Residential Electricity Prices in New Hampshire – Has Deregulation Delivered?

One of the first bits of energy news I looked at in the New Year was the updated information from the Energy Information Agency (EIA) on annual electricity prices across the US. This information takes a long time to collect and prepare, so it is only current to the end of 2018. Below, I have plotted the historical residential electricity prices for the US and New Hampshire.

There are a few important points to take from this chart.

• There was a run up in NH electricity prices in the early 1990s followed by a fall off around the start of the millennium, and since 2003 we have seen an almost consistent price increase year after year. Since 1990, retail prices for electricity in the US have increased by 60%, whereas those in NH have increased by 87%.
• In 2018, electricity prices in NH were 62% higher than the national average. This is the largest difference since the mid-1990s.

In NH, we (and I include myself) spend a lot of time wringing our hands and bemoaning our excessive electrical rates, which are the  6^th highest in the US: these grumbles are certainly supported by the data in the chart above.

As high as our electrical charges are, we need to appreciate that electrical rates are only one component of our electrical bills. The other important piece is how much electricity we use. I used the same data source and calculated the average monthly electricity consumption for each household in NH and the US for the same time period. The data are plotted below. I was impressed to note that the average NH electrical consumption has hovered around 600 kWh/month for the last 28 years, whereas the average consumption for the US has increased from 800 to 900 kWh/month.

Combining average monthly consumption and the retail electricity rates (via multiplication) yields the result that in 2018 the average NH electrical bill was $122/month vs. $118 for the US. That is a substantially smaller difference than I expected and has made me a little less fretful about electricity prices in NH. Yes, they are among the highest in the US, but our Yankee frugality combined with our lower dependence on electrical heating and air conditioning, as well as investments in energy efficiency, have led us to electrical bills that are very much on a par with the average for the US.

There is another way to analyze these numbers. I took the monthly bills, annualized them, and calculated them as a percent of the average annual household income, which I assembled from US Census data. For NH, the number in 2018 is 1.7%, which is down from 2.3% in 1990. The equivalent average numbers for the US have risen from 1.6% to 2.2% over the 1990–2018 time period. This indicates that, as a percent of household income, electrical bills in NH are lower than the US average.

All things considered, I think paying 1.7% of our income for reliable electricity supply that is there at a click of a switch is a small price to pay. However, this does not mean that we should not be concerned about electricity costs in NH. We should. My calculations use an average household income of $81,000 for NH. If you are earning substantially less than that amount, your costs for electricity can very quickly balloon to over 5% of your income and, if you are watching your pennies, every rate increase has a significant impact.

Whenever I look at historical electrical rates, I think about the impact of deregulation, which started in 1997 in NH and was only recently completed with the final sale of Eversource’s generating assets in 2018. As I have written in previous blog posts, deregulation required that electrical utilities get out of the electricity-generating business, but left them with the transmission and distribution monopolies in their service area. As a result, NH ratepayers now have the opportunity to purchase power from competitive suppliers or from their utilities who have to go into the open market to procure that electricity from independent generators.

The whole point of deregulation was to remove the monopoly of the utility and to bring competition into the electricity supply business and that prices would fall as a result. After 20+ years of deregulation, the results for NH have been a bit of a mixed bag. Yes, the large industrial and commercial enterprises in the state have benefited and, as individual rate payers, we now can choose who we buy electricity from, but, as the previous chart showed, it has certainly not brought down residential electricity prices.

In the Energy and Sustainability courses I teach at Franklin Pierce University, my students and I spend a fair amount of time debating the success of deregulation efforts in the US. There are now 17 states that have some form of electricity deregulation and it is hard to point at any fabulous success stories, whereas some stunning disasters, such as California’s attempts at deregulation and the subsequent bankruptcy of some of its largest utilities, have ensued.

I am always interested in good ideas and novel experiments: my view of deregulation is that it has been both of these. However, what is more important is looking back and understanding if these experiments and ideas have worked and, if they haven’t, perhaps we should consider trying something else.

With that said, I followed the approach of the folks from the American Public Power Association, who took a look at residential electrical rates from 1997, which is considered the first official year of electricity deregulation in the US . I looked at data for NH, and the US (this includes data from the chart above) as well as for the deregulated states (which include NH, MA, ME,  RI, CT, NY, NJ, DE, IL,CA, MI, OH, TX, DC, MT, MD). This is presented in the chart below, along with some data in the accompanying table.

