This article is about the citizens' referendum in Maine that killed the New England Clean Energy Connect... or is it? Although ostensibly about the adventures of Massachusetts to get "clean energy" at the expense of neighboring states, it has a broader lesson.
Two words: Merchant Transmission.
The article says:
Two words: Merchant Transmission.
The article says:
Neither New England Clean Power Connect nor Northern Pass would be in the regulated electric system. They are there to make money as what is known as merchant power lines.
The costs and activities are not regulated like “public utility” systems are. The profit from these lines has to be significant.
How potentially significant? The early tabulations on the amount spent to influence the Maine referendum are as large as some of the towers that were proposed for Northern Pass.
Merchant transmission is an entirely different animal than transmission built by regulated public utilities and states must end treating it the same when it comes to eminent domain. Although the regulators who approve these projects know the difference, hardly anyone else does, including legislators, local governments, the media, and sometimes even the landowners affected by it. It's up to you to educate these people and work to update your state's eminent domain laws to protect the people of your state from speculative energy projects without a public purpose.
First, let's talk about regulated public utility transmission. It's something most people are familiar with. For this kind of transmission line, there is a public purpose. Numerous independent regional electric grid planners across the country study the system's needs to determine whether new transmission is needed to keep the lights on. When a need is found, the grid planner approves a new project, which is then sent to the appropriate state utility commission(s) where the line would be built for subsequent approval. All transmission must be approved according to the state's laws governing transmission before it may be built. If a state also finds the project needed, it grants a permit and eminent domain authority to the utility in accordance with the state's law. This allows the public utility to condemn land for the project, if necessary. However, regulated public utilities use this power sparingly and prefer to coerce landowners to sign voluntarily. A public utility historically uses its eminent domain authority on less than 5% of the needed easements. Public utilities are heavily regulated, and the rates they charge for public purpose transmission are what's known as "cost of service" rates. As you might have guessed, the public utility can only charge electric consumers for its cost of the project, plus a return (profit) set by regulators. The return allows the public utility to recover a reasonable profit on its investment in the project, which is slowly paid for by electric consumers over its useful life, usually 40 years.
While not ideal for affected landowners, who must sacrifice their property for the general public good, it's what was historically developed to allow for electrification of our country in the last century. But the historical public purpose for condemnation has been reimagined in the past 20 years, and state laws granting eminent domain authority to public utilities have not kept up with these changes.
It's time for change!
The biggest reason for change is the development of merchant transmission. Merchant transmission is, at its most basic, a speculative transmission line proposed solely for investor profit. The idea behind it is that there is a market need for additional transmission beyond that needed for a public purpose. A group of investors may determine that there is a market for one of these supplemental projects, although there is no public purpose for it. If a merchant proposes a new transmission project, it must find voluntary customers to pay for it. Because there is no public purpose, the cost of a merchant line cannot be involuntarily allocated to captive electric consumers. Investors put their own money up for the project and hope that they can attract enough voluntary customers to pay for the line, plus an attractive profit. A merchant is granted authority to fairly negotiate rates with prospective customers. If the merchant charges too much, it won't have enough customers. The rates it can negotiate are set by the market for transmission capacity. If a potential customer believes the rate it has negotiated is economic and will supply a need for its customers, in turn, then a contract is signed and the customer is on the hook to pay the contracted rate. The need here is a market need, not a public purpose need. The lights will still stay on for everyone if the merchant project is not built. The merchant takes a risk that a supplemental market for its project will develop. If it does not, then the merchant will not build the project because there is nobody to pay for it. A merchant cannot get a loan to build a transmission line without a guaranteed stream of revenue that comes with negotiated rate contracts with its customers.
