Tuesday, August 4, 2015

Next Year* - New Hampshire Electricity Price Update

While we are all enjoying the fine summer weather, I thought it would be useful to take a look back at electricity rates for this past winter and to think about what the coming winter might hold for us. Before we get into this topic, however, I need to note that this will be my last blog on New Hampshire energy issues for the next year. I am heading off to Botswana, Southern Africa, as a Fulbright scholar, where I will be studying energy matters in Botswana, with a particular focus on the solar energy field and storage technologies. As you can imagine, the energy issues in a developing country are quite different. Here in NH, we are all used to reliable, inexpensive electricity whereas, in Africa, two-thirds of the population do not even have access to electricity, it can be very expensive, and, when available, it is often not reliable. In NH, we sometimes seem intent on blocking the development of any energy projects, whereas in Africa energy infrastructure development is welcomed, encouraged, and supported. The energy field and the associated issues will be quite different and I am looking forward to learning more. While down in Southern Africa, I will be firing up a new blog, tentatively titled Energy in Southern Africa, so if you are interested in following my energy explorations in this part of the world, drop me an email and I will put you on a notification list. But back to NH energy matters…

In my last blog on electricity rates in NH, Gonna Take You Higher, I noted the following:
  • Wholesale prices (and thus retail prices) for electricity during the 2013/2014 winter increased due to natural gas pipeline constraints.
  • The three deregulated utilities—NH Electric Co-op, Unitil, and Liberty Utilities— substantially increased in their winter default service rates, with price increases ranging from 60 to 75%.
  • PSNH rates only increased by 4% and they ended up with the lowest rates in the state.
  • The increases were due to the fact that Unitil and Liberty Utilities were compelled to lock in electricity prices from the short-term 2014/2015 futures market for electricity where prices had skyrocketed due to the high prices of the 2013/2014 wholesale market.
  • I made the recommendation that the utilities should not be restricted to purchasing their future electricity supply to just six months out and that they be allowed to adopt a portfolio approach of both long- and short-term electricity supply agreements to mitigate the effects of short-term price spikes.

I thought it would be interesting to take a look at what actually happened over the winter and what has happened since then.

As shown in the figure below, wholesale electricity prices did spike over the winter but nowhere near the frequency, duration, or magnitude of the previous winter. Peak prices were even lower than those of the 2012/2013 winter.
Data Source: EIA

Compared with the previous two winters, prices increases this year were moderate and actual wholesale rates were lower than the futures prices at the start of the season. In October 2014, futures prices for the winter peak in January and February were ~18 c/kWh (see Gonna Take You Higher).  In January and February 2015, although the wholesale market prices peaked at ~12 c/kWh for January and 20 c/kWh for February, the daily averages for those months were a lot lower—at 8.7 and 13.7 c/kWh, respectively.

This means that when  the electrical utilities bought electricity on the futures market, it is likely they overpaid relative to actual day-ahead wholesale prices. However, this the essence of hedging (or locking in) the price of a commodity ahead of the time you actually need it:  if actual prices turn out to be lower, you end up overpaying, but, if prices end up higher, you are very pleased. Hedging is just like paying for insurance – you pay a premium to protect yourself: it is not about getting the lowest possible price; rather, it is about reducing risk and avoiding exposure to excessive price increases.

After those very large winter increases, the summer default rates plummeted and the three deregulated utilities ended up with rates lower than that of PSNH, which again had the highest rates in the state. The figure below gives an historical record of the default rates for the four NH electrical utilities.

Data Source: Courtesy of NH PUC

Futures prices for electricity for the upcoming winter are currently pretty low compared with those of years past (see the figure below).  The futures markets indicate prices of the order of 12 c/kWh for the Jan/Feb 2016 winter peak, with further decreases expected in the following winters. These lower futures prices are most likely a reflection of the changes that we are seeing in the New England electricity market. The local electricity supply coordinator, ISO-NE, has worked hard to mitigate the extent and duration of the winter spikes by implementing a winter reliability program in which owners of oil-based generating facilities and liquefied natural gas storage operations are paid to store fuel. This ensures a reliable and predicable backup supply of alternative fuels to generate electricity should there be bottlenecks in the natural gas supply from pipelines. 

Data Source: CME
My predictions for electricity rates for the next few years are that we will continue to see short-term winter spikes due to natural gas pipeline congestion during high demand periods but that these spikes will moderate over time as ISO-NE expands and improves its winter reliability program, as some the natural gas pipeline projects get implemented, and as more Canadian hydro power makes its way down to New England.

Since the deregulation of electricity supply in NH, customers are no longer compelled to purchase their electricity from their default provider. Given the big fluctuations in default energy rates and the availability of competitive suppliers, I thought it would be interesting to look at how customers have responded – are they flocking to competitive suppliers or are they staying with their default utility? I took a look at the customer migration numbers for PSNH – the largest NH utility. The chart below shows data for the past three years. The data in orange show that, from about July 2012, the number of residential customers purchasing their electricity from competitive suppliers started to accelerate, and this trend really kicked in in the first quarter of 2013 when there was big movement of customers to competitive suppliers. The numbers reached a peak at the end of 2013, when approximately 28% of PSNH residential electricity customers were supplied by other companies. Since then, there has been a slow decrease and, presently, some 20% of the electricity supply to residences comes from competitive suppliers. The data in blue, which is for all PSNH customers (including small and large commercial and industrial enterprises), show that, in October 2013, almost 60% of all electricity distributed by PSNH came from competitive supplies. The numbers have fluctuated since then but, this past winter, this number fell below 40%, corresponding to a big migration back to PSNH due to their lower default rates. There is now a slow movement away from PSNH again, as lower summer rates begin to appear attractive to the commercial and industrial enterprises. 

