Part 1: Power to Rely On
While Maine has a host of stubborn challenges – high taxes, costly health care and cold weather, to name a few – there is one issue where policy makers can make a large difference in the months ahead: how to reduce the exorbitant price of electric power. In this two-part series we look at how Maine’s policies on electric power, taxation and economic development presently intersect and how those policies must change to benefit from wind. …
In the same fashion that our nation has failed in recent decades to maintain its highways, its bridges, its rail lines, its flood levees and its water and sewer systems, it has also failed to keep pace with our growing dependence on electricity.
It is not so much a shortage of generators that renders our systems so vulnerable but our inability to dispatch available power quickly to places where it is needed. As the 2003 blackout cascaded across Ohio, Michigan, Pennsylvania, New Jersey and Ontario, the state of New York still had generators in reserve but was unable to deploy them in time to save even itself, let alone its neighboring states.
As the demand for electric power has steadily grown, investors have built generators and transmission lines to keep pace, but utilities have failed to provide the responsive control systems necessary to manage power effectively. …
Long before the blackout of 2003, Washington had been gridlocked over energy. But the “Final Report on the August 14, 2003, Blackout in the U.S. and Canada” finally goaded Congress into passing The Energy Policy Act of 2005, a lengthy and comprehensive law that shifts energy policy on many fronts.
On the specific topic of electricity, the law emphasizes reliability to the exclusion of every other competing value – including cost, the environment or local autonomy. Reliability standards that were once voluntary are now mandatory. Utilities that fail to comply are now to be penalized.
In addition, the Federal Energy Regulatory Commission (FERC) has authority to reward handsomely – at the expense of ratepayers – any utility that seeks to build new transmission lines needed to improve the grid. If state regulators get in the way, the federal Department of Energy may override local resistance by designating a geographic area as a “national interest electric transmission corridor”.
Reliability in New England
Although all of eastern North America is essentially a single organic grid with high levels of interdependency among regions, there are “seams” in the network defining smaller management areas. One of those seams surrounds the six New England states and is managed by “ISO-NE” – the Independent System Operator for New England, a non-profit organization that coordinates reliability for the region. Its annual administrative cost to ratepayers is $125M. ISO-NE contracts with most of New England’s utilities to dispatch power, set transmission tariffs and operate a market for the sale of wholesale electricity.
When the blackout wave surged east from Ohio in 2003, it overcame many regional control systems including those of the New York state ISO; but ISO-NE was able to stop the surge short and spare most of New England from its effects.
Even though Maine generates more power than it needs and generally serves as an exporter to the rest of New England, we, too, have had our close calls, largely related to our notorious dependency on natural gas. Gas represents 40% of New England’s total electric capacity, and 49% for Maine alone, compared to 20% in the rest of the nation.
On Saturday, December 1, 2007, an equipment failure in the Sable Island fields disrupted gas supplies to the principal pipeline feeding Maine. Three of Maine’s five gas-fired plants dropped off line, resulting in a loss of 1,370 MW, over half of Maine’s total capacity. ISO-NE responded by importing power from outside New England and calling on a number of factories to shut down, thus saving the rest of us from browning or blacking out. Other close calls occurred during the cold snap of 2004 and following Katrina in 2005.
Maine Utilities Ride to the Rescue
In response to these local reliability issues, and taking advantage of the special benefits of the 2005 Energy Policy Act, Central Maine Power Company in July of 2008 requested Maine’s PUC to approve construction of a new 345 KV transmission line and numerous ancillary upgrades to better serve all of southern Maine from Newington, NH, to Orrington just south of Bangor. This “Maine Power Reliability Project” (MPRP) is projected to cost $1.4 billion. How much it may cost in the end is anybody’s guess.
