Text of a white paper written by Represenative Dean Corren in March, 1999, for Vermont legislators. Reproduced with the permission of the author.

Re-Powering Vermont

|| Rep. Dean Corren
|| 92 Brookes Ave. Burlington VT 05401
|| Statehouse: 800-322-5616
|| Home: 802-864-9916

Vermont has a historic opportunity to establish an electric power system that can carry its economy sustainability through the 3rd millenium. We can make the potential a reality if we take deliberate and reasonably expeditious steps at this critical time.

1. Things Have Changed

For the last few years, the Vermont legislature, as most others, has been presented with a proposal developed by large industrial users and Wall Street to more or less deregulate the electric industry and bring about an supposed retail competition that will give all customers choice of power provider.

As in most other states, large industrial users, regulators, many political powers claimed that such a restructuring would cut costs. More powerfully, despite the fact that even now only a handful of states have adopted such a plan, the proponents claimed that it was inevitable. The Vermont Senate responded by passing the proposal, along with measures to address some of its worst economic, environmental, and social impacts.

Lacking sufficient proof of such claims or answers to the numerous questions regarding cost-shifting and other economic impacts, and the difficulty in establishing any meaningful competition, the Vermont House rejected retail competition. It did so while supporting the other Senate reforms (none of which require retail competition). In the VT legislature, the electric utility industry restructuring debate is no longer about how to add environmental and social band-aids to a fundamental loss of control over this $600 million per year industry.

We are now free to explore restructuring the industry with a view towards creating a Vermont-based solution.

2. How We Got Here

Freed to explore genuine Vermont solutions, the discussion is slowly but surely returning to the historic fight throughout most of the last century in Vermont: who makes the decisions? That is, public vs. private power.

For most of Vermont's power history, private power interests have won nearly all of the battles. Early electrification in Vermont consisted mostly of hydropower development for the benefit of southern New England. Villages and cities wanting better an cheaper service built their own municipal utilities. In 1902 the legislature authorized the Burlington Electric Department, which began operation in 1905, promptly cutting rates by 40%.

Until 1909, when the legislature created the Public Service Commission, utilities were regulated to some degree through local franchise contracts. With the PSC, regulation was transferred to the state., but for decades, the PSC was underfunded, and highly influenced by the private utilities.

By the teens, Vermont had over 70 small utilities, and the out-of-state speculators and holding companies began buying them up. The Connecticut and Deerfield river dams sent power to Massachusetts, while denying water power and electric power to Vermont businesses. A legislative commission issued a report in 1912 calling for Vermont to control its hydropower dams and the power being exported from them as Maine had done. The legislature did not act on the report other than to require some power from Vermont's dams to go to local communities.

Also in 1912, the nation's most infamous power speculator, Chicago-based Samuel Insull acquired the Brattleboro and Bennington utilities and began assembling what would become the Central Vermont Public Service Company (CVPS). Although eventually dominant in Vermont, CVPS was yet a small piece of Insull's New England and Midwest power empire. During the same period another out-of-state holding company, controlled by Forshay and Ohrstrom began assembling what would become Vermont's second-largest utility, Green Mountain Power (GMP). Both utility empires used pyramiding, exaggerated asset accounting, self-dealing, and other legal and illegal techniques to increase profits and expand their corporate and political control.

By the end of the 1920s, most Vermont utilities had been bought up by large multi-state holding companies that were beyond the reach of state regulators and left unregulated by the federal government. Ineffective utility regulation and the failure to electrify the struggling dairy industry was a major driver of a split in the Republican Party between the powerful utility-connected Proctor Machine and the progressive Republicans backed by the Farm Bureau. Perhaps the final straw after many battles was the 1929 effort led by the Farm Bureau to improve utility regulation which was once again killed by the Republican establishment.

The Depression finally burst the bubble of the over-inflated holding companies including those owning Vermont's largest private utilities. Two of the three that dominated Vermont went bankrupt. Insull fled the country, but was eventually extradited, tried and acquitted. Forshay was jailed for mail fraud.

In 1932 a second-term Republican representative from Putney named George Aiken, Jr. was elected speaker, and pursued an agenda of rural electrification Vermont control over its power resources. At the same time Democrat Franklin Roosevelt was elected President, and initiated efforts to reign in the unregulated multistate utility holding companies.

