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February 24, 2014

Battle over CMP's rate proposal pits profits against renewable advocates

Photo / Tim Greenway; Photo illustration / Matt Selva
PHOTo / Tim Greenway Steve Levesque, executive director of Midcoast Regional Redevelopment Authority in Brunswick, opposes Central Maine Power Co.’s proposed rate plan that, in his view, penalizes alternative energy suppliers. Levesque is negotiating with a company that wants to build an anaerobic digester at the former Navy base.
The first bar represents the average CMP customer’s bundled bill. The two bars to the right show one- and five-year projections for the average customer’s bill if CMP’s rate plan is approved. Five years out, the distribution costs for the average customer are projected to rise by about $7.
PHOTo / Tim greenway Fortunat Mueller, co-founder of ReVision Energy, stands with inverters and solar electric panels in his company’s Portland office. Mueller fears Central Maine Power Co.’s proposed rate change will extend the payback period for customers who invest in alternative energy.

Steve Levesque, executive director of the Midcoast Regional Redevelopment Authority, has spent the better part of three years pitching Brunswick Landing as the epicenter of an emerging clean energy market in Maine and is nearly ready to seal a deal with a company that intends to build an anaerobic digester at the former Navy base. Until recently, he had no inkling that goal also would put Brunswick Landing in a high-stakes policy battle with Central Maine Power Co.

But that's where he finds himself, joining more than a dozen trade, environmental and renewable energy groups that have filed with the Maine Public Utilities Commission as intervenors in CMP's Alternative Rate Plan 2014 proposal. The plan sets rates for residential and small business customers over the next five years.

At issue is a CMP proposal to base the distribution part of its bill on fixed costs rather than customers' usage. The rub for opponents of CMP's plan is a surcharge, or standby rate, that would be charged to customers with on-site power generation who still need access to the grid. Customers such as the company proposing to build the anaerobic digester at Brunswick Landing, which would need access to the grid if their on-site power generation goes down, expect the standby rate could cost in the thousands annually.

“It certainly has the potential of making our Renewable Energy Center unfeasible,” says Levesque. “It's pretty expensive as is to generate power through renewable sources. If we had an additional charge …, it's very likely we couldn't pass that on to our tenants. No one would come here. Our combined rate would be too expensive.”

Levesque's fears are shared by other intervenors, which include the Ski Maine Association, Industrial Energy Consumers Group, Maine Independent Colleges Association and GridSolar. Public hearings on the rate case are scheduled for the spring, prior to an expected June decision.

But CMP executives argue that the standby rate and other changes outlined in the plan will help assure its shareholders of steady returns and fairly distribute the costs of operating, maintaining and upgrading its distribution network against a backdrop of overall increasing operational costs. The tactic has proven effective for power transmitters elsewhere, including two New York utilities operated by Iberdrola USA that have been allowed by regulators to employ similar cost-recovery mechanisms — resulting in Moody's Investor Services improving the bond rating for the U.S. subsidiary of CMP's parent company by one notch.

Seeking a different tack

To understand CMP's proposal, it's important to understand its context. Since the mid-1990s, CMP has based the distribution portion of its bundled monthly bill for residential and small business customers on the volume of electricity usage. Basically, customers pay for what they use.

But in a major departure from the rate structure of its previous five-year agreements, the utility's proposed rate plan would base the distribution portion of monthly customer bills on a percentage of its fixed costs.

Through a “revenue decoupling mechanism,” the plan would also allow CMP to adjust rates periodically up to certain PUC-approved levels to cover any revenue losses resulting from decreased electricity usage.

But the most controversial element of the proposal is the standby rate that CMP says would minimize the rate hike if all its distribution revenues came from fixed customer charges. Since CMP's proposed distribution rate design only recovers 45% of its fixed costs in the first year, increasing to 60% by the fifth year, the utility is proposing a surcharge to cover the remaining fixed costs of distribution. The chief sticking point for Levesque and many of the other intervenors is CMP's assertion that even when customers reduce their electricity consumption through conservation or on-site generation such as with solar panels, they still benefit by being connected to CMP's power lines and should pay their fair share of the utility's fixed distribution costs via the standby rate.