We can observe that, in all cases, there have been overall price escalations, but for NH and the other deregulated states, the increases started from a higher base. The challenge with this data is how do we compare the relative increases – do we do this on the basis of the overall increase, the average annual increase, or the compounded annual growth rate, and, most importantly, what do we use as our time frame and starting date? In the table, I present data for the overall nominal and percent increases from a starting point to 2018. I chose three start dates for the comparisons: the first was 1997 – the date when deregulation became law in NH; the second was 2002, the year of the lowest NH electricity prices since deregulation; and 2012, which is when, based on the data, residential customer choice really kicked in at Eversource, the largest utility in NH.

In the first case, the data show that overall percent increases for electricity in NH and the deregulated states from 1997 were lower than those for the regulated states and the US overall because they started from a higher base. However if we use 2002 or 2012 as the base year, the increases for NH are substantially greater than for the US, the deregulated states, and the regulated states.

These analyses and comparisons are further complicated because deregulation only deals with the electricity-supply portion of the overall electricity price, which is about 60% of our overall electrical rates. There are a lot of factors baked into our electricity prices. There is the cost of electricity, which includes wholesale costs, long-term supply contracts, as well as the necessity to source renewable energy required by the renewable portfolio standard. And then there are transmission, distribution costs, systems benefit charges, service fees, and penalties for past mistakes and regulatory changes (in the form of stranded costs) and well as built-in profits for the utilities.

At this time, there is little evidence that residential rate payers in NH have benefited from deregulation. Although the large industrial and commercial users in the state have profited from the changes, I am hard pressed to make the case that deregulation has been good for residential rate payers. Yes, we can now choose to buy electricity from suppliers that source from renewable power generators (at a higher cost) and some might propose that deregulation had an impact by inhibiting larger prices increases. This is a weak argument to make because lower wholesale prices, driven by lower natural gas prices, have had a larger mitigating effect on price increases than deregulation.

Further evidence of the small impact that deregulation has had on residential rate payers in NH is the observation that only ~20% of NH residences have elected to go with a competitive provider. Moreover my recent review of electricity offerings from competitive suppliers shows that, in most cases, the default rates offered by the local utilities rates are, at this time, mostly lower than the competitive suppliers operating in the state. There are exceptions, but the differences are generally small and generally do not last over time. Not only are there concerns that deregulation has not benefited rate payers, but recent studies from other states have shown that residential rate payers have been penalized for participating in the competitive electricity supply market and that low-income customers suffer the bulk of the harm.

Deregulation seemed like a good idea at the time: we have tried it out but it has not worked out the way we thought it would. There have been benefits, but, in this case, competition and the “invisible hand” of the market have not led to lower residential rates. I think it is now time for us to take a long hard look at this experiment and to figure out if there is a better way. NH was the first state to the deregulation party and we should be the first to take a deep data-driven look at alternatives. I will be taking a closer look at this issue in future blogs. In the meantime, do your bit and turn off the lights when you leave the room.

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
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PS: For those of you interested in looking at competitive electricity rates, the NH Public Utilities Commission now publishes information about the competitive suppliers and their rates on the PUC website at the following link. https://www.puc.nh.gov/ceps/shop.aspx

Saving Grace* - Energy Efficiency in New Hampshire – Part 2

In my last post, I looked at the big picture of energy supply and consumption in New Hampshire, as well as some gross measures of energy efficiency (EE), viz., energy intensity and energy use per capita. The data indicated that we are making progress, but that we have a long, long way to go before we can consider ourselves energy efficient. In this post, I take a look at NH’s EE ranking and some important policy developments that will help promote EE in the state.  

The American Council on an Energy Efficient Economy (ACEEE) produces an annual scorecard that ranks the states on their EE initiatives and progress. The map below shows the state rankings in the most recent scorecard report. The ranking is done by grading each state’s utility EE programs, transportation initiatives, building energy codes, state government initiatives, and combined heat and power programs. NH’s ranking is in the midrange at # 21: we are surrounded by New England states with much better rankings, including Massachusetts, which, along with California, hold the number 1 spot.  

A closer look at the NH’s scorecard is enlightening. The figure below shows specific data regarding various scorecard components compared with those of NH’s immediate neighbors.