In 1935, Congress passed the Public Utility Holding Company Act (PUHCA). This law curtailed some of the worst holding company financial abuses, protected investors, and eliminated excessive pyramiding, but took two decades to become fully effective. PUHCA helped strengthen the regulatory power of the states, but Vermont's major utilities were still controlled by of out-of-state financial interests.

The year 1935 also brought into office Governor Charles Smith and Lt. Governor George Aiken Jr. Aiken drove forward rural electrification with a law that began to force the utilities to extend their lines to the farms, but the real impetus was provided by Roosevelt's creation of the Rural Electrification Administration which made federal capital available for powerline construction. Farm and rural interests achieved a great victory with the inauguration of George D. Aiken as Governor in 1937. Aiken effectively stopped the further flooding of farmland by power dams, both by private interests and by the federal government. He also attempted to reform the PSC. His friend, Senate Secretary Ernest Gibson, Jr. had begun investigations of the PSC which uncovered improprieties, pro-utility bias, and ineffectiveness that was costly to ratepayers. A bill to strengthen the PSC and enhance its independence passed easily in the House but was thwarted in the Senate which was more utility-friendly and included a private utility director among its members. The Senate also blocked Barre, Shelburne, and Vergennes from forming municipal utilities.

Frustrated by the Senate's resistance to reform, Aiken appointed consumer-oriented PSC commissioners including prominent private utility critic and former Farm Bureau President Ellsworth Cornwall and Putney orchardist William Darrow. In the 1939 session, House Corporations Committee chair Paul Douglas of Poultney introduced a sweeping public power bill. Although it did not pass, it's debate set the stage for the passage of the Gibson PSC reform bill. With its new makeup and strength, the PSC went about investigating utility abuses and found them. It ordered rate reductions, but was limited by the inability to regulate the holding companies' interstate operations. Aiken called for federal investigations, and with their powers under PUHCA, the Securities and Exchange Commission (SEC) and Federal Power Commission (FPC) ordered an end to the abuses and rate cut to Vermonters.

During Aiken's tenure, rural electrification through three cooperatives started to become a reality, with farm electrification rising from only 10% to about 40%. The mere existence of the co-ops caused the privates to decide that many rural customers could be hooked up after all. In 1941 Aiken went to Washington as a U.S. Senator, leaving behind a collapsing progressive Republican movement. The old private utility-connected establishment retook the governor's office and dismantled Aiken's aggressive PSC. Because of the strong public support for the lower rates of municipal power, a general municipal enabling law was finally passed, but the privates made sure that forming a municipal was unnecessarily difficult. A similar cooperatives law followed in 1943. These ostensibly enabling laws have suppressed municipal and cooperative formation ever since. The private utility-friendly establishment only lasted three terms when Ernest Gibson, Jr. won the 1948 Republican primary and the general election.

In his 1949 inaugural speech, Governor Gibson called for ending private power's control over Vermont's resources and its simultaneous abuse of Vermont's electric consumers. Believing that regulation of private power would never be fully effective, Gibson proposed public power in the form of a state Power Authority. He relied on a 1948 report by the influential Farm and Labor Council that cited the dramatic achievement of Nebraska which went to public power in 1941 and from having among the highest rates in the nation to among the lowest. Vermont, with adequate resources, could achieve similar results if it could wrest control from the out-of-state interests.

CVPS president Albert Cree, Associated Industries of Vermont (AIV), and the Bankers Association campaigned against Gibson's Power Authority. The leading newspapers conducted red-baiting attacks, helping Cree gut the bill in committee to the point that its sponsors were no longer supportive. The pro-consumer coalition of rural progressive Republicans and urban Democrats did however pass the relatively minor reform that required prior PSC approval of rate increases. The next year, Gibson was appointed a federal judge, and discouraged of the possibility of any real political or power reform in Vermont, resigned as governor.

The 1950s finally brought the split up of the giant holding companies as required by PUHCA, and the large private Vermont utilities became independent companies, GMP in 1951 and CVPS in 1953. Rather than the holding company shells, they were now owned directly by out-of-state banks, insurance companies, and securities firms. Still desiring total control, CVPS president Cree in 1952 called for the consolidation of all 38 Vermont utilities, publics, privates and co-ops into CVPS. GMP and Citizen's Utilities (CU) refused, but by 1953 he had acquired St. Albans. When public power supporters in the legislature introduced a bill in 1951 to allow the PSC to purchase, transmit, and sell low-cost public hydropower from New York's St. Lawrence River, the private utilities, along with AIV, and for the first time the Grange and Farm Bureau, pushed and won an alternative that kept transmission of the power under private control.

