Best Buy the Dams Now

By Dave Dunn, Hervey Scudder, and Rick Foley

Many Vermonters feel that the state should have purchased the eight hydroelectric dams on the Connecticut and Deerfield rivers two years ago, and lament the failed attempt. As members of the NorthEast Center for Social Issues Studies (NECSIS) team of utility-industry managers, financiers, lawyers, and energy consultants that initiated the widespread public support for the idea that Vermonters buy the dams back in 2003, we are often asked, “What happened to the dam deal?”
That's a fascinating century-long saga about wealthy outsiders developing our commons, and offers deeper reflections. Right now, however, you may want to know what compromised the most recent chapter in the people's attempt to own the dams – because it's not too late to buy the dams.

What happened? The simple answer: Gov. Jim Douglas “sold us down the river” by pulling resorting to the George W. Bush playbook – saying one thing for the public good and doing the opposite, to maximize big-business profits.
The more complex answer: The federal government controls interstate commerce, including converting the commons (e.g. watersheds and waterways) into commodities (e.g. electrical power); corporations, via their lobbyists, call the shots in Montpelier; and the two major parties restrict themselves to playing by the federal/corporate rules on their tilted playing field.

Want more? First, let's look at who's been running Vermont's electric industry for the past 80 years while Vermont consumers have been held hostage to some of the nation's highest electric rates. Central Vermont Public Service (CVPS) and Green Mountain Power (GMP) are the big boys. They service six out of seven of our electric customers – residential and industrial — as regulated monopolies owned by shareholders. These IOUs (investor-owned utilities) are guaranteed a 10-percent return-on-investment for their shareholders. Vermont's IOUs hire “Big Dog” lobbyists to promote their interests in Montpelier, and historically they have called the shots on state energy planning and supported Republican candidates.

Vermont's true “public power” producers – 18 small municipal utilities and cooperatives – service the rest of us. One little-known fact is that, all across America public power customers pay less for electricity than the IOUs' consumers. How come? Because compared to IOUs, the more than 2,000 public power entities tend to be leaner (less management overhead), more flexible (re-investing “profits” in their systems and energy conservation), and more responsive to consumers (whose votes provide a direct voice in policies and decisions).

While paying some of the region's highest electric high rates, Vermont holds the title as New England's largest exporter of inexpensive “green power.” The eight dams generate the equivalent of 20 percent of our state's demand for electricity, but the string of out-of-state IOU owners has shipped most of it down-country for handsome profits. In an odd twist of fate, the dams' previous IOU owner – USGen, a subsidiary of PG&E, held title and FERC license from 1997 to 2004 – defaulted on loan payments and was forced to put the dams up for sale in bankruptcy court. A strong grassroots campaign launched by NECSIS, combined with the adroit non-partisan leadership of State Rep. Steve Darrow and State Sen. Vince Illuzzi, spurred the Legislature to pursue Vermont ownership of the dams.

Enter Gov. Douglas, who said all the right words about looking objectively at both sides of the issue – the benefits of Vermont ownership and the risks. Meanwhile, he quietly made known his objections to the concept of public ownership of natural resources, especially for power generation. The governor felt that the state's energy problems should be left to the private sector – IOUs.

So how did the governor proceed? First, he orchestrated the Republican Party's attempts to kill the dam bill, but he lost that battle in 2003 when the Legislature established and funded an “Authority” (Renewable Power Supply Acquisition Authority) to research the opportunity and develop strategies to buy the dams. However, the governor managed to slip a poison pill into the process by appointing his loyal foot soldiers (including former IOU executives) to a majority of the seats on the Authority.

NECSIS followed closely the Authority's $250,000 budgeted “objective fact-finding.” We attended hearings across the state and studied the reports issued by Lexecon, the consulting firm contracted to assess the feasibility of state ownership. Lexecon consultants produced reams of complicated formulas, graphs, charts, and arcane investment-banking language to calculate the risk to the state's credit rating in taking the $500 million project. Conversely, Lexecon allowed less than two pages to a generic list of possible benefits to state ownership. In short, Lexecon followed the administration's orders to stack the deck against the purchase.

The Authority then recommended that Vermont should work in secret (executive sessions) with some IOUs to form a consortium to bid on the dams in bankruptcy court. Vermont would be limited to “junior” status with no more than 25-percent ownership. In other words, the “senior” IOUs would use the state's excellent credit rating to obtain lower interest rates on their purchase bonds and retain control of the partnership's decisions. In 2004 the Legislature passed a bill appropriating $500,000 for the venture and creating the Vermont Hydroelectric Power Authority (VHPA), to which the governor appointed no one from the Connecticut River valley, but rather his personal energy czar, three IOU executives, and a former IOU CEO.

