Energy Policy

New report highlights the downfalls of establishing a state-owned utility

on

A recent report by London Economics International (LEI), a Boston-based financial advisory firm specializing in energy market analysis, commissioned by the Maine Public Utilities Commission (MPUC) suggests that under certain scenarios, Mainers could pay less over the long term with a state-owned power company.

The MPUC commissioned the report with the goal of gaining a clearer view of the potential risks and benefits of enacting LD 1646, a bill to create the Maine Power Delivery Authority (MPDA) and authorize it to acquire the transmission and distribution (T&D) assets of Maine’s two power companies, Central Maine Power (CMP) and Emera Maine. The acquisition would be determined through an agreement based on the “net book value” of the T&D assets of both companies. If an agreement fails to be reached, MPDA could still seize assets through eminent domain under the bill.

Representative Seth Berry of Bowdoinham is sponsoring LD 1646 at a time when public frustration with Central Maine Power is cresting. Earlier this year, MPUC fined CMP $10 million after reviewing numerous consumer complaints over a two year period regarding a mismanaged roll-out of its new billing system. The company will be required to meet certain service quality benchmarks over the next 18 months to avoid further penalty.

Although LEI does not take a position on what Maine’s legislature should do with LD 1646, the report suggests that Maine electricity ratepayers would pay more in the short term, after the initial acquisition, but could see lower fees in the long run. LEI largely attributes this prediction to the fact that a not-for-profit, state-owned utility as proposed in LD 1646 would be tax-exempt and would likely be able to take out new debt at lower rates.

The report also recognizes that although future bonding for capital improvements by the proposed MPDA would be tax-exempt due to access to nonprofit Private-Activity bonds, the interest rate for debt incurred through the initial purchase of CMP and Emera’s assets is likely to be higher, as acquisition debt would not be tax-exempt.

It is unclear if the report’s authors have taken into account how the massive new incursion of debt would affect the financial health of the state government. 

LD 1646 would authorize the MPDA to issue bonds in order to acquire the assets of CMP and Emera, based on “net book value,” which some suggest could be upwards of $4 billion. The State of Maine raises through taxation and spends nearly $4 billion in a whole year. 

The authors note that many Mainers would prefer to see the utility contribute to the overall tax base in order to avoid higher local taxes. In a scenario where MPDA collects sufficient pre-tax income, it would pay the same amount of local property tax as CMP and Emera do now, but ratepayers would not see any reduction in rates. If MPDA does not raise sufficient revenue to make those property tax payments, Maine’s municipalities would face a shortfall that would require tax increases or cuts in services to accommodate. 

Section 4004 of the proposed law outlines how MPDA will calculate its rates, noting that they must be “sufficient to pay in full the cost of service, including the cost of debt and any payments in lieu of taxation.” Given the incursion of numerous billions of dollars of new debt on Maine taxpayers, as well as the commitment to maintaining unionized labor, the rates charged by the new state-owned utility would likely be higher in the short-run with little assurance of cost-savings in the long term. 

Section 7.5 of LEI’s report provides a “sensitivity analysis” to account for the multiple variables present in this scenario, such as the rate of growth in the Maine’s energy consumer base, the acquisition price, and the rate of interest paid on debt related to acquisition. All of these greatly affect possible long-term savings for ratepayers.

Under LD 1646, Maine taxpayers would incur an enormous amount of debt without a guarantee of substantial savings, increased efficiency, or heightened customer satisfaction. Local governments could also face financial struggles given the potential for tax shortfalls due to MPDA’s tax-exempt status and potential for lower-than-expected revenues. 

Consequently, LD 1646 does not ensure that the state will do a better job of delivering electricity to Mainers than CMP and Emera do currently, especially since the incentives for better service and limited price increases will be much weaker under a government-run board. Like it or not, the profit motive for business is a much stronger driver of efficiency than bureaucrats’ and politicians’ desire to maintain their stature.

The recent report from LEI cannot assuage the fears that many policymakers have over a state takeover of power distribution. It poses many questions that Maine legislators should be asking of Rep. Berry and others who support LD 1646.

About Nick Murray

Nick is the Outreach Coordinator at Maine Policy Institute, working to plan events, engage with supporters, and spread the word about Maine Policy's work to new audiences around the state.

Recommended for you

Comments