At the same time, CMP joined with Maine Public Service (MPS) in Aroostook County to seek approval of a 200-mile 345 KV line from Detroit, ME, to Limestone, to provide a direct connection from northern Maine to the rest of New England without having to wheel power through New Brunswick. This “Maine Power Connection Project” (MPC) is estimated to cost $635M. In a separate federal proceeding, CMP has asked FERC to declare that investments in both these projects are entitled under the 2005 Energy Policy Act to a bonus rate of return of 13.14%, about 3% higher than what the Maine PUC would ordinarily allow for utility investments under its jurisdiction. By way of further contrast, a public utility can borrow money in the corporate bond market for only 7%. In the meantime, the utilities are asking ISO-NE to qualify both proposals as “Pool Transmission Facilities” under the tariff rules that ISO administers. If they do qualify, then the cost will be “socialized,” i.e., paid for by ratepayers throughout New England. Because Maine is only 8.4% of the ISO-NE market, over 9/10 of the cost of these projects may be paid for by the other five states. Maine ratepayers are already paying our small share for reliability projects in Connecticut and Massachusetts, and the other states are contributing to Maine’s recently completed 345 KV line from Orrington to New Brunswick.
A Bias Toward Transmission
In any area where there is a shortage of power, the issue can be addressed either by building more generators close to the load, or by building transmission lines to import power from a surplus region, or by doing a bit of both. The challenge, in any case, is to define the “least cost alternative” so that ratepayers get the cheapest form of reliable power. …
Since deregulation, the world of electric power in New England has been divided into two investment camps: the generators who sell power across political lines in open markets; and the transmission and distribution (T&D) utilities whose distribution rates continue to be controlled by state agencies like the Maine PUC and whose transmission rates are controlled by ISO-NE and FERC.
Most experts conclude that the present system, dominated by federal regulators, is heavily biased toward building transmission. As noted above, the Energy Policy Act of 2005 creates powerful rewards for T&D utilities to invest in new transmission corridors and provides a federal preemption where necessary to overcome local barriers.
ISO-NE derives its authority from the T&D utilities through contracts that are approved and regulated by FERC. ISO-NE’s stated mission is to ensure reliability and the adequacy of supply. Cost is a tertiary consideration left largely to the market. Under current ISO-NE policies, most transmission projects will qualify for socialized funding. Therefore, each state has a near-term advantage to approve such lines knowing that the cost will be spread among neighbor states. But if all of the neighbors behave the same way, there is a distinct risk of spending more on transmission than New England requires.
The millions of people who live south of Maine from Boston to New York create huge demands for electricity; but because supply is so limited, they have the highest power costs in America.
To the north and east of Maine, by contrast, power is cheaper, a blend of hydro, nuclear, and wind sources from Quebec and New Brunswick. In addition, Maine has its own supply surplus and the potential to generate even more power from wind, bio-mass, and hydro – if only we could move the electrons south to those who need them.
And that’s a problem. Existing power lines running from central Maine to the south can’t carry any greater peak load, either from within Maine or from our Canadian neighbors.
As one economist put it, Maine is sandwiched between 6¢ power to our north and a 10¢ market to our south. That price gap, as well as the reliability issue, is creating pressure to build transmission to move electricity from northern generators to southern customers.
Unfortunately for Maine, our own power costs are linked to the broader New England market. Because generators in Maine have the right by federal law to sell their power anywhere they want, Mainers pay almost as much for electricity as do consumers in Connecticut. Our slight price advantage derives from two factors: (1) A user close to the generator can buy power with less attenuation loss; and (2) at times of peak demand, congestion on the transmission lines limits the amount of power that can be sold out of Maine.
The building of proposed new transmission to New Hampshire will eliminate Maine’s congestion advantage; but CMP argues that this cost increase will be offset by a general reduction in New England power prices made possible by the new line to Aroostook that will bring in less costly power from northern Maine and Canada.