Data Source: NH PUC

Some months ago I wrote about a website called shopenergyplans.com, which allows you to compare electricity costs from competitive suppliers in your service area. At that time, shopenergyplan.com was only presenting information for suppliers who agreed to have their rates posted. Shopenergyplans.com has advanced since then and now provides details for a larger number of competitive suppliers. In my last blog on this topic, I noted that rates for only three competitive suppliers were listed for the Manchester service area. Yesterday, I noted that are now seven different suppliers listed, with 40 different plans, ranging from 1 to 36 months, and including various renewable energy sources. A few weeks ago, shopenergyplans.com notified me of two electricity supply plans from competitive suppliers offering lower rates in the PSNH service area. This website is a good place to start if you are considering looking for a competitive supplier but I caution you to do your research and make sure that you understand the contract terms – remember that there can be costs for switching and the competitive suppliers can shunt you back to the service utility in your area at their discretion.

As I noted at the start, this will be my last blog until I return next year.* If you are interested in following my energy adventures down in Botswana, please drop me a note at my email address below. In the meantime, thank you for your interest in my work. Keep in touch, let me know what is happening in NH while I am away, and remember to turn off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University

(*Next Year - A very appropriate song by the Foo Fighters featuring the ubiquitous Dave Grohl. Great video too. Enjoy Next Year.

Wednesday, June 10, 2015

Gimme Some Money* – The PSNH Divestiture Settlement Deal - Part 2

In my last post, I covered some of the details regarding the PSNH/Eversouce divestiture deal that rolls the three big outstanding PSNH matters – the scrubber costs and recovery investigation, the sell-off of PSNH generating assets, and the impact  of PSNH’s ownership of generating assets on its default service customers – into a single settlement. Legislation related to the deal, in the form of Senate Bill 221, made its way through the NH General Court.  This Bill is not an approval of the deal but does permit the securitization of stranded costs to take place once the PSNH electricity-generating assets have been sold. The details of the settlement have been outlined in the agreement between the State negotiating team and PSNH but it will be up to the NH Public Utilities Commission to finalize all the details and to figure out who will pay what and when.

In Last Fair Deal Gone Down, I laid out my general understanding of the big issues at stake in this complex deal. However, I have a particular interest in the numbers and where the various piles of money will end up once this particular money tree gets shaken. As is usual with utility rate cases, when the numbers are spread out over billions of units of electricity, kilowatt hours (kWh), they don’t seem so bad but, when the absolute dollar amounts are calculated, they can be staggering. In utility cases there are two sets of numbers that need to be tracked: the total dollar amount and then that amount divided by the number of kWh. Both are important and both are relevant.

Let’s start with some of the big kWh numbers.

According to the  PSNH customer migration reports, there were approximately 390,000 customers getting their electricity supplied through PSNH’s default electricity supply service in 2014. The total amount of electricity supplied through this service in 2014 was ~3.8 billion kWh. This means that the average amount of electricity consumed by each customer was 9800 kWh/year or 810 kWh/month. These so-called default-service (DS) customers are largely residential in nature along with a few smaller industrial and commercial customers.
However, PSNH also has another set of customers. These customers purchase their electricity from competitive suppliers but that electricity still has be delivered over PSNH’s transmission and distribution lines. This pool of transmission and distribution customers is larger because it includes the DS customers. There are some 504,000 transmission and distribution (T&D) service customers and, in 2014, the total amount of electricity transmitted through the PSNH lines was ~7.9 billion kWh. This means that 52% of the electricity transmitted by PSNH was supplied by their competitors. These non-DS customers are largely the big commercial and industrial users of electricity, however it is notable that ~20% of residential customers buy their electricity from competitive suppliers. Graphically, the two sets of customers appear as follows:

Now that we have a sense of PSNH’s two customer pools, let’s turn to the big piles of money that are involved in this deal.  Bear in mind that these numbers are approximate only and they will change as the calculations are refined. They are also very dependent on the exact timing of the approval and completion of the deal, the final sales price for PSNH’s generating assets, as well as when the sale of the generating assets actually takes place.