Turns out Vermont's senior partners were two Canadian IOUs, which would have put two foreign transnationals in control of our rivers and our electricity. But after months of secret negotiations the deal died and another Canadian energy giant, TransCanada, waltzed into bankruptcy court and purchased the dams for more than $500 million – peanuts, according to its ledgers.
Where and at what cost we – and the rest of New England – get our electricity in the near future is a real problem. We either lose Vermont Yankee's 30-odd-percent contribution in 2012 when the plant is scheduled to close, or in 2032 if its license is extended. The Hydro Quebec contracts start ramping down in 2012, to a relatively token flow (10 percent of the current contribution) four years later. These losses add up to a potential short fall of almost 70 percent of our current supply by 2016.

How does the governor's administrative team plan to cover this “supply gap”? Keep Vermont Yankee operating at 120 percent (the contentious uprate) for an additional 20 years (license extension from 2012 to 2032), with additional spent fuel stored on-site in a semi-permanent radioactive dump. And purchase 40 percent of our power from the ever-more-costly New England grid and – cross your fingers – Hydro Quebec. All this, while watching TransCanada, an absentee Canadian IOU, sell the stable, low-cost hydropower produced by our rivers for big bucks out of state.
The powers in Montpelier clearly chose their IOU friends and their big-bad-business-as-usual agenda over serving Vermont's electricity consumers. Didn't Ethan Allen and his friends object to something similar — the Crown's support for neighboring big-bad-businesses (New York, New Hampshire, and the East India Trading Company) that wanted to claim Vermont's natural resources for themselves?

The Town of Rockingham did rebel against the IOU agenda by attempting to purchase the Bellows Falls dam, but that aborted attempt proved again how things can go wrong if Vermont's executive branch rejects common ownership of hydro-electricity and is committed to private (read: IOU) control of dams and generating facilities.

A formula for public purchase

However, the recent Supreme Court ruling supporting New London, Connecticut, in its seizure of private property by eminent domain sheds new light on the dam deal. One of the least evident but surprising facts about converting hydroelectric resources in Vermont to common ownership is how relatively simple and risk-free it could be if Vermont's Legislature and governor were truly behind the project. The most immediate benefits of common ownership would be stabilization of local tax bases and greater local control of electric power distribution and rates. Down the road, local ownership means more energy independence for Vermont.

The Legislature could start by confirming that Vermont towns could use eminent-domain power to purchase the facilities in their towns. Confirmation from New Hampshire's Legislature would also be helpful in purchasing the entire real estate package. Then, any Vermont town with a portion of the dams in its boundaries would have the option to purchase the entire facility through eminent domain, which it would do in conjunction with its New Hampshire neighbor's similar eminent-domain proceeding.

The simplest, most risk-free basis for common ownership would have the Vermont Legislature authorize bonds for local municipalities to use to purchase hydro-electric facilities located in their towns, including ancillary facilities in adjacent towns. Proceeds generated by sale of the bonds on Wall Street would pay the cost of the eminent-domain takings in both states. This is important because partial takings by eminent domain are questionable under federal regulations.

What's in it for the towns? First and foremost, tax stabilization. Although the towns would own the facilities (the Vermont town would own the generating facility, the New Hampshire town would own the dam, or visa versa), the generating facility would provide to each town a payment in lieu of taxes (PILOT) every year. The towns would, in effect, be in control of a significant portion of their tax base, and no longer be subject to appeals of their assessments – appeals that cost towns money to contest in court and which can dramatically reduce tax revenues.

Theoretically, each town could chose its own system operator. However, the benefits of shared O&M (operation and management) suggest it would be logical for towns to select a common operator. A common operator would reduce costs, allow for effective resource management by regulating water flow, share risks (by sharing revenues among the facilities), and provide for better bargaining power in selling generated electricity. Towns could select local representatives to serve on a board to oversee the operator's management, distribution of power, and negotiation of power contracts. Importantly, it would also allow towns to decide how much power to sell on the open market at relatively fixed rates (thus hedging their risks), and how much to retain for discounted sales to local residents and businesses to encourage intelligent economic development.

The Rockingham experience highlights the fact that it is difficult to expect local municipalities to shoulder the risk of purchasing and operating the dams without support on the state level. Using bond proceeds, however, pushes the risk of purchasing the dams to Wall Street, which is well-equipped to evaluate and accept risk as it sells bonds to investors. Bonds are repaid from electricity generated by the plants; pooling generating capacity minimizes the risk to any facility, and using a central operator minimizes the operational risk yet leaves towns with control over how that operator makes fundamental decisions.

It's time to buy the dams. From a local perspective it means tax stabilization and local control of local power, not to mention local stewardship of the watershed commons. From a statewide perspective, in a single bold stroke, we would have answered the mantra of the nuclear energy proponents: if Vermont Yankee closes in 2012, how are you going to replace the nuclear power plant's contribution to the state's supply? The dams would offset 80 percent of Vermont Yankee's contribution to the current mix with reliable, affordable “green power,” and more than double the in-state, renewable generation in Vermont's Energy Independence Portfolio.