Opening the Back Door to Public Power:How the Vermont Public May Soon Operate their

Investor-Owned Transmission Utility

By: Brian Buckley Vermont Law School JD/MELP/Energy Certificate Candidate 2013

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TABLE OF CONTENTSTABLE OF CONTENTS..……………………………………………………………………… 1

I. INTRODUCTION…..……………………………………………………………………….. 2

II. CONSOLIDATION OF THE AMERICAN ELECTRIC UTILITY INDUSTRY: HISTORICAL TRENDS….……………………………………………………………............ 4

A. PUHCA and the Energy Policy Act of 2005…………...…………………………… 4B. FERC and Utility Consolidation…………...………………………………………... 5

III. ELECTRIC UTILITY MERGER AND ACQUISITION IN AMERICA TODAY……….. 6A. Constellation-Exelon Merger and Conditions………………………………………. 7B. Northeast-Nstar Merger and Conditions…………………………………………….. 8C. Duke-Progress Merger and Conditions…………………………………………….... 8

IV. PROPOSED MERGER OF CVPS AND GMP……………………………………………. 9A. GMP, CVPS, Transco, and Velco……...……………………………………………. 9B. Vermont’s Unique Utility Landscape………………………………………………...10C. Merger Approvals Required…………………………………………………………. 11

V. POSSIBLE CONFLICTS PRESENTED BY THE CVPS-GMP MERGER……………….. 12A. Unresolved Prior Obligations………………………………………………………... 13

i. The Windfall Sharing Mandate………………………………………………. 13ii. CVPS’s Penalty for Fortis Acquisition Agreement’s Withdrawal…………... 14

B. Questions Resulting from the Proposed Merger……………………………………...14i. The Acquisition Premium…………………………………………………….. 14ii. Rate Adjustment through Alternative Regulation Plans……………………... 14iii. Market Distortion and the Fate of Smaller Utilities………………………….14iv. Parent Company Influence and Velco Dominance………………………….. 15

VI. PROPOSED SOLUTIONS FOR ENSURING THE PROTECTION OF THE PUBLIC INTEREST IN THE CONTEXT OF VELCO…………………………………………………. 15

A. The Public Ownership Model……………………………………………………….. 16i. Economic Considerations…………………………………………………….. 17ii. Environmental Considerations………………………………………………. 18iii. Reliability Considerations…………………………………………………... 18

B. The Cooperative Ownership Model…………………………………………………. 19i. Economic Considerations…………………………………………………….. 19ii. Environmental Considerations………………………………………………. 20iii. Reliability Considerations…………………………………………………... 21

C. The Corporate Governance Reform Model…………………………………………. 21i. Economic Considerations 24ii. Environmental Considerations 24iii. Reliability Considerations 24

VII. CONCLUSION AMD RECOMMENDATIONS………………………………………… 25

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I. INTRODUCTION

Since the days of Samuel Insul, the American electric utility industry has been regulated

by state and federal commissions whose job it is to balance the need to incentivize investment in

utilities with competing public policy interests, including but not limited to the rights of

ratepayers.1 This is because the electric utilities exist within an industry “deeply affected with the

public interest” due to the natural bottleneck created by its transmission system.2 The typical

system used to ensure that this regulation is “just and reasonable” is a board of state public utility

commissioners who must approve or reject any major action proposed by a utility.3 The electric

utility industry has operated in this manner for more than a century.

However, present history offers another option. This option casts aside the shackles of

short-term, profit maximizing motives and pragmatically

blends them with long-term public policy considerations;

a conscious mind to supplement the invisible hand.

President Roosevelt stated in his 1932 Portland Speech

that public utility commissions have an inherent duty to

advocate for the public interest4. This paper examines a

scenario where an investor-owned utility (IOU)’s board

of directors might be held to a similar duty. Imagine a

system that injects the public good directly into the design process of an electric utility’s

proposals- before they are presented to regulators. This system would allow for advocacy of the

1 See Generally, Forest MacDonald, Samuel Insull and the Movement for State Utility Regulatory Commissions,Vol. 32, No. 3, Autumn (1958) 2 Munn v. People of State of Illinois, 94 U.S. 113, 139, 24 L. Ed. 77 (1876)3 Fed. Power Comm'n v. Hope Natural Gas Co., 320 U.S. 591, 601, 64 S. Ct. 281, 287, 88 L. Ed. 333 (1944)4 Franklin D. Roosevelt, The Portland Speech, 9/21/1942, available at: http://newdeal.feri.org/speeches/1932a.htm, Accessed 4/21/12

“The regulating commission, my friends, must be a Tribune of the

people, putting its engineering, its accounting, and its legal resources into the breach for the purpose of

getting the facts and doing justice to both the consumer and investors in

public utilities”-President Franklin D. Roosevelt,

Portland 1932

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public interest from a proposal’s inception; rather than using the term as a comparative

regulatory yardstick.

Specifically, this new option involves placing a majority population of well-informed

public servants onto an IOU’s board of directors. The duty of these directors, dictated through

the bylaws and articles of incorporation of that utility, could provide decision-makers with an

obligation to consider externalities relevant to the public good when utilizing their business

judgment.5

The aim of this document is to examine ideas regarding transmission utility governance

observed by the author in the context of Vermont Public Service Board (VT PSB) hearings and

testimony. These hearings, known to the VT PSB as Docket 7770, explore the facets of the

proposed acquisition of Central Vermont Public Service Corp (CVPS) by GazMetro, the parent

company of Green Mountain Power (GMP) and subsequent merger of CVPS and GMP.6

This paper will examine several unique features of the relevant energy landscape and

explain ideas from the frontier of electric utility governance. First, it will explain historical

trends of the American electric industry as a whole; it is in the midst of a consolidation cycle.7

Second, it will examine specific actors throughout this industry to understand what steps they

have taken to improve merger and acquisition prospects.8 Third, this paper will examine the

Vermont energy landscape and--most specifically--the proposed merger of CVPS with GMP.9