These are the big piles of money:
  1.  Lower DS Rates: Let’s start with the good news. The whole point of deregulation is to provide utility customers with access to lower cost electricity that should result from a competitive market. Generally speaking, default service rates from utilities that access electricity supply from the competitive wholesale markets in NE have been lower, as shown in the chart below.
    The other NH utilities—Liberty, New Hampshire Electricity Cooperative, and Unitil—completed their deregulation activities a while ago and sold off their generating assets. As can be noted from the chart above, their rates, in general, have been about 20% or 2 cents/kWh lower than the PSNH rates. This has not always been the case because competitive markets are subject to supply constraints and growing demand. As a consequence, prices can increase and sometimes quite sharply. We saw this just this past winter when the rates for these three deregulated utilities shot up above the PSNH rate. Going back to the historical savings of 2 cents/kWh, the hope is that, going forward, PSNH DS customers will benefit from these savings. If this is indeed the case, then this 2 cents/kWh savings multiplied by the 3.8 billion kWh of electricity sold to DS customers every year would result in annual savings of $76 million. This would end up in the pockets of DS service customers only. A nice chunk of change—but not at all guaranteed because this is very much subject to the constraints of the New England wholesale electricity market which, in turn, is held in check by natural gas supply and pricing. As mutual fund and investment gurus continually remind us, “Past performance is not an indicator of future results.”
  2. Stranded costs: This is the difference between the book value of PSNH assets and their eventual sale price. This is estimated to be of the order of ~$400 million. PSNH will get a check for this amount which will be funded by the issuance of rate reduction bonds (see Walking on the Wild Side) – which is the purpose of Senate Bill 221. In other words, PSNH customers—including those buying from competitive suppliers—will end up borrowing money at market rates, hopefully at about 4%, to pay PSNH for these stranded costs. PSNH customers will be on the hook for these costs for the next 15 years. The $400 million borrowed at 4% over 15 years will result in an annual cost of $35 million. Spread over the 7.9 billion kWh of electricity delivered to all PSNH customers annually, this will result in an increased cost to both DS and non-DS customers of about 0.44 cents/kWh.                                                                          
  3.  Deferred payments on the scrubber returns: The scrubber went into service in 2011. It was estimated then that the payments to PSNH to cover their operations and maintenance (O&M) costs as well as their return on the scrubber should have been ~$65 million per year. This cost would typically have been recovered through DS rates. However, as I have noted in previous posts, the scrubber costs have been controversial and a prudency review was initiated to investigate the cause of the cost overruns. In the meantime, an agreement was negotiated that allowed PSNH to recover 2/3 of the scrubber-related costs. These were built into the DS rates. PSNH has therefore not been collecting their full costs and return on the scrubber and that unpaid amount has been accumulating. By the end of this year, it will have grown to about $140 million. Per the proposed PSNH deal, these costs will be recovered from all PSNH customers over seven years. The annual cost is $20 million ($140 million/7 years) which, spread over the 7.9 billion kWh of electricity delivered to all PSNH customers, will result in an additional  0.25 cents/kWh for all PSNH customers. This amount will likely change as starting in January 2016, all scrubber costs, including the deferred amounts will go into the DS rates, until such time divestiture is complete.
  4. Power purchase agreements:  PSNH has long-term power purchase agreements (PPAs) for renewable energy with the Lempster wind project, owned by Iberdrola, and the converted Berlin paper mill that was turned into a large wood-burning electricity generator, Burgess Biopower, that need to be honored as part of the deal. The costs will be picked up PSNH customers. The consultant report commissioned by the PUC estimated that the Lempster PPA is contracted at close to market prices and there $5 million gain to PSNH if it were sold. The Burgess Biopower PPA, however, is an entirely different matter. The consultants have estimated that, if this agreement were sold, PSSH would have to pay the acquirer ~$125 million to compensate for the above-market prices. The costs for these PPAs are likely to be paid by all PSNH customers. These costs are estimated to be of the order of $10 million per year, which, when divided by the 7.9 billion kWh supplied to DS customers, results in a further cost of 0.13 cents/kWh. The annual costs will vary depending to market prices for electricity and renewable energy credits and could be higher.                                                      
  5. Two-year moratorium on T&D Rate Increases. As part of the deal  PSNH agreed to hold off on annual increases in their T&D rates for two years (except for reliability enhancement projects). This should result in an annual savings of $35 million, which is equivalent to 0.44 cents/kWh for all PSNH customers but just for two years.
All these savings and costs are summarized in the table below. The grey columns show the total savings or costs and how they will be spread between DS and non-DS customers. The green-highlighted columns show the costs in cents per kWh after dividing by the annual kWh in each customer pool.

It should be noted that my numbers differ somewhat from those that have been published in press releases. In the original press release, a savings of $300 million over five years was touted for DS customers. My calculations shows a savings to DS customers of  $273 million over five years – most likely because I used a higher interest rate for securitization. My estimate is that over the 15-year life of securitization, the savings to DS customers could be over $800 million dollars, but—and this is important—this is based on, as I noted earlier, a very squishy DS savings of $80 million per year.

This might all seem well and good for DS customers, however, it needs to be appreciated that these savings are occurring on the backs of the PSNH customers that are presently getting their electricity supply from competitive suppliers. These non-DS customers will not realize any savings – they will only pick up costs, as shown in the table above.  I have calculated that this will cost them about $128 million over the first five years and $373 million over the 15 years of the securitization. When you look at these numbers, it is clear why the large industrial electricity users who migrated to competitive suppliers many years ago are not at all impressed with this deal.

So there you have my understanding of where and how the big piles of money will end up in this deal. A lot of details need to be worked out and there is still much discussion and negotiation underway to determine how the various costs will be allocated between DS and non-DS customers. One of the proposals under consideration is that the DS customers will pick up a larger portion of the securitization costs.

This deal is a complicated matter but it seems to provide more certainty than the alternative which is not proceeding with divestiture. However, the time aspect of this deal cannot be overstated. The longer this is dragged out, the more expensive and more complicated it will become: interest rates will go up, the accumulation in the deferred scrubber cost account will increase, and costs will generally increase. Timely resolution would seem to be the prudent course of action.

Until next time, remember to turn off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University

(*Gimme Some Money – A tune from one of my favorite rock movies “This is Spinal Tap”, the mockumentary of the fictional Spinal Tap rock group. Some great tunes in this movie and the famous Stonehenge scene still makes me chuckle. Gimme Some Money features The Thamesmen appearing on British TV, a la early Beatles and Stones. Enjoy and Go Nigel Go!) 

Sunday, April 26, 2015

Last Fair Deal Gone Down* – The PSNH Divestiture Settlement Deal

It has been some time since my last blog but I have been out and about, immersing myself in the solar energy field and working on combined heat and power consulting projects. There is an awful lot happening in the NH energy field – there are natural gas pipeline routing issues, there are grabs for renewable energy fund money to balance budgets, and there is the recently announced PSNH divestiture deal. In this blog, I am going to focus on the PSNH deal as I have written quite a bit about this topic in the past. (I know that PSNH and its parent company have been rebranded under the new name “Eversource” but I will continue to use the “PSNH” terminology as it is still useful.)