While the transmission project in southern Maine will likely be paid for as a socialized cost by all of New England, other states object to having to contribute to the northern project in the same fashion. To counter this resistance, the two sponsoring utilities, CMP and MPS, have presented a study to show that the anticipated cost ($635M) will be more than offset by a $1B savings for all of New England through reductions in the cost of power over the next ten years. Maine’s share of the projected ten-year savings is $189M. …
Part 2: Capturing the Wind
… Wind power has captured the imagination of many policy-makers, business executives, regulators, environmentalists, and ordinary Maine people eager for clean, renewable, and cheap energy. Will Maine reap benefits from wind power? …
The heads of regulatory agencies in Massachusetts and Connecticut have protested vigorously that their ratepayers should not have to share the cost of a 200-mile high-tension line to connect Aroostook County to the New England grid. In other regions of the country, the costs of transmission lines are divided between region- wide ratepayers and those who receive a more direct economic benefit. The line to Aroostook will benefit primarily a single wind developer, Aroostook Wind Energy (AWE), that plans to build 800 MW of new wind power to sell to southern Maine and the rest of New England. Maine Public Service says it has received connection requests for an additional 450 MW from other sources.
While Aroostook Wind and others are waiting for new transmission to be built to accommodate their projects, other wind developers have gone on ahead, most notably First Wind, whose 42 MW of power on Mars Hill is already being sold locally or wheeled through New Brunswick. First Wind is also constructing 57 MW on Stetson Mountain in Washington County, this one with its own transmission line to the New England grid. Another company, TransCanada, is building 132 MW on Kibby Mountain in Franklin County, and Portland’s Competitive Energy Services is completing a 4.5 MW project in Freedom. Both these companies are paying for their own interconnections.
The Governor’s Task Force on Wind Power Development set a goal of 2,000 MW of installed wind power capacity in Maine by 2015 and 3,000 MW by 2020, but nothing of this magnitude can be achieved without building new transmission lines, regardless of who pays for them.
Obviously, the near-term construction jobs for these projects will benefit Maine’s economy; but once all the transmission has been built and the turbines are up and spinning, the question needs to be posed: What is the net benefit for Maine citizens and ratepayers?
While the power itself is practically free, that benefit belongs primarily to the investors who put up the capital to install the turbines. In the New England power market, all the states have laws that require a premium to be paid for renewable power. Given these opportunities, no wind company will volunteer to give Maine a special rate just for hosting the site.
Because it takes remarkably little effort to maintain a turbine, there are few permanent jobs created by a wind power project. In Mars Hill, 28 turbines are managed and maintained by only five people.
Real estate tax benefits are substantial but restricted to the jurisdiction with taxing authority – as they famously were in Wiscasset during the time of Maine Yankee. Every megawatt of wind power capacity costs about $1.5M in new capital investment; but the tax benefits diminish rapidly as the equipment depreciates in value over the 20-year life of each turbine.
If 1,000 megawatts of wind power are built in the Unorganized Territories (UT), it will temporarily increase the assessed value of the entire UT by $1.5B or approximately 50%. The UT already has the lowest tax rates in Maine, and wind power could reduce them by a third more. But the benefit will accrue primarily to those who own land in the UT, the large out-of-state owners like Irving, Wagner, and Plum Creek who already benefit from special “tree growth” tax treatment of their forest lands and who stand to gain substantially from leasing their ridge tops to the wind developers.
If the project falls within a small town, the benefit is extraordinarily narrow. For example, in Highland Plantation, 90% of the town is owned by Bayroot (Wagner) whose tax liabilities are already limited by “tree growth” tax treatment. They presently pay about 1/3 of the town’s taxes, $87,000 per year, for 25 square miles of land that includes five ridge tops suitable for turbines.
If a wind developer invests $100M on Bayroot land, Highland’s total valuation will rise from $7.5M to $107.5M in one year. The mill rate will drop to 1/14 of its present level for the benefit of one major landowner and 58 local residents. The developer will pay only 2 mills in taxes for the privilege of generating power for the Connecticut market. Property taxes paid elsewhere by Maine homeowners and small businesses average 17 mills.
All three of the large-scale wind projects that have so far been approved have received benefits under Maine’s Tax Increment Finance Law (TIF). In Mars Hill, these benefits were granted by the town. Stetson and Kibby are both in the UT where county commissioners control the decisions.