Fourth, the paper will detail the conflicts that have begun to emerge as a result of the proposed

combined corporation.10 Fifth, this paper then analyzes the solutions that have been proffered

5 Alissa Mickels, Beyond Corporate Social Responsibility: Reconciling the Ideals of a For- Benefit Corporation with Director Fiduciary Duties in the US and Europe, 32 Hastings Int’l & Comp. L. Rev. 271, 282 (2009)6 Documents and Summary available at: http://psb.vermont.gov/http%3A/%252Fpsb.vermont.gov/docketsandprojects/electric/CVPS_GMP_Merger7. See infra text accompanying notes 13-218. See infra text accompanying notes 22-279. See infra text accompanying notes 28-3910. See infra text accompanying notes 40-53

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during the hearings of Vermont’s public utility commission, the VT PSB.11 Finally, the paper

concludes with comments on the proposed regulatory solution, a publicly-operated but investor-

owned transmission utility.12

II. CONSOLIDATION OF THE AMERICAN ELECTRIC UTILITY INDUSTRY:

HISTORICAL TRENDS

In order to best understand forces behind the merging of CVPS and GMP, one must first

review a brief history of the American electric utility industry. This history will begin with

background on the Public Utility Holding Company Act (PUHCA). It will then explain a trend

toward consolidation in the electric utility industry since 2005. Finally, this explanation of

historical trends will examine a recent rulemaking procedure of the Federal Energy Regulatory

Commission (FERC). Analysis of these historical trends will help explain patterns of utility

consolidation in the United States as they are today.

A. PUHCA and the Energy Policy Act of 2005

On September 21st 1931, President Franklin Delano Roosevelt delivered an impassioned

speech to the people of Portland denouncing electric utility monopolies and their regulators’

susceptibility to corporate capture.13 Shortly after, a Depression Era Congress was able to secure

passage of the Public Utilities Holding Company Act (PUHCA). PUHCA spelled the end of an

era defined by influence peddling of large public utility holding companies through: (1)

imposition geographic contiguity requirements upon utility franchise area and (2) confinement of

business pursuits to within only the energy industry.14 In 2005, Congress passed the Energy

11. See infra text accompanying notes 54-9312. See infra text accompanying note 9413 Roosevelt, Supra, at note 414 The America Utility Industry After PUHCA Repeal: What Happens Next?, 2005, American Public Power Association. Available at: http://www.publicpower.org/files/PDFs/APPAreportAfterPUHCARepeal.pdf Accessed 4/21/12

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Policy Act of 2005 (EPAct 2005), which effectively repealed PUHCA’s aforementioned aspects

and gave FERC oversight of public utility holding companies.15,16 In accordance with EPAct

2005, FERC could approve a utility merger if it found the merger: (1) to be in the public interest

and (2) not to result in cross subsidization of a non-utility affiliate.17 This resulted in greater

ability for utilities and non-utility firms to consolidate in pursuit of economies of scale. IOUs are

driven to pursue economies of scale because, like most other entities that issue stock, they have a

fiduciary duty to maximize profits for their shareholders. In most other industries, this profit

maximization is accomplished through growth. A sluggish economy and the energy market’s

recent efficiency focus have forced IOUs to look outward for growth, in search of mergers and

acquisitions.18

B. FERC and Utility Consolidation

In 2010, the Department of Justice and Federal Trade Commission issued new rules on

relaxing market concentration standards. These rules identified a market is not highly

concentrated only if it has a Herfindahl-Hirschman Index (HHI) of 2,500 or more, and that a

merger would be permitted if it didn’t raise the HHI by any more than 200 points.19 FERC then

conducted a year-long notice and comment process regarding this rule, which it decided to scrap

15 Id.16 For Congressional testimony regarding PURPA repeal and probable effects upon industry consolidation see 109th Congress. US House. Subcommittee on Energy and Air Quality. Energy Policy Act 2005 (H. RPT 109-1) available at: http://www.gpo.gov/fdsys/pkg/CHRG-109hhrg99906/pdf/CHRG-109hhrg99906.pdf Accessed 4/21/12.It contains the testimony of: Alan Richardson, CEO of the APPA (at 149-152); Mark Cooper, on behalf of the Consumer Federation of America and Consumers Union (at 171-173); Marty Kanner, on behalf of Consumers for Fair Competition (at 198-201); the Edison Electric Institute (at 208); the American Public Power Association (at 210-216); and Gerald Norlander, on behalf of the National Association of State Utility Consumer Advocates (at 402-407)17 18 C.F.R. 366, Energy Policy Act of 2005 §128918 Adam Aston, Utilities Turn to Mergers as Demand for Power Slows, NY Times: Dealbook, Published 6/16/11Available at: http://dealbook.nytimes.com/2011/06/16/utilities-turn-to-mergers-as-demand-for-power-wanes/ Accessed 4/21/12.19 Re Analysis of Horizontal Market Power Under the Federal Power Act, Docket No. RM11-14-000, 138 FERC ¶ 61,109, Feb. 16, 2012 (F.E.R.C.).

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in favor of its own, more rigorous definition of highly concentrated as 1,800 HHI points with

mergers defined as anticompetitive if they would cause the HHI to rise more than 100 points. As

justification for their decision, FERC noted that “relaxing market concentration thresholds would

not be in the public interest” due to the distinctive characteristics of electric markets.20

This discussion of PUHCA and historical trends of industry consolidation will help one

better understand the issues surrounding today’s electric industry. This historical analysis shows

that we are in the midst of another cycle of electric utility consolidation as a result of EPAct of

2005. IOUs are searching for growth through pursuit of mergers and acquisitions. An analysis

of FERC’s recent decision regarding electric utility consolidation further proves this analysis;

FERC understands that this pattern warrants caution. This insight regarding the historical trends

that underlie the electric utility industry in America is important for an evaluation of the recent

wave of merger and acquisition activity, and subsequently, for understanding the CVPS-GMP

merger.21

III. ELECTRIC UTILITY MERGER AND ACUISITION IN AMERICA TODAY

The next logical step in understanding the forces behind the CVPS-GMP merger is to

compare it to other electric utilities throughout current-day America. For the purposes of this

analysis, the author has chosen three sets of utilities seeking regulatory approval for --or who

have recently consummated-- a merger agreement. These three pairs include the Constellation-

