Are municipal light firms doing enough?

Munis exempt from renewable energy requirement

THE MASSACHUSETTS LEGISLATURE appears primed to enact legislation that will require large purchases of clean energy resources to address the daunting challenge of meeting our greenhouse gas emission reduction targets. Given the magnitude of these initiatives, should we be reconsidering the exemption for municipal electric utilities that allows them to avoid contributing toward initiatives like these? That question may puzzle many. “What exemption?” they ask. Certainly, we cannot answer the first question without knowing the answer to the second. So it is worth supplying some background, even if it touches a political nerve.

It is widely known that Massachusetts has a requirement called the Renewable Portfolio Standard, or RPS, which currently requires “all” electricity suppliers to purchase renewable energy certificates from eligible renewable projects in an amount equal to 11 percent of the electricity they sell to customers. This requirement increases by 1 percentage point per year, reaching 15 percent by 2020 and continuing thereafter. Many supporters of renewable energy are seeking to double the annual increase.

What is not so widely known is that the RPS is not really a requirement for “all” suppliers. Rather, it only applies to investor-owned utilities in the state and all retail suppliers providing electricity in the service areas of those utilities, the costs of which are passed on to ratepayers. The requirement does not apply to the 41 municipal electric utilities (also referred to as municipal electric light plants) in Massachusetts that serve 50 communities. Similarly, there is a requirement under the Green Communities Act for investor-owned utilities to enter into long-term contracts for renewable resources, the costs of which are funded by ratepayers. This requirement, too, does not apply to the municipal electric utilities.

So what does all this mean, as a practical matter? It means that only those citizens who happen to take electricity service from Eversource, National Grid, and Unitil are required to fund the growth of renewable energy for the Commonwealth. For the citizens living in the 50 communities served by the municipal electric utilities, there is no mandate to contribute. The list of the communities and municipal utilities can be found here on the Department of Public Utilities website. The list includes a diverse mix, but there are some affluent towns among them.

While many of the municipal utilities have procured renewable energy on their own, they retain local control over this policy decision, including the right to purchase any amount of new renewable energy, very little, or none at all. While it is difficult to research the question, it does not appear that there are many municipal electric companies that have voluntarily agreed to make commitments for new renewable energy in the amounts and at the growth rates required for the vast majority of citizens in the Commonwealth under the RPS rules. Thus, as the Commonwealth increases requirements to reduce greenhouse gas emissions in the electric sector, the relative responsibility appears one-sided. And if the Commonwealth goes forward with the sizable commitments for large-scale hydro and off-shore wind that are being contemplated, it could become lopsided.

Retail sales data published by the US Energy Information Administration appears to indicate that electricity consumption in Massachusetts from these communities in recent years has been over 13 percent of the state’s total consumption annually. When the state’s renewable requirements were relatively small, the lack of participation by municipal electricial plants might not have been a material issue. But if the Commonwealth decides to commit to large purchases of clean resources, a 13 percent share becomes quite significant.

Municipal electric utilities

So why does this disparity exist in the first place? The simple answer is that it originated as a quirk of history. Some communities at the turn of the 20th century and other times long ago established their own electric light plants that function like a municipal department, while most of the others contracted with electric light companies which became consolidated over time into larger investor-owned utilities through mergers. Since then, it has come down to the principle of local control. For quite understandable reasons, the local officials operating the 41 local municipal light plants desire local autonomy. The plants are run by good people who are dedicated to local service for the public interest. Most care deeply about controlling costs for the local citizenry and have a very good track record of reliable service. The municipal electric utilities tend to run with lean staff and are not typically equipped to meet the same type of regulatory reporting requirements imposed on the investor-owned utilities. Most significant, they were never required to divest their ownership stakes in generation at the time of restructuring in 1998 and there is no retail choice of suppliers in those communities.

When the initial renewable energy requirements were put in place after utility restructuring, the Legislature left the municipal electric plants alone. Many of them have taken steps to make renewable resources a part of their energy portfolios – some quite admirably. One example is a 15 megawatt collaborative wind project in the Berkshires, the output of which is shared among 14 municipal participants. Some also have had decades-old entitlements to inexpensive hydro power from the massive hydro facilities in the Niagara Falls area of New York that have been operating for more than a half century. These hydro entitlements were given to Massachusetts under a historically unique federal law long ago and, in turn, were allocated to some of the municipal electric plants as a low cost power supply.