And let's talk about merchant transmission rate contracts. A merchant cannot charge more than its voluntary customers are willing to pay. A merchant rate is set by market, not its cost of service plus regulated, reasonable profit. Whatever the market is willing to pay determines the profit. If a merchant can build its project for less than the market rate, then whatever amount leftover above its cost of service is pure profit for the merchant. There is no reasonable cap on its profit. As the linked article above points out, a merchant profit can be enormous, which makes these kind of speculative transmission projects so attractive to investors. But keep in mind, if the profit that remains after contracts are negotiated with voluntary customers is not enough for the investors, they are not committed to building the project and can simply fold while absorbing the loss for money spent to date. Losing a small investment is better than losing a larger amount of money over time selling a service that costs more than the market will pay for it.
So, why are merchant projects a problem when it comes to eminent domain law?
Because states are in a position to either approve or reject the project based on speculation. If a state approves a merchant project, it must grant it public utility status under current laws. Public utility status determines that the project serves a public need and grants the utility eminent domain authority. Not such a problem for a regulated transmission project ordered to serve a public need. The public utility is under orders to build the project if approved. It can't decide afterwards that there is not enough profit in it and cancel its plans. If approved, the project will meet a public need, and any land acquired using eminent domain is only used for a public need. But public utility status is a problem when granted to merchants. Because the merchant has the option to cancel the project at any time, it may never serve a public purpose. But a private investor in the project may have still acquired land "for a public purpose" using eminent domain. There's no provision requiring a merchant to actually use the land it has acquired for a public purpose. In that case, the land will have been acquired through eminent domain without the required public use, or public purpose. Our Constitution prevents the acquisition of land by private parties for a private use.
The tragedy currently unfolding in Missouri illustrates why public utility status and eminent domain authority for speculative merchant transmission projects must end through modernization of state eminent domain laws.
The Grain Belt Express merchant transmission project owned by private investor Invenergy has been approved by Missouri regulators and granted public utility status and eminent domain authority. But it still doesn't have the approval it needs in Illinois, and its Kansas approval is tied to future approval in Illinois. The only state where GBE currently has the authority to condemn property is Missouri. The entirety of the project has not been approved in other states, and it does not have enough voluntary customers to pay for the project. It's only known customer is a small group of Missouri municipalities who signed a contract to pay an amount less than it would cost GBE to provide the service. This "loss leader" contract was only signed so that GBE could tell the Missouri utility commission that it was providing "benefit" to Missouri in order to schmooze its way to approval. GBE has still not reached the point in its development where it has enough customers and permits to build. GBE is still only a SPECULATIVE transmission project. There is no guarantee that it will ever be built.
But GBE has been asking Missouri landowners to willingly sign over their land now for a project that may never be built or used for a public purpose. The landowners who resist are being threatened with eminent domain, and GBE has made good in its threat against one landowner in Buchanan County. It has made a court filing to take this person's property using eminent domain. In the event that GBE is successful, then it will own property for a project that it may never build. What happens to that property if GBE does not find enough customers, or is denied the additional permits it needs to build the project? GBE will still own an interest in that landowner's property, an interest it has acquired that may never serve the public.
Until GBE has signed enough customers, received all its necessary permits, and committed to build the project, there is no "public use" or "public purpose" for the speculative taking of private property. Our Constitution does not allow the taking of private property without public use, but that's exactly what's happening in Missouri. Right now. GBE is threatening condemnation on more than 50% of the property it *could* need for its speculative project. Remember, regulated public utilities typically condemn less than 5% of the easements, and only then when construction is imminent. Regulated public utilities only use eminent domain as a last resort on a project that they are committed to build. GBE is condemning NOW the majority of the property it *could* need later, when it may have customers and permits necessary to complete the project. There is no "public need" to condemn property now for a speculative project.
