Utilities on both sides of bargaining table
Eversource, National Grid could end up awarding billion-dollar clean energy contracts to themselves
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T officials said it would create the potential for conflict of interest if the project construction manager was affiliated with one of the companies seeking to land the Green Line contract, so they severed ties with the advisor and hired the second-place finisher from the original contracting process.
The circumstances are a bit different, but state officials are taking a very distinct approach in their push for clean energy. Under a measure passed last year by the Legislature and signed by Gov. Charlie Baker, the state’s two major utilities, Eversource Energy and National Grid, are charged with procuring billions of dollars worth of clean energy through two separate contracting processes. But the utilities are also part of groups bidding on the clean energy deals, which means Eversource and National Grid could end up awarding contracts to themselves.
A number of steps have been taken to minimize self-dealing. The utilities adopted standards of conduct that bar company officials on one side of the table from talking to their colleagues on the other side of the table. An independent evaluator is monitoring the contracting process and is charged with making sure everything is on the up and up. And the two utilities are both vying for the contracts, so there is a good chance they will blow the whistle if they witness any self-dealing by the other firm.
But the truth is no one knows what’s going to happen as the contracting process moves forward. Billions of dollars are at stake and there are a lot of subjective judgements that will go into picking the winners. Officials at Eversource and National Grid say the procurement process will be fair and impartial, but those assurances haven’t put to rest the concerns among some of the companies vying for the contracts.
Donald Jessome, the CEO of TDI New England, a bidder on one of the clean energy contracts, likes his project’s chances, largely because he has already obtained most of the permits he needs to begin construction. But he knows he is facing a lot of competition, including from affiliates of Eversource and National Grid. Jessome is appreciative of the steps Massachusetts officials have taken to make sure the contracting process is fair, but he admits the situation makes him nervous.
“At the end of the day, I’m being graded by my competitors,” he says. “I can’t help but be concerned. It’s not the best place to be in a competitive process.”
HOW WE GOT HERE
Dan Bosley runs the North Adams SteepleCats baseball team today, but 20 years ago he was a state rep on Beacon Hill pushing through legislation deregulating the electricity industry. Instead of vertically integrated utilities that both generated electricity and distributed it to customers, Bosley’s legislation divided the industry into two parts. Regulated utilities would continue to handle the delivery of electricity to homes and businesses, and power generators would battle against each other in a competitive wholesale market. Competition meant the power generators—and not ratepayers—would be on the hook for any financial losses if a power plant failed or if it produced electricity nobody wanted to buy.
Deregulation worked well. Power generators responded to a falloff in natural gas prices by building plants that produced electricity using natural gas. Plants that relied on coal and oil gradually found themselves being priced out of the market, and forced to shut down. Nuclear plants also fell victim to the market shift toward gas.
Cape Wind was an early example. National Grid negotiated a long-term, power-supply contract with the offshore wind company in 2010, and Eversource followed suit in 2012. The deal collapsed in 2015 when Cape Wind was unable to complete its financing.
As the state began considering more ambitious clean energy deals, key players on Beacon Hill quietly started discussing what role the state’s utilities should play. According to those familiar with the discussions, there was concern that the utilities might end up on both sides of the negotiating table. Some wanted to create a new authority or designate an existing one to negotiate long-term clean energy contracts on behalf of the state. New York and Texas adopted this approach, and some insiders wanted to try it here.
Ultimately, however, the state decided to stick with Eversource and National Grid. One participant in the discussions said the utility arrangement was the best of several imperfect choices. The utilities offered expertise and institutional memory; they also wielded lots of clout and handed out lots of campaign contributions on Beacon Hill. Benjamin Downing, a former state senator who specialized in energy issues, says he was never totally comfortable with the utilities taking the lead role. “It was and remains a troubling aspect of the entire arrangement,” he says.
The clean energy bill that emerged from the Legislature last year put the utilities in charge of two major procurements—one for clean energy (hydroelectricity, wind, and solar) and one for offshore wind. At the urging of Attorney General Maura Healey, the legislation also called for the appointment of an independent evaluator to monitor the contracting process for any signs of self-dealing.
Both Eversource and National Grid, through nonregulated subsidiaries, are bidding on the state’s clean energy contracts. Eversource’s proposed Northern Pass transmission line would deliver hydroelectricity produced by Hydro-Quebec to southern New England. With partner DONG Energy, Eversource is also one of three likely bidders for the offshore wind contract. National Grid, in partnership with Citizens Energy, is pushing two clean energy projects, one that would bring wind power from Quebec and another that would deliver wind, solar, and hydroelectricity from New York.
Twenty years ago, lawmakers deregulated electricity generation to promote competition and take utility customers off the hook for costly energy projects that don’t pan out. Now, to promote the development of clean energy and meet the state’s emissions targets, ratepayers are being asked to pony up for 20-year contracts negotiated by the utilities.
Bosley never envisioned such a change in the market when he was pushing for deregulation 20 years ago. “The market has changed,” he says.
“We’re gradually moving back toward re-regulation,” says Peter Shattuck, Massachusetts director of the Acadia Center, an environmental advocacy group. “It’s less than ideal.”
Ian Bowles, a former secretary of energy and environmental affairs under Deval Patrick, says putting the utilities in charge of the procurements means the Baker administration has to be vigilant. “The core idea of the 1997 utility restructuring was to require competition and merchant developer risk to drive down power prices,” he says in an emailed statement. “This fact pattern challenges that construct and puts particular pressure on Gov. Baker and his team to ensure fair, merit-based competition and police the natural inclination toward self-dealing.”