Overall, this is a big deal—and in more ways than one. The three big outstanding PSNH matters – the scrubber costs and recovery investigation, the sell-off of PSNH generating assets, and the investigation of PSNH ownership of generating assets on its default service customers are lumped together in a single settlement. It involves a lot of money, is complicated, and is likely to have an impact on all PSNH customers for a long, long time. A big deal indeed!

I have been trying to understand this settlement and learn more. For a deal of this complexity, I will remark that there is surprisingly little documentation: there is only the term sheet posted on the PUC website and a single press release. I have chatted to several people trying to understand more. For a deal so important to NH, PSNH electricity rate payers, and the New England electricity market, it certainly—at the moment—lacks transparency.  I hope that this will improve over time.

So this is what I know:

  • The deal bundles the scrubber settlement, divestiture of generating assets, stranded cost recovery, and a bunch of other odds and ends into one agreement. In so doing, it completes the deregulation process that started in 1996.  
  • PSNH will take a $25 million haircut on the cost of the scrubber. To recap: the original deal was supposed to cost $250 million but, by the time it was done, it cost $422 million and PSNH was looking to electricity ratepayers to pick up the entire tab and  to pay their ~10% return on the investment. PSNH had been partially successful in this regard and had negotiated to get ratepayers to start paying two-thirds of the costs. The $25 million in this deal is a discount of 15% on the cost overrun.
  • From Jan 2016, PSNH’s default electricity customers will be paying the full amount of the scrubber (minus that $25 million) over 7 years, while allowing PSNH to earn their 9.67% regulated rate of return. This will continue until the generating assets are sold.
  • However, since PSNH ratepayers have only been paying for 2/3 of the scrubber costs so far, the obligations and returns on the remaining one-third have been accumulating. The total in this account is now of the order of $105 million. Someone is going to have to pay for this in one way or another.
  • The deal requires PSNH to sell their generating assets but the new owners will be obligated to keep the plants in service for at least 18 months. PSNH has several generating assets (shown in the table below) and some of the new owners will want to keep them running. Some of the hydro-generating plants have been running for close to 100 years and probably could do so for another 100. The coal-fired power plants are, however, another issue. In a low-priced natural gas market, their value is marginal: requiring the new owners to keep them running for 18 months after purchase when they may have only salvage value could further depress the  price. Consider the table below, which presents data on the utilization of the PSNH plants. One has to question who would buy those plants and keep them running until they can be scrapped, redeveloped, or re-engineered to burn natural gas. They might have some value on the electrical-capacity market, but only time will tell. I don’t believe these old plants will be sold very easily or quickly – PSNH may even have to pay someone to take on those assets.

  • The difference between the book value and actual market value is termed “stranded costs”, because this is the amount that PSNH invested in generating assets that they are now obligated, due to deregulation, to sell at loss. PSNH will also not earn a return on the stranded costs.  By law, PSNH is eligible to recover these stranded costs from its ratepayers. In other words, PSNH is entitled to get a check for this amount that they can invest elsewhere to earn a return.
  • We have the book value, $660 million, of PSNH assets. From this, we subtract the value that PSNH may realize from the sale of the assets, ~$225 million, as well as the $25 discount on the scrubber. This leaves us with approximately $410 million of stranded costs.
  • The check for $410 million in stranded costs that must be paid to PSNH will be funded through a 15-year stranded costs securitization deal at a lower interest rate, which hopefully will be of the order of 3 to 4%.  This is exactly like refinancing a mortgage on a home – instead of continuing to pay PSNH their 9.67% on the depreciating book value of their generating assets, PSNH ratepayers are going to pay someone else 4%. My post Walking on the Wild Side discusses securitization of stranded costs in more detail. 
  • My stranded costs calculations do not take into account the fact that PSNH had entered into some pretty sweet long-term deals with the Lempster wind-power plant and with the wood-burning operation at the converted Burgess paper mill in Berlin. According to a consultant report commissioned by the PUC, the market value of these deals is a negative $120 million (!). These costs could be bundled into the stranded costs calculation and increase the amount that will need to be funded.
  • The odds and ends in this deal involve the setup of a $5 million renewable energy fund, another fund that will be used to compensate municipalities for the decline in property taxes that are sure to result from the decreased property valuations that will occur after the sale of the generating assets and some as-yet unquantified protections for union workers at the affected properties.

As I noted earlier, this is a complicated, messy, and expensive deal, with long-term obligations for PSNH ratepayers—but here is the rub. Ratepayers could get angry and annoyed and royally ticked off. NH legislators could fight it and try to renegotiate it and drag it out for the next few years, and then it will be taken through the courts which will take a few more years. In the meantime,  PSNH, as a regulated utility responsible for supplying default electricity to their customers, will charge their customers for the scrubber and those aging assets and coal plants. PSNH will be making money all the time while legislators try to renegotiate the deal. 

In meantime, it is highly likely that interest rates will rise and the very low interest rates that are currently available for refinancing will increase. Ratepayers will then have to pay more for the deal and—even though it might be viewed as unfair— the very pragmatic approach is to pay PSNH a big chunk of change as soon as possible so that NH can move along with deregulation. Some might view it as being in the utility’s best interest to drag along this process as long as possible but this is what happens when a process is not completed –someone ends up paying. 

There is another concern to consider if this deal drags out. PSNH’s default electric service rates this summer will most likely be above market rates, which could promote migration to competitive suppliers. Such a process has the potential to accelerate rapidly, leaving fewer and fewer PSNH customers on the hook for all of PSNH’s costs associated with those generation plants. This will increase prices for the remaining customers, which will promote more migration and eventually the one remaining PSNH customer is going to be responsible for all the PSNH costs. This so-called “death spiral” would create a crisis both for PSNH and for NH because someone is going to have to pick up the tab. I am not clear as to what the end game would be in this situation, but I do know that some nasty legal battles will ensue and a lot of money would be wasted in the process. There is clearly a price to be paid for dragging out this deal.

