Academic journal article Energy Law Journal

The Used and Useful Test: Implications for a Restructured Electric Industry

Academic journal article Energy Law Journal

The Used and Useful Test: Implications for a Restructured Electric Industry

Article excerpt

In the late 1980s, the demand for electricity was growing steadily in Vermont. Vermont utilities sought out new supplies that would provide longterm price stability. Additionally, Vermont utilities, politicians, and regulators were concerned about forecasts of much higher fossil fuel prices in the long terms, and concerned about the adverse environmental consequences of developing additional fossil-fuel generating capacity. The most obvious source of new supply was Hydro-Quebec (HQ), which had been developing the Province of Quebec's hydroelectric potential and was actively seeking to increase sales for export into the United States. HQ offered the prospect of seemingly limitless supplies of clean energy at stable prices, apparently the ideal solution for Vermont's situation.1

In 1987, a group of nine Vermont utilities, collectively called the Vermont Joint Owners (VJO), entered into a thirty-year contract, from 1990 to 2020, for power from HQ. Given the duration of this contract, the VJO was required to seek regulatory approval because the State of Vermont requires that parties seeking long-term supply commitments (five years or longer) obtain a Certificate of Public Good (CPG).2 The contract was amended, in 1988, because of concerns about obtaining all of the necessary regulatory approvals. Under the amended contract, the parties had until April 30, 1991 to terminate the contract if the necessary regulatory approvals were withheld or simply unsatisfactory to the party. In October 1990, the Vermont Public Service Board (PSB) issued a CPG to the Vermont utilities, providing interim approval for the contract and the participation agreement among the nine utilities.3 However, in early 1991 HQ was running into its own regulatory problems, and was dissatisfied with one of the conditions of the regulatory approval it obtained from the Canadian National Energy Board. Because HQ was appealing that condition to the Canadian Court of Appeals, it sought to extend the April 30, 1991 termination deadline. The parties subsequently signed a new agreement with a termination deadline of IMAGE FORMULA3December 1, 1991. This new agreement was also approved by the PSB.4

In July 1991, the Canadian Court of Appeals affirmed the export license to HQ and struck down the condition to which HQ had objected. By the end of August 1991, the parties had locked-in the contract. In February 1992, the PSB approved the allocation of the contract costs among the participants.5 Under the agreement, the cost of power under the HQ contract increased significantly beginning in 1995, but would then be tied to the rate of inflation.6 However, in light of the forecasts for fossil fuel prices and inflation, those higher HQ contract costs still appeared to offer benefits to Vermont ratepayers, including price stability.

The forecasts of rapid fuel price and demand increases did not come to pass. The recession in the early 1990s reduced the demand for power in Vermont. By 1994 deregulation of natural gas supplies had also significantly reduced fuel costs and increased supplies. The ideal solution that the HQ contract initially provided was appearing to be less than ideal. The regulatory controversy over the contract intensified and ultimately utilities were unable to recover all of the costs of the contract because the PSB determined that the contract was not economically used and useful. The PSB's definition and application of an economic used and useful test has been highly controversial, and has raised numerous legal and economic issues. This article focuses on that regulatory controversy and its implications for a restructured electric utility industry.

1. INTRODUCTION

When the State of California began its march towards restructuring and retail competition in its electric industry in 1994, few imagined the ensuing debacle. Nor would it have been predicted in the late 1990's that rapid growth in wholesale market trading and emergence of sophisticated derivatives instruments would so rapidly disintegrate as a result of the financial scandal propagated by the collapse of Enron. …

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