Exelon merger, the Northeast Utilites-Nstar merger and the Duke-Progress merger. A review of

these transactions and the conditions of their regulatory approval will demonstrate that while the

20 4060 PUR Util. Reg. News 1 PUR UTILITY REGULATORY NEWS March 2, 2012 Mergers & Acquisitions “FERC MAINTAINS STATUS QUO ON REVIEW STANDARDS”21 See Generally for 2011 US Utility Franchise Map: http://www.eei.org/whoweare/ourmembers/USElectricCompanies/Documents/EEIMemCoTerrMap.pdf Accessed 4/21/12

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CVPS-GMP merger is unique, it is reflective of a much broader trend in the industry; a new type

of merger where utilities have much to offer regulators in return for approval.

A. The Constellation-Exelon Merger and Conditions

The Constellation-Exelon merger, which closed on March 12th 2012, offers a numbers of

public benefits in order to encourage regulatory approval. Exelon itself plans to sell a number of

coal fired power plants so the combined company may reduce its coal generation capacity from

12% to roughly 6% of its total capacity.22 The combined company also plans to produce a

number of other direct benefits including: a $100 rate credit to customers within 90 days; $113.5

million over 3 years into a fund for energy efficiency to serve low income ratepayers; 285-

300Mw of new generation based in Maryland; 120Mw of renewables and roughly 30Mw of solar

in 3 years; a jobs freeze; divestiture of Baltimore Gas and Electric if Exelon goes bankrupt or

drops six levels below investment grade; a new headquarters in Baltimore; and payment of a

$245 million dollar fine to settle a suit brought by FERC for alleged price manipulation.23,24 This

comprehensive list of conditions is indicative of an industry that is reaching for growth, and

willing to offer quite a bit to achieve it.

B. The Northeast Utilties-Nstar Merger and Conditions

The Northeast Utilities-Nstar Merger, planned to close on April 4th 2012, also offers a

number of public benefits in order to encourage regulatory approval. For example,

Massachusetts regulators conditioned the approval of the merger on a power purchase agreement

22 Aston, Supra, at note 1823 Ben Mook, PSC Approves Exelon-Constellation Merger, The Daily Record. Published 2/17/12.Available at: http://benmook.wordpress.com/2012/02/20/psc-approves-constellation-exelon-merger/ Accessed 4/21/12.24 Hanah Cho, Constellation $245 Million Settlement for Trading is Largest Ever, Baltimore Sun. Published 3/12/12. Available at: http://articles.baltimoresun.com/2012-03-12/business/bs-bz-constellation-merger-completed-20120312_1_ferc-baltimore-s-constellation-energy-group-grid-operators Accessed 4/21/12.

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with Cape Wind. Nstar agreed that it would purchase one-quarter of the power produced by the

fabled wind farm.25 Connecticut regulators were able to obtain several public benefits to make

the merger more appealing including: a one-time credit of $16 million to Connecticut Light &

Power customers; an almost 3 year rate freeze; $15 million to fund an energy efficiency

program; $300 million in distribution investments; preservation of 1,000 undeveloped acres and

the opportunity to preserve 8,500 more; employment freezes for line men; $40 million worth of

Irene expenditures the utility won’t ask to recover from ratepayers; and synergies that will send

$350 million to Connecticut ratepayers over a ten year period.26 This long list of public benefits

illustrates that state public utility commissions have a broad range of options when leveraging

concessions from merger applicants.

C. The Duke-Progress Merger and Conditions

The Duke-Progress merger, set to close on July 1st 2012, doesn’t offer much to state

regulators in an effort to sweeten the proverbial pot. However, one condition FERC has imposed

as a prerequisite of the merger is that the combined company would commit to spending $110

million to improve transmission reliability.27

After reviewing three other proposed transactions it seems obvious that, while unique, the

CVPS-GMP case is reflective of a broader trend in the utility industry. Electric utility investors

are looking for growth, and one of their only avenues for growth in the age of efficiency and

conservation is through mergers and acquisitions. While the Duke-Progress merger offers little to

25 Janice Podsada, CT Set to Rule on NU Settlement Today, But Lack of Alternative Energy in Settlement Rankles Some, Hartford Courant. Published 3/25/12. Available at: http://www.courant.com/business/hc-nu-merger-alternative-energy-20120325,0,2492823.story Accessed 4/21/12.26 Luther Turmelle, Northeast Utilities, Nstar Merger in Home Stretch, New Haven Register, Published 3/26/12. Available at http://nhregister.com/articles/2012/03/26/business/doc4f711f04cd512614101824.txt Accessed 4/21/12.27 Duke, Progress Submit New Merger Plan, The Times News, Published 3/26/2011. Available at: http://www.thetimesnews.com/articles/plan-53822-power-merger.html Accessed 4/21/12.

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regulators by way of incentives for gaining approval, the Constellation-Exelon and Northeast

Utilites-Nstar mergers show that state public utility commissions often have a broad range of

options when leveraging concessions from merger applicants. As this document will soon

discuss, this leveraging ability can also be seen in the Vermont Public Service Board’s approach

toward regulatory approval of the CVPS-GMP merger

IV. PROPOSED MERGER OF CVPS AND GMP

Following the analysis of the forces that motivate utility consolidation in America today,

this paper will now outline the constituent elements of the CVPS-GMP merger. First, it will

discuss the specific IOUs at issue in this transaction: CVPS, GMP, Velco, and Transco. Second,

it will explain the general electric utility landscape in Vermont. Third, it will discuss the hurdles

to regulatory approval faced by merging electric utilities. This discussion will outline the

constituent elements of the proposed merger and provide further insight and context as to why

the CVPS-GMP merger presents possible conflicts for Vermont ratepayers.

