Wednesday, February 2, 2011

Some Transparency in the Vermont Hydro-Québec Contract. Maybe We Should Thank John McClaughry

The Hidden Contract

In a late-December post, I pointed out several ways that the Hydro-Québec contract was a bad deal. One bad thing about the deal was the required secrecy.

When John McClaughry read my blog post about the HQ contract, he realized that this contract was another example of secrecy in government, secrecy that does not serve the ratepayers or taxpayers of Vermont. He decided to ask about it

About John McClaughry. I head the Ethan Allen Institute Energy Education Project. John McClaughry, a former Vermont State Senator, leads the main Ethan Allen Institute. One of the Institute goals is transparency in state government. For example. the Institute also has a Transparency Project which is a joint project of the Ethan Allen Institute and the Public Assets Institute.

McClaughry's Letter to the Public Service Board

On December 31, 2010, John McClaughry wrote a letter to James Volz, Chair of the Public Service Board. McClaughry shared a copy of this letter with me. I have a long quote from his letter at the end of this post.

My translation of his letter would be: You are giving an unfair advantage to HQ compared to VY, by putting the HQ contract terms under seal of secrecy. What law allows you to set this kind of advantage for one party over another?

The PSB Responds

Within days, the PSB responded, in a letter dated January 4 and signed by Kurt Janson, General Counsel. Once again, I have a long quote from this letter at the end of this post. Janson never mentions Vermont Yankee.

My translation of Janson's letter would be: We know that markets are more efficient when they are more open. However, the greater good is to help Vermont utilities with theoretical new out-of-state contracts. We're not going to comment on the effect of this secrecy on VY. Thanks for writing.

Truth in Purchasing?

A few days after this exchange, HydroQuebec announced that its going-in price to Vermont would be 5.8 cents per kWh instead of the current price of 6.6 cents. In Vermont, rejoicing was general. Wow, did we get a good deal! Wow, now we have transparency!

And also. "Wow, now Entergy knows the price it has to beat!"

Perhaps McClaughry's letter had something to do with this revelation. Perhaps it didn't. His letter could have been irrelevant, or the proverbial straw that broke the camel's back of secrecy. We will never know.

So, Now We Know The Deal?

I, for one, am not impressed with the new information. The HQ price still floats with the market price. The price is still tied to the "clearing price" which is set by natural gas. Entergy was offering a fixed price, and the HQ is still a variable rate mortgage.

As a matter of fact, I am less impressed now than I was before. My life experience says that only the slippery mortgage brokers and credit-card companies offer too-good-to-be-true teaser rates, going in to the contract. This 5.8 cents business is a teaser rate IMHO.

What Vermont Yankee Should Do

I am going out on a limb here. I have a negotiating suggestion for Vermont Yankee. Of course, they don't ask me for advice.

VY should go to the utilities and say: Our going-in rate is 5.3 cents. Half a cent below what HQ has offered. However, our tracking system for rate rises must be exactly the same as HQ. So, if the price of power goes up to 8 cents and HQ is getting 8, we get 7.5. Etc. We're always below them, but we get the same market-based deal as they got.

This would be a great deal for Vermont Yankee. They would make a fortune. It would be the lowest price producer, and still make a fortune. Of course, some regulators might object that ratepayers would be soon paying more than if they had taken VY's 6.1 cent fixed price offer. To which Vermont Yankee could answer: you had your chance, friends. You missed it.

I like it.

Aside: I expect electricity rates to rise, rather steeply, in a year or so. The rise will start when the hoopla about the Marcellus shale dissolves into the reality that most shale wells are expensive wells that don't produce much gas. (Yes, I know. This assertion is worth its own blog post. I'll get to it.) End Aside.

Here's a video on the deal from WCAX. Note how often the words "market" and "market smoothing" appear. A great deal of excitement for a 5.8 cent teaser rate.

The Letters

From McClaughry

Dear Mr. Chairman:

In their prefiled testimony for the Joint Applicants (Vermont power companies) in this case, Deehan and Cole state:
As described in the Petitioners’ Motion for Confidential Treatment of Prefiled Evidence, the details of the PPA’s pricing provisions are subject to confidentiality limitations under Section 11.15 of the PPA, and are therefore described in more detail in confidential testimony that we will submit under seal upon approval by the Board of confidential treatment. For this same reason, portions of the PPA, Confidential Exhibit Petitioners’ Joint-3, have been redacted.......

Your Board has an obligation to determine whether a PPA merits a certificate of public good. At the same time that the Board is deliberating on this docket, the General Assembly will be debating whether to allow Entergy Vermont Yankee to pursue a certificate of public good for extending Vermont Yankee’s operating period for another twenty years. It seems clear that a commitment by Entergy Vermont Yankee to offer these same utilities a multi-year power price more favorable than that agreed to by the Buyers and HydroQuebec would produce strong added support for a favorable vote in the General Assembly.