As you can see, NH’s scores were run-of-the-mill in the areas of utility programs, building codes, and state initiatives, and poor in transportation, appliance, and combined heat and power initiatives. The scorecard report does note that the state took a big step forward by approving new energy-savings targets for 2018 to 2020, but also remarked that NH could improve considerably in the transportation and combined heat and power sectors. Our neighbors are clearly doing more in almost all categories.

When it comes to EE, it is my view that there are three main drivers, as indicated below.

The first, and most important, are government-mandated EE programs. These include building codes, appliance efficiency standards, and fuel-economy standards for motor vehicles. These are often Federal standards, but sometimes state-specific requirements may exceed or fill in for a lack of Federal standards. Producers of the goods and services affected by such mandates are required by law to ensure that their products meet these requirements; we, as consumers, indirectly participate in EE by purchasing these goods.

The other type of EE initiatives are those in which we voluntarily participate by making non-mandated but important EE decisions; for example, the replacement of an incandescent or CFL lightbulb with a more expensive but more energy-efficient LED bulb.

The third driver for EE is energy prices. We are very basic creatures and respond to financial incentives, so if energy prices are high, be it electricity, natural gas, or gasoline, we generally take active measures to reduce our energy expenditure by driving less, buying more fuel-efficient vehicles, or putting on a sweater and turning down the thermostat. One might argue that high energy prices are just a driver of our voluntary actions; however, I see them as different because there is often an altruistic/it’s good for the planet/right-thing-to-do component to voluntary action. And if you can save boatloads of money by doing the right thing for the planet, more power to you. (Or perhaps that should be less power to you?)

For the remainder of this post, I review utility-run EE programs in NH. These are a combination of mandated and voluntary actions. The utilities are mandated to offer them, but we, as home or business owners, voluntarily participate in them, but, in doing so, we also have to open our wallets to pay for our part of these investments.

Since 2002, NH has had a formal utility-run program to promote EE investments in NH, known as the Core Energy Efficiency Program. This is a New Hampshire Public Utility Commission (NHPUC)-mandated program with required participation by the electrical and natural gas utilities. The utilities collaborate in their efforts to provide savings, information, incentives, and assistance in the implementation of EE investments to their ratepayers, which include municipalities, homeowners, and industrial and commercial operations. Information about the program is reported on the NHSaves website, which is a good place to start looking for information about energy savings and EE if you are a NH ratepayer. The program is directed at both the electrical and natural gas utilities and requires savings in both.

The NHSaves program has many features and offers a lot of services to realize energy savings. Quoting directly from the 2017 New Hampshire Statewide Energy Efficiency Plan, the elements of the program include:

• “Working with Home Energy Raters and building contractors, to incent the construction of highly efficient homes that use 15-30 percent less energy than a standard new home. 
•  Incentivizing insulation, air-sealing and other weatherization measures performed by qualified private contractors to reduce a homeowner’s heating fuel use by more than 15 percent on average.
• Providing insulation, air-sealing and other weatherization measures to low-income families, saving them hundreds of dollars per year on energy costs, though a collaboration with the NH Office of Energy and Planning’s Weatherization Assistance Program and New Hampshire’s six Community Action Agencies.
• Partnering with over 100 New Hampshire appliance retailers and suppliers across the state to help customers purchase highly efficient appliances such as refrigerators, clothes washers and room air conditioners, saving 10-20 percent of the energy they would have used if they had purchased standard efficiency models.
•  Partnering with over 100 lighting retailers and suppliers across the state to reduce the barriers for New Hampshire customers to purchase energy efficient lighting measures that can save between $30 to $80 over the lifetime of a single product.
• Working with qualified private contractors to help businesses and non-profits identify and install more efficient lighting, controls, motors, HVAC equipment, air compressors and industrial process equipment. 
• Focusing on municipalities to help save energy in public buildings, reducing overall costs to taxpayers and making public spaces a model for efficiency improvements.”

To date, the goals of the NH program have been modest and the annual energy savings have been small—of the order of 0.5% of NH total energy consumption. Our neighboring states have been more aggressive in their savings; for example, in 2015, RI, MA, VT, and ME had savings of 2.91%, 3.74%, 2.01%, and 1.53% of their 2015 retail sales, respectively.