Public power proponents again attempted to wrest control of St. Lawrence power from the privates with a new bill in 1953 for a Vermont Power Commission. This bill met the new alignment of Democrats for public power and the farm organizations against. It also met the opposition of House Appropriations chair and CVPS director, Robert Gannett, and failed.

In 1955, Cree attempted to further weaken the PSC's authority over St. Lawrence power, so he could more likely control its transmission. Public power legislators tried again with a bill to create a Vermont Energy Corporation with broad power to develop power sources for Vermonters. Cree and CVPS won again, and in 1956 he established the Vermont Electric Power Company (VELCO) .

In 1957, to head off an attempt to require legislative approval of any PSC contract to transmit the St. Lawrence power, Governor Joseph Johnson, an AIV member and private utility supporter signed a secret contract with CVPS's private VELCO for transmission of the St. Lawrence power.

Despite the more costly transmission by the CVPS-controlled VELCO and self-dealing that benefited CVPS financially and increased its control over the state's other utilities, the public hydropower was so cheap that rates came down. This trend continued with purchases of public hydropower from Niagara power beginning in 1962.

Further purchases were being planned from proposed federal hydropower projects in Maine. The private utilities throughout New England fought the developments, since they could only profit from facilities they invested in themselves. They invested $1 million to lobby Congress, and killed the funding for the Maine projects.

Vermont's new Democratic governor, Philip Hoff, took office in 1963 and restored the pro-consumer PSC by appointing Ernest Gibson III as chair. Hoff was intrigued by the potential for low-cost hydropower from Churchill Falls in Canada, and by 1965 had negotiated for power to begin by 1971 at 4 mills per kWh -- even cheaper than Niagara power. His plan was to have a new Vermont non-profit corporation import the power and finance the construction of the new powerline. It quickly passed the Senate with only two opposing votes. In the House, Cree and the privates argued that an atomic powerplant that they would build would provide cheaper power and not require public financing. Hoff won in the House, but by only a four vote margin.

Prior to final reading, the bill was tabled for one day which moved the vote to the Wednesday after Town Meeting Day, giving the utility lobbyists more time to work. By the day of the vote, Luther Hackett, a friend of Speaker Richard Mallary, whose father was a director of CVPS, moved to replace the bill with a study by the Legislative Council. This version passed, the House prevailed over the Senate in the conference committee, and Mallary assured Hoff that the study would not be completed until after adjournment. The Canadian deal was lost, and one year later the utilities applied for a permit to build the Vermont Yankee nuclear power station. The plant began operation in 1972, two years late, and at 2.5 times the proposed cost. While the debates on nuclear safety and waste issues raged, the plant operated very poorly in its first three years. In apparent reaction, the 1975 legislature reclaimed to itself from the Public Service Board (which had been renamed in 1959) the authority to approve any new nuclear plants.

Vermont's power politics has been significantly less colorful since that time. In 1981 the legislature split the Board in two in order to separate its advocacy function (the new Department of Public Service) from its quasi-judicial function (the new Public Service Board). In 1987, primarily in an attempt to secure low-cost Niagara power, the DPS was authorized to sell power to retail customers through the utilities' distribution systems. Because, under federal law, only customer-owners of public power systems are eligible for such preference power, the courts stopped such sales to customers of the private utilities. Other legislative efforts to enhance the state's ability to purchase power for sale to consumers were easily rebuffed.

An important energy efficiency measure was passed into law in 1991. Least-cost integrated planning requires utilities to compare the costs of demand-side management (DSM) with those of new power supplies and choose a reasonable mix of those with the lowest life-cycle costs. Actually compelling the utilities, especially the privates, to invest in conservation (and lower their revenues) proved difficult, complicated, and ultimately of limited success.

In general, throughout Vermont's power history, the private utilities have been able to stop any major legislative reforms or actions that they feared would tend to limit their control over Vermont's electric power. With the large private utilities (GMP and CVPS) now on the verge of insolvency, we have a historic opportunity to craft a solution that finally puts Vermonters in control rather than boards of directors that are half out-of-state and shareholders that are almost entirely out-of-state.

We now need to recall and be inspired by the efforts of Vermont's leaders like Republican Governors Aiken and Gibson and Democratic Governor Hoff to finally bring power under Vermont control. We have the opportunity they never had, to secure a more economically and environmentally sustainable energy future for Vermont.