Under a TIF, the developer and the taxing jurisdiction may shelter some or all of the new assessed value to avoid the town’s loss of school funding and municipal revenue sharing and to avoid having to pay an increase in county taxes. The developer still pays a tax on the sheltered value but the tax is often partly refunded as a “credit enhancement” to help pay for the project. The remainder may be kept by the town for the restricted purpose of economic development.
In the Unorganized Territories, the amount reserved must be spent on economic development within unorganized portions of the affected county, but these are areas where LURC zoning forbids nearly all forms of development.
For the Stetson Mountain project, Washington County Commissioners gave back to the developer 60% of all real estate taxes for the first 20 years (estimated at $5.6M). The remaining 40% ($3.75M) will be retained for such projects as a revolving loan fund and development planning for the Washington County UT.
The Kibby Mountain project in Franklin County is over twice as large as Stetson. The commissioners agreed to return to the developer about 40% of the taxes for 20 years, which is tantamount to an $8.8M subsidy to the New England power market. Amounts retained by the county ($4M over 20 years) will be spent on scenic by-way improvements, a revolving loan fund, and tourism marketing.
Advocates for both of these TIFs in the Unorganized Territories were clearly straining to find ways to spend the money. When owners of the next ridge top apply for a TIF within either county, the commissioners may be hard pressed to do anything but give the money back to the developer, a result that will primarily benefit either the company’s owners or southern New England rate payers at Maine’s expense.
Sovereignty and Destiny
While wind power in Maine creates economic and environmental benefits for New England – and for Maine as part of that region, it is difficult to define a substantial long-term benefit that will accrue specifically to Maine people. Our power bills will not be noticeably cheaper; real estate taxes from these projects will not be broadly beneficial; and the number of new jobs will be small.
Some have suggested that CMP and Bangor Hydro should be ordered to withdraw from ISO-NE when contracts come up for renewal in 2010, in hopes that we might reestablish more complete control of our T&D companies and the supply of power to Maine customers. Under a directive from the Legislature, this very issue is being litigated before the PUC with a decision due by January of 2009.
Even if Maine’s utilities withdraw from ISO-NE or form an alternative alliance with New Brunswick, generators in Maine would still have the right to sell their power in inter-state commerce over Maine transmission lines at a non-discriminatory rate. Maine would still have to contract with the New England power market to guarantee reliability, as required by good management and by federal law. And Maine would lose the opportunity to socialize the cost of new transmission facilities. Those costs would have to be borne either by generators or by Maine ratepayers without financial participation from other states.
On the other hand, many argue that Maine should get out of ISO-NE while the getting is good. The Energy Policy Act of 2005 is irrationally biased in favor of high-cost transmission, and the policies of ISO-NE have amplified those irrationalities to the point where costs may soon run amuck.
In addition, in its role as manager of the energy supply, ISO-NE recently imposed a substantial rate increase that will be used to encourage the building of new generators primarily in southern New England. Many feel that Maine’s allocated share of that cost is too large.
Scale of the Issue
Maine consumers presently pay about 15¢ for each kilowatthour (10¢ for energy, 5¢ for T&D). Thus it costs only 15¢ to iron a few shirts, to watch television for an evening or to leave a couple of lights on all night.
But every year Maine’s homes and businesses burn through more than 12 billion of these little units at an aggregate cost of nearly two billion dollars.
The burden to our economy is the same as imposing a 4% sales tax on the entire domestic product of our state – except that few of the proceeds are spent here. The money is used to buy natural gas, oil, or nuclear power from people who may not be our friends, or it pays dividends to Spanish shareholders who are buying CMP.
… Because wind is intermittent and often blows at times of low electricity demand, it can only be exploited as part of a larger and more balanced market than what Maine alone can supply. Nevertheless, it will be a shame to allow the entire benefit to flow beyond our border – which is exactly where it is headed without the intelligent assertion of Maine’s sovereignty. …
Choices, Maine Center for Economic Policy, Vol. IX, Nos. 8 & 9, October 17 & 20, 2008
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