Finding a Well Planned Path

Here, by way of a "guest post," is a letter to legislators from Tom Schneider, a former member of the Public Service Commission. Tom asks whether or not it's a good idea - for either tax or rate payers - for Northwestern Energy to buy the coal-fired power plants at Colstrip, presumably to prevent what is otherwise their likely closure. For me, the critical concern here is that we not, by locking ourselves into the Colstrip plants now, tie our hands when, some day in the future, we need to put in place an efficient, cost effective policy to cut carbon emissions. And I don't think that day is very far off. But here's Tom's take:

April 9, 2016

Dear Legislators:

I served as a Montana Public Service Commissioner from 1977-1984 and again from 2003-2006. I am deeply concerned about the rash of proposals and media flurry regarding Colstrip’s future, particularly the suggestion that NorthWestern Energy (NorthWestern) purchase a larger portion of the Colstrip plant. There are enormous economic and environmental risks associated with these coal plants. As a former Commissioner I understand what it takes to plan energy systems. I understand about protecting consumers from risks. And these proposals are absolutely heading in the wrong direction. NorthWestern’s purchase of any additional portion of Colstrip could very well put Montana ratepayers and taxpayers at risk.

The ownership structure of the Colstrip plant is complex (see table at the end of this letter). The two older units, 1 & 2 are owned by Puget Sound Energy (PSE) and Talen Energy. PSE is a regulated utility and Talen Energy is an unregulated power provider. (Talen took control of PPL’s share of Colstrip and its operating obligations last year when PPL spun off all of its unregulated assets, including Colstrip, into a new company named Talen Energy.) Recent red flags raised by regulators, financial analysts, and the owners should not be ignored. The Washington Utilities and Transportation Commission (WUTC), the entity that regulates PSE, expressed concern after it reviewed the economic viability of the two older units, 1 & 2. An analysis by NorthWestern showed significant financial liability associated with purchasing PPL’s coal plants, and particularly Units 1 & 2. Independent financial analysts who review Talen, have increasingly expressed concern regarding the significant and mounting liabilities associated with the plants. The conclusions of all three is that the older two units of Colstrip are increasingly uneconomic.

The WUTC has not only expressed concern regarding the two older units’ economic viability[i] but recently completed an analysis of PSE’s remediation obligations for units 1 & 2.[ii] PSE and UTC analyses provide a glimpse into the hefty price tag that Montana ratepayers and/or taxpayers could shoulder if ownership is transferred to NorthWestern.[iii] In its remediation analysis, largely based on data provided by PSE, the WUTC determined that the preliminary estimate of environmental remediation and decommissioning costs for units 1 & 2 would be $134 million to $195 million (the report said that the law contains no decommissioning requirements). The report said that these costs would increase the longer the plant stayed open. If either PSE’s or Talen’s share of Colstrip were to shift to NorthWestern, Montana ratepayers could be on the hook for those costs. 

Financial analysts have also issued warnings to Talen Energy about Colstrip continuing to be a highly risky investment. UBS, an international financial firm, was PPL’s financial advisor when it tried to sell all of its generation assets to NorthWestern, including the Colstrip plant.[iv] UBS issued a report on March 7, 2016, in which it called Colstrip a “money-losing” asset for Talen. It said that Talen should find a way to monetize its ownership in the plant.  This declining valuation is reflected in Talen’s property taxes to the State of Montana and local governments. In the last three years PPL and Talen have written down the value of its interest in Colstrip by 87%, meaning its share of Colstrip 1, 2, and 3 has no real value.

Ultimately, NorthWestern has already determined that purchasing any portion of Colstrip would be a risky investment. In 2013, when it purchased the hydroelectric dams from PPL, its own analysis showed that also purchasing PPL’s share of the Colstrip plant would be a major liability. At that time, NorthWestern assigned a negative $340 million value to PPL coal plants and a negative $127 million value to Colstrip units 1 and 2 specifically.[v] Since 2013, the liabilities have only increased.

In its most recent planning document submitted to the Montana Public Service Commission, NorthWestern acknowledges it does not need the additional power. That means the intent of this proposal is probably for NorthWestern to purchase additional power to serve large industrial customers that are currently buying power on the open market and likely contracting for power with Talen (because that information is proprietary it is impossible to know for certain where Montana’s industrial customers get their power). If the large industrial customers, who sought deregulation and embraced the market, believe that the Colstrip plant has value then they ought to acquire the plants themselves. This negative value means that Talen and PSE might even have to pay NorthWestern (or the large industrials) to take these plants off their hands – an absurd result.