State utility commission conditions that attempt to prevent a speculative merchant from hurting landowners by beginning construction before they have customers and permits for the entire project do not work. Missouri requires GBE to have funding for the complete project before beginning construction, but not before using eminent domain. Kansas, too, prevents construction until all permits have been granted, but it doesn't prevent eminent domain. State eminent domain law needs to be updated to rein in eminent domain authority for speculative merchant projects. Updates to state law to prevent the granting of eminent domain for merchant projects until they have necessary permits, customers, and have legally committed to building the project are desperately needed to protect citizens. If you haven't yet been put in the position to have your land condemned for a speculative private profit purpose, count yourself lucky... and hurry down to your legislator's office to make sure it doesn't happen. Congressional "infrastructure" legislation will light a fire in investor circles to propose more merchant transmission in exchange for taxpayer-funded financial reward. Missouri is teaching the lesson right now and should be first to protect its citizens from eminent domain abuse.
Only one state has updated its laws to deal with merchant transmission. Several years ago, Iowa passed legislation that prevented above-ground merchant transmission. Think that ended merchant transmission? It did not! Another speculative merchant transmission project is in the works that complies with the new law. SOO Green Renewable Rail is proposing a merchant transmission project that is buried on existing rail rights-of-way. Changing state law to rein in merchant transmission did not make Iowa undesirable for merchant projects. It did not scare anyone away. It simply ensured that future merchant projects are less invasive for the state's citizens.
Why doesn't Missouri require GBE to be buried on existing easements like the SOO Green project? Doing so won't make the project impossible. But what it would do is cut into Invenergy's enormous profits. Building underground is more expensive, which siphons off some of Invenergy's profit. Invenergy wants to build the cheapest project it can so that its profit is bigger. The negotiated market rates for a merchant project won't change if the project is buried, or uses eminent domain to acquire land cheaper. GBE's rates would still be set by market. But if SOO Green is risking its money betting that even a buried project will create a profit, then it is possible, even for GBE.
Ask your legislators what will happen to the easements GBE condemns now, if the project is cancelled later due to rejected permits and lack of customers? Will GBE have to restore the land and return the easements? There's nothing requiring that. GBE can keep the land it condemned without a public use, and then use it for any private purpose it likes. What good is a linear easement across 200 miles of Missouri? It could be used for a number of things such as a pipeline of some sorts, including one of the new-fangled and extremely dangerous CO2 pipelines. It could be used for a private toll road. It could be a private railroad. It could be sold at a huge profit to someone else for any of these projects, and more. There is no guarantee that it will be used for a public purpose. And our Constitution states: "nor shall private property be taken for public use, without just compensation." There is no provision that allows the taking of private property for a private use, but that is exactly what Missouri is allowing to occur today.
GBE's use of eminent domain is UNCONSTITUTIONAL.
First, let's talk about regulated public utility transmission. It's something most people are familiar with. For this kind of transmission line, there is a public purpose. Numerous independent regional electric grid planners across the country study the system's needs to determine whether new transmission is needed to keep the lights on. When a need is found, the grid planner approves a new project, which is then sent to the appropriate state utility commission(s) where the line would be built for subsequent approval. All transmission must be approved according to the state's laws governing transmission before it may be built. If a state also finds the project needed, it grants a permit and eminent domain authority to the utility in accordance with the state's law. This allows the public utility to condemn land for the project, if necessary. However, regulated public utilities use this power sparingly and prefer to coerce landowners to sign voluntarily. A public utility historically uses its eminent domain authority on less than 5% of the needed easements. Public utilities are heavily regulated, and the rates they charge for public purpose transmission are what's known as "cost of service" rates. As you might have guessed, the public utility can only charge electric consumers for its cost of the project, plus a return (profit) set by regulators. The return allows the public utility to recover a reasonable profit on its investment in the project, which is slowly paid for by electric consumers over its useful life, usually 40 years.
While not ideal for affected landowners, who must sacrifice their property for the general public good, it's what was historically developed to allow for electrification of our country in the last century. But the historical public purpose for condemnation has been reimagined in the past 20 years, and state laws granting eminent domain authority to public utilities have not kept up with these changes.
It's time for change!
