Wednesday, September 25, 2013

What’s It All About, Alfie?* - A Primer on Public Utilities

I have followed with great interest the various reports, meetings and debates regarding the restructuring of the electricity market in New Hampshire and the impact it has had on the State's largest electrical utility, Public Services of New Hampshire (PSNH). In the past, we allowed public utilities, like PSNH, to have unopposed access to supply services to consumers in designated areas. For much of the last century this monopolistic model worked as it permitted the build-out of the infrastructure, such as roads, power lines, railways, airports, communications networks, etc., that we now have across the country and that are so important to our economic success. 

However, times have changed, economic thought has evolved, and there has been deregulation of many of these utilities. We now require that utilities give up their monopolistic hold on their markets and that they compete with other suppliers for customers. For example, consider what has happened with telephone service and the airlines and more recently with electricity supply in some states. This has had profound implications for the utilities, their investors and for us as consumers. In my next series of posts, I plan to take a look at utilities in general, at what has been happening to electrical utilities during this wave of deregulation and at the issue of stranded costs.

I think it is important to understand what a public utility is and what its obligations are because, in the electricity deregulation debate here in NH, I am sometimes astonished at the vitriolic comments aimed at public utilities such as PSNH and the condemnation of their actions. Now I am no advocate for the public utility industry, but it is essential that we discuss these matters on the basis of facts and data rather than on emotion and gut feel. It is my sense that the debate surrounding public utilities and deregulation could benefit from a reiteration of some key facts about utilities. I appreciate that many of the readers of this blog are probably familiar with these matters, but for new students in the energy world, a primer on utilities is, I think, useful material to cover.
So let's turn our attention to improving our understanding of a utility. A useful definition of a utility is provided by Rick Geddes, Professor of Economics at Cornell University. He states that "Utilities typically create a good or service at one location, and then distribute it over a 'network' where it is delivered to numerous customers for end use."

The delivery of electricity, natural gas and land-line telephone service are obvious examples. The supply of these services are delivered by organizations that need to run their infrastructure, such as power lines or supply piping, through a community to get to their customers. Sewer service is another example of a utility. In this case, the service is removing water-borne waste from our homes through a network of piping to be treated at another location. Other utilities we tend to forget about are the transportation networks provided by trucking, rail and air travel.

The key to a utility is the distribution network that has to run between and through communities. As a result, the utilities need the ability to utilize parts of the public space of a community to put equipment in place to establish the network. These service networks can only be established and made to function if the community allows the utility access and rights-of-way to put up support structures to carry wires or to dig up roads and sidewalks to lay piping. However, establishing these networks is a very disruptive and expensive endeavor, so this led to the concept of a natural monopoly: we agree to provide the utility with the sole right to supply the service in a specified area - a franchise as it were - on condition that it is done cost effectively, safely and that the service is reliable.

By allowing the monopoly, we in the community benefit from having the service network built and operated and the utility benefits from an assured revenue and profit stream as they have no competition in the provision of the service. We as a community also gain by virtue of only having one company digging up our roads or stringing power lines, i.e, we avoid congestion of power lines, utility poles, and pipelines in our public spaces. In permitting monopolistic access to our community in exchange for cost-effective, safe and reliable service, we, in essence, establish a financial and regulatory agreement or compact with the service provider.
In the figure below I have attempted to capture the main aspects of the financial and regulatory compact. The fundamental nature of the agreement is that we get affordable, safe and reliable service and the utility gets an assured rate of return for an extended period of time. At the same time, we do not permit these utilities unchecked access to our communities. We insist on the regulation of these utilities; we want them to be transparent about their financial performance so that they make reasonable, but not excessive, returns on their investments; we want to be involved in establishing rates for service; we want them to make long-term investments in infrastructure; and not discriminate against customers. The utilities, on the other hand, without challenges from competitors, are assured of a large customer base, a profitable business, steady returns to investors and, as a result, they have the ability to borrow money at low rates to fund the infrastructure projects. They are also given the power of eminent domain to obtain the land to install their networks.