A. GMP, CVPS, Transco, and Velco

On July 11th 2011, CVPS and GMP entered into a merger agreement where CVPS agreed

to merge with Danaus Corp. (a wholly-owned subsidiary of Gazmetro created for the purposes of

the merger).28 There are four specific investor owned utilities directly involved in this merger:

CVPS; GMP; Velco; and Transco. CVPS is the state of Vermont’s largest utility, serves 160,000

customers, and sold 2.9 million Megawatt-hours of power in 2011.29 GMP is Vermont’s second

largest utility with 90,000 customers and covers many of the state’s urban areas.30 Additionally,

28 Central Vermont Public Service Co. Schedule 14a filing with Securities and Exchange Commission, page 3. Available at: http://www.sec.gov/Archives/edgar/data/18808/000121465911002911/s817110defm14a.htm Accessed 4/21/12. 29 http://www.cvps.com/AboutUs/AtAGlance.aspx Accessed 4/21/12.30 http://www.greenmountainpower.com/customer-service/maps.html Accessed 4/21/12.

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there are 18 other municipal, cooperative, or transmission-only electric utilities throughout

Vermont who will be indirectly affected as a result of this transaction.31

B. Vermont’s Unique Utility Landscape

Vermont is unique because its transmission system was the first transmission-only

investor owned utility in the United States.32 Transco was formed in 1956 to bring hydropower

from Quebec into Vermont. It is collectively owned by its investors, the state’s electric utilities.

Each electric utility in the state can be responsible for providing equity during times of capital

calls. The transmission system was split along the lines of an owner/operator distinction into

Transco and Velco respectively in 2006.33 Transco owns the state’s transmission assets. It is

collectively owned by the state’s electric utilities in a manner roughly proportionate to their

investment in those assets.34 Velco operates the state’s transmission facilities. It is collectively

owned by the state’s electric utilities in a manner roughly proportionate to the amount of load

that each utility typically carries.35

The Vermont electric utility landscape is currently based on system which centers upon

GMP and CVPS, with roughly 16 other municipal and cooperative utilities on the periphery (plus

Velco and Transco).36 Electric utilities in Vermont are regulated and the state has not

restructured. This means that a customers’ geographic area determines their electricity provider

according to franchise and the state’s public utility commission must approve or reject major

actions of the state’s utilities.37 Vermont’s electric systems are within the jurisdiction of ISO-NE

31 Micheal Dworkin, Pre-filed Direct Testimony, VT PSB Docket 7770, page 932 See Generally, VT Electric Power Company Brochure, Available at: http://www.iso-ne.com/committees/comm_wkgrps/othr/clg/mtrls/2011/mar32011/03_03_11_clg_johnson.pdfAccessed 4/21/12.33 Id.34 Ellen L. Burt, Pre-filed Direct Testimony, VT PSB Docket 7770, page 735 Id.36See Generally for VT Utility Service Map: http://www.cvps.com/CustomerService/2007ElectricFranchiseMap.pdf37 Supra, at note 28, page 54 states: CVPS is “subject to the jurisdiction of the VPSB. Under 30 V.S.A. §§ 104, 107, 109 and 311, the approval of the VPSB is required in connection with the amendment to the articles of incorporation

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and must be accountable to FERC for purposes of wholesale market regulation (et. al.) In

Vermont, the Department of Public Service (DPS) is an office of the state’s executive branch

that, amongst other things, advocates on behalf of the consumer when a public utility brings a

rate case to the VT PSB.38 These unique aspects of the Vermont electric utility landscape,

including a transmission-only IOU that has been separated along the lines of ownership and

operation, make possible unique concessions from the proposed combined company.

C. Merger Approvals Required

The final important element that must be explained about the CVPS-GMP merger is that

it must be approved by a plethora of organizations. These organizations include the FERC, the

VT PSB, the Department of Justice, the Free Trade Commission, the Committee on Foreign

Investment in the United States (Gazmetro is a Canadian-owned company), the Federal

Communications Commission, the Nuclear Regulatory Commission, and some of the

neighboring public utility commissions (including those of New York, New Hampshire, and

Maine).39 This immense organizational mix of necessary approvals complicates this interaction

far beyond what is required of a non-utility company for merger approval.

Analysis of the constituent elements of the CVPS-GMP merger helps to convey a basic,

tangible understanding of the actors within the context of the agreement. Discussion of CVPS,

GMP, Velco, and Transco helps illustrate that the utilities are in fact interrelated, even before the

advent of the proposed merger. The general examination of the Vermont Electric utility

landscape presents a background upon which to juxtapose this agreement. The discussion of

of, and with the acquisition of a controlling interest in, or merger involving any company under its jurisdiction. In considering the merger, the VPSB is required to determine that it will promote the general good of the state and will not result in obstructing or preventing competition with respect to any product or service sold, purchased or manufactured by us and Gaz Métro.”38 See Generally: http://publicservice.vermont.gov/about-dps/about-dps.html Accessed 4/21/12.39 Supra, at note 28, page 8-9

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normal regulatory hurdles faced by merging utilities in the context illustrates the immense

amount regulatory approval required to complete a merger or acquisition in the regulated electric

utility industry. This understanding of the actors, background, and normal hurdles for regulatory

approval provide further insight as to why the CVPS-GMP merger must face great scrutiny in an

attempt to resolve conflicts before merger approval.

V. POSSIBLE CONFLICTS PRESENTED BY THE CVPS-GMP MERGER

The CVPS-GMP merger must face several conflicts before it can gain regulatory

approval, most specifically, from the Vermont Public Service Board. For the purpose of this

paper, these conflicts are divided into two major categories: (1) Conflicts arising from

unresolved prior obligations of the electric utilities and (2) Questions arising from the newly

signed merger agreement. Solutions to these conflicts are a large source of the conditions that

have been placed upon CVPS-GMP before the merger can be approved. Insight toward the

conflicts inherent in the merger will be instrumental in understanding a discussion of the

proposed solutions.