So what do PSNH default electricity rate payers get out of the deal if it closes soon? Well, they will have to pay PSNH for the stranded costs and enable PSNH to get their full return on the scrubber until the Merrimack plant is sold.  Over time, this deal should result in savings for PSNH default electricity ratepayers because they will benefit from the lower mortgage on those assets. They should also benefit from lower default service rates going forward because all of PSNH electricity supply will be sourced from the New England wholesale market. Various amounts have been touted for these savings. The PSNH press release indicated savings of $300 million over the first five years of the deal. I plan to dig deeper into these savings figures in a future blog.

However—and this is a big Howeverthis refinancing deal will only work if all PSNH customers pick up the tab, i.e., all residential, commercial, and industrial customers in the PSNH service areas, even if they buy their electricity from a competitor. The deal will not work if just default electrical service customers have to pay, because they can leave. Every time a default customer leaves, the remaining customers must carry a larger piece of the remaining costs. It is important that these charges cannot be bypassed. This means all PSNH customers, and especially the industrial and commercial customers who buy their electricity from other competitive suppliers, will be caught up in the payment net and will see their rates increase. The essence of the settlement is that to complete deregulation and to get the remaining PSNH default electricity service customers off the hook, all customers in the PSNH service areas are going to have to pay for the stranded cost recovery charges.

Here are some of the questions I have been asked about the deal.
  • Is this a good deal or a bad deal? – It all depends on your perspective and your level of pragmatism. Some may say “Hey, it's a deal”—which is better than no deal. Customers who migrated to competitive suppliers on the understanding that they would not be held responsible for the scrubber costs will now be gathered up in the net of payers. For large industrial and commercial customers, who feel the sting of high electricity prices acutely, this is going to be particularly painful. Their costs will rise and it will put them at a competitive disadvantage: some may even consider relocating to states with lower energy costs.
  • What is the alternative? – We take the deal off the table and continue with the scrubber cost prudency review. If the outcome is that PSNH overspent on the scrubber and are entitled to a smaller recovery, you can be assured that a long-winded legal battle will ensue. Perhaps in this process, PSNH will take a larger haircut on the scrubber than the $25 million that they have presently agreed to. In the meantime, default service rate payers will continue to pick up the tab, their rates will rise, and more will leave PSNH for competitive suppliers, pushing PSNH closer to that death spiral. Some larger users of electricity might see some benefits from this, because it pushes the obligations and costs of having to contribute to stranded cost recovery out into the future but it could end up being a lot messier and expensive in the process.
  • Does PSNH make out? – To a degree, but less than they were entitled to, as per the regulatory compact that we have with utilities and that they are entitled to by law. Monopolistic and regulated utilities are a necessary part of our energy infrastructure: this is the price we have to pay if we want the lights to turn on at a flick of a switch.
  • Do PSNH default customers save money? – Yeah. They will be paying a lower interest rate on the assets and there will now be a larger group of PSNH customers helping to pick up the tab. Default electricity customers, mainly residential customers, should eventually see some rate relief.
  • Will all PSNH customers and distribution and electricity supply customers pick up the tab? – Most probably.
  • Is there a better deal out there? – I’m not sure, but I do know that it will take years to negotiate and that, in the meantime, PSNH will continue to earn a return on the book value of their generating assets. Default electricity service customers pay above market rates and increasing migration could cause a crisis. Bear in mind that there are some looming environmental mandates out there, such as the EPA requirement for cooling towers at the Merrimack plant, which will further burden rate payers.
Some have characterized this deal as “suck it up, pay up and move on”. This might be a harsh characterization and, even though I do not have horse in this race, it might well be time for some well-considered pragmatism. This situation is a mess due to the stop/start approach to deregulation, poorly crafted legislation, lack of oversight and transparency on the scrubber costs, and some bruising utility related legal battles in the past in which the State of NH has not come out well. Indeed, there is plenty of blame to go around but, at this stage, I am not sure what is gained from digging up old graves and beating on the remains. Perhaps it is time to buy the expensive headstone, agree to pay for fresh flowers every month for the next 15 years, and put this matter to rest.  

When thinking about this deal, the words of the late great Robert Johnson, the blues guitarist, in his song “Last Fair Deal Gone Down”*, come to mind:

Ida Belle, don't cry this time
Ida Belle, don't cry this time
If you cry about a nickel, you'll die about a dime
She wouldn't cry, but your money won't mine

Until next time,  remember to turn off the lights when you leave the room. 

Mike Mooiman
Franklin Pierce University
(*Last Fair Deal Gone Down: A tune by the great blues guitarist Robert Johnson covered here by Eric Clapton on his 2004 Me and Mr. Johnson album.)

Friday, January 2, 2015

It’s Time to Move On* - Competitive Electricity Supply in New Hampshire

In my last few posts, I have been writing about the electrical utilities and their winter rates. In this post, I take a look at the competitive energy suppliers in New Hampshire.

Electricity consumers in NH have a choice. They can go out and pick their electricity supplier or they can simply leave it to their utility to source and supply their electricity under the so-called default electrical service rate (see Gonna Take You Higher post).The move to competitive electricity supply has gone through two waves. In 2006, five years after the onset of electricity deregulation in NH, there was a massive migration of commercial and industrial customers to competitive suppliers. In 2011, there was a second wave of migration, this time by retail customers. Right now, about 50% of the electricity supply in NH is from competitive suppliers. The table below shows data for overall competitive supply for the NH electrical utilities and some information for large commercial and residential customers. It is clear that competitive suppliers provide most of the electricity for large commercial customers. In the case of PSNH, this is a stunning 96%, which, as I have noted before, leaves the residential customers responsible for picking up most of the costs for PSNH’s generating assets.
There are three types of electricity providers in NH. There is the utility itself which the default supplier, and then there are competitive suppliers and aggregators. At last count, there were 25 competitive suppliers and 90(!) aggregators.