3. No Bailing Out Failing Private Utilities

A bailout, through novel coercive rates that force ratepayers to pay for imprudently-incurred costs, or through a securitization scheme that amounts to the same thing, will buy Vermonters nothing for their extra burden. Why pay even more money to protect the utility managers who put Vermont's economy at such great peril? The private utilities are not too big to fail and if they are treated that way now, they owe Vermonters a refund of all the profits they were allowed for decades by the Public Service Board for the risk they supposedly bore.

Furthermore, with stock market capitalizations at about half of book value, the CVPS and GMP will eventually be acquired by a national or international giant. Why throw ratepayer or taxpayer money into them just to sweeten the deal for their future owners? Since they cut essential personnel prior to cutting dividends, new revenues will likewise go to dividends rather than restoring the workforce and improving service. We need to remain calm when financially interested parties claim utility bankruptcy will destroy the state's economy. These are the same interests (primarily the private utilities and their creditors) who told us that not building Vermont Yankee and not buying the Hydro-Quebec contract would destroy the state's economy. Their track record could not be worse.

In general, while there would be uncertainties, throughout bankruptcy the real work of the utility continues by the same employees, and rates continue to be set by state regulators.

4. Let's Talk

While we must not short-circuit the possibility of bankruptcy by bailing out the utilities, actual bankruptcy is not an ideal outcome. It would inject unpredictability, unnecessary costs, and worse, it would delay any real change to the system. Bankruptcy would not represent a failure of the large private utilities - they have essentially already failed - but a failure of state policy. We need to use this window of opportunity prior to bankruptcy to make a great deal for Vermonters.

The utilities are willing if not eager to talk, and more so as the clock ticks. It's no longer about ideology - it's only about money. We can make the private utilities a deal they can,t refuse, and still save Vermonters vast sums over the next decades. Since the Governor (who, when asked about a public role replied, It never occurred to me.) won't provide the political leadership, it falls to others to fill the vacuum. In terms of the economics, the environment, and the sustainability of both, that represents our best chance to act in the interest of all Vermonters.

Of course, the private utilities are not the only players. Their major creditors, particularly Hydro-Quebec must be brought in at the right time. The real threat of bankruptcy, with the potential loss of value of its contract finally got H-Q's attention, and as time draws short, they too are serious about making a deal. So are the independent power producers (IPPs).

5. Starting Over -- Analyzing the Alternatives

We need to calmly review all proposals to see if there is anything to them. Upon even the gentlest of criticism, the deregulators' pronouncements such as the Governor's Gilbert Working Group report have immediately crumbled. Their facts were wrong, their conclusions unsupported, and their unbiased image proved a sham (Gilbert is a utility lobbyist and a Director of Vermont Gas Systems, which is controlled by Hydro-Quebec, the utilities, largest creditor).

Similarly, if we take the time for analysis, we won't fall for the more sophisticated shell games that transfer the public's assets into private utility hands. The foremost example is the proposal to discount the H-Q contract (which some utilities owe, not Vermonters) for a powerline through Vermont which by law can only be built for the public good.

By getting past the distractions we can start to get the real work done - first understanding the nature of this commodity, how it is generated, bought, sold and used, how the market works, and doesn't. Then we can do the necessary economic, financial, and technical analyses of reorganizing, governing, maintaining, and improving a system that makes sense for Vermont. Such studies must be rigorous, independent, and credible. They are regularly performed by respected accounting, management, and engineering firms experienced in the electric utility field.

6. Putting Vermonters in Control

We ought to restructure, but not just tinker with the brand of restructuring demanded by the administration, the utilities, and the [Burlington] Free Press (the same group that demanded the H-Q contract). As our history tells us, the key question of restructuring is whether the people of Vermont are going to be in control or shut out. In a sense, the old regulatory scheme simply postponed resolving that fundamental question for many decades. If we fail to act, or even to consider the question, it will be decided in the negative by default, and outside this state there is a trillion-dollar electric industry and a billion-dollar financial industry poised to extract even more from Vermont than we now pay.

We need a framework through which to debate and decide values. Should the Vermont Yankee nuclear plant continue to operate? Should we build a powerline through Vermont so H-Q can sell more power to southern New England? Should we invest the economically optimal amount in efficiency and focus on bottom-line bills, or just minimize rates? Vermonters will either be empowered to decide these and many other questions in our own best interest or we will watch them happen, mere bystanders to our economic future. The combination of saving money while having control gives us greater latitude to make such decisions, and take the long-term (i.e. our children) into consideration.

