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Toby Talbot, Associated Press
Vermont Electric Power Company transmission lines are seen Wednesday, Feb. 8, 2012 in Waterbury, Vt. A Vermont Senate committee is taking testimony about the possibility of having the state buy a controlling stake in the state's electrical transmission system. The committee on Economic Development, Housing and General Affairs is hearing Wednesday from utility officials and others about the proposal that would use special bonds to help buy 51 percent of the system run by the Vermont Electric Power Company, known as VELCO.

MONTPELIER, Vt. — A Vermont Senate committee is working on a plan to have the state take a majority stake in its high-tension power transmission grid, now that a proposed merger between the state's two largest utilities would put control of Vermont's electric backbone under Canadian control.

The proposed merger of Green Mountain Power and Central Vermont Public Service under the ownership of Montreal-based Gaz Metro has raised concerns that Vermont could end up facing pressure for new high-voltage lines carrying electricity from hydropower-rich Quebec to the energy-hungry cities of southern New England and New York.

Bulk transmissions of power in the state currently are handled by the Vermont Electric Power Company, known as VELCO, of which a combined Green Mountain Power and Central Vermont Public Service — and their parent Gaz Metro — would own a majority share.

"The transmission grid is really akin to our interstate highway system, except it's one better," said Sen. Vincent Illuzzi, R-Essex-Orleans and chairman of the Senate Committee on Economic Development, Housing and General Affairs. "There is no other route by which Vermonters receive their electricity."

"There are decisions made by VELCO that impact the lives of all Vermonters," Illuzzi continued. As examples he cited "where transmission lines go, how big they are, who they primarily serve, what rates are charged to the distribution utilities which are in turn passed on to the ratepayers."

The administration of Gov. Peter Shumlin has asked the state's utility regulators, the Public Service Board, that if it approves the merger it make a condition that five of the 13 members on the VELCO board represent the public, limiting Gaz Metro's sway over VELCO's operations.

Illuzzi's committee appears poised to go much further — to outright state ownership of 51 percent of VELCO. The panel was working Wednesday to draft an amendment to be offered on a mid-year budget adjustment bill on Thursday. Illuzzi said he expected it would stall the Public Service Board's review of the proposed merger while lawmakers flesh out their takeover plan — including how to pay for it.

The proposal, if introduced, is likely to spark a battle in the Senate.

"I think it's crazy," Senate President Pro Tem John Campbell said of Illuzzi's proposal. "We wouldn't just be buying the assets, we'd be buying the current liabilities and the potential liabilities as well."

Green Mountain Power spokeswoman Dorothy Schnure said the purchase would make the state "responsible for the financial risks of the half-billion-dollar investment. In addition, the state would be responsible for investing tens of millions of dollars every year to ensure a reliable transmission system.

She said the terms of the merger already keep control of the merger in Vermont. "GMP's proposal transfers 30 percent of VELCO stock to a nonprofit to ensure that the new GMP (and its owner Gaz Metro) does not control the transmission system."

Kerrick Johnson, vice president for external affairs at VELCO, expressed skepticism about a state takeover. "I would suggest that a purchase of this magnitude, in an industry this dynamic, that costs, benefits and risks be identified, understood and considered very carefully."

VELCO has about $1 billion in assets, $500 million in debt, and is planning to make about $500 million in system improvements during the next five years, Johnson said.

State Treasurer Beth Pearce urged caution. She first provided the committee copies of a tax consultant's report indicating that the state would not be allowed under Internal Revenue Service rules to use private activity bonds to buy a stake in VELCO. Those are bonds usually issued so the state can subsidize business loans or mortgage financing for homeowners.

She also gently rebuffed committee members when they suggested Vermont use some of the $3.4 billion in its public employee pension funds to invest in VELCO. A small state like Vermont has to use outside consultants to manage its pension funds and generally has shied away from making its own investment picks, she said, pointing to the 20 percent annual return announced last June as a sign the formula has been successful.

Using the pension funds to buy a majority stake in VELCO "would be outside the model, and frankly the model has been working pretty well. We're getting good results," Pearce said.

William Driscoll, vice president of the manufacturers' group Associated Industries of Vermont, called a potential VELCO takeover "a bad solution in search of a nonexistent problem."

If protecting the public good is the goal, Driscoll said, "We already have the Public Service Board process, which is the forum for investigating, debating and making decisions on those sorts of issues. Introducing what could be a politicized governance of VELCO could undermine the most cost-effective and technically expert operations or project development."

But there appeared to be enthusiasm among a majority of committee members — Illuzzi said it was unanimous — for moving forward.

When Pearce suggested the Legislature would want to hire consultants to study a possible purchase of a majority of VELCO, Sen. Peter Galbraith, D-Windham, responded by pointing to the profit the state could reap.

"To have this benefit come to the state is a really big deal. The fact that it was $50,000 or $150,000 to do a proper valuation shouldn't be a deterrent for something that could be so beneficial to the people of the state of Vermont," Galbraith said.