A. Unresolved Prior Obligations

The conflicts which result from unresolved obligations that CVPS and GMP had before

the merger are not insurmountable. These problems will be explained in the two subsequent

paragraphs and include: (1) how to utilize the “windfall sharing” mandate, and (2) the payment

of CVPS’s penalty for withdrawing from a previous acquisition agreement with Fortis.

The “Windfall sharing” mandate is the result of a 2001 VT PSB order which allowed

CVPS and GMP to recoup from ratepayers money that had been lost on an imprudent power

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purchase agreement with Hydro-Quebec.40 A mandate was written into the order stating that if

either utility was ever acquired, that the ratepayers would share in the benefit through a return of

the rate increase.41 The money associated with the ratepayer bailout of CVPS is currently worth

roughly $21 million after inflation.42 The American Association of Retired Persons (et. al.)

would like to see this money paid back directly to ratepayers.43 Others would rather utilize this

money as an investment in energy efficiency or weatherization so that Vermonters might benefit

through thermal efficiency and therefore lower electric capacity needs. Advocates for investing

the money in efficiency have three basic arguments. First, many of the ratepayers who paid the

increase may no longer reside at the same location or in the same state.44 Second the money

could be used to leverage other funds and provide even greater benefits to the consumer.45 Third,

efficiency and weatherization programs benefit ratepayers by decreasing demand for capacity

and therefore reducing the amount of investment necessary to maintain transmission, distribution

and generation assets.46

The termination fee that CVPS owed to Fortis will have a large influence on whether

CVPS can find approval for its acquisition by GMP. CVPS is responsible for roughly $20

million in fees for withdrawing from an agreement with Fortis, a previous purchaser; GMP

agreed to cover this fee if the CVPS-GMP deal were to actually go through.47 This puts the VT

PSB and DPS in an interesting position because if the deal were to fall through over objections

of regulators then CVPS could find itself facing bankruptcy or asking for another ratepayer

funded loan. The problems which have arisen from dealings before the agreement are not

40 In re Cent. Vermont Pub. Serv. Corp., 6460, 2001 WL 1002730 (June 26, 2001) page 5841 Id. page 8542. Asa Hopkins, Pre-filed Direct Testimony, VT PSB Docket 7770, page 1143. Silkman/Bradford, Pre-filed Direct Testimony, VT PSB Docket 7770, pages 19-2144 Hopkins, Supra at note 42, pages 14-2245 Hopkins, Supra at note 42, pages 14-2246 Hopkins, Supra at note 42, pages 14-2247 Supra at note 28, page 80

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insurmountable, but they are important and should be addressed so that ratepayers receive their

fair share and are not demystified by the typical rhetoric of efficiencies and synergies offered

during mergers of this nature.

B. Questions Resulting from the Proposed Merger

The questions arising from the newly signed merger agreement have slightly tougher

solutions. These include questions regarding the acquisition premium, the new cost of service,

possible market distortion, and Velco dominance. The acquisition premium is a tough sell, but

ratepayers are going to have to deal with it if they want to benefit from increased

synergies/efficiencies in the long term, especially if they want their share of the $144 million

payment they have been promised.48 Also, there is concern by some that the rates charged to the

newly combined company would no longer reflect the true cost of service.49 To remedy this, a

short rate freeze can be implemented while the newly combined entity is given time to submit an

amended alternative regulation plan (ARP).50 Vigilant regulation is the only way to ensure that

CVPS-GMP (the Combined Company) cannot use its influence to distort power markets or wipe

out smaller cooperative or municipal utilities.

The largest hurdle that proponents of the merger face is the uncertain agenda of parent

companies/subsidiaries and their ability to peddle influence regarding transmission and

distribution. Ring fencing and transparency will be among the most likely solutions to these

problems.51 Ring fencing is a method of separating business accounts in a way that prohibits

comingling of funds between separate entities.52 Transparency is accomplished through a

48 Supra at note 28, page 30.49 Goulding, Pre-filed Direct, Vermont Public Service Board, Docket 7770, page 1150 Memorandum of Understanding, Public Service Board Docket 7770, filed 3/27/12 page 11-1551 See Generally: Supra at note 50.52 Supra at note 50, page 8

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requirement that the combined company submit a copy of their accounting books to regulators

and notify regulators when any large financial transaction occurs.53

Solutions to the aforementioned conflicts can be guided by prior examples and precedent;

this is not the first time two utilities have merged in the United States. However, the question of

how to ensure protection of the public good when a foreign-owned power producer controls the

transmission system finds little precedent. This question was a major focus of the Vermont

Public Service Board testimony contained in Docket 7770. It is also the focus of the rest of this

paper.

VI. PROPOSED SOLUTIONS FOR ENSURING PROTECTION OF THE

PUBLIC INTEREST IN THE CONTEXT OF VELCO

Opportunities such as this are rare. The Velco/Transco relationship and the proposed

GMP-CVPS merger presents unique conditions in the Vermont utility landscape. The conditions

provide the opportunity to try a different model for governance of electric transmission facilities,

which are is deeply affected with the public interest.54 During VT PSB hearings, witnesses and

advocates for a just and reasonable solution to this situation presented several proposals related

to Velco ownership. After examining the broader industry context, the proposed action, and

conflicts presented by the proposed action, this paper has one remaining purpose. That purpose

is to evaluate the characteristics of the three traditional utility models presented through the

testimony at Vermont Public Service Board and propose an answer to the conflicts presented by

the proposed action. These models are:

(1) The Public Power model, which I characterize as state-ownership

(2) The Cooperative model

53 Supra at note 50, page 8-1154 Supra at note 2

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(3) The IOU model, with a focus on good corporate governance

A. The Public Ownership Model

Public power ownership can materialize in a variety of ways. The Vermont Public Power

Supply Authority represents various municipally owned utilities and participated in Docket 7770.