“This is a huge and very complicated case,” says Eric Bryant, senior counsel for the Office of the Public Advocate, which represents utility consumers in PUC rate cases and defines its mission as making sure they have affordable, high-quality utility services.

Given those complexities and the high stakes for both ratepayers and CMP, the Public Advocate Office asked the PUC to schedule public witness hearings, which have been set for April 2, at 7 p.m., at the PUC office in Hallowell, and for April 3, at 7 p.m., at the University of Southern Maine's Abromson Center in Portland.

CMP following industry trend

CMP launched its proposal on May 1, 2013, with a four-page letter to the PUC signed by CMP Vice President Eric Stinneford laying out three challenges the company faces in the next five years:

• The utility projects growth in future sales volumes “will be nonexistent over the next five years, in large part as a result of the efficiency programs implemented by the Efficiency Maine Trust.”

• The utility does not expect historical levels of productivity gains can be sustained, “given the significant productivity gains it has already achieved over the last two rate plans as a result of its acquisition by Energy East and then Iberdrola S.A.”

• The utility's capital investment plan, which includes replacing its 40-year-old customer billing system, will average nearly $90 million per year. That is approximately one-third greater than the level of distribution capital investment during the current rate plan.

The combination of flat or declining electricity usage and the cost of needed investments, Stinneford wrote, requires a new approach to setting rates. Sticking with the status quo approaches, he said in his filing letter, “would result in a steady erosion of CMP's returns.”

CMP's new rate plan and supporting rationale echoes a January 2013 white paper published by the Edison Electric Institute, an association of U.S. shareholder electric companies representing almost 70% of the country's electric power industry. Titled “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business,” the 20-page report sounds an alarm over “game changers” such as accelerating development of on-site power generation like solar photovoltaic panels and new technologies that provide alternative energy efficiencies. These challenges to electric utilities, the report states, are comparable to the way cell phones and digital cameras challenged AT&T and Eastman Kodak.

“Left unaddressed, these financial pressures could have a major impact on realized equity returns, required investor returns and credit quality,” the report's author, Peter Kind, writes.

The report identifies several immediate and long-term actions regulated utilities should take to counter the threat of declining revenues resulting from on-site power generation by a growing number of utility customers. Topping its list is instituting a monthly customer service charge to recover fixed costs and eliminate the biases that are created by alternative power producers.

The urgency of doing so is underscored by the white paper's conclusion: “Investors have no desire to sit by and watch as disruptive forces slice away at the value and financial prospects of their investment … Investors will want to see very clear-cut programs to capture value that are consistent with the core strengths of utilities: ability to execute construction projects, to provide dependable service with high reliability and to access relatively low-cost capital.”

CMP spokesman John Carroll, who also serves as director of corporate communications for Iberdrola USA, a subsidiary of the Spanish energy company that owns CMP and four other utilities in the Northeast, says the utility's new rate approach aligns with emerging trends in the utility industry. A July 2013 survey by the Institute for Electric Efficiency, he says, reports that 32 states have approved fixed-cost recovery mechanisms — 14 with revenue decoupling and 18 with lost revenue adjustment mechanisms — which is up from 27 states in 2012. Maine is one of three additional states with open cases awaiting a decision by regulators.

“I truly believe we are peering around a bend into the future and many of the issues in this case reflect the breadth and depth of changes in technology, consumer habits and the structure of the utility industry,” he says. “From a decoupling perspective, we are behind the curve. We're an outlier compared to what's happening everywhere else.”

Bond rating services are taking note of the changing environment for utilities and their investors.

On Jan. 30, Moody's Investors Service Inc. upgraded its bond rating for Iberdrola USA by one notch to Baa1, citing as a factor “better cost recovery provisions” allowed by the “supportive New York regulatory environment” for CMP's sister companies New York State Electric & Gas and Rochester Gas & Electric. “The implementation of such mechanisms has helped each company improve its financial profile and the predictability of its cash flow generation in recent years,” the Moody's report states.

