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Joseph W. McDonnell is a professor of public policy and management at the Edmund S. Muskie School of Public Service at the University of Southern Maine. He previously served as a senior vice president of the Long Island Lighting Company.
The Maine Legislature’s Energy, Utility and Technology Committee voted to bring to the full Legislature a proposed state law to acquire Maine’s two electric utilities with a newly created Pine Tree Power utility. The proposal responds to consumer frustration over rates, reliability and service — and the hope that a consumer-run utility would accelerate adoption of renewable energy.
The proposal received a cool reception from Gov. Janet Mills. Once Mainers dig down into the details, the proposal will likely get a cool reception from the public, as well. Maine would be wise to study the takeover of the electric system by the Long Island Power Authority (LIPA) in New York before moving forward with this venture.
I served as a senior executive of the utility that sold the electric system to LIPA. Like Central Maine Power (CMP), my company had high rates and an overhead system in a region vulnerable to storms, which led to customer dissatisfaction.
We also had licensed an unpopular nuclear plant that became a political football. LIPA was originally created to stop the nuclear plant from going online. When the Nuclear Regulatory Commission issued the plant a license to operate, New York’s governor decided to use LIPA to buy the plant to shut it down. In return, the utility received a rate plan to cover its costs.
But even with the rate plan to recover the stranded costs of the abandoned plant, the company had to rely on the good faith of the Public Utility Commission to raise rates to recover those costs over a 30 year period — which motivated the company to seek alternative solutions.
The company’s critics threatened to take over the utility, just like the CMP critics. But much to their surprise we called their bluff — and agreed to be acquired. LIPA assumed the debt of the company and used tax-exempt bonds to lower rates. It hired a utility to run the electric system, just like the Maine proposal.
The difference between the LIPA takeover and the proposed Pine Tree takeover is that the New York utility agreed to the acquisition. The Pine Tree proposal will likely require a takeover by eminent domain, which would probably result in a lengthy legal dispute with the courts ultimately deciding the acquisition price.
The proponents are counting on a low acquisition price, but the utilities will argue that the price ought to be the replacement value of the facilities — the cost of building the system today. Consumers will likely see higher rates for any price above the original cost less depreciation. A takeover without mutual agreement would be prohibitively risky.
The critics who took over the utility system in New York may have thought the switch to a consumer utility would resolve customer dissatisfaction, but ironically new critics arose and the old critics sounded just like the utility managers they replaced.
Following Hurricane Sandy, New York’s governor sought to return LIPA to an investor-owned utility, but the transition costs proved too expensive. The Moreland Commission that studied the response to Hurricane Sandy called the LIPA organization dysfunctional. LIPA ended its contractual relationship with the first management organization that ran the utility. LIPA is now considering replacing the second management organization in light of outages from Hurricane Isaias.
Good feelings from lower rates were short-lived, if they were even noticed. The curious thing about electric bills is that usage, more than rates, determine the size of the bill. As the weather becomes colder in the winter or hotter in the summer, and as customers add more electric devices, these more than rates determine the size of the bill.
If tomorrow the Pine State utility took over the electric system, it would have the same challenges as the current utilities. Would it be willing to raise rates to improve reliability, service or to promote renewable energy?
The tradeoff between rates, reliability and renewables is the challenge for today’s utilities. A takeover attempt saddles Maine with a risky undertaking just when it has to address these important tradeoffs.