The biggest reason for change is the development of merchant transmission. Merchant transmission is, at its most basic, a speculative transmission line proposed solely for investor profit. The idea behind it is that there is a market need for additional transmission beyond that needed for a public purpose. A group of investors may determine that there is a market for one of these supplemental projects, although there is no public purpose for it. If a merchant proposes a new transmission project, it must find voluntary customers to pay for it. Because there is no public purpose, the cost of a merchant line cannot be involuntarily allocated to captive electric consumers. Investors put their own money up for the project and hope that they can attract enough voluntary customers to pay for the line, plus an attractive profit. A merchant is granted authority to fairly negotiate rates with prospective customers. If the merchant charges too much, it won't have enough customers. The rates it can negotiate are set by the market for transmission capacity. If a potential customer believes the rate it has negotiated is economic and will supply a need for its customers, in turn, then a contract is signed and the customer is on the hook to pay the contracted rate. The need here is a market need, not a public purpose need. The lights will still stay on for everyone if the merchant project is not built. The merchant takes a risk that a supplemental market for its project will develop. If it does not, then the merchant will not build the project because there is nobody to pay for it. A merchant cannot get a loan to build a transmission line without a guaranteed stream of revenue that comes with negotiated rate contracts with its customers.
And let's talk about merchant transmission rate contracts. A merchant cannot charge more than its voluntary customers are willing to pay. A merchant rate is set by market, not its cost of service plus regulated, reasonable profit. Whatever the market is willing to pay determines the profit. If a merchant can build its project for less than the market rate, then whatever amount leftover above its cost of service is pure profit for the merchant. There is no reasonable cap on its profit. As the linked article above points out, a merchant profit can be enormous, which makes these kind of speculative transmission projects so attractive to investors. But keep in mind, if the profit that remains after contracts are negotiated with voluntary customers is not enough for the investors, they are not committed to building the project and can simply fold while absorbing the loss for money spent to date. Losing a small investment is better than losing a larger amount of money over time selling a service that costs more than the market will pay for it.
So, why are merchant projects a problem when it comes to eminent domain law?
Because states are in a position to either approve or reject the project based on speculation. If a state approves a merchant project, it must grant it public utility status under current laws. Public utility status determines that the project serves a public need and grants the utility eminent domain authority. Not such a problem for a regulated transmission project ordered to serve a public need. The public utility is under orders to build the project if approved. It can't decide afterwards that there is not enough profit in it and cancel its plans. If approved, the project will meet a public need, and any land acquired using eminent domain is only used for a public need. But public utility status is a problem when granted to merchants. Because the merchant has the option to cancel the project at any time, it may never serve a public purpose. But a private investor in the project may have still acquired land "for a public purpose" using eminent domain. There's no provision requiring a merchant to actually use the land it has acquired for a public purpose. In that case, the land will have been acquired through eminent domain without the required public use, or public purpose. Our Constitution prevents the acquisition of land by private parties for a private use.
The tragedy currently unfolding in Missouri illustrates why public utility status and eminent domain authority for speculative merchant transmission projects must end through modernization of state eminent domain laws.
The Grain Belt Express merchant transmission project owned by private investor Invenergy has been approved by Missouri regulators and granted public utility status and eminent domain authority. But it still doesn't have the approval it needs in Illinois, and its Kansas approval is tied to future approval in Illinois. The only state where GBE currently has the authority to condemn property is Missouri. The entirety of the project has not been approved in other states, and it does not have enough voluntary customers to pay for the project. It's only known customer is a small group of Missouri municipalities who signed a contract to pay an amount less than it would cost GBE to provide the service. This "loss leader" contract was only signed so that GBE could tell the Missouri utility commission that it was providing "benefit" to Missouri in order to schmooze its way to approval. GBE has still not reached the point in its development where it has enough customers and permits to build. GBE is still only a SPECULATIVE transmission project. There is no guarantee that it will ever be built.