It is likely that NorthWestern would only consider buying an additional interest in Colstrip if the state of Montana and taxpayers and/or ratepayers subsidize the financial and environmental liabilities. That scenario would be disastrous. Montana taxpayers and ratepayers should not foot the bill. Instead of placing an additional and hefty burden on Montana businesses and families, Montanans should be working on prudent Montana energy solutions. Planning a different energy future will take time and resources. It will require detailed assessments of remediation obligations, worker and community responsibilities, reliability and transmission studies, contracts, and more. Considerable progress was being made in Montana prior to the unprecedented action of the U.S. Supreme Court to stay the Environmental Protection Agency’s Clean Power Plan. The positive Montana momentum has been slowed and the uncertainties magnified. The delay has sidetracked productive efforts with a rash of half-baked ideas and political theatre from major political candidates of both parties.

Montana deserves better. We need real Montana solutions, not false hope. The workers and the community of Colstrip deserve our focused attention. Utilities need certainty. Consumers need to be protected. We don’t need to be distracted from the important challenges before us. The market is determining Colstrip’s fate. Concerns about the economic, public health, and environmental impacts of climate change are helping to drive the market. Our job is to help Montana have a thoughtful and well planned path to a cleaner, more affordable energy system. Montana has a responsibility to build a better energy future. We must not squander that opportunity.

Sincerely,

Thomas J. Schneider

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Colstrip Ownership Structure

Owner	Unit 1	Unit 2	Unit 3	Unit 4
Puget Sound Energy	50%	50%	25%	25%
Talen Energy	50%	50%	30%*
Portland General Electric			20%	20%
NorthWestern Energy				30%*
Avista			15%	15%
Pacificorp			10%	10%

*Talen Energy and NorthWestern Energy have an agreement to share the output of units 3 & 4.

Endnotes

[i] Washington Utilities and Transportation Commission Comments on Puget Sound Energy’s Cosltrip Study, Docket UE-120767, Feb. 6, 2014.

[ii] WUTC, “Investigation Report. Investigation of coal-fired generation unit decommissioning and remediation costs.” UE-151500, Feb. 2016

[iii] Puget Sound Energy’s 2013 and 2015, Electric and Natural Gas Integrated Resource Plans.

[iv] NorthWestern Energy, Application for Approval to Purchase and Operate PPL Montana’s Electricity Supply Rates, for Approval of Issuance of Securities to Complete the Purchase, and for Related Relief, Testimony and Exhibits, Docket No. D2013.12.85, December 2013.

[v] Ibid. And NorthWestern Energy Submittal to Public Servic Commission, Project Mustang Valuation Spreadsheet, “PSC-066 Mustang Valuation – 2032 Case - 6-24-13.”

Struggling to Survive the Revolution

Superficially, at any rate, there are some striking similarities between Greg Gianforte and Donald Trump. They are both business guys who have made piles of money and can pretty much pay for their own campaigns. They are both outsiders who assure us they will clean house if they end up in the Governor’s Mansion or the White House.  When it comes to public policy, they both have ideas that are mind bogglingly half baked. And they both claim that as captains of industry, if elected they would know how to “create jobs.”

But there the similarity ends. Unlike Trump, Gianforte is not a loud-mouthed, misogynistic, narcissistic, bullying fool. So far as I know, he does not think he can force Mexico to build a wall on its northern border (although for a lot of Mexicans, that’s beginning to look like a pretty good idea). There’s no evidence that he’s obsessed with the size of his hands and his sexual prowess. He doesn’t recommend beating up people who disagree with him, or torturing prisoners of war, or bombing their children. And unlike Trump, Gianforte is not trying to tear to shreds the Reaganism that has inhabited Republican thinking for the last 35 years.

Reaganism, as David Brooks describes it in a recent New York Times column, is that familiar notion that the road to economic prosperity is paved with deregulation and tax cuts, especially for the rich. And it’s the belief that when those policies unleash the energies of the private sector and the pace of economic growth quickens, all boats will rise with the tide, and prosperity will trickle down.

The trouble is, Brooks says, Reaganism just doesn’t work any more (if it ever did), and Republicans, in their heart of hearts, know it. They know instead that “technological change, globalization and social and family breakdown mean that the benefits of growth, to the extent there is growth, are not widely shared.” Ideologically, they are in a crisis, looking for a new and better way to understand the world and needing desperately to respond to the mostly white, typically not-well-educated men in their base who are the ones who have not “widely shared” in the benefits of growth. It’s a situation that’s ripe for Trump to step into - not, of course, because he can lead the Republican party onto firmer ground - but because he is a port in the storm to people for whom the party has become little more than a trail of false promises.

And that’s where Greg Gainforte comes in. Despite being an outsider and an entrepreneur and a fresh face and a job creator, Gianforte is still peddling the old time, Reaganite Republican religion. He says he is going to make things all better by bringing in “good jobs,” but if you’re paying attention, you’ll notice that the way he's going to do that sounds like he’s channeling Reagan himself. He wants to cut taxes on capital gains and on the personal property of big businesses. He promises to get rid of pesky regulations. He refuses to say where he is on right to work. He’d appoint a business guy to run the Department of Environmental Quality, presumably because more business is better for us than a clean environment. All the things, in other words, that orthodox Republicans have pinned their hopes on since the 1980s.

