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Power to the People

Why Vermont needs a strategy for electrical energy

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Alone in the sunshine-flooded room of the House Natural Resources and Energy Committee, state Rep. Steve Darrow recalls the impact of the national energy crisis of the 1970s. Then, public buildings shut off unneeded lights to conserve energy, commuters began carpooling, and homeowners turned down thermostats and put on sweaters. In Vermont it was a boom time for the woodstove industry and loggers. Everyone, it seemed, was splitting and stacking wood out of necessity.

The crisis, triggered by the Arab oil embargo of 1973-74, a response to U.S. support for Israel in the Yom Kippur War, was relatively short-lived - the nation eventually returned to its energy-consuming ways. Yet in Vermont that brush with energy shortages did provide one important and enduring lesson, Darrow says. Vermonters understand the need for energy efficiency.

"It was the first wake-up call for the American people and for Vermonters," says Darrow, a lanky Democrat from Putney who comes by his interest in energy policy honestly - his grandfather was once a member of the Vermont Public Service Commission, then the state agency with authority over electric rates. The embargo "was the origin of a lot of energy efficiency and gave a push to renewable energy," he says.

The state's electric power future has been weighing heavily on Darrow and other members of the legislative committee. That's because, starting in 2012, the contracts between Vermont's utilities and their two largest sources of power, Vermont Yankee and Hydro-Quebec, will begin to expire. Those once long-term contracts, with the Yankee nuclear plant in Vernon and the public utility in Quebec, have largely insulated Vermont from some of the radical price jumps experienced recently in other areas of New England.

In the worst-case scenario, Vermont will have to unplug from Vermont Yankee and Hydro-Quebec; the state's utilities will then have to wire into the deregulated and more volatile "spot market" power system on which much of the rest of New England is hooked.

Darrow says such a scenario will amount to Vermont's "second energy crisis." Unlike the crisis of the 1970s, there would be no supply cutoffs. Rather, residents and businesses would be hit in the pocketbook as prices surge. The problem would be significant. "I am afraid the public will have to feel some real pain before we can implement some real policy changes," Darrow says somewhat pessimistically.

Vermont Yankee and Hydro-Quebec now supply roughly two-thirds of the state's electricity needs. But after Yankee's 40-year operating license expires in six years, the plant will have to gain both state and federal approval to continue operating. And the contracts between Vermont utilities and Hydro-Quebec's massive, 560-dam hydroelectric operation in the north will start phasing out around the same time.

"How are we going to replace that, and at what cost?" asks Rep. Robert Dostis (D-Waterbury), chairman of the committee on which Darrow serves. Vermont Yankee may not win approval to operate beyond 2012, and Hydro-Quebec may want to sell its power at much higher prices - if it has excess power to sell at all, he says. "I don't know what more you need to look at to be alarmed."

Though aware of the looming deadline, Public Service Commissioner David O'Brien says the public should take heart that no one is predicting shortages like those experienced in 1973-74. "We don't have the answer, but I think we are on a good path to the solution," he suggests.

Without new power sources, the state will have to keep Yankee on line and continue a relationship with Hydro-Quebec. The Public Service Department, which is charged with planning for Vermont's energy future - the Public Service Board sets electric rates - may well want Yankee's Louisiana-based parent company, Entergy, to keep operating the plant, provided it is safe and reliable.

Says O'Brien: "I see the potential for a continued positive relationship between the state and Vermont Yankee."

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Vermont has faced energy challenges in the past, and not just in the mid-1970s. The issue of electrical power has colored state politics for decades - ever since electric light bulbs began replacing kerosene lamps in barns and farmhouses in the 1920s, '30s and '40s. The question of how to obtain affordable electricity has propelled the careers of some of Vermont's most noted politicians.

And some of the state's biggest political struggles have revolved around issues of public versus private power. These have involved philosophical and practical questions about whether the sources of electrical energy and the entities that distribute it should be owned by the state's citizenry or by private utility stockholders.

"The history of Vermont power is [one of] large, bold moves," says Richard Saudek, a Montpelier lawyer who headed the state Public Service Board in the late 1970s and now specializes in utility law.

A half-century ago, for example, the issue weighed on Vermont's Republican U.S. Sen. George Aiken, long an advocate for federal measures bringing electricity to America's hinterlands. In the mid-1950s Aiken pushed through federal legislation encouraging the Power Authority of the State of New York to build hydroelectric dams on rivers near the Canadian border, so the authority could sell power at a bargain price to his home state.

