Maine wants to take over its investor owned utilities: a bad idea

The following is testimony offered in opposition to Maine Bill LD 1646 “An Act To Restore Local Ownership and Control of Maine’s Power Delivery Systems.” This bill creates the Maine Power Delivery Authority by acquiring and operating all transmission and distribution systems in the State currently operated by the investor-owned transmission and distribution utilities known as Central Maine Power Company and Emera Maine.

Senator Lawrence, Representative Berry, members of the Joint Committee, my name is Gerry Runte. I am a constituent of Senator Lawrence and live in York.  Thank you for the opportunity to testify today in opposition to LD 1646.

LD 1646 is an attempt to cure several ailments currently afflicting Maine’s investor owned utilities (IOUs): high consumer rates; extraordinarily poor reliability; and operational strategies that are a barrier to the adoption of 21^st century electric utility business models as well as to aggressive actions on mitigating greenhouse gas emissions.  They are all very real. The cure proposed by LD 1646, however, is very likely to be much worse than the illness.  Indeed, there are far more efficacious measures that can be taken.

LD 1646 is being rationalized using statistics that show one in seven customers of electric rate payers are served by consumer owned utilities (COUs); their average reliability is higher than investor owned utilities and their rates are, on average lower.  However intriguing, these statistics are very misleading and irrelevant to the situation at hand.

Portraying these metrics to claim that becoming a consumer owned utility results in lower cost and higher reliability is grossly misleading.  These statistics average values for over 2,000 utilities, masking the fact that many have metrics that are far worse than Maine’s IOUs. The average customer base of these utilities is about 24,000, far smaller and much less complex than the utility LD 1646 would create.  While their average cost of electricity is lower than the IOU average, many have significantly higher rates than CMP, including all of those with 1 million or more customers – the group most comparable to the entity LD 1646 wants to create.

The statistics are irrelevant because 98 % of these utilities began life as consumer owned utilities.  Their system design, infrastructure, costs and regulatory structure have evolved together as an integrated whole.  Taking over an investor owned utility’s territory – one designed, developed and operated under an entirely different structure – and converting it to a COU is extraordinarily rare and in all but one case, involved municipalities withdrawing from the territory of the incumbent investor owned.   “Municipalization” is rare for a reason: the costs can way overwhelm whatever benefits were assumed. Ask the District of Columbia or San Francisco about why they decided not to proceed. 

There is, however, one case that is relevant to LD 1646, where a state did take over a long-established IOU and converted it to a COU.  It is a case that merits a very careful look by the supporters of LD 1646 because it is the only point of comparison to what this bill intends to accomplish.  In 1998 the State of New York took over the Long Island Lighting Company (LILCO), an investor owned electric utility.  They spun off out the generation assets and sold a portion of the distribution and all its natural gas assets to Brooklyn Union Gas (forming Keyspan Energy). The remaining portion of the distribution company formed the Long Island Lighting Authority (LIPA).  LIPA serves 1.1 million customers, several hundred thousand more than CMP and Emera combined. Fifteen years after formation LIPA was one of the most expensive and most unreliable utilities in the US. After LIPA was decimated by Hurricane Sandy, the State of New York hired Public Service Electric and Gas (PSEG), a New Jersey investor owned utility, to take LIPA over and run it under contract.  Reliability has improved, but LIPA’s rates are still much higher than CMP or Emera.  PSEG is one of the top 5 most reliable utilities in the country.

Nonetheless, the issues with CMP and Emera remain, but there is a remedy that would be far more efficacious than creating a power authority.  CMP and Emera operate according to business plans that are specifically designed to maximize shareholder earnings under the rules established by the Public Utility Commission based on the concept of cost of service regulation. Cost of service regulation – the form of regulation that rewards capital investment with guaranteed returns – is nearly 100 years old and is the functional equivalent of rotary dial telephones in a digital age.  Cost of service regulation was designed to promote the rapid expansion of electric utility infrastructure under the monopoly utility model and get electricity to customers at the lowest cost.  It worked well, but it is now an anachronism, yet that is what drives the business plans and operational philosophy of these two IOUs.

Other jurisdictions have recognized this problem and have made major strides in promulgating 21^st century regulatory frameworks that not only remold the IOUs approach to the business.  In some cases, IOUs have even become advocates of these measures, rather than constant obstacles to progress.  Innovative rate reform can take many forms, but its root is in the recognition of several key elements:

• The grid is increasingly operated as a two-way network that will be integrating across sectors (e.g., electric vehicles)
• Real time monitoring and data collection is available and useful to gauge performance
• Heavy utilization of distributed generation as both a source and as a T&D asset
• Demand side management is vital
• Greenhouse gas emissions performance key metric
• All costs are temporal and locational

The key to resolving Maine’s problems with its IOUs is to institute innovative rate reform and 21^st century performance-based ratemaking (PBR).  This is not “PBR” as previously attempted in Maine. Those earlier attempts used metrics that failed to consider the locational aspects of cost and reliability, instead establishing standards that averaged entire service territories. It is not surprising they were ineffective because their data was so diluted. Instead of rewarding reliability in Portland and penalizing poor reliability in Farmington, something easily done with smart meters, old PBR averaged reliability across all areas resulting in a meaningless number.

Instead of embarking on a long and very costly attempt to take over the IOUs, one with questionable cost and benefits, the state would be far better served by immediately initiating a major effort to define a new electric utility regulatory policy and take steps to craft its own form of PBR.  The legislature has already begun to look at various elements of such a policy, such as beneficial electrification or non-wires alternatives, but they are scattered and disconnected.  A comprehensive policy that recognizes all these activities provides the proper coordination and context to get optimum results.

There is no one right way to do this but there is a large collection of examples across the country where innovative rate reform has been implemented and for which results are available.  One need only look at the initiatives taken in California, New York, Minnesota, Illinois, Iowa and Hawaii, among others.

I strongly oppose LD 1646 and urge the Joint Committee to reject this concept, instead seek to resolve our IOU problems by developing and implementing an innovative comprehensive 21^st century rate regulatory policy and structure.