But GBE has been asking Missouri landowners to willingly sign over their land now for a project that may never be built or used for a public purpose. The landowners who resist are being threatened with eminent domain, and GBE has made good in its threat against one landowner in Buchanan County. It has made a court filing to take this person's property using eminent domain. In the event that GBE is successful, then it will own property for a project that it may never build. What happens to that property if GBE does not find enough customers, or is denied the additional permits it needs to build the project? GBE will still own an interest in that landowner's property, an interest it has acquired that may never serve the public.
Until GBE has signed enough customers, received all its necessary permits, and committed to build the project, there is no "public use" or "public purpose" for the speculative taking of private property. Our Constitution does not allow the taking of private property without public use, but that's exactly what's happening in Missouri. Right now. GBE is threatening condemnation on more than 50% of the property it *could* need for its speculative project. Remember, regulated public utilities typically condemn less than 5% of the easements, and only then when construction is imminent. Regulated public utilities only use eminent domain as a last resort on a project that they are committed to build. GBE is condemning NOW the majority of the property it *could* need later, when it may have customers and permits necessary to complete the project. There is no "public need" to condemn property now for a speculative project.
State utility commission conditions that attempt to prevent a speculative merchant from hurting landowners by beginning construction before they have customers and permits for the entire project do not work. Missouri requires GBE to have funding for the complete project before beginning construction, but not before using eminent domain. Kansas, too, prevents construction until all permits have been granted, but it doesn't prevent eminent domain. State eminent domain law needs to be updated to rein in eminent domain authority for speculative merchant projects. Updates to state law to prevent the granting of eminent domain for merchant projects until they have necessary permits, customers, and have legally committed to building the project are desperately needed to protect citizens. If you haven't yet been put in the position to have your land condemned for a speculative private profit purpose, count yourself lucky... and hurry down to your legislator's office to make sure it doesn't happen. Congressional "infrastructure" legislation will light a fire in investor circles to propose more merchant transmission in exchange for taxpayer-funded financial reward. Missouri is teaching the lesson right now and should be first to protect its citizens from eminent domain abuse.
Only one state has updated its laws to deal with merchant transmission. Several years ago, Iowa passed legislation that prevented above-ground merchant transmission. Think that ended merchant transmission? It did not! Another speculative merchant transmission project is in the works that complies with the new law. SOO Green Renewable Rail is proposing a merchant transmission project that is buried on existing rail rights-of-way. Changing state law to rein in merchant transmission did not make Iowa undesirable for merchant projects. It did not scare anyone away. It simply ensured that future merchant projects are less invasive for the state's citizens.
Why doesn't Missouri require GBE to be buried on existing easements like the SOO Green project? Doing so won't make the project impossible. But what it would do is cut into Invenergy's enormous profits. Building underground is more expensive, which siphons off some of Invenergy's profit. Invenergy wants to build the cheapest project it can so that its profit is bigger. The negotiated market rates for a merchant project won't change if the project is buried, or uses eminent domain to acquire land cheaper. GBE's rates would still be set by market. But if SOO Green is risking its money betting that even a buried project will create a profit, then it is possible, even for GBE.
Ask your legislators what will happen to the easements GBE condemns now, if the project is cancelled later due to rejected permits and lack of customers? Will GBE have to restore the land and return the easements? There's nothing requiring that. GBE can keep the land it condemned without a public use, and then use it for any private purpose it likes. What good is a linear easement across 200 miles of Missouri? It could be used for a number of things such as a pipeline of some sorts, including one of the new-fangled and extremely dangerous CO2 pipelines. It could be used for a private toll road. It could be a private railroad. It could be sold at a huge profit to someone else for any of these projects, and more. There is no guarantee that it will be used for a public purpose. And our Constitution states: "nor shall private property be taken for public use, without just compensation." There is no provision that allows the taking of private property for a private use, but that is exactly what Missouri is allowing to occur today.
GBE's use of eminent domain is UNCONSTITUTIONAL.
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