While many of the municipal light plants have contracts to purchase some energy output from wind, solar, and other renewable resources, this presents some inconsistencies, as it relates to the renewable resource market and the RPS rules. The RPS system works like this: An eligible resource sells its energy like any other ordinary generation unit. But the rules create a second market for the sale of renewable energy certificates (referred to as RECs). The sale of RECs provides additional revenue needed to finance and advance the renewable industry. In order for a buyer to claim credit for the renewable power (often referred to as the “environmental attributes” of the unit), it was intended that the buyer purchase and retire the RECs. That is an essential component of the market design. In fact, when many businesses and other entities note the fact that they are purchasing quantities of renewable energy, they are typically achieving this objective by the purchase of RECs. Some voluntary “green up” programs work the same way. An important question to ask is whether the municipal electric plants receiving the energy from renewable generation resources are also obtaining the RECs from the projects and retiring them. There is no readily available public information that would show the extent to which any might be doing so.

Like the RPS requirements, investor-owned utilities also have been required to enter into above-market contracts with new renewable projects. The stated statutory purpose has been to facilitate the financing of those resources in the region. The above-market costs also are passed along to ratepayers. Just as the municipal light plants have no obligation to purchase RECs under the RPS rules, they also have no statutory obligation to enter into such long-term contracts to advance the renewable industry.

So what is the rationale for the disparity? The bottom line is that local control has been sacrosanct. It is the kind of thing that yields metaphors warning about the “camel’s nose under the tent” and the “slippery slope” of state interference with local decision-making. That is the stated reason why the municipal electric plants have been left alone. It also is the political “path of least resistance.” If advocates for enactment of new renewable requirements press the Legislature, it is difficult enough to enact such legislation. Realizing that the lobbying efforts of the municipal electric entities might be difficult to overcome, it is much easier to simply leave them alone.

When the RPS and other long-term contracting requirements for renewable resources were first put in place for the investor-owned utilities, the requirements started relatively small. For that reason, leaving out the communities served by the municipal electric plants never presented a compelling issue of inequity worth troubling over. But now, we are about to move from small incremental procurements to large acquisitions that may bring significant incremental costs. To be clear, this is not an argument against moving forward with these ambitious initiatives. By all indications, the Commonwealth will need everyone in the electric sector ramping up to meet the emissions reduction goals. The specter of the proposed ramp-up simply presents the question in a new context regarding the scope of the municipal electric exemption. Specifically, with the new ambitious initiatives, should the duty and responsibility include everyone this time?

It may be that municipal electric plants are not really in a position to comply with the same type of requirements as investor-owned utilities and, for that reason, it may not be practical to impose the same requirements. But as the Commonwealth takes the next steps, there are many ways through which these municipal entities can make an equitable contribution toward the new clean energy requirements without creating administrative or supply portfolio problems. For example, large electric transmission infrastructure will be needed to bring large-scale clean resources into Massachusetts. If the municipal electric utilities simply covered a proportionate share of these new transmission costs through the transmission charges assessed by ISO New England, it would help to balance the contributions. Similarly, the municipalities could contribute toward the cost of procuring off-shore wind by purchasing and retiring a proportional share of the RECs from the new off-shore wind facilities each year. They can easily acquire the RECs from the investor-owned utilities who purchase the off-shore wind RECs in their mandated long-term contracts. Each of these commitments would help to spread the cost of the new initiatives more equitably across the state. These are not administratively or operationally difficult tasks that would disturb the actual supply portfolios of the municipal electric plants. It only requires some additional commitments to achieve a better balance of contributions across the citizenry.

For what it is worth, the intent of this opinion piece has been to educate, in order to raise an important question while we contemplate significant policy initiatives. Unfortunately, it also may aggravate – because the issue tends to be a political “hot button” for those fiercely defending the principle of local control. If this piece misses important facts that could sway one’s opinion, then by all means anyone with a different view should provide that perspective. In that regard, neither the local officials operating the plants nor consumers living in those communities should take this personally, because many have taken action to address the environment in many ways. And there probably are numerous initiatives that many of the communities have implemented that are not well known. But the policy of the Commonwealth today has required consumers residing in the service areas of investor-owned utilities to fund all the major initiatives, including contributions from low income consumers living in some of our most economically challenged cities. Yet, consumers residing in the 50 communities served by municipal light plants have essentially been exempt. Considering the magnitude of the new commitments being contemplated, it just seems fundamentally unfair to leave things “as is” for the next round.

Meet the Author
Today, citizens are becoming more and more passionate about the universal imperative of environmental stewardship. Given that imperative, is there any reason why the duty and responsibility for the new climate change initiatives should not be shared universally this time around?  After all, we’re all in this together.

Ron Gerwatowski is a freelance energy advisor with 29 years of experience in the energy industry. He recently served as assistant secretary for energy during the first year of the Baker-Polito Administration. After completing a year of public service, he returned to the private sector as an energy and regulatory policy consultant. He was formerly senior vice president for regulation and pricing at National Grid before retiring from the company in early 2014.