One particularly notable advocate of public power and municipal ownership during the Docket

7770 debate was VT State Senator Vincent Illuzi, who championed a bill in a Vermont

legislative committee to study state purchase of Velco.55 After gaining some support and

publicity, the bill was released to the floor with a negative outlook, meaning it will probably

never reach debate. However, public power lives on through the 14 municipal utilities that buy

wholesale power from the grid and distribute it to their citizens.56 Public power has a fairly long

history in Vermont, where hydroelectric dams were often built by localities who would later

harvest their energy. In order to analyze the possibilities of a public power solution as it relates

to Velco ownership I will use a three-pronged analysis based upon the economic, environmental,

and reliability effects of a 51% state-owned Velco. This three pronged analysis shows that while

public ownership presents many benefits, it also poses many downsides due to liability exposure

and capital requirements.

There are several economic factors to consider when evaluating whether state ownership

of Velco is a prudent investment. Critics of this approach would argue that it is too expensive57,

would affect the state’s credit rating and ability to borrow capital (they would need about 500

55 Vincent Illuzi, Pre-filed Direct, VT PSB Docket 7770, page 2-356 VT Utility Franchise Map available at: http://www.cvps.com/CustomerService/2007ElectricFranchiseMap.pdfAccessed 4/21/12.57 See Senate Finance Committee Hearings, Testimony of VT State Treasurer Beth Pearce, 2/14/12Stating: Velco purchase by state of VT would roughly double the state’s budgetary needs.

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million for 51%)58, would cost consumers slightly more in rates59, and leave Vermont liable for

any bad financial choices Velco makes (especially if something unpredictable were to happen

like a large storm or the sudden advent of distributed generation.)60 Proponents of state

ownership of Velco would argue that Velco is guaranteed a 14% return on equity and therefore

very profitable.61 They would also argue that Vermont and Velco’s credit rating are both very

high --AAA62 and A 63respectively-- and therefore would pose little risk to borrowing power or

interest rates for the state of Vermont. Governor Peter Shumlin had come out as against state

ownership for liability/budgetary reasons.64 One DPS witness also noted that the state of

Vermont had tried to be a wholesaler of power before, through a piece of legislation known as S.

130.65 This bill authorized the state to buy and sell power, but failed to authorize the necessary

increase in personnel needed to carry out those functions. These types of unforeseen economic

burdens are the main reason state ownership of VELCO would have too many downfalls to be a

viable solution.

There are a several environmental factors to consider when thinking about state

ownership of VELCO. One environmentally-based argument is that the state might be able to

inject public policy into the decision process and only build new transmission to connect

58 (Quoting Beth Pearce) CBS Moneywatch, Vermont Senate Committee Talks Power Line Purchase. Published 2/9/12 . Available at: http://www.cbsnews.com/8301-505245_162-57373940/vt-senate-committee-talks-power-line-purchase/ Accessed 4/21/12.59 Foley, Direct Pre-filed Testimony, VT PSB, Docket 7770, page 760 Escalating New England Transmission Costs and the Need for Policy Reform, Environmental NortheastAvailable: http://www.env-ne.org/public/resources/pdf/ENE_TransmissionReport_Summary_20111003_FINAL.pdfAccessed 4/21/12.61 John Dillon, Vermont Senate Committee Talks Powerline Purchase, VPR News. Published 2/8/12.Available at: http://www.vpr.net/news_detail/93340/vt-senate-committee-talks-power-line-purchase/ Accessed 4/21/1262 Bruce Edwards, Strong Credit Rating Helping Vermont’s Bond Sales, Times Argus. Published 3/5/12. Available at: http://timesargus.com/article/20120305/BUSINESS03/703059995/0/MEDIACENTER Accessed 4/21/1263 VELCO Brochure, Available at: http://www.iso-ne.com/committees/comm_wkgrps/othr/clg/mtrls/2011/mar32011/03_03_11_clg_johnson.pdf64 Supra. at Note 5865 Dworkin, Supra, Note 31, page 30

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renewables to the grid. However, one might counter that the state could be driven by taxpayer

greed and overbuild its resources due to a pressure for the state to use the cash-cow as a way to

reduce taxes.66

There are a number of examples of the how public ownership of electric assets will affect

reliability. Government ownership of electric utilities works well in many places. For example,

the Long Island Power Authority67, the New York Power Authority68, and the entire state of

Nebraska’s grid69 are all publicly owned and rarely experience reliability or liability problems.

However, there are also examples of places where public ownership had an adverse effect on

reliability. This includes the city of Harrisburg, PA, who recently entered receivership do to an

imprudent investment in municipal power and is having trouble juggling its affairs in an attempt

to maintain reliability.70

After an evaluation of the economic, environmental, and reliability factors that are

inherent in Velco’s public power path, it seems that while there are arguments on both sides, the

capitalization issue is too large a liability for the state to willingly engage. Therefore, there must

be some other sort of solution for ensuring the public interest regarding Vermont’s investor

owned transmission-only utility.

B. The Cooperative Ownership Model

The Washington Electric Cooperative, whose ideas were presented by Mr. Avram Patt,

was one of the most fervent advocates for cooperative ownership of Velco during the Docket

7770 hearings of the Vermont Public Service Board. Cooperative Power was born out of the

66 See Generally: Seeking the Current, Available at: http://www.seekingthecurrent.com/ (costs 4 dollars for 3 days of streaming access) Accessed 4/21/12.67 See generally: http://www.lipower.org/company/ Accessed 4/21/12.68 See generally: http://www.nypa.gov/about/mission.htm Accessed 4/21/12.69 See generally: http://www.nppd.com/about-us/public-power/ Accessed 4/21/12.70 See http://www.nytimes.com/2011/10/13/us/harrisburg-pennsylvania-files-for-bankruptcy.html Published 10/13/11. Accessed 4/21/12

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Rural Electrification Administration and was the model that eventually brought electricity to

71% of the Continental US’s land mass.71 “The primary principles of any cooperative are (1)

Voluntary and open membership (though, this isn’t as applicable in the case of electric

cooperatives) (2) Democratic member control (3) Member Economic Participation (4) Autonomy

and Independence (5) Education, training and information (6) Cooperation among cooperatives

and (7)Concern for Community.”72 Cooperative Power in Vermont has a long history,

highlighted best perhaps by ardent supporter of Cooperatives and former VT governor, the late

George Aiken. In order to analyze the possibilities of a cooperative power solution as it relates

to Velco ownership I will use a three-pronged analysis based upon the economic, environmental,

and the reliability effects of a cooperatively owned Velco.