In any real restructuring, whether the model is a statewide authority, new municipal power districts, or a cooperative, we must clearly realize that no solution can guarantee perfect decisions about the future. But we can maximize the potential for good decisions. By operating strictly in their customers' interest, with effective public responsiveness and accountability controls designed in, consumer-owned utilities save money. They can be robust enough to help our economy weather downturns and flexible enough to meet changing needs. On average, nationally, the 2000 public power utilities have residential rates are 24% lower than the private utilities,, commercial rates are 17% lower, and industrial rates are 2% lower. In Vermont, residential bills of public power utilities average 12% less than those of the private utilities.

With about 300,000 electrical hookups, Vermont is about the size of Nashville's municipal utility, or about one-third as large as Nebraska, both of which have rates much lower than ours.

Once we are no longer having our power decisions made on behalf of out-of-state shareholders, the fundamental economic question becomes: how does Vermont best seize the opportunities of the competitive wholesale marketplace?

7. Stopping the End-Run

We don't need to act suddenly to restructure. There is still much to learn, and then much to do, and it must be done right. Despite the media (especially the [Burlington] Free Press) hysteria, rates are not soaring, and they are not about to. We need to stay focused, and not be distracted by seemingly huge issues like bankruptcy and securitization, which in the big picture are mere component parts. We can appropriately disregard any media charges of inaction. Refusing to jump off a cliff after detailed investigation of the terrain is not inaction. And those yelling jump today are mostly those who couldn,t wait to jump into the Hydro-Quebec contract eight years ago.

Let's take heart from the fact that last session the House did what had been considered impossible. It considered the impacts on Vermonters and halted the deregulation juggernaut which, once stopped, lost its mantel of invincibility, along with much of its support. There is no question that the more deliberate approach has served Vermonters well. We need not panic every time the Dean administration uses media ploys like the Gilbert Working Group or the Public Service Board or Department threaten to restructure the industry without the legislature.

We do need to act soon to stop any attempted restructuring end-run by the private utilities and the administration. After years of common agreement that any major restructuring can only be done through a change in our utility laws, the state regulators and private utility interests, having become frustrated with the legislature's rejection of their plan, now appear intent on accomplishing their restructuring through secret negotiations. While negotiations to lower contract costs are appropriate, regulators are not authorized by law to restructure the industry. The Public Service Board is an agency of the legislature, authorized by it to carry out only very specific actions.

There is a serious risk, however, that other actions taken could have the practical effect of locking-in their proposed restructuring while circumventing the legislature, unless we take preventive action now. Two areas in particular should be required to have specific legislative approvals: 1. securitization, or establishing a permanent obligation for Vermonters to pay for utility obligations, and 2. passing on to ratepayers costs the Board finds were imprudently incurred by utilities. To reduce the possibility of Vermonters being shut out of the process or of protracted litigation, such legislation should be passed as soon as possible.

8. Principles Are Not Enough

It is often said that all the legislature needs to do is pass a bill establishing a set of principles or guidelines for a restructured industry. Virtually every stakeholder that has weighed in on this issue in every state has adopted a set of principles, such as, all customers must win, or low-income consumers and the environment must be protected. They all sound good, but this approach can be a trap. First, the devil is in the details, and broad, conclusory principles provide inadequate guidance if others are to be actually making the decisions.

Second, how any restructuring is evaluated against such principles, and by whom is critical. Will it be done in advance by the legislature, or after the fact, or in a courtroom? Whether such principals are actually met can only be determined after it is too late.

Third, we cannot possibly, anticipate every possible aspect of either the business deal among the parties or the settlement offer they will propose to the regulators. The legislature should not rashly delegate this unprecedented degree of its responsibility.

The fact is that establishing principles is a proven technique to get advocates and legislatures out of the loop, so that large consumer, utility, or Wall Street-driven restructuring can proceed unimpeded.

Similarly, creating good programs to make up for the fundamental protections under the current regulatory system may provide merely illusory benefits in the long run. Good programs can come and go and can be implemented well or poorly. Deregulation is almost certainly irreversible. While no system can be expected to be perfect, the legislature should accept the duty to create an underlying structure that maximizes the probably of reasonable operating decisions and public accountability.

Rep. Dean Corren, Progressive, Burlington, has served in the Vermont Legislature for 6 years. He has an MS in energy science and policy, and has spent 8 years doing energy research at NYU for government, private, and public utilities.

Reformatted and posted by VCE on October 13, 1999