Even though NH’s annual savings have been relatively small, these small savings, year on year, have accumulated over time. It has been estimated that, since the start of the Core program, customers have saved over $1.9 billion and reduced electricity consumption by 12 billion kWh and natural gas use by 24.5 million MMBtus (million BTUs). The Core program, by most measures, has been a successful one.

These accumulated savings are great, but there is a cost for the program that NH ratepayers fund. The 2016 budget was ~$24 million for the electrical EE programs and ~$7 million for the gas programs. The electrical component has been funded by part of the Systems Benefit Charge (SBC) paid by each electrical ratepayer (in 2017, the  EE portion will be 0.198 cents/kWh of the 0..354 cents/kWh SBC charge averaged across the four utilities), money from the Regional Greenhouse Gas Initiative (RGGI) auctions that are distributed to the NE states, and from the ISO-NE capacity market. The natural gas savings program has been funded through the local distribution adjustment charge (LDAC) paid by natural gas users. Typically, the split in funding for the electrical program has been 70% from SBC funds, 19% from RGGI, 10% from the forward capacity market, and  1% from carryover and interest, whereas the natural gas savings program is funded completely from the LDAC charge.

It is important to appreciate that all ratepayers pay their share towards the program, but only those that elect to participate benefit directly and reap the big savings. To actively benefit from this program and reap the rewards requires you, as the ratepayer, to make an upfront EE investment. The amount that you have to pay depends on your utility, class of service, and particular type of EE investment. Even though there is a requirement for an upfront investment, the utility-run EE programs have been popular: there have been waiting lists and money to fund EE investments has run out before the end of each year.

Even if you don’t participate directly, you, along with other non-participating ratepayers, benefit indirectly because reduced energy consumption, regardless where it comes from, benefits us all. It improves the resiliency of our energy-delivery systems because less energy has to be sourced, it keeps our costs down because fewer power plants have to be built, our resources last longer, less pollution results, greenhouse gas emissions are reduced, local jobs are created, and, as noted in my previous post, there is a cascade of other benefits that results from EE investments.

The Core program is well run and carefully administered, and a great deal of effort is expended in evaluating its effectiveness. It is overseen by the NHPUC, but is run by the electrical and natural gas utility companies that are required to submit a joint annual plan and budget. The joint administration and shared marketing resources through the NHSaves program ensures consistency and best practice implementation across all utilities. Each utility is required to provide quarterly and annual reports and is subject to annual financial audits and independent certification of savings.   The program is a serious endeavor and is continually reviewed. THE NHPUC has over 130 reports evaluating the effectiveness of EE programs in NH and NE. I consider this to be an important and well-run, documented, audited, and verified initiative.

As part of their administration of the EE program, the utilities carefully vet the projects that are considered and each undergoes a thorough cost-effective screening. Each program is required to have a benefit-to-cost ratio above one. The costs and benefits are over the lifetime of the project (which vary depending on the nature of the project); costs include both the utility and ratepayer contributions. The specific benefit:cost goals laid out in the 2017 plan are shown in the table  below.

  

As mentioned, the utilities report annually on their EE programs, recording what was spent and what the benefits were. I have summarized some key findings from the 2015 reports in the table and bullet points below:

• Eversource, with the largest number of customers in NH, spent the most on EE programs.
• There are variations from utility to utility, but the end users (homeowners, commercial, industrial and municipal) are paying, on average, 45% of the costs of EE investment; the utility pays the other 55% out of their funds allocated for EE.
• Homeowners are paying, on average, 37% of their EE investments.
• The lifetime benefit/cost ratio is an average of 2.2, which means that, for every $ invested in EE, NH reaps over $2 in benefits in terms of energy savings.

Overall, the cost of EE investments in NH through the Core program has been estimated to be 3.7 cents/kWh. If we had spent this money on just buying more electricity, we would have paid the retail price of about 16 cents/kWh. The natural gas savings are similar: $0.336/therm for EE vs. $0.81/therm for purchase. In short, investing in EE is a bargain.

The challenge with the Core program is that, while it has been popular, funding has been limited and a lot of deserving EE projects have not yet been implemented. To support more EE savings and meet the objectives of  NH’s 10-year Energy Strategy, the NHPUC  has recently approved a new statewide utility-run EE policy, known as the Energy Efficiency Resource Standard (EERS). This program boosts the annual goals for energy efficiency and increases funding available for EE investments. It kicks in at the start of 2018 and requires utilities to increase their annual energy savings.  The EERS program was developed with significant stakeholder involvement, ranging from environmental lobbying groups, utilities, state representation, community action groups, and other energy-related non-profits. The program will be overseen by NHPUC with input from stakeholders and will be jointly administered by the utilities, as with the Core program.