The legislation set aside about 20 percent of new, cheap power for public use. That meant the power was to go to the public rather than private utilities, theoretically reducing consumer costs. After the bill passed Congress, Vermont's Legislature established a Public Service Commission - forerunner of the Public Service Department and Public Service Board - as the public entity to buy and distribute this power. The electricity cost less than 1 cent per kilowatt-hour, roughly 10 percent of the wholesale cost of power in 2006.

What amounted to a special deal between Vermont and New York worked well until other states became jealous. They complained that they had not been given an equal shot at the cheap power. Their gripes were addressed in the 1960s when federal regulators began to phase out Vermont's special arrangement with the New York Power Authority, and the flow of power to Vermont eventually began to ebb.

Enter Phil Hoff. Vermont's Democratic governor in the mid-1960s proposed another arrangement, this one with Canada. Hoff wanted Vermont to establish a publicly owned power authority to invest in the proposed Churchill Falls project, a mammoth hydroelectric enterprise in Newfoundland.

Hoff fought hard for the idea but was unsuccessful, largely because of opposition from the state's private electric utilities, which preferred to develop their own energy sources in Vermont. Many legislative Republicans opposed the idea on philosophical grounds, or worried that such an investment would put the state at too great a risk. So, instead of the state investing in the Churchill Falls project, the utilities built Vermont Yankee, with its promise of power "too cheap to meter."

Among those legislators opposed to the Churchill Falls proposal was then-House Speaker Richard Mallary, now 77, who has had a long career of public service including a stint in Congress in the 1970s. "The public power people wanted to create a public power authority," he says. "There had been for a long time friction and disagreement between the public power people and the private utilities."

Mallary says some opponents felt the project was too speculative, and believed the state would have great difficulty marketing the bonds for such an investment.

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Yankee went on line in 1972, but Vermont would still need more power to meet growing demands. When Republican Gov. Richard Snelling took office in January 1977, Yankee supplied about 250 megawatts of the roughly 700 megawatts the state needed at any given time; about 150 were still being provided by the New York Power Authority, according to Saudek. The rest was purchased at a high price on an open market still constrained by the Arab oil embargo.

Like Hoff, Snelling looked north. Only this time it was toward Quebec, where the huge Hydro-Quebec dams project was under way. The provincial utility had plans to export power, and in 1979, under Snelling and Saudek, the state reached an agreement to buy 52 megawatts. In the early 1980s Snelling encouraged other New England states to sign on with the Canadians, Saudek says. In a later arrangement, Vermont signed another 150-megawatt contract good for 10 years.

After that deal the private utilities, which thought that negotiating power contracts was within their purview rather than the state's, began to arrange their own contracts with Hydro-Quebec, Saudek explains.

As energy costs began to ease for a number of years, those contracts "seemed to make no sense in terms of price," he says, but the utilities were stuck with them. Both state regulators and the public criticized the utilities for having entered into the contracts.

But in the 2006 marketplace, in large part because of those contracts with Hydro-Quebec and Vermont Yankee, Vermont enjoys the second-cheapest power in New England (only Maine is cheaper). And while customers of other utilities in the region have been facing rate increases - in some cases of up to 80 percent - Vermonters will likely see only moderate price increases for the next few years.

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This may all change in 2012 even if Vermont Yankee and Hydro-Quebec remain a big part of the state's energy mix.

Yankee has already asked the federal Nuclear Regulatory Agency for a new license extending until 2032. The plant also recently received permission to increase its power output by 20 percent, to roughly 650 megawatts. A little less than half of that amount goes to Vermont utilities; the rest is sold out of state. As for Hydro-Quebec, energy experts predict it is likely to have surplus power to sell, though not at its current bargain price of about 4 cents per kilowatt-hour.

There remains, of course, a broad portfolio of other electricity sources for Vermont, but many are either technologically limited or require environmental tradeoffs the state may not be willing to make. And that more expensive power will almost certainly remain available from the open market.

In New England the cost of open-market power is high because it is driven largely by the price of natural gas, the fuel of choice in many power plants outside Vermont. And natural gas prices have been climbing because of supply problems. Experts say underground supplies in the United States and Canada have likely peaked, while transporting the gas, whether through pipelines or shipping, has become more costly. In addition, many major supply lines in the Gulf states were demolished last summer by Hurricane Katrina, and repair costs will be reflected in prices for years.