Baker administration officials declined interview requests, but a spokesman for the Department of Energy Resources issued a statement suggesting the pressure is on the independent evaluator. “The Department of Energy Resources, along with the attorney general’s office, have fulfilled our legislative requirement to select an independent evaluator to ensure that the solicitation process is open, fair, and transparent and is not unduly influenced by an affiliated company,” says Kevin O’Shea.
HOW IS IT WORKING?
Duncan McKay, the chief compliance officer at Eversource, says he is confident the Massachusetts clean energy procurement process is being run impartially because his company has years of experience guarding against such conflicts.
“This isn’t our first rodeo,” says McKay, pointing to prior instances going back to deregulation when the regulated part of the company was dealing with an unregulated part. “It can be done. We’ve been doing it a long time.”
Eversource and National Grid each identified evaluation and bid teams for both contracts, plus a separate group of subject matter experts who can be called upon for information by either team. Under a standard of conduct the companies signed, information can not be shared between the evaluation and bid teams, and the subject matter experts cannot act as information conduits.
National Grid declined comment on the procurement process other than to say the utility was “complying with all required regulations and statutes.”
McKay says the bid and evaluation teams at Eversource use separate, secure databases and members of the teams wear colored badges to identify themselves—green for the bid team and red for the evaluation team. “If I’m a green badger and you’re a red badger, I can’t be talking to you about confidential information,” McKay says.
Beyond the steps taken by Eversource to guarantee a fair procurement process, McKay says there are a lot of other parties watching, including the independent evaluator and officials from the Department of Energy Resources and the attorney general’s office. He also notes that Eversource and National Grid are competitors on the bidding side, with no interest in seeing a rival get a leg up.
“It is very difficult to conceive of a way you would do something inappropriate because you have so many participants and observers,” McKay says.
The independent evaluator plays the key watchdog role during the procurement process. While the name implies a single individual, the evaluator is actually a team of energy, accounting, and law firms operating under the direction of the Peregrine Energy Group of Boston. According to the firm’s application, two members of the Peregrine team have partnered on eight previous independent evaluator projects. Peregrine’s $749,820 contract with the state runs through the end of 2018.
State officials declined to make officials from Peregrine available, so the only available look inside the contracting process comes from reports issued by Peregrine and proceedings of the Department of Public Utilities, which must approve the final contracts. The procurement for the clean energy contract began in November 2016 and Peregrine started work at the end of December. The offshore wind contracting process is still in its early stages.
A red flag was raised early on with the utilities’ initial request for proposals (RFP) on the clean energy contract. Environmental advocates and several companies participating in the procurement said two provisions in the RFP favored all-hydro projects and would have made it nearly impossible for wind and solar to compete. New Brunswick Power Co. said in a filing with the DPU that the two provisions would “favor one technology (firm hydroelectric generation) over other technologies, are not required by the law, and actually contravene the law’s intent to favor wind and/or solar in conjuction with hydro.”
The dispute was resolved when the RFP was amended to remove the controversial provisions. None of those raising objections singled out Eversource, which at the time was pushing Northern Pass as a hydro-only project. Months later, when bids on the clean energy contract were submitted, Eversource filed both hydro and wind-hydro options.
The DPU rejected two recommendations from the independent evaluator, one that would have allowed the Peregrine team to directly monitor contract negotiations between the utilities and bidders and one that would have disbanded the utility subject matter experts to avoid concerns about information sharing.
The DPU also rejected a suggestion that the utilities should not collect payment of up to 2.75 percent of any contract award if the winning bidder is an affiliate of one of the utilities. Emera Inc., one of the companies vying for the clean energy contract, said in a filing with the DPU that allowing the utilities to collect the annual payments if one of their affiliates is selected would allow the affiliate “to price that remuneration in its bid, providing an unfair competitive advantage.” The DPU said it would make a decision on utility remuneration once the bidding process is completed.
Cynthia Arcate, president and CEO of Power Options, a nonprofit energy-buying consortium, urged the DPU to ignore the wording of the energy diversity law and remove the utilities from the procurement process. “There will be no way of knowing for sure that the winning bidder was chosen based solely on merit,” Arcate said in her filing. “Even with an independent evaluator, there is still the possibility that affiliated companies may have undue influence on the procurement process.” The DPU kept the utilities in charge.
What makes everyone nervous is that the procurement process is not cut and dried. The utilities can’t just open the bids, arrange them in order by price, and award the contract. Most of the projects vying for contracts still face a host of regulatory hurdles. Eversource, for example, has said its Northern Pass project could be completed a year ahead of most of its rivals, but that’s only if it obtains all the necessary permits. It now seems likely the project will not have a key New Hampshire permit in hand when one-on-one contract negotiations are scheduled to start January 25, and there is no guarantee the permit will be awarded by the time the contract is slated to be awarded on March 27.Dan Dolan, the president of the New England Power Generators Association, is no fan of the way Massachusetts and other states are contracting for energy directly outside of the wholesale markets. But he really dislikes turning the contracting process over to the state’s utilities.
“We simply don’t see a way for it to be an open and truly competitive process when you have that sort of structure in place,” he says. “It’s hard to claim that a company that writes the RFP, bids on the (request for formal proposal), and decides who wins the RFP is unbiased.”