Vermont faces choices over the future of its electric supply

Burlington Free Press, April 13, 2003

By Sue Robinson
Free Press Staff Writer

Vermont has no giant hydroelectric dams, paid for by the federal government, like those out West.

Vermont lacks the cheap, coal-fired power plants of the Plains states.

What this state does have are miles and miles of transmission lines strung out over mountain- tops delivering power paid for with expensive long-term contracts to a small number of people. Thus, Vermont's electric rates are the sixth-highest in the nation.

What can Vermont do about what it pays for electricity? The answer depends on whom you ask.

Businesses and some state regulators argue that the perfect opportunity to squash Vermont's reputation as a high-priced-power state will arrive in a decade when nearly three-quarters of the state's power supply contracts expire. Other industry experts say certain, unalterable facts will keep Vermont's rates high.
Rating the rates


The reasons for Vermont's high power costs -- according to industry experts and state regulators -- include:

-- Vermont lacks the geography for large-scale hydroelectric plants. The federal government paid for giant dams out West decades ago. Utilities continue to draw electricity from the dams without the debt associated with building new power plants. Vermont failed to take advantage of long-term contracts for power from such dams back in the mid-1900s, said Chairman Michael Dworkin of the Vermont Public Service Board.

-- Vermont has no coal-fired power plants. Coal is abundant and cheap, but pollutes the air. About half of all America's power comes from coal, which costs about half as much as other sources of energy.

-- Vermont signed a long-term power contract with Hydro Quebec in Canada a decade ago just as electric prices plummeted. The contract locked the utilities into buying power at above-market prices.

-- About a third of the state's power comes from the Vermont Yankee nuclear power plant, whose debt, building and other expenses have generally meant more expensive power.

The Hydro Quebec contract is the main culprit for the rise in the state's average electricity rate from 28 percent above national average to almost 50 percent higher over the last decade, according to data that IBM compiled from the U.S. Department of Energy.

But it is the first two reasons why Vermont will never have electric bills that approach the national average, industry experts say.

The national and regional averages are skewed lower by states whose utilities were banned from raising rates while their electric markets went through deregulation. State regulators gave the utilities permission to delay paying for cost increases, assuming that deregulation would end up lowering costs for all.

Now deadlines are nearing for those companies to pay up, and many are applying to their state regulators for giant increases. New Jersey is trying to figure out now how it will pay the $1.2 billion in costs it deferred during restructuring, Dworkin said.

Other states have banked on short-term buying on the wholesale market, whose volatility is also starting to catch up to prices. Massachusetts Electric, for example, is asking for a 44 percent rate increase.

"That's going to make Vermont's rate's look pretty good," said Dorothy Schnure, spokeswoman for Green Mountain Power Corp., the state's second-largest utility with 87,000 customers.

Meanwhile, the Hydro Quebec contract ends around 2015 and the Vermont Yankee nuclear plant ends its relationship with Vermont in 2012. Together these contracts account for 72 percent of Vermont's power supply.

When these supply contracts expire, the state will have an opportunity to seek power elsewhere.

One option is for the state or its utilities to build their own generating plants in Vermont. The choices include:

-- Nuclear. Vermont just spent several years trying to sell its sole nuclear plant, Vermont Yankee. Nuclear power is expensive and controversial because of the radioactive waste it produces. The state has the option of renewing its power contract with Vermont Yankee in 2012. Power from Vermont Yankee costs about 4.5 cents per kilowatt, according to the electric utilities.

-- Hydro. Vermont's contract with Hydro Quebec expires in a decade. The Canadian utility has said it wants to get out of long-term contracts. However, the company is expanding its generation capacity in Quebec, a move that might provide an opportunity for new contracts for Vermont utilities. Hydro Quebec accounts for a third of the state's power -- over dependence on a single source, some state regulators say. Electricity from Hydro Quebec costs about 6.6 cents per kilowatt, according to the electric utilities.

-- Coal. Vermont has rejected this option in the past because of the air pollution associated with burning coal. Power from coal-burning plants costs about 2 to 3 cents per kilowatt hour, according to energy consultants.

-- Natural gas. These plants have proliferated across southern New England in recent years; few power generators are willing to build more for a saturated market. Electricity from natural gas-powered plants costs about 5 to 6 cents per kilowatt, according to energy consultants.

-- Renewable energy. Electricity from windmills, solar panels and the like are still 5 to 20 percent more expensive than power from more traditional sources. Power from windmills cost about 5 to 7 cents per kilowatt, according to energy consultants.

A new natural gas power plant would cost around $240 million, and open the utilities -- and their Vermont ratepayers -- to risks they are trying to get away from with the Yankee sale. Risks include breakdowns, fuel cost volatility, long-term debt and pollution. Such a plant would also mean revenue and a guaranteed, nearby power supply.

The utilities -- or the state -- could buy existing power plants.

Hydroelectric dams on the Connecticut River are for sale. Buying the dams could cost as much as $1 billion. The state also would have to convince the seller -- a California company -- to sell just the dam, separate from the rest of the generating capacity it is selling. However, this option would allow Vermont to attract and retain large companies with discounted power, for example.

The state government could spend money making Vermonters conserve energy, thereby lessening the need for more generating capacity.

Previous reports by the Vermont Electric Power Co. have pegged the cost of conservation programs at $540 million over the next decade to pay for equipment upgrades such as efficient furnaces and conservation education. Vermont already uses less electricity per person than most states because of an active efficiency program and an environmentalist mind-set. That is why the average consumer's electric bill is lower than in most other states despite higher electric rates. Most experts agree more energy could be conserved.

State regulators and the utilities could look into a mix of short- and long-term supply contracts with private companies such as Hydro Quebec or straight from the wholesale market on a daily basis. If done right, the contracts could contain prices.

If Vermont followed a path that would give it diverse power sources, Vermont electric rates could realistically fall by 1 to 1.5 cents a kilowatt hour -- from almost 11 cents to around 10 or 9.5 cents -- said Rich Sedano, who stepped down as public service commissioner in January 2001 to become an energy consultant in Montpelier with the Regulatory Assistance Project.

Such a decrease in rates would save the average Green Mountain Power Corp. homeowner about $97 a year, for example. Or, in the case of IBM, it could mean about $3 million in savings a year.

Sedano cautioned against forming a policy that gives Vermont the cheapest rate possible at the expense of price stability or the environment.

Some businesses say perhaps now is the time the state should rethink its policies with a nod to economic development.

Any policy will contain uncertainty. When Vermont utilities signed the Hydro Quebec contracts in 1987, even the regulators gave their stamp of approval to a move they believed would provide the state with a stable supply of electricity at reasonable prices. Instead, changes in the market's electric demand and supply prices drove several Vermont power companies to the brink of bankruptcy.

"A few options are theoretically possible that would theoretically give you lower rates," Sedano said. "But no option is going to give you the best rate out there all of the time. That is just the nature of the electric business. You just never know what is going to happen."

Contact Sue Robinson at 660-1852 or srobinso@bfp.burlingtonfreepress.com