One way to limit the rising cost of power in Vermont is to reduce demand - which is exactly what Richard Cowart, another former head of the state Public Service Board, has been advocating. As a member of the consulting firm the Regulatory Assistance Project, Cowart has been frequenting the Statehouse advising legislators on a number of energy-conservation measures. "Many people think of efficiency as just a small resource option," he says, "but over a sustained period it becomes a major element in the electric power resource mix."

Advocates argue such measures can reduce the state's power consumption, not just limit its increases. And the Vermont Legislature has responded. The state now has a $17 million energy-savings program that helps commercial and residential property owners build tighter buildings and install more efficient lighting and appliances.

There are other power sources, all with limitations:

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Hydroelectric dams: Dams generate about a third of the state's power, but most of that comes from Hydro-Quebec. Only about 9 percent of the state's power needs are supplied through the more than 20 hydroelectric plants along Vermont's own rivers.

The size of the dams range from the 191-megawatt Moore dam in Waterford, one of a network of dams on the Connecticut River, to the 0.11-megawatt Nantana Mill dam in Northfield.

Energy experts say power from hydroelectric sources is unlikely to increase, because of the cost to the environment - creating lakes where rivers and streams now flow and destroying the habitats of fish and other wildlife. If anything, the total production from in-state hydroelectric dams is likely to drop as dams are being taken out to improve fish spawning grounds, according to the state.

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Solar projects: Because Vermont has such cloudy weather, it probably will never have the kinds of solar projects that are cropping up in Arizona and California. In Vermont, solar projects are - and likely will continue to be - limited to very small systems, such as those that can be installed on the roofs of homes. But such projects do help. And they can be "net metered," which means they can be attached to the power lines of utilities, so homeowners on highly productive days can sell back any excess power to a utility.

The legislature is taking steps to make things easier for homeowners to connect their energy projects to the grid. Still, net-metered projects now account for only about 0.1 percent of the total power used by customers of Central Vermont Public Service, the largest utility in the state.

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Wood burning: Given the state's logging history, it is hardly surprising that one possibility Vermonters are considering is more wood-chip-burning plants, such as the McNeil Plant operated by the Burlington Electric Department. That plant provides about 5 percent of the state's power needs. However, burning wood also presents environmental, health and financial challenges, including impact on forest eco-systems, transportation costs and air pollution.

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Wind power: Many advocates believe that wind power is the state's best bet for a more homegrown renewable energy market. But much concern is being voiced by homeowners and some environmentalists, who worry about 300-foot-high wind turbines proposed for scenic ridgelines and the need to build roads to reach them for construction and maintenance.

Still, if all of the wind projects now deemed feasible were built - given site restrictions and the limits of existing technology - those turbines could account for only about 10 percent of the state's power needs, says John Zimmerman, president of Vermont Environmental Research Associates, a wind developer. "There are unacceptable places in Vermont, that is for sure," he admits.

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Methane: The Washington Electric Cooperative, serving central Vermont, uses methane from the Coventry landfill to supply about a third of the co-op's power needs of 15 megawatts during peak periods. That 4.5-megawatt Coventry project began producing power last year, the co-op says, but the amount will eventually increase to about 6 megawatts. Coventry is the largest landfill in the state and therefore has the most potential for generating methane power. A handful of other landfills in Vermont may be tapped.

In addition, CVPS is working on a series of farm methane projects. In such cases manure from dairy farms is fed into what's known as a methane digester, and the gas produced is burned to produce electricity.

So far one operation, Blue Spruce Farm in Bridport, is online and producing about 200 kilowatts. (See "The Poop Scoop," page 36a.) More are expected. Similar projects could produce up to 5 megawatts of power in aggregate, says David Dunn, who oversees the "cow power" projects for CVPS. "I think it's safe to say it is not going to replace Yankee or Hydro-Quebec," he says.

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The bottom line, experts say, is that renewable power projects in Vermont in the next decade or so will remain too small and varied to count for much. Still, power companies express support for them.

"We need to develop renewable resources to the degree that we can in Vermont," says Chris Dutton, president and CEO of Green Mountain Power. "But we need to understand that, for the most part, renewable resources aren't going to be able to replace the baseload resources we have."