The competitive suppliers approved to offer electricity supply are listed on the NH Public Utilities Commission (PUC) website. Not all of these companies supply to residential customers: some specialize just in the larger commercial and industrial  customers. Of the 25 competitive suppliers, 16 supply to the residential market but not all suppliers are active in all utility service areas.

Suppliers actually have to source the electricity and work with the utility to get it delivered to your home. Aggregators adopt a different approach. They will do the shopping for you and will go out to competitive suppliers and find a good rate for you. Once they do this, and you agree to the terms, they will then switch you to the competitive supplier. Aggregators tend to specialize in specific markets, e.g. small commercial customers or geographic areas. 

The table below shows which suppliers are active in which electrical utility service areas.

Some of you may recall the drama caused last year by one of the competitive suppliers, Power New England (PNE) and its aggregator, Resident Power, when PNE was suspended by ISO-NE for cash-flow problems created by high electricity rates in the winter of 2013. With the suspension of PNE, about 7000 customers had to be transferred back to the default service of PSNH over a weekend.

There are some key points that everyone should know about competitive suppliers:

  • Competitive suppliers are not regulated. Their prices and terms are not subjected to the same scrutiny as those provided by the utilities through their default service rates.
  • Do your homework. Look at the rates and request the terms and conditions.
  • Competitive suppliers offer fixed and variable prices.
  • There can be costs for switching.
  • Competitive suppliers can shunt you back to the service utility at their discretion.
  • The utility is always there as a backstop, in case your competitive supplier cannot supply electricity or goes under.

The NH PUC provides helpful information on competitive suppliers, including a useful list of FAQs and, particularly, a valuable list of questions to ask suppliers.

One of the challenges we face as consumers is that sometimes there is simply too much choice. It is well known that, in the face of too much choice, we often pick the easiest option – which is usually the default option. How many of us really have the time to call those 16 competitive suppliers and the compare their rates and terms?

This is where information-aggregation tools, such as Kayak for airline prices, are so useful. In one simple search, you can look at most airline rates on one page. One would hope that a similar tool would be available for competitive electrical supply, but, unfortunately, similar tools for NH electricity shoppers are not as helpful.

ShopEnergyPlans.com is one such site, but only a limited number of suppliers post their rates on the website. Recent examination of the website showed only three vendors in the PSNH service area. I chatted to Andre Ramirez, one of the co-founders of ShopEnergyPlans.com, about this. Although he has contacted most of the NH suppliers, there is a reluctance for many suppliers to openly exhibit their rates on an aggregator website. On reflection, I think this is understandable, particularly for a price-sensitive commodity, such as electricity, where customer loyalty is very price-dependent. It is the lowest price that will command the most interest, so many vendors choose not to post when their prices are higher.

In my chat with Andre, I did learn of a new feature offered by ShopEnergyPlans called PlanTracker. This is a notification tool that sends out emails with recommendations for actions to take regarding your electricity supplier. Having entered Manchester as the zip code for my energy service provider, this morning I received an email recommending that I stay with PSNH for the time being. A list of their recent recommendations for New Hampshire and Massachusetts are tabulated below. I think PlanTracker is a useful service and is a great way to keep on top of changes.

Although I understand why vendors may not want to post their information on an information aggregation website, such as ShopEnergyPlans, I still wanted to know what rates these other vendors were offering, so I spent a morning visiting the websites of all competitive suppliers for residential electricity in the NH service areas and collected the information in the rather large table below. In the process, I was subjected to an overdose of photographs of outrageously illuminated homes or of happy families in warm (and uncluttered) homes, playing on the carpets or looking at their laptops or smart phones, as well as more short videos featuring cute cartoon characters than one person should watch.

The table shows all competitive suppliers servicing the four NH utilities. Orange indicates that the supplier has not registered to supply electricity in that particular service area. Yellow highlights indicate areas where the supplier has registered but is not yet offering service (as indicated by their websites).  The non-highlighted areas, of course, indicate that rates were available on the various websites and I present the lowest rates for particular services. Many of these vendors offer “green,” or renewable energy, options or a blend of renewable and fossil fuel options. I did not consider these, but simply looked for the lowest rates. Here is what I learned from this exercise of cutting through the overgrowth of website based electricity supply marketing in NH.
  • Many vendors offer fixed-period and variable options – variable electricity prices are not posted. It is probably a challenge to keep variable rates updated regularly and this is perhaps not a popular option.
  • For the smaller utilities (NHEC, Liberty, and Unitil), competitive vendors do not seem to have made headway in their service areas and limited choices are available.
  • PSNH has the most competitive suppliers offering prices.
  • There can be a wide range of prices offered by competitors in a service area.
  • Many of the competitive suppliers have cancellation fees associated with their fixed-term contracts, so if you want to jump early, you will end up with some additional costs.
  • Not all suppliers offer contracts across all service periods. Some just offer a vanilla option of a single rate for 12 months.
I am sure I may have been able to gather price information for the vendors with unlisted prices if I called each utility, but that would have taken up even more time. It also serves to make the point that, even though NH has competitive electricity supply, finding and comparing rates is a time-consuming task.  My overall assessment of competitive electricity supply in NH is that we still have a long way to go. I would have thought that competitive suppliers would be falling over themselves in the NH market, that more choices would have been available for residents, and that price information would be more accessible.  

In the deregulation process to date, the companies that have done well are the large competitive suppliers, such as Constellation and TransCanada, that have focused on the large industrial and commercial customers and have won a great deal of this business. The table below, based on Energy Information Agency 2012 data, show that these competitive suppliers are now the second- and fourth-largest electricity suppliers in NH.

