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Kreis: Windfall Romance

08/29/12 7:55AM By Don Kreis
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(Host) There's still time this summer to head for the beach with some light reading in your beach bag. And commentator Don Kreis, who teaches energy regulation at Vermont Law School, has a recommendation for you.

(Kreis) I've been doing some summer reading. And after all the teasers, who could resist picking up this romantic story? I refer, of course, to the June 15, 2012 order of the Vermont Public Service Board - all 172 pages of it - approving the merger of Vermont's two big electric utilities.

Although somewhat less entertaining than a real love story, the Public Service Board's order merits scrutiny in part because it demonstrates how misguided the public discussion was of the infamous 21 million dollars that wasn't refunded to the customers of the now-departed Central Vermont Public Service Company, or CVPS. The 21 million relates back to a 2001 agreement in which the Public Service Board forgave CVPS for some bad decisions the utility made in buying power from Hydro-Quebec. What the Public Service Board said back in 2001 was that, to prevent "unjust enrichment" of CVPS shareholders in light of this forgiveness, it was essential that there be, quote, "a mechanism by which ratepayers will share in the above-book proceeds of any future sale or merger of the Company." The so-called book value of the company is the actual value of the utility's assets as calculated for rate-setting purposes.

It turned out that there would be above-book proceeds galore. Back in 2010, shares in CVPS were trading at slightly more than 20 dollars. Then a bidding war ensued. And, when a winner emerged, the Canadian parent company of Green Mountain Power had agreed to pay CVPS shareholders the very nice price of 35 dollars and 25 cents a share. Altogether, that's 197 million dollars in above-book proceeds. All of which has now been paid to the former owners of CVPS.

The regulators approved the merger because the new and bigger GMP guaranteed that it would share with its customers the sum of 144 million dollars in savings achieved by having one big utility instead of two smaller ones.

What the critics essentially argued is that Green Mountain Power should have taken the $21 million from that rate agreement 11 years ago and added it to the $144 million in guaranteed customer savings.

Instead, GMP agreed to invest the 21 million in various energy efficiency measures. This benefits both shareholders, who get a return on this investment, and customers, who are ultimately expected to receive 25 million dollars' worth of benefits.

I urge people who care about this to read the Board's actual order. But read the whole thing - the courtship of GMP and CVPS is a complicated tale.

Sure Mr. Rochester was weird, but Jane Eyre still declared: "Reader, I married him." Jane had her reasons for taking such a chance - and so did the Vermont Public Service Board in blessing the union of our two big utilities.
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