United States: Meeting Electric Generation Need: Through Markets or State-Mandated Contracts?

Recently, the Massachusetts Department of Public Utilities answered -- at least for now -- the question of whether it would allow market forces to determine where and when new electric generation gets built in the Commonwealth or whether it would bow to legislative pressure and mandate ratepayer-subsidized contracts for such generation. In a March 15, 2013, order,[1] the department came down squarely on the side of letting markets work, holding to the course the state set in 1998 when it began restructuring the electric industry in Massachusetts to provide for competitive electricity supply.[2]

The March 15 order came at the conclusion of an investigation triggered by legislation passed in 2012. That legislation required the department to investigate the need for additional generating capacity in the Northeast Massachusetts/greater Boston area ("NEMA"). The legislation provided that if the department determined there was a need, based on results of the current electricity market auction and other relevant factors, it had discretion to order the regulated electric distribution companies under its jurisdiction to enter into long-term contracts for new electric generation in NEMA. The legislation came about as the result of a strong push by one of the state's lawmakers for the development of new generation at a site in Salem, MA, where a large, old coal-burning power plant will be retired in 2014. That legislator took an active role in the proceeding, advocating for the department to require long-term contracts and supporting the position of the developer of the new generation facility at the Salem site. In connection with the proceeding, Day Pitney represented a generation owner that has invested more than $1 billion in Massachusetts generation assets based on the premise that competitive wholesale markets for electricity in New England will make those investments profitable. The developer of the Salem generation facility wanted the benefits of the markets but also wanted a subsidy for its proposed generation through state-mandated long-term contracts with electric distribution companies that would be paid for by their retail electricity customers.

The department opened its investigation on October 1, 2012, held a technical conference on November 8, 2012, and allowed parties in the proceeding to submit comments and reply comments in November and December, setting forth their positions and arguments. Participants in the case included existing generation owners and wholesale market participants, the electric distribution companies serving NEMA customers, the Massachusetts Office of the Attorney General, the Massachusetts Department of Energy Resources, environmental advocacy groups, the generation developer of the Salem power plant, and state legislators.

In its March 15 order the department determined there was a "need," as defined in the statute, for new generating capacity in NEMA, thus opening the door to state-mandated contracts. The department, however, exercised its discretion and closed that door, deciding not to require long-term contracts. Instead, the department provided considerable comfort to those market participants that have made major investments in Massachusetts expecting that market competition and not state subsidies would determine the outcome of those investments. Specifically, it recognized in the March 15 order that

"[electric industry] restructuring shifted the risks of generation development from consumers to generators, who are better positioned to manage those risks. Restructuring represents a clear policy choice that electric generation resources are best developed in response to price signals from a competitive marketplace. The theory is that consumers thereby see the lowest possible prices for electricity and remain insulated from construction, operational and price risks that were inherent in commodity rate regulation."[3]

The department concluded it was premature to order long-term ratepayer-subsidized contracts and said "the wholesale market should be given the opportunity to work before taking the extraordinary step of ordering local distribution companies to enter into long-term contracts."[4]

For now, at least, electricity supply in Massachusetts will continue to be determined largely by the New England-wide wholesale electricity markets and not by legislative mandate and department order. That result should benefit consumers.


[1] The March 15 order was issued in a proceeding titled "Investigation by the Department of Public Utilities on its own motion into the need for additional capacity in NEMA/Boston within the next ten years, pursuant to Chapter 209, Section 40 of the Acts of 2012, "An Act Relative to Competitively Priced Electricity in the Commonwealth," and pursuant to G.L.c. 164 § 76" (Docket No. D.P.U. 12-77).

[2] The one area where the commonwealth has deviated from this course is with respect to renewable energy, which is not always the most economic choice of energy supply. By legislation enacted in 2008 and 2012, Massachusetts has required that electric distribution companies enter into certain long-term contracts with renewable energy suppliers to help Massachusetts meet its renewable energy goals.

[3] March 15 order at p. 30.

[4] Id. at p. 33.

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