Carroll says for an average customer (based on 525 kWh/month usage and a $74.51 monthly bill under the current rate plan), the company's proposal would add $1.03 to the distribution portion of the bill and contribute 1.4% to the overall increase in the total bill for the first year. In the second year, it would add 2.1% or $1.69 to the bill; in the third year, 2% or $1.71; in the fourth year, 1.7% or $1.48; in the fifth year, 1.1% or $1.01. By 2018, the average homeowner would likely see a cumulative $7 per month increase on just the distribution portion of the bill.

Intervenors weigh in

Hundreds of pages of testimony for and against CMP's rate plan proposal have been filed with the PUC since the case was initiated last May. At least 14 companies, trade groups and environmental organizations, along with several individuals, have filed as intervenors in the case. Some have filed detailed objections to various elements of CMP's proposal, a few have voiced support and others have simply notified PUC of their interest in the proceedings.

“It's hard work and it's a zero sum game,” says Tony Buxton, one of several Preti Flaherty attorneys representing various intervenors, including MRRA. “It's required everyone to get educated about rate design very quickly … This is an industry-wide initiative to combat what investor-owned utilities view as a disruptive threat.”

Although Buxton singles out the standby rate as a primary concern, he says the intervenors have also raised concerns that in his view collectively make CMP's rate design case “a very anti-consumer filing in significant respects.”

Objections made by key intervenors include:

  • Thermal Energy Storage of Maine, a Biddeford-based company that is the New England distributor of the Steffes Corp. thermal storage units that use low-cost electricity at night to heat ceramic bricks that disperse heat throughout the day. Average annual savings for a 2,000-square-foot house comes to almost $700 per year, compared to the cost of heating with oil. The company says CMP's proposed increases in its rate for off-peak electricity usage is “inconsistent with state energy policy” because it would reduce the yearly savings and increase the payback period for homeowners using electric thermal storage heating units.
  • Industrial Energy Consumer Group, a trade group representing Maine's largest consumers of electricity, describes CMP's standby rate proposal as “punitive to customers with self generation” — many of whom “have the ability to reduce, rather than increase, CMP's costs at the time of summer peak. … This cost reduction capability should be rewarded, not penalized.”
  • Maine Independent Colleges Association, representing 10 private colleges in Maine with about 16,000 students, cites investments already made by Thomas College and Bowdoin College, among others, to create their own renewable energy onsite. Laurie Lachance, Thomas College's president who previously was a former state economist and a corporate economist at CMP, testifying on behalf of the association, told the PUC that CMP's proposed standby rates would “substantially and directly” affect the colleges' efforts to invest in solar energy, combine heat and power, biomass and wind as ways to meet their own energy needs. “The rate appears to be intentionally designed to discourage investment in onsite generation by CMP's customers by imposing unsupported fees that would make such investments uneconomic,” Lachance says in her intervenor testimony.
  • Ski Maine Association: “Several of Ski Maine's members own and operate generation projects that are located 'behind-the-meter,' and other members are considering such projects. These members would each be substantially and directly affected by CMP's proposal regarding standby rates.”
  • Peregrine Turbine Technologies LLC, a Wiscasset-based developer of wind turbines for on-site power generation: “Peregrine's success in penetrating relevant markets is inversely related to CMP's standby service rates: When standby rates increase on the customers who would purchase Peregrine's turbine technology, Peregrine's market penetration slows.”

At least two intervenors voiced support for various elements of CMP's proposed rate plan:

  • Efficiency Maine Trust, an independent trust funded with revenue from a regional cap-and-trade program to reduce carbon emissions, promotes energy efficiency. Detaching the utility's distribution revenues from the customer's volume of usage, says Michael Stoddard, its executive director, should eliminate any disincentives CMP might have had for supporting energy efficiency initiatives such as installing high-efficiency fluorescent lighting.
  • Bangor Hydro Electric/Maine Public Service (now called Emera Maine): “Bangor Hydro Electric and Maine Public Service support CMP's view that rates should be designed to fairly allocate the costs involved in providing service to customers. Allowing a local generator to sell electricity to neighboring customers, via the transmission and distributions system, without paying for said use, is unfair to other ratepayers who are not similarly situated.”

