The consequence, however, is that Maine taxpayers would lose this revenue, causing taxes to go up by a like amount or reduction in services.

The MPDA is to be operated by a for-profit third party contractor, most likely a subsidiary of another IOU. Part of the lower customer bills would come If their management fees are less than the current returns for the IOUs, the Status Quo tax revenues from these services would also decline.

Electric utility unions vs ratepayer bills

Lower electric bills also are achieved by lowering the cost of labor, however the bill retains all Maine based unionized employees, who will want to preserve job security and see higher compensation.

Transaction cost is the single biggest parameter

The cost of acquiring the utility assets is the single most important factor in determining what will happen to customer costs. The 10 year breakeven point for costs occurs if the utility assets are acquired at about 1.5 times net book value (NBV), about the same valuation as Emera’s current possible buyer is considering.  But if assets are valued at even 1.7 times NBV, the 22 year payback comes into play.

Establishing that valuation will not be easy and could end up in protracted litigation that exceeds 4 years. Both CMP and Emera made it clear in earlier testimony that they saw their valuation at 2 times NBV.

The study made a point of correcting several assumptions that were used to “sell” the idea. The bill as written would not:

  • Give control to ratepayers but rather to a board that does not solely represent their interests; in fact it reduces PUC control over rates
  • Reduce administrative and management costs of transmission and distribution
  • Provide financial benefits to local residents.
  • Guarantee improvements in reliability.

In fact, as to the last bullet, the study states “Based on empirical evidence from the US Energy Information Administration (“EIA”), the ownership structure of a utility (i.e., customer-owned utility such as a cooperative versus an investor-owned utility) is not a clear-cut predictor of performance.”

Conclusions

The report makes the following recommendations regarding LD 1646: reconsider or revise how it defines MPDA’s board structure; not reduce PUC control over rates; define the standards of service by the MPDA; resolve the purchase price before eminent domain is considered; reconsider the clauses relating to union labor; and revise language regarding local property taxes and sales tax. LEI also recommends several procedural changes and clarifications to the bill as well as further study of the

  • Tax issues
  • Future capital needs to improve the reliability of the transmission and distribution network
  • Develop optimized financing and capital structure of MPDA
  • Define procurement process for the contractor that is in synch with other recommendations and goals.

If this concept is to be legislated, the bill as currently proposed requires major rework and then only after several key topics are more thoroughly examined.  Trying to rush this bill through this shortened legislative session would be a disservice to the State of Maine and its ratepayers, who deserve a very level of care in the design and implementation of such a significant change in their electricity delivery system.

The full study is available here:

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.