Economic effects are probably the most important considerations when evaluating

prospects for a cooperatively owned Velco. Most cooperatives get their funding from one of two

places: (1) the National Rural Utilties Cooperative Finance Corporation (CFC) or (2) the Rural

Utility Services.73 To qualify as a cooperative, however, tax law explicitly states that an entity

must appropriate at least 85% of its income from selling a good to its members. 74 Enforcement

of this requirement would severely limit options for load-sharing between Velco and the rest of

ISO-NE. Also, as one DPS witness points out, Velco/Transco is already a form of cooperative in

that it’s collectively owned and managed by its members, the IOUs. That same witness also

notes an “unpleasant experience” that Vermont Electric Cooperative had with the Rural Utility

Service when it was dragged through bankruptcy a few years prior.75 After evaluating the

71 Kreis, Donald M., The Next Greatest Thing: An Electric Cooperative Manifesto. Vermont Law School Research Paper No. 11-18. at page 172 id. page 3, within footnote 573 Jim Cooper, Electric Cooperatives, From New Deal to Bad Deal74 IRC § 501(c)(12)(a) (2006)75 Dworkin, Supra, at note 31, page 27

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financial factors, it seems that the cooperative model has potential problems of its own as a

solution for the Velco transmission system.

One must also examine possible environmental effects when evaluating the cooperative

model as a possibility for Velco. Since cooperatives are primarily operated and directed by

ratepayers, their main objective is often to keep rates low. To this end, a cooperative’s

management team is sometimes described as “Philosophically progressive, but fiscally

conservative.”76 This can lead to trouble when one is trying to plan for something with long term

benefits and high front end costs. For example, implementation of smart grid technology is a

front loaded cost, but could save money and allow for greater integration of intermittent

renewable resources over time. Others note that cooperatives are well known for their reliance on

coal fired power plants due to their rural proximity and fiscal conservatism.77 Still others argue

that with the right leadership, the cooperative model can make environmentally sound and

forward-thinking decisions. For example, the Washington Electric Cooperative in Vermont has

made the active choice to no longer buy nuclear power, and instead has invested in a landfill

methane gas recovery plant for a majority of its generation needs.78 After evaluating the

cooperative model in terms of environmental factors, there seems to be mixed arguments as to

whether it would be a useful model for Velco governance.

In terms of reliability, one must consider the “black box” effect as observed in the

cooperative industry. This term is used to describe the lack of ratepayer participation in the

cooperative governance process. Cooperatives are based on a business model that depends on its

members staying informed and participating in the cooperative democratic process.79 This black

76 Avram Patt, Lecture, VT LAW SCHOOL, 3/21/1277 Kreis, Supra, at note 71, page 1178 See generally: http://www.washingtonelectric.coop/wp-content/uploads/2011/03/wec-sources-of-power-2010.pdfAccessed 4/21/1279 Kreis, Supra, note 71, page 13-14

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box effect has at times led to instability within the industry and it is not clear that one could

count on widespread public participation on the Velco scale. Many ratepayers simply want their

power to be available when they plug in their devices and are reluctant to exert time and effort

toward governance of their electric utility. While there is an argument to be made for utilizing

sunshine laws to keep people informed,80 it seems evident that reliability of the transmission grid

is not a burden which should be placed upon the average citizen.

After an evaluation of economic, environmental, and reliability factors, it becomes

obvious that while the cooperative model may have its advantages, the uncertainty inherent in

the cooperative’s democratic process could result in an unstable and unreliable transmission

system.

C. The Corporate Governance Reform Model

The DPS, whose interest were represented by Michael Dworkin among others, was one

of the most fervent advocates for reforming the VELCO corporate structure while leaving the

system of investor ownership in place. While this has never actually been done in the realm of

electric transmission utilities, one can draw upon examples from the non-profit realm, the public

power model, and the investor owned model to understand how the different facets of the hybrid

public-private model might work. Critics of this approach argue that it is unnecessarily

redundant. They state that Velco’s reliability is already regulated under the federal guidelines

provided by FERC and that Velco may be held accountable as a member of ISO-NE.81 They also

note that while FERC regulates wholesale power markets and transmission, it is the state of

Vermont and its PSB who retains jurisdiction over approval of transmission siting.82

80 Kreis, Supra, note 71, page 1781 Brownell, Pre-filed Direct Testimony, VT PSB Docket 7770, pages 6-1482 id. at page 14-15

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The DPS has suggested a number of different approaches to enact this model.83 Most

recently however, they have settled with the proposed combined company’s representatives and

agreed to support the merger on the condition that independent directors chosen by the DPS are

appointed to the board of Velco.84 The details of this agreement state that including the five

public power members already seated on the Velco board, there will be three more publicly

appointed board members.85 This model seems to embody the appealing aspects of

public/cooperative power without the economic liabilities. It effectively proposes a publicly

controlled board of directors (8/13) that operates the state’s transmission grid while the state’s

IOUs supply the capital. Hence, the title of this paper: “Opening the Back Door to Public

Power”

Proposals similar to this have been written previously, but never with regard to an

investor owned transmission system such as Vermont’s Velco/Transco. Micheal Dworkin, who

testified for the DPS about the advantages of placing “common good directors” on the Velco

board of directors, has written about similar issues. Most notably, he published an article on

Regional Transmission Organization (RTO) governance with Rachel Goldwasser in the Journal

of Energy Law.86 Dworkin had also written a letter to former chairman of the FERC Pat Wood

which is cited in the aforementioned article and stated his views on the public interest and

transmission organization accountability as follows:

“If at some point in the future the Commission did appoint an RTO board, we would like to see consideration given to the following principles. First, we believe public interest representation, of some sort, is warranted on an RTO board since any regional regulatory body should be charged with protecting the interests of all the consumers in our state, both large and small. The board should have a

83 Dworkin, Supra at note 31, pages 32-3884 Supra at note 50, page 2-685 Id.86 Michael Dworkin and Rachel Goldwasser, Ensuring Consideration of the Public Interest in Governance and Accountability of Regional Transmission organizations. Energy Law Journal. Volume 28:543 (2007). Page 543-601 Available at: http://felj.org/docs/elj282/Governance_of_RTOs.pdf Accessed 4/21/12.

