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:
- 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.”
- 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.
- 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.
- 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.
- 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
Franklin Pierce University
mooimanm@franklinpierce.edu
6/8/2015
6/8/2015
(*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!)
