Utilities seek cut of hydro, wind contracts

Tucked inside the House energy bill is what industry folks call an adder, a special add-on fee paid by electric ratepayers to their utilities to compensate them for carrying out the Commonwealth’s energy policy.

Eversource Energy and National Grid play key roles under the legislation.  The two utilities are assigned the task of negotiating long-term contracts with offshore wind and hydroelectricity suppliers for large quantities of electricity, roughly a quarter  of the state’s total usage. Ratepayers will foot the bill for the electricity itself, but the legislation provides remuneration to the utilities “for accepting the financial obligation of the long-term contract,” according to the language of the House bill.

The adder authorizes the utilities to collect from their customers up to 2.75 percent of the annual payments under the contracts for offshore wind and hydroelectricity. The precise size of the adder won’t be known until the contracts are signed, but some analysts estimate it could be worth $40 million or more a year to the utilities for both the offshore wind and hydro contracts.

The financial obligations associated with long-term power contracts are a bit murky, with no consensus on the utilities’ actual cost. The original Green Communities Act, for example, allowed for adders of 4 percent; subsequent legislation lowered the number to 2.75 percent. When Rep. Patricia Haddad of Somerset filed her energy legislation last year, she included a 1.5 percent adder. There was no adder in the original energy bill reported out of the Legislature’s Telecommunications, Utilities, and Energy Committee; the “up to 2.75 percent” amount was added by Rep. Brian Dempsey in the House Ways and Means Committee.

Mike Hachey, an energy consultant who formerly served as an executive with a company selling electricity in Massachusetts, sent out a note recently on the House energy bill to manufacturers around the state. In his note, he said the adder is included ostensibly to offset the impact of the contracts on a utility’s credit rating. But he said that impact would essentially be mitigated by the fact that the utilities are simply complying with a state law that requires ratepayers to pay the tab for the power.

“There is no need to compensate the utilities for risk,” he said in his note. “The payment is simply gratuitous. The Legislature is giving a gift they will pay for with your money.”

A spokeswoman for Attorney General Maura Healey said her office, which represents ratepayers in energy matters, is strongly opposed to paying the utilities extra for handling power contracts. The attorney general pushed an amendment that was filed by Rep. Tacky Chan of Quincy to eliminate the adder, but, like many other amendments to the energy bill, it was withdrawn before it came up for a vote.

Peter Shattuck, Massachusetts director at the Acadia Center, an energy advocacy group, said the utility fee seems high considering National Grid and Eversource might play a role in building the transmission lines that will deliver the power. Eversource, for example, is partnering with Hydro-Quebec on the Northern Pass transmission line down from Canada. National Grid is involved with the Green Line in Vermont.

“The bonus incentives seem excessive given that utilities can get a return of 10 percent or more on the transmission to bring hydro and wind online,” Shattuck said.

Michael Durand, a spokesman for Eversource, said in a statement that the adder in the House bill is consistent state energy policy. “Adders such as this one, and those currently in place in legislation such as the Green Communities Act, are important when utilities are required to enter into guaranteed long-term energy contracts,” he said. “With those contracts come long-term financial obligations on the part of the utilities.  These obligations can negatively affect the company’s financial ratings and increase the cost of capital to finance the many large projects we undertake.  As those costs become higher, electricity rates customers pay also increase.”

Amie Breton, a spokeswoman for National Grid, said utilities deserve compensation because the risks associated with long-term contracts limit the companies’ ability to raise capital. “National Grid has consistently argued, and the Legislature has agreed, that it is important to address the monetary risks associated with mandated long-term contracts. In the long run, these efforts provide benefits by lowering the cost of capital benefits to our customers, given that they will be responsible for supporting these long term contracts as required under state law,” Breton said in a statement.

Ron Gerwatowski, an energy consultant who formerly held top positions at National Grid and in the Baker administration, worries about the cost.  “The utilities have a point to be concerned about the impact of taking on multi-billion-dollar, long-term commitments, but implementing an incentive as a percentage of total payments is a method that produces rough results,” he said in a statement. “When we consider the magnitude of the megawatt-hours being contemplated under the new law, the size of the incentive could get higher than some policy-makers might find acceptable.  This might cause some to consider whether there is a different way to compensate them for the financial risk, or whether the amounts earned should be capped.”

A correction has been added to this story to fix the employment status of Mike Hachey.