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Maine PUC Issues Report Analyzing the Costs and Benefits of “Public Power” in Maine

Last week, the Maine PUC submitted to the Maine Legislature its Report, authored by London Economics International (LEI), on the costs and benefits of requiring the State of Maine to take over Central Maine Power and Emera Maine and hire a private contractor to operate Maine’s electric grid. On Wednesday February 26, the Committee heard a presentation of the Report by London Economics International.

The LEI report was prompted by LD 1646, legislation submitted last year that would move Maine in the direction of a state-owned public power authority. The Report found that it would take approximately four years of complex litigation and process before the State of Maine would be able to take over Maine’s electric system, after which Maine ratepayers would likely see an annual increase in rates for at least 10 years through 2034. Thereafter, the Report found that rates would potentially decrease for consumers, depending on a range of assumptions; however, the Report found that public power would not by itself result in improved reliability or local control.

Under LD 1646, the” Maine Power Delivery Authority” would be formed as an independent state agency, governed by a nine-member board appointed by the Governor. The bill directs the Authority to acquire the assets of Maine’s two investor-owned utilities at “net book value” either by negotiation or the exercise of eminent domain. The Report assumed that a negotiated sale at net book value would not likely occur given that the constitutional standard for eminent domain was “fair market value.” As such, the Report estimated that eminent domain would be necessary, and would require four or more years of litigation before a final price would be set by the courts. The four year estimate hinged on use of an expedited process conceived by LEI that has not been used before. Following litigation, assuming the State decides to proceed, the Authority would be required to competitively bid out the operation and maintenance of the grid to a private contractor, and the contractor would be entitled to earn a “management fee” for its services, which fee would be included in rates. The Authority, as a unit of government, would be legally exempt from sales and income taxes, which the Report found could create a shortfall in tax receipts on the state and local level – although the Report acknowledged that the legislation required “payments in lieu of taxes” for local government.

Overall, the Report exposed the complexity and significant uncertainty surrounding LD 1646. The Report identified a number of significant variables that, over 30 years, would affect the costs and benefits of the proposal, including:

  • The acquisition cost of the T&D utility property. In the Report, LEI used an estimate of 1.5x net book value of the assets, which costs would need to be financed with taxable revenue bonds. LEI’s estimate did not rely on prior “comparable sales” and was put forward as “illustrative”
  • The ongoing future cost of debt for the Authority, which the Report estimated using a 3.5% interest rate based on the rate for bonds used in a recent New Hampshire navigation project. The Report did note that borrowing costs could be higher, which would reduce the value of public power
  • The management fee of the private contractor, which the Report estimated as 1.5% the value of all assets
  • The anticipated level of capital expenditures that the CMP and Emera Maine T&D systems will require regardless of a State takeover, which the Report estimated at a net 3.5% of rate base (assuming 3% annual depreciation)

The Report’s primary analysis did not consider the risk of interest rate increases. The Report included a sensitivity analysis for each of the Report’s major assumptions – a change in any one of which would have a substantial impact on the net benefits or costs of public power.

The Report also acknowledged the need for further study of several key issues, in order for the State to have a greater sense of the true costs and benefits of public power. The recommended studies include:

  • Study of a range of tax issues, including the taxability of future debt issued by the Authority
  • A technical study on the future capex needs of Maine’s T&D network
  • A financing study to design and optimize the Authority’s capital structure
  • A study around the design of the competitive procurement process and optimal contractual agreement for the contractor

The Report also considered whether the newly created Authority would be required to seek a certificate of public convenience and necessity, prior to beginning service. In considering this complex legal issue, the Report cited to Verrill’s public utility law treatise, Maine Regulation of Public Utilities.

The Legislature’s Energy, Utilities and Technology Committee will review LD 1646 over the course of the next month.

Topics: Electricity