Brooks argues that the Republican world view – Reaganism - is in a crisis brought on by its increasing inability to explain reality. And invoking the theories of Thomas Kuhn, Brooks says that that world view is about to undergo a revolution – an abrupt and wrenching shift in perspective – impelled by the ravings of Donald Trump.* That could be, and if it is, it looks like a revolution Greg Gianforte will struggle to survive.

*Kuhn’s book, The Structure of Scientific Revolutions, first published in 1962, itself developed a revolutionary account of how science progresses over time. Personally, I think it’s a bit of a stretch for Brooks to apply Kuhn’s thinking to what’s happening in the Republican party, but it’s an engaging argument.

Losing Touch With Reality

In recent meetings with the editorial boards at the Helena Independent Record and the Billings Gazette*, gubernatorial wannabe Greg Gianforte has laid out a plan for tax cuts and infrastructure spending that frankly loses touch with reality. A former businessman, Gianforte is a Republican outsider with no experience in governing, which may explain how he has come up with a proposal that would make a complete mess out of the state’s budget.

According to Gianforte, the state has a surplus of “almost half a billion dollars.” With that  money, he figures, we could eliminate the business equipment tax, which he claims is the “most regressive” tax on the books. We could also adopt a measure to cut income taxes that made it through the 2015 Legislature, only to be vetoed. And after both of those tax cuts, Gianforte figures, we would have enough left to spend $200 million on infrastructure projects.

Consider Gianforte’s claim that we have a “surplus” of half a billion dollars. He appears to be referring to the $455 million the state had in the bank at the start of the current biennium. But he doesn’t seem to realize that by the beginning of the next biennium, that cash on hand is expected to be reduced to $357 million. It’s only then that Gianforte, if elected, could begin to put his tax and spending proposals in place, so he would be doing that with about $98 million less to work with than he thinks.

But it gets worse. Right now, the amount of ongoing revenue the state takes in just about equals the amount that it spends. The budget is currently balanced; there is no surplus or deficit. The money that’s in the bank is not a current surplus; it’s a reserve that has been set aside out of past surpluses. So if Gianforte really did cut taxes and increase spending, the state would run a deficit, and the only way we could pay for it would be by eating up our reserves.

And with Gianforte’s plan, those reserves would disappear very quickly. Assuming that the state would make up for the loss to local governments, eliminating the business equipment tax would cost at least $160 million over the next biennium. Depending on the details, cutting the income tax could easily cost another $100 million.** And then there’s the $200 million Gianforte says he will spend on infrastructure. All that adds up to $460 million, which means that we would blow through our $357 million cash reserve well before the biennium was over, and would still be running a serious deficit with no way to pay for it. Needless to say, running a deficit and cannibalizing our reserves would obliterate the track record for sound fiscal management put up by Steve Bullock. And the state’s credit rating, which right now is excellent, would go in the tank. Nobody would want to lend money to a state that had lost all sense of fiscal discipline.

Quite aside from being fiscally irresponsible, Gianforte’s proposal to eliminate the business equipment tax is misinformed.  Several past legislatures have already substantially reduced the tax, and in 2013, eliminated it entirely for 60 percent of Montana’s small businesses. The bulk of the tax is now paid by large businesses. How Gianforte concludes that that makes it the most regressive tax around is a mystery to me.

Another big problem with eliminating the business equipment tax is that it puts a major dent in the budgets of local governments, which means that they either have to cut services or shift the tax onto other taxpayers, mainly homeowners. To prevent that from happening, the legislature would have to make up for the loss of local revenue with state funds. That's what it's done in the past, and it works, but it simply means that the dent moves over to the state budget.

Gianforte’s taxing and spending plans don’t pencil out, but you shouldn’t let that worry you too much. Because even though Gianforte doesn’t seem to know it, the state constitution requires the budget to be balanced. So his plan is simply unworkable. There’s some comfort in that, although it’s alarming to think that there is a candidate out there who doesn’t seem to know or care that he is pitching a plan that can never get off the ground.

* You can see video of these meetings here, for the Independent Record and here for the Gazette.

** Gianforte says he would have signed the income tax cut bill that Steve Bullock vetoed. Since the governor in fact vetoed three such bills, it’s anyone’s guess what Gianforte is actually talking about. The three bills (SB 171, SB 200 and HB 166) would have cost, in lost revenue, $22, $112 and $85 million respectively. The Republicans were only serious about the first one, SB 171. The other two were obvious budget busters that were sent to the governor so that he would have to veto them, which would give Republicans a chance to go after Bullock in his re-election campaign. And sure ‘nuff, that’s what Gianforte’s doing.