The annual goals for the new EERS program, and how they compare with the recent Core program goals, are shown in the figure below.

It is good to see the annual savings increase: over the next four years (2017 to 2020), there will be a cumulative savings of 3.1% of electricity and 2.25% of natural gas (compared with 2014 consumption). But, again, I need to note that, compared with our neighbors, these goals are rather humble: the average annual electrical savings increases are 2.1% for Vermont, 2.9% for Massachusetts, 2.4% for Maine, and 2.6% for Rhode Island. 

The EERS plan also has the following features:

• Instead of the two-year planning and implementation cycles used in the Core program, the EERS program will use a three-year cycle.
• Funding for EE investments will more than double over the next few years. In 2016, the budget for EE investments was $31 million; in 2020, it proposed to be $74 million.
• The money for these increased EE investments will come from an increase in the SBC and LDAC components of the utility bill. The average SBC and LDAC in 2017 will be 0..354 cents/kWh and 4.95 cents/therm, increasing to 0.821 cents/kWh and 6.91 cents/therm in 2020, respectively. This will result in a $2.70 monthly increase in the electrical bill for a ratepayer using 600 kWh per month. Overall, the EERS program will contribute to a 2 to 3% increase  in NH utility bills from 2017 to 2020.
• To compensate utilities for the lower energy sales and lost revenue associated with EE, a lost revenue adjustment mechanism (LRAM) will be implemented. This is new and is built into the SBC rate increase.
• As with the Core program, there are built-in performance incentives to encourage utilities to make these investments. Basically, the utilities will earn a bonus for achieving above-budget energy savings.
• The EESE Board, which is a multi-stakeholder committee that works with the NHPUC to promote energy efficiency and sustainable energy in the state, will serve as a review and advisory council.
• Evaluation, monitoring, and verification will be carried out by independent consultants.
• The low-income assistance portion of the program will increase from 15.5% to 17% of the total EE budget for the first three years.

There are, of course, objections to the EERS program. It will increase the bills of all ratepayers across the state, but big savings only accrue to those who participate and have the funds to foot their part of the investment. However, bear in mind that if your neighbor makes a big investment in EE and significantly reduces her monthly cost, you indirectly benefit from improved energy system resiliency, lower long-term energy costs, less pollution, etc. This is similar to the benefits that an SUV driver might derive from drivers of EE vehicles: those drivers of EE vehicles extend the lifetime of oil resources, reduce pollution, and keep oil prices down.  Ultimately, it is your choice whether to pour your dollars into your gas tank or into inefficient energy use in your home, but keep in mind that you do benefit from the EE activities of others.

  

Should you find yourself agitated by the increase in utility rates associated with the EERS program, I encourage you to take direct action that undo that increase. Go through your home and find three old style incandescent ightbulbs and change them to LED bulbs (which can be purchased for $2/bulb). The annual energy savings from these bulbs (assuming you have changed to  10W LEDs,  burning for 4 hours a day and your average electricity use per month is 600 W) will save you 2.7% of your electricity bill which more than relieves that phased SBC increase.

It must also be appreciated that EE presents a problem to regulated utility companies. They are in business to sell electricity or natural gas and thereby earn a return on their investments to pass on to their investors. (And before you get all self-righteous about money-grabbing investors, look at the companies in your retirement investments: you will mostly likely find some utility companies in your portfolio, making you one of those investors. Utility company shares have proved to be extraordinarily reliable investments with steady returns.) When utilities are obligated to make investments in EE, this reduces the amount of electricity or natural gas they sell, reduces revenue and profits, and limits opportunities to make infrastructure investments on which they can earn a return. Moreover, they have to administer these EE investments, employ staff to run these programs, and incur costs. Generally, the utilities would not be in favor of these programs so they need to be incentivized to participate. This is done by compensating them for the lost sales and costs associated with the EE program, which is built into the SBC or LDAC charges. In essence, the utilities get to sell less of their energy commodity at higher prices.