These competitors have been very successful at drawing large users of electricity away from the utilities and there is now a slower picking away at residential customers by smaller competitors focused on this market. It always astounds me that more than 50% of PSNH electricity sales are going to competitive suppliers (see the first table in this post), leaving a smaller and smaller base of residential customers picking up the tab for those PSNH plants. Rough calculations show that, if the costs in PSNH’s recent filing are accurate and we assume that 60% of their costs are fixed, and if PSNH supplied electricity to all their customers, then their costs per kWh of electricity could be as much as 30% lower than their present default rate.  

What do we take from this?  This half-hearted and incomplete process of electricity deregulation in NH has hurt PSNH residential rate payers. We understand that it is complicated but the process needs to be completed. It is time to move forward and get the job done. Either pull the plug on deregulation or get it done.

In the words of that great rock and roll sage, Tom Petty*

It’s time to move on, it’s time to get going.
And what lies ahead I have no way of knowing
but under my feet, the grass is growing.
It’s time to move on, it’s time to get going.

Until next time, remember to turn off the lights when you leave the room.
Mike Mooiman
Franklin Pierce University

(*It’s Time to Move On – A tune from one of my favorite Tom Petty’s albums, Wildflowers. Here is Petty performing the tune live in 1994. It’s Time To Move On)

Thursday, November 13, 2014

The Heart of the Matter* – PSNH and Electricity Price Increases in New Hampshire

In my last post, I presented the table below and made a big deal about the large winter price increases that have been put forward by NH Electrical Co-op, Liberty and Unitil, but did not discuss the surprisingly small increase put forward by PSNH (highlighted in yellow). However, in an earlier post, River’s Gonna Rise, I made the statement that, “…with electricity prices shooting up this winter and with PSNH customers, for the time being at least, somewhat shielded from these increases, this does give one pause for thought and to consider that ownership of generating operations may perhaps have some benefits.” Well, I have been thinking long and hard about this and about PSNH’s relatively low winter rates and, after some research, analysis, charts, and graphs, I have now come to a rather different conclusion. Read on.

For the three-winter period shown in the table above, I have plotted the default electricity rates for the different utilities in the graph below.  Bear in mind that these data are not exactly comparable because they involves slightly different time periods (e.g., the NH Electric Coop (NHEC) winter rate runs from October to March, whereas that for PSNH runs from January to June), but it is a convenient way to view the data. Over this three-year period, PSNH rates were generally higher than those of the other utilities except for this upcoming winter, however the other utilities tend to show larger fluctuations from season to season, which PSNH  does not.

Because the other utilities no longer have generating operations, they purchase electricity from the wholesale markets or (in the case of NHEC) directly from generators, as shown in the figure below (excerpted from my last post). As a result, the other utilities are more subject to the ups and downs of the wholesale electricity markets.

However, PSNH is still an integrated utility – it owns its own generating assets – and, as a result, generates a lot of its own electricity. The electricity supply picture for PSNH is therefore somewhat different, as shown in the following figure, where PSNH has a large supply of electricity generated from its own operations (shown in grey).

I have written about PSNH’s generating operation in several posts, including a recent overview of their hydro assets in River’s Gonna Rise and the possible sale of their generating assets in Options. PSNH has approximately 1200 MW of generating assets, as shown below.

The problem for PSNH is that their main assets are the old coal-fired Merrimack and Schiller plants and the relatively inefficient dual-fuel plant in Newington. In a market with low natural gas prices and very efficient dual-cycle natural gas plants, these older PSNH plants are generally non-competitive and there is often little call for the expensive power they generate.

To understand just how much electricity PSNH produces from its own operations, I took a close look at the data presented in PSNH’s latest filing for winter electricity rates. The filing included electricity supply numbers for the whole of 2014, which were a combination of actual year-to-date and forecast numbers.  I used this data to prepare the Sankey diagram below. (For more on Sankey diagrams, see Another View of Statewide Energy Flows in New Hampshire.)

The origin of PSNH’s 2014 electricity supply is shown on the left in gigawatt hours (GWh). The total amount supplied is 4901 GWh. The flows in grey originate from PSNH’s own generation operations, whereas green flows are from contracted suppliers or wholesale market purchases. The right side shows what happens to the electricity generated and sourced by PSNH: the bulk of it, 79%, is sold directly to PSNH customers; transmission and distribution losses are about 6%; and the remaining 15% is sold into the wholesale markets - mainly during the cold winter months.

The chart below shows the same data on a month-by- month basis, calculated as the percentage of PSNH’s total output generated by its own operations. These 2014 numbers are a combination of actual (blue) and forecast data (orange). The chart clearly shows that the PSNH operations – largely the coal-fired Merrimack plant – really ramp up in the cold winter months and are responsible for the majority of PSNH output during these times.  In the warm summer months, when natural gas is cheap and readily available, it is not financially prudent to run the coal-fired operations. Instead, it is cheaper for PSNH to buy natural gas-generated electricity from the wholesale markets. At these times, the bulk of PSNH supply comes from contracted or wholesale market purchases. (That little blip in July comes from supplying electricity for our summer air-conditioning needs.)  The final column, in red, shows that the amount of electricity that PSNH will generate from its own operations this year is projected to be right around 50%.

In the Sankey diagram above, I have included the costs of the electricity purchased by PSNH. Aggregating these costs and calculating a weighted average, I determine that that average cost of purchased energy is 5.4 c/kWh. If this purchased energy is 50% of PSNH output and PSNH is selling electricity at 9.5 c/kWh to its customers, it takes only simple algebra to determine that the all-in cost associated with PSNH-generated electricity is 13.6 c/kWh (0.5 x 5.4 + 0.5 x 13.6 = 9.5). And therein lies the rub: At present utilization rates and with low electricity prices in the summer, the PSNH generation facilities are very expensive to run. The high costs associated with its coal-fired operations weigh heavily on the rates paid by PSNH customers and explains why, more often than not, PSNH rates are higher those of the other NH utilities.