GridSolar, a company established by Richard Silkman and Mark Isaacson in early 2009 to provide a “non-transmission alternative” related to electric grid reliability in Maine, has been overseeing a smart grid pilot project on the Boothbay peninsula that brings together a variety of power generation resources such as solar power, backup generator units and battery storage to reduce the amount of power transmitted down the peninsula by CMP, particularly during peak demand. Its intervenor testimony supports the general concept of decoupling distribution revenues from usage, but strongly opposes the standby rate as “fundamentally discriminatory” against alternative energy technologies that can reduce demand on CMP's electricity grid.

It offers a counter-proposal that essentially flips the utility's response to the disruptive technology threatening to reduce its revenues — recommending that CMP charge rates that would provide incentives to customers “to invest in technologies and take actions that reduce the loads they impose on CMP at the time of its system peak. This, in turn, will mean CMP's long-run costs to provide service to its customers will be lower and all ratepayers will benefit from the lower costs.”

Competing interests

For MRRA's Steve Levesque, CMP's proposed standby rate greatly complicates the power purchase agreement he and his board have been negotiating with developers David Weyburn and Stewart Geyer, the principals of Brooklyn-based Village Green Ventures LLC. The company, which has secured approvals from the local planning board and Maine Department of Environmental Protection, plans to build a 1-megawatt anaerobic digester at the southern end of Brunswick Executive Airport.

Levesque says Village Green Ventures, which is supposed to break ground on its facility this spring, is precisely the kind of innovative energy-related business MRRA envisioned when it created its Renewable Energy Center at Brunswick Landing. When the anaerobic digester is up and running — converting food waste, biomass, restaurant grease and other solid waste to electricity and heat — he says the plan had been to sell that power to tenants at the former Navy base.

“If the rate case goes through, it would seriously jeopardize what we've been trying to do here,” Levesque says, citing Bowdoin College's planned solar energy facility on three acres at Brunswick Landing as another example of a behind-the-meter project that would be hurt by CMP's proposed standby rate. A collaboration between the college and SolarCity Corp., the 1,300-kilowatt system includes a 700 kW installation at Brunswick Landing and is expected to offset about 8% of Bowdoin's annual electricity usage. CMP's standby rate would add almost $300,000 annually to its electricity cost, according to the Maine Independent Colleges Association's testimony as an intervener. CMP, in its rebuttal, disputes that estimate, saying it's too high.

Preti Flaherty lawyer Andrew Landry says CMP's proposal essentially shifts all the utility's risks going forward from its investors onto ratepayers.

“They are attacking the problem in three different ways,” he says. “They are asking for a 'belt,' 'suspenders' and 'duct tape' to hold their pants up. How much protection do they need to operate in a changing marketplace?”

Fortunat Mueller, co-founder and co-owner of ReVision Energy, describes CMP's proposal as a “back-door attack” on Maine policies supporting small renewable energy systems, such as solar photovoltaic panels. He says a typical residential solar customer installing a 4 kW solar electric system can expect to save upwards of $685 in electricity costs annually — noting that at current rates that results in a payback of roughly 10 years.

“CMP's proposed rate design would cost this customer an extra $133 each year, pushing the payback out to close to 14 years,” he says. “The proposed rate design would severely slow and potentially shut down the adoption of residential solar energy in Maine.”

CMP's Carroll says the intervenors objecting to the utility's rate proposals — particularly opponents of the standby rate — by and large have narrower perspectives than the utility, which he says is trying to balance the interests of all ratepayers, its mandated requirements as a public utility and the interest its investors have in achieving a predictable return on equity in line with utility industry norms that are in the range of 9.5% to 11% annually.

“If they wanted to go off the grid entirely, we'd have no problem with that,” he says. “But if they don't, they're getting a lot of value from being on the grid. The power is always going to be there when they need it. That's true even for the time when they produce all of their own electricity. Our position is that they should pay their fair share of the distribution costs even for the times when they produce all of their electricity on site.”

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