This post has covered NH’s middle-ranking EE. We are way behind our New England neighbors in EE, but the saving grace* is that that NH is in the process of transitioning from the Core to the EERS program, which is an important step forward.  Required annual energy savings will increase and EE investment budgets will more than double. This will have utility-cost implications because NH ratepayers will see a 2 to 3% increase in their utility bills over the 2017–2020 period as a result of these changes. However, these are good programs that make a difference and we all benefit and, by our implementing our own simple EE actions, like changing over to LED lightbulbs, we can cancel out the effect of the rate increase. It is a far better idea to make EE investments now that reduce our exploitation of fuel resources and reduce energy infrastructure investments. This will reduce energy cost increases in the future. 

However, to fully benefit from these programs requires action and investment on our part. This is something that we don’t always do—even when we know it is the right thing. I will discuss this lack of action in my next post. In the meantime, do your bit for energy efficiency and turn off the lights when you leave the room.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

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(*Saving Grace: A fabulous tune with a great driving groove by one of my favorites: Tom Petty. From the Highway Companion album released in 2006. Enjoy Saving Grace.)

Back Home* – Electricity Prices After the Mild Winter of 2015/2016

After a year away on my sabbatical in Botswana where I spent my time researching off-grid solar systems and learning about energy challenges in Southern Africa, I have returned home and am back to teaching and doing research at Franklin Pierce University. My time in Botswana was interesting, complicated, frustrating, and ultimately very rewarding. I had the opportunity to meet some very interesting people, I visited solar installations in some very unique and remote places, and was involved in the installation of a 20 kW photovoltaic system in a village just outside of Gaborone, the capital of the country. During my time in Botswana, I developed a far more nuanced understanding of the challenges associated with energy supply and demand in the developing world and learned to appreciate the reliable and inexpensive electricity and water supplies we have here in the US.  

Even though I plan to continue my interest in Southern African energy matters, I am now focusing again on NH energy issues. I thought it would be fitting to start where I left off a year ago and take a look at electricity prices and what the future might hold, especially after the mild weather experienced in New England last winter.

When looking at electricity prices, I always start by looking at wholesale prices. We have a very dynamic market for electricity in New England because we have a formal and well-run market organized by the independent system operator in New England, ISO-NE. (See my blog Extraordinary Machine to learn more.) We have 350 generators of electricity bidding to sell their electricity into the market. This includes nuclear power plants, coal, natural gas- and biomass-fired operations, as well as wind, solar, and hydro. This all makes for an interesting and dynamic market.

The figure below shows historical wholesale prices for electricity going back to 2010. It is interesting to note that, after three winters of spiking electricity prices, prices were very calm this past winter. This resulted from several factors.

Source: EIA

 First and most important, it was a mild winter – some have called it the winter that wasn’t (while I was away in Africa, my snow blower only received one workout). A good indication of how mild the winter was comes from examining the heating degree days (HDDs) (see A Hundred and Ten in the Shade for an explanation of heating degree days). The chart below shows HDDs for the past 12 years. We normally experience about 7000 HDD over a year (July to June) in NH and 6000 for the whole of NE; this past year, the values were ~15% lower, with values of 6000 and 5300, respectively. That was indeed a whole lot warmer, but I was taken by surprise that the HDD values for 2012/13 indicated an even warmer winter that year. Like many other folks, I tend have a short memory about past winters, except when they are extreme, but the data show that the winter of 2012/13 was the warmest in the past 12 years – at least as measured by HDDs values. An examination of the wholesale prices for that winter in the figure above shows some daily prices spikes, but nothing to the degree we experienced in the following three winters.

Source: ISO-NE

The other key driver for low electricity prices is low natural gas prices. Over the past winter, ~55% of the electricity produced in New England was from natural gas: as a result, natural gas prices had a big impact on what we paid for electricity. The two big uses of natural gas in NE are for home heating and electricity production. With the mild winter, there was enough natural gas to go around for both heating and generation. Daily prices did not spike, which was quite different from previous years. The figure below shows the extraordinarily tight correlation between natural gas prices and electricity prices in NE – when natural gas prices spike so do electricity prices.

Source: ISO-NE

Wholesale prices for electricity are presently of the order of 2 c/kWh. This is great, but what are the implications for us as retail electricity customers? Well, less positive than we would like. In NH this past winter, retail electricity prices were in the region of 18c/kWh, almost 9 times the wholesale rate, as shown in the figure below.