This it seems to me imperative that legislators be informed of just what that power price is under this PPA. If the parties to this PPA have agreed on that price, as their prefiled testimony avers, why is in the public interest for the Board to compel nondisclosure to legislators debating a similar and very relevant issue? .....

It appears to have been argued by HQ, and supported by the purchasing utilities, that the PPAdeal is dependent upon nondisclosure. Why is in the public interest for the board to grant that request? If that information is kept secret by a public body, the interest of Entergy Vermont Yankee, HQ’s leading competitor, in offering a PPA with terms that would favorably influence the chances of gaining legislative approval for its application – approval that HQ is not required to obtain – would be damaged or thwarted.

I would appreciate it if you or your counsel would, for the record, state the legal authority and rationale for the Board keeping the HQ PPA terms secret from the legislature and the public.
For the record, I make this request solely on behalf of this Institute, and I have not discussed this request, directly or indirectly, with any parties to Docket 7670.

Yours truly,
John McClaughry
President (acting)
(Senator, 1989-92)

From Kurt Janson, General Counsel of the PSB
...public disclosure of the Confidential Information relating to price and credit arrangements would provide an entity seeking to sell power to, or purchase power from, the Buyers (or HQUS) with knowledge as to the Buyers' (or HQUS's) position on several of the most significant factors at issue in negotiating power contracts, putting them at a significant competitive disadvantage. Price and credit terms relating to wholesale power agreements are commercially sensitive and are typically not disclosed to the public.....

The Vermont utilities know the specific terms of the HQ power contract, and when they negotiate with other sellers of power the Vermont utilities will be able to compare potential deals to the HQ contract. Therefore, making the HQ terms public would not be expected to result in better power deals for Vermont; to the contrary, it would provide potential sellers with valuable information that they otherwise would not have regarding the terms and conditions that the Vermont utilities might ultimately accept.

As a general matter, more transparency about the specific terms of power purchase agreements is still desirable both because of the public interest and because competitive markets tend to operate more efficiently when market participants have greater information. However, given the national trend toward greater confidentiality about pricing information in recent years, there is a concern that requiring Vermont distribution utilities to publicly disclose commercial1y sensitive pricing terms may put them at a competitive disadvantage in relation to out-of-state sellers and buyers of power. (Emphasis added by blogger.)
Janson then continues that this desire for more efficient markets must be balanced with the desire not to undermine the bargaining position of Vermont utilities. He never mentions Vermont Yankee.

Image of Spillway of Robert-Bourassa Generating Station from Wikipedia.


Martin Langeveld said...

There's a difference between VY and HQ in terms negotiating clout. HQ needs customers, but Vermont is not particularly important to it, and it is not facing a shutdown in 13 months. In other words, HQ is in a position to say take it or leave it. VY/Entergy (or whoever steps forward to buy VY) has no such bargaining power; it needs to come up with a deal for Vermont that goes beyond the price per KWH but includes substantial investment in upgrading plant systems, dealing definitively with the tritium leaks, and committing actual cash to the decommissioning fund to ensure actual decomissioning, not mothballing, starting in 2032.

The real question is whether all of that is feasible at any price that beats HQ. A 20-year window gives you only so much time to amortize the upgrades, fixes and decom funds. Consider that the present value of those commitments is on the order of $500 million, and that the plant can generate (my SWAG) something like $40 million a year in cash flow. That's in IRR of less than 5%; it's even lower if the buyer has to pay more than a dollar for the plant.

With the deal you suggest, the picture improves quite a bit, of course. An improvement in the price to VY of one penny adds around $50 million to the (pre-tax) bottom line, if my back-of-the-envelope is correct. But Shumlin is unlikely to grant that kind of windfall without a very substantial contribution to Vermont's bottom line.

Meredith Angwin said...

Martin. Good comment.

Of course you are right. VY is not in as good a negotiating position as HQ. As I have pointed out in earlier posts, you always get your best deal from the in-state or in-country utility, because they have to please the in-state regulators. Which is why HQ gets 40% of its profits from the 10% of the power it exports. I have several posts on this, or you can go to the HQ website and look at their annual reports. They get between 30 and 40 percent (depending on the year) of profits from the export power.

I don't imagine I could really figure out how much Entergy is making from this plant. But I think they could do the upgrade pretty well. About two days ago, several of us bloggers received a pdf of a letter Entergy sent. Rod Adams has blogged about it already...I guess we were on a media list. Anyhow, here's Rod's blog

and I also put the letter on my personal website, to link to it later. I plan to blog about it, of course.

Anyhow, the important point is that Entergy invested $400 million in upgrades, over about an eight year period, while selling most of the power at 4.4 cents. So investing $500 million over 20 years should be very doable.

Summing up. Yes, HQ doesn't need us...but they sure like our money! And Entergy can indeed make money while investing in upgrades.

You point out some important issues. Including that HQ pays no taxes here, and VY does!