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fiduciary duty (expressed in its Articles of Incorporation and filed at the FERC) solely to the public interest. Meaningful participation by public interest representatives on the RTO board is critical. Public interest representatives on the RTO board will at least give a voice to those who are most affected by its actions. We are not wedded to any particular proposal for choosing such public interest representatives although we would suggest that a significant minority of the members (e.g., one-third) be selected from a pool of nominees designated by state governments (whether by legislative, executive, or regulatory bodies). However, once-chosen, all board members should have fixed, staggered terms to protect the12 board against undue short-term political influence.”87

While the RTOs described in this passage are different from the Velco corporation, this

passage shows that Dworkin has cultivated views on a similar subject subject throughout his

experiences as a state regulator; these views are founded in experience. Other authors have also

previously written on a similar subject. Allen White, and Leondard D. Goldberg (et al.) have

written of modifying a for-profit corporation’s board of directors to include directors who are

accountable to the public, but never have they been in a position allowing them to leverage such

a proposal into existence.88,89

In consideration of whether this corporate governance reform model can be implemented

in the context of Velco, one must consider economic, environmental, and reliability factors.

From an economic perspective, reforming Velco governance could allow for the consideration of

long-term policy based perspectives in a similar way to how the public power model might, but

without the burden of state exposure to possible liabilities. Specifically, proponents of this

model argue it might “institutionalize a role for representatives of the general good within

87 Michael Dworkin, Letter from the Vermont Public Service Board to Pat Wood, III, Chairman of the FERC at 5 (Jan. 17, 2002) Available at: http://www.state.vt.us/psb/letters/woodltrl.pdf Accessed 4/21/1288 For further reading, see: Allen White and Marjorie Kelly, Corporate Design: The Missing Business and Public Policy Issue of Our Time Available at: http://www.tellus.org/documents/CorporateDesign.pdf Accessed 4/21/12.

89 For further reading see: Thomas M. Jones and Leonard D. Goldberg, Governing the Large Corporations: More Arguments for Public Good Directors (1982) Available at: http://www.jstor.org/discover/10.2307/257227?uid=3739952&uid=2&uid=4&uid=3739256&sid=47698919056647Accessed 4/21/12.

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Velco’s strategic decision-making process.”90 A counter-argument to this however, is that long

term policy perspectives don’t always align with a company’s normal business judgment, and

therefore could result in inefficient or ineffective corporate operations.91 After this analysis

however, it becomes obvious that the public-private hybrid presented by the corporate reform

model may entail the best aspects of both approaches.

A public-private hybrid like the proposed Velco governance structure would likely have

positive impacts from an environmental perspective. The articles of incorporation and bylaws of

Velco will soon be outlined and recorded as a result of transparency measures conditioned upon

the proposed merger. Some believe that the new bylaws should dictate that the Velco board of

directors must take all environmental health and safety related externalities into consideration

during their decision-making process.92 This internalization of externalities is embodied on the

corporate scale in a business model known as the benefit-corporation.93 This business model is a

recent edition to the differing corporate structural frameworks allowed in Vermont. If this model

were imposed upon the combined corporation as a condition of the merger, its board of directors

would be open to shareholder suits for failure to consider externalities during their decision-

making process. While this could have drastic effects on the economic liabilities of the

corporation, it would also ensure that environmental considerations are at the forefront of the

corporate decision-making process.

A public-private hybrid like the proposed Velco governance structure would likely have

positive impacts from a reliability perspective. The ability inherent within this structure to mix

short-term profit maximizing with the consideration of long term externalities could bring about

90 Dworkin, Supra, at note 31, pages 21-2291 Chris Dutton, Pre-Filed Testimony, VT PSB Docket 7770, pages 24-2692 Illuzi, Supra at note 55, pages 3-493 11A V.S.A. 21.13

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greater reliability for the ratepayers of Vermont. This is because the new company would be

obligated to consider sustainability (an issue which is intimately intertwined with reliability and

security) rather than solely motivated by profit maximization.

VII. CONCLUSION

After an evaluation of the three traditional electric utility models and their economic,

environmental, and reliability implications when applied to the transmission utility Velco,

several things become obvious. While transforming Velco into a public power/municipally

owned model might seem appealing at first, the resource strain and liabilities make this option

less than perfect. The cooperative model also has great appeal given the historical influence of

cooperatives in Vermont. However, this model presents problems related to capitalization and

good governance when applied on the scale occupied by an investor owned transmission utility

VELCO. The public/private corporate board combination advocated by the DPS however,

retains many of the benefits of public ownership without the liability or capitalization downfalls

faced by the municipally-owned and cooperative models. This is especially true in the context of

Velco/Transco relationship.

The Velco/Transco relationship allows for one entity or group of entities to own the

transmission grid while another entity or group of entities makes all of the decisions relative to

the operation of that grid. In the realm of corporate governance, the importance of this

distinction cannot be stressed enough. It becomes plainly obvious that through (1) careful

articulation of the VELCO’s corporate purpose (2) a majority of public servants on its corporate

board, and (3) steps which ensure transparency/accountability, the IOU that is Transco might

come to be publicly controlled by its operating entity, Velco. This board of this operating

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entity--through its four profit seeking board members and nine public servants--might be able to

better shape transmission system policy for the good of all Vermonters, rather than the profit of

Transco’s investors.94

94 The author would like to thank Robert Glover and Theo Fetter for their continued feedback on this paper’s earlier drafts.