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Whatever mix of energy sources the state settles on, the process will likely involve politics and, in some cases, sharp controversy. The recent debate over the proposed state purchase of hydroelectric dams along the Connecticut and Deerfield rivers is a case in point. Ultimately Vermont did not buy the dams, but it looked seriously into that possibility.

The dams - 13 in all - are in Vermont, New Hampshire and Massachusetts. Those power stations, which can produce up to 567 megawatts, became available when the owner, USGen New England, headquartered in Bethesda, Md., went bankrupt and put them on the market.

Vermont, in collaboration with private utilities, finally did make a bid on the dams. But it was lower than the accepted offer of $500 million. Public Service Department Commissioner O'Brien believes that buying the dams at that price would have been problematic because the state's private utilities for the next six years or more will remain locked into those Yankee and Hydro-Quebec contracts. With the dams, the state of Vermont would be producing power, but it would have no immediate local market for what would be generated.

"The state would have been getting into the risky business of buying and selling power," O'Brien says. And he believes the dams would have cost too much for the state to be comfortable borrowing the money for the purchase. The $500 million selling price would have amounted to as much as half of Vermont's current indebtedness.

"The cost of those facilities . . . ended up being quite high," says GMP's Dutton. "I think it would have been very difficult for the state of Vermont to do," and nearly impossible for the state's utilities to do alone.

Still, both GMP and CVPS said they were ready to buy the power if the state had bought the dams.

"We were eager to buy the output of those plants," says Dutton, whose company might not have needed the power immediately but would have been poised to buy and sell it on the spot market.

CVPS wrote to the state in November 2004 saying essentially the same thing. "Right now Central Vermont Public Service expects that it will not soon need additional capacity and energy," the letter said. But it also said of the dams: "CVPS continues to believe that purchase could be of significant value to the state and CVPS' customers and investors."

Those who supported buying the dams say the state could and should have done more to buy them, and that selling off the power until the state's utilities needed it would have been easier than state regulators had suggested. The state power use now peaks at about 1000 megawatts on a typical day, and with current demands and the rising cost of energy on the open market, they argue that the dams would have been a wise financial investment for the future. They also argue that with the rising prices of fuel the dams' worth already has increased.

Sen. Vincent Illuzzi (R-Essex-Orleans), who was a vigorous proponent of a state's purchase, says the fight was more about private utilities' opposition to public power than the cost of the dams, despite what GMP and CVPS may have stated. "The utilities were concerned that public power would come to Vermont in a big way," he says. "It's my biggest disappointment with [Gov.] Jim Douglas, whom I enthusiastically supported in his first run for governor. He has essentially delegated the development of energy policy."

The state could have bought the dams for less than the selling price, perhaps for less than $400 million, if it had moved quickly, Illuzzi says. The state may not need the electricity right now, but 2012 is not that far away. "In the world of utilities you can't take the short view; you have to take the long view," he says.

"We really missed an opportunity there," says state representative Darrow. "The dams have appreciated, and now they would be much more expensive."

Cowart agrees. "I expect we will look back at the effort to purchase the dams and wish we had done more for the long-term benefit of Vermont," he says.

Mallary was a member of the state commission that considered the purchase. He says he isn't so sure the dams were a great deal. Ultimately the Calgary, Alberta, energy giant TransCanada bought them. "On analysis it looked like TransCanada was paying more than it was worth," he says. "If you can tell me what the price of oil and natural gas is going to be for the next 30 years, I can tell you if they paid too much for them or not."

The other problem with the hydroelectric dams is that their energy generation fluctuates. They operate best when the water flows hard, but not particularly well in dry spells. Had the state bought them, it might have found itself in the position of selling the power to out-of-state utilities, Mallary says, but then having to buy it back at a higher price at certain times.

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So, what price will Vermonters have to pay for their power? The question is important for any homeowner who wants to turn on the television or the bedroom air conditioner, and it's downright critical for companies planning to move to Vermont or continue doing business in the state and possibly expand.

That is why legislators in the House Natural Resources and Energy Committee have spent much of the last two years trying to develop an energy strategy that can take the state beyond Vermont Yankee and Hydro-Quebec. Lawmakers are considering expanding homeowner-operated "net metering" programs and increasing the budget for Efficiency Vermont, the Burlington-based renewable energy and conservation program.

"Whether Vermont can be creative enough to pull it out in the future," says Saudek, "remains to be seen."

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