Administration of this regulatory compact, with all its different configurations and nuances, is largely done by the various state-based Public Utilities Commissions (PUCs) which sit between the communities and the utilities. There is some federal based regulation of utilities. Specifically, it is the task of the Federal Energy Regulatory Commission (FERC) to regulate the interstate transmission of electricity, oil and gas as well as the operation and location of hydropower projects. The NRC, the Nuclear Regulatory Commission, is in charge of nuclear power plants.
As noted, most of the regulation of utilities is done on a state by state basis. Here in NH, we have the New Hampshire Public Utilities Commission which is run by three appointed Commissioners. They have the challenging and interesting task of regulating a range of utilities to ensure folks in New Hampshire get reliable, safe and reasonably priced services. In New Hampshire the law is quite clear on what a public utility is. Specifically RSA 362:2 states that:
"The term "public utility" shall include every corporation, company, association, joint stock association, partnership and person, their lessees, trustees or receivers appointed by any court, except municipal corporations and county corporations operating within their corporate limits, owning, operating or managing any plant or equipment or any part of the same for the conveyance of telephone or telegraph messages or for the manufacture or furnishing of light, heat, sewage disposal, power or water for the public, or in the generation, transmission or sale of electricity ultimately sold to the public, or owning or operating any pipeline, including pumping stations, storage depots and other facilities, for the transportation, distribution or sale of gas, crude petroleum, refined petroleum products, or combinations of petroleum products, rural electric cooperatives organized pursuant to RSA 301 or RSA 301-A and any other business, except as hereinafter exempted, over which on September 1, 1951, the public utilities commission exercised jurisdiction."

So in New Hampshire, public utilities are electricity and natural gas suppliers, landline telephone companies, as well as drinking water supply and sewage treatment enterprises. They do not include your cable company or your cell phone service supplier.

There are different ownership structures for public utilities. There are utilities that are owned by the community - municipal drinking water supply and sewage services are typical examples and there are even a few communities in NH that have municipal electricity companies – there are cooperatives that are owned by their members, and then there are large investor-owned utilities, such as natural gas, electricity providers and landline telephone services that we all know (and like to complain about).

In supplying a service to a community, a public utility has to take into account three key aspects of the utility business. The first is the generation of service that it is supplying. This is usually some central location like a power plant for an electrical utility or the treatment works for the handling and discharge of domestic sewage. Secondly, these services often need to be supplied over long distances, so there is the transmission part of a utility. For example, consider the railway lines between cities or those large power lines that run across the state delivering electricity to towns. Finally, there is the distribution network where the service is dispersed throughout the community to reach individual residences and businesses. Examples of distribution networks include the telephone lines that run down our roads or the electrical wires and transformers that are spread throughout our communities.
The basic structure of the utility industry - the generation, transmission and distribution aspects - is shown in the figure below. Some utilities are focused on just one or two aspects of this network, e.g., I live in a community with a municipal electrical company and their focus is just on the distribution network, whereas some utilities deal with all three. PSNH is a public utility that deals with all three aspects of the utility business which is the cause for some of the challenges they currently face.


With this basic knowledge of a public utility and the regulatory compact involved, I will, in my next post, take a closer look at electrical utilities and the some aspects of deregulation of electricity supply in New Hampshire.

Until next time, remember to turn off the lights when you leave the room but, before you do, take a moment to think about the network that was involved in getting electricity to that light bulb.

Mike Mooiman
Franklin Pierce University

(Alfie* – One of those songs that was always in the background when I was growing up. It is one the finest tunes ever composed by Burt Bacharach and Hal David, one of my favorite songwriting teams, and that has been recorded by dozens of folks. It was first recorded in the UK by Cilla Black in 1965 but it took Dionne Warwick, after 42 other singers had covered the song, to drive it way up the charts in 1967. I tend to prefer the Cilla Black version. Here are both for your consideration and enjoyment Cilla Black and Dionne Warwick.)

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