Source: EIA

It is important to appreciate that wholesale electricity prices are a small component of what we, as rate payers, shell out for electricity. Baked into the retail rates are a host of charges: there are charges to pay for the transmission and distribution networks; there are long-term contracts that the utilities have entered to purchase electricity (most likely at higher than 2 c/kWh); there are overheads, salaries for the utility company employees, etc.; and, in the case of Eversource, there is the cost of operating their generating facilities – which produce electricity for a whole lot more than 2 c/kWh. On top of this is the profit that the regulated utilities are allowed to earn on their investment in infrastructure. It is a long list of costs and additional charges that gets us all the way from 2 to 18 c/kWh and well worth a closer look in a future blog. It turns out that the utilities from which we buy our electricity end up buying a relatively small portion of their electricity from the wholesale market – a lot of their supply is from long-term contracts that they signed up for years ago. Of course, when wholesale prices are low we don’t like this but, when prices spike up to 45 c/kWh, as they did in the winter of 2013/14, we are quite grateful that our electricity suppliers have locked into lower cost long-term contracts.

Despite last year’s mild winter weather, if this upcoming winter were to be a very cold one, we should expect to see spikes in both natural gas prices and wholesale electricity rates that will impact what we pay for electricity. ISO-NE has taken some important steps in New England to mitigate these spikes through their winter reliability program and by increasing storage of liquefied natural gas, but we have not taken any steps to significantly increase natural gas supply. If we have a very cold winter again, we will see price spikes and then we will go through another round of handwringing and planning for increasing natural gas supply. The truth of the matter is that we do not have a long-term view about our energy supply here in New England. Plans to increase natural gas supply have been scuttled due to opposition or our desire to have the pipeline companies take all the risk. These are both good reasons for not increasing supply, but we must bear in mind that most existing energy infrastructure in the US has been built with some government intervention via regulated monopolies. Ultimately, every one of those infrastructure investments impacted somebody somewhere. If we do not want to invest in energy efficiency, we as energy consumers will end up paying in one of two ways: we will pay for infrastructure investments through costs and direct impacts on our property, our environment, and way of life, or we will suffer the consequences of not investing in infrastructure and creating unreliable supply conditions. Ultimately, it is our choice.

I like to take a look at what the futures markets are predicting for NE electricity prices and, even though futures markets are about looking forward, I also like to look back at their prices from the previous year and see how things have changed, especially with the warm winter we had. The figure below is a comparison of the future prices from last year with those at present. It is clear that there has been some change in the market’s view of upcoming electricity prices. As usual, we are seeing a market forecast of winter price spikes, but, compared with last year, the spikes are smaller and the base-line prices are also lower. This chart also gives one a sense of the challenges the utility companies face as they look to lock in sufficient electricity to supply us over the coming years. Do they secure long-term higher-priced electricity contracts, do they subject us to the whims of the short-term markets and maybe prices won’t spike again like last winter, or do they mitigate potential price spikes by buying insurance through futures contracts. These are important and challenging decisions that the utilities make under regulatory supervision because ultimately it is NH ratepayers that end up paying for whatever choice they make. What would you do?

Source: CME

As we consider the consequences of choices, I am going to wrap up this data-heavy post with an updated chart for default electricity rates for the four NH regulated electricity utilities. (Remember that default rates only reflect the retail costs of electricity and do not include the distribution costs.) These rates, shown below, are a direct reflection of the choices the utilities have made, under regulatory mandates, regarding the sourcing of electricity. Presently, PSNH default rates are substantially higher than those of Liberty, Unitil, and the NH Electric Cooperative. The rates for PSNH presently reflect the high costs associated with operating their own generation facilities, including the coal-fired Merrimack power plant. Even though there have been times that the rates for the other utilities have been higher than those for PSNH (due to wholesale market price spikes), their default rates have generally been lower. Now that the divestiture of the PSNH generating assets has finally started, it will be interesting to follow how PSNH’s rates in the future will compare with those of the other NH utilities.

Source: NH PUC

That wraps it up for this post. It is good to be back teaching in NH and learning about statewide energy matters. Feel free to email me to suggest topics for future blogs and, in the meantime, remember to turn off the lights when you leave the room.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

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*Back Home A great upbeat singalong tune by Andy Grammar. 

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

mooimanm@franklinpierce.edu
6/8/2015

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(*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!)