I realize that this calculation represents a gross simplification of a complex matter and it allocates the burden of all government-mandated electricity programs, like RPS and RGGI, to the generating assets only. Even so, the bulk of the costs originate from the assets themselves so I am comfortable with the simplification. This straightforward calculation, when applied to 2015 projections, clearly demonstrates that PSNH low winter rates for 2015 are not as a consequence of its own generating assets. Instead, they are a direct result of its portfolio of supply arrangements from wholesale market purchases and power-purchase agreements from wood-burning plants, including the new Burgess plant in Berlin, the wind farm in Lempster, and other generators.  So my earlier statement that, “…with electricity prices shooting up this winter and with PSNH customers, for the time being at least, somewhat shielded from these increases, this does give one pause for thought and to consider that ownership of generating operations may perhaps have some benefits,” does, in retrospect, not appear to have been well founded, at least from a electricity rate point of view.

This calculation also underscores the decision that lawmakers and regulators in NH are wrestling with at this time: Is it in the best interest of PSNH customers to complete the process of deregulation and compel PSNH to sell its generating assets?  If this happens, PSNH will be like the other utilities in NH and will need to source 100% of its electricity from the wholesale markets in New England or directly from generators through long- and short-term contracts. The next (and, I think, the most important) question is: Can this be done for less than 13.6 c/kWh once those generating assets are sold?

If PSNH has to source all its electricity from the wholesale market, they could run into a problem similar to that discussed in my last post, where, like Liberty and Unitil, PSNH could end up buying right into those winter peaks created by natural gas shortages. In my  last post I was somewhat critical of the short-term “next six month” approach that regulations compel Liberty and Unitil to use to source electricity for their customers. I suggested that a portfolio of different sources, as well as long- and short-term supply, be used. As it turns out, the regulators are ahead of me on this one:  the NH Public Utilities Commission (NH PUC) recently issued Order 25,732 to review the sourcing of electricity by Unitil and Liberty. It is very likely that any changes in sourcing approaches would apply to PSNH after the sale of its assets, so it will be interesting to follow developments in this area. 

It is important to note that this is not the whole story. If PSNH is mandated to sell their generating assets, they will − and correctly, I might add − expect to be compensated for the difference between the book value of those assets and what they will raise from their sale. All indications are that this difference, known as stranded costs and discussed in Options, will be substantial.  These stranded costs will come out of the pockets of PSNH customers. The NH regulators at the NH PUC are presently trying to determine how large this amount will be.

In the equation

Stranded costs = Book value – Sale value,

there are obviously two components, both of which are being scrutinized and debated at this time.

As I noted previously, the generating assets are listed on the PSNH financial statements at $ 1.1 billion but with a net depreciated value, or book value, of $ 660 million. This $660 million value includes the $ 422 million recently spent on the scrubber that was installed at the Merrimack plant to reduce mercury emissions from the burning of coal. The original budget for the scrubber was "not to exceed" $ 250 million, but, by the time it was completed, the price had skyrocketed to $ 422 million. A series of hearings was recently held to determine whether it was prudent for PSNH to have spent $ 422 million for a scrubber on an aging coal plant, and we are currently waiting for the NH PUC to make a determination on the prudency of this investment. I anticipate that PSNH will file an objection to the determination and we can then expect the battle to play out in the NH courts.

The second component of the stranded cost equation, the sale value of PSNH generating assets, is also being analyzed. Consultant reports have been commissioned, blogs have been written, and one thing is clear: in this low-cost natural gas market, the coal-fired assets of PSNH have relatively little value. Interestingly, the crown jewels in the PSNH generating portfolio are their hydro assets, about which I have recently written.

In the end − after all the consultant reports, hearings, determinations, and court battles − I believe the book value will be decreased and the sale value will erode, which is still going to leave PSNH ratepayers on the hook for those stranded costs. In Walking on the Wild Side, I indicate these stranded costs may be of the order of 0.5 c/kWh. This has been borne out in a recent status report issued by the NH PUC. This is an important number, but of far less importance than the numbers that will come from answering this one very important question:  Once the PSNH assets are sold, can PSNH reliably, consistently, and over the long term, source electricity at a lower cost than that incurred by their generating assets? This is the heart of the matter* and one that PSNH, ratepayers, legislators, regulators, and courts in NH will be struggling with over the next few years.

This post has covered a lot of ground, so, to wrap it up, let me leave you with the following takeaways:

  • PSNH rates are low this winter but this is not a consequence of owning their generating assets. Instead, it is a result of their low cost purchases through a portfolio of long-term power purchase agreements and wholesale market purchases.
  • The PSNH generating assets have value in cold winter months when natural gas is expensive. As natural gas supply to the region improves over the next few year, this will become less of an issue and the value of coal-fired operations will diminish even further.
  • Scrubber prudency reviews are an important step in moving PSNH to divest its generating assets but, in the big picture, I do not anticipate that this will have a significant effect on the electricity rates that PSNH rate payers will end up paying.
  • More important will be the rates at which PSNH can procure all its electricity from the wholesale markets and whether they will be able to adopt a portfolio approach to sourcing this electricity.
Until next time, remember to turn off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University

(*The Heart of the Matter – The very moving song from Don Henley’s album The End of Innocence. I really like Henley’s version but it has been very well covered by India Arie. Here are both - you decide which you like best.  Don Henley or India Arie)