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

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

mooimanm@franklinpierce.edu

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(*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)

Gonna Take You Higher* – Electricity Price Increases in New Hampshire

If you are a NH resident buying your electricity from Unitil, NH Electric Cooperative, or Liberty Utilities, you are most likely reeling from the recent increases in winter electricity rates. This post begins a series that takes a look at what makes up NH retail electricity prices and the reasons behind the large increases that we are seeing for certain utilities.

Historically, electricity prices have been on the rise. The chart below shows the 24-year historical average NH residential electricity prices.  In 1990, prices were about 10 cents per kilowatt hour (c/kWh) and then climbed to about 14 c/KWh in 1998. Prices then experienced a slow decrease until about 2002, after which they continued their increase to this past winter when we saw average prices of ~17 c/kWh. The trend from 1990 to 2103 represents a compounded average increase of 2.5% per year, which is the same as US inflation over the same period.

Source: EIA

The next chart looks at residential electricity prices for a shorter time period, and compares the NH prices (in green) to those of the NE states (brown) and to the average US monthly figure (blue) since 2000.

Source: EIA

NH has generally followed the NE average, but from 2006 to 2010 was quite a bit lower. However, over this period, our electricity rates have been about 40% higher than the national average.

State-by-state comparison is always useful and interesting. The figure below shows recent state rankings based on July 2014 retail electricity prices. The NE states are all in the top 11, with Vermont and Connecticut higher having higher prices than NH. Our electricity prices are the 7^th highest in the US at 17.23 c/KWh − we can take some solace that the price in Hawaii is more than double the NH average. On the other hand, Washington state, which benefits from cheap hydroelectricity, has the lowest prices – almost half of NH’s at 8.96 c/KWh.

Source: EIA

All of the electricity prices I have presented so far are average prices and include all the charges you see on your electrical utility bill. Looking at an electricity bill is not unlike deciphering your cell bill. There are a lot of bits and pieces and it takes effort to understand them. There are three basic components. The first is the cost of power, which is usually a single line item for the cost of electricity per KWh. The second is the cost of getting the electricity to your home, i.e., the cost of distribution and servicing your account, which usually involves several line items, such a fixed account charge, a distribution charge, and perhaps even a transmission fee. Finally, there are all the odds and ends, such as taxes, charges for government-mandated programs, etc.

The reason for all these separate charges is, as I have noted previously in What’s It All About, Alfie?, is that there are three key parts to the electricity business: the generation of electricity, typically at a large power plant located in a central location; the transmission of electricity over long distances from the generation point to towns and cities; and the distribution of electricity through the community via the sub-stations, wires, and transformers to individual homes and businesses. Not all electrical utilities focus on all aspects of the business. Some, for example, such as my local electrical company, just distribute electricity. Others, such as the merchant wood-fired power plants or wind farms, just focus on generation, whereas utilities like PSNH are fully integrated organizations involved in all three aspects of the business. 

The biggest line item in your electrical utility bill is the cost of electricity. This is the focus for the rest of this post.

The electricity industry has been partially deregulated in NH and retail customers can purchase their electricity from different competitive suppliers. However, this electricity still has to run through the transmission lines and electrical wires of their local electrical utility and so customers are charged for the use of that distribution infrastructure.  Should a NH resident decide not to purchase electricity from a competitive supplier, the local electrical utility has the responsibility to source and supply the electricity to the customer. The utilities do so and apply their default electrical service rate. Although there has been competition on the residential supply side of electricity for a few years now, the majority of NH residential customers still rely on their local electrical utility company to source and supply their electricity. This is the reason that increases in default electrical service rates are so important.

There has been a good amount of reporting lately about the big increases in electrical service rates proposed by the utility companies and approved by the NH PUC.  The table below summarizes the present default electrical service rates as well as some information for previous years.  

It is important to remember that these increases all relate to electricity supply (and not to transmission or distribution charges) so let’s take a closer look at the supply side of the NH utilities. The rest of this post focuses on the three utilities, NH Electric Co-op, Unitil, and Liberty Utilities, with approved increases. PSNH's default rates - which are not yet approved by the Public Utilities Commission - will be the topic for my next post. 

Expanding the supply aspect of the simple generation-transmission-distribution diagram presented above, the picture quickly becomes complicated because, as part of deregulation and the drive for competitive supply, we have introduced various intermediaries and market participants.

The electricity supply to residences by three of the four NH utilities (NH Electric Co-op, Unitil, and Liberty Utilities) is shown in the figure below. Competitive suppliers, shown in yellow, purchase electricity directly from generators (red) or through wholesale electrical markets (green). The second source of supply is from the utility itself, shown in blue, which needs to procure electricity for its default electrical service customers. The utility can purchase this electricity directly from generators but the bulk of the purchases are through wholesale electrical markets. There are two types of wholesale electrical markets – the forward sales and the spot markets. Generators sell electricity into both of these markets.  

In order to supply electricity to their default customers, the utilities have to forecast how much electricity will be required for a six-month period and then lock in the price of the forecasted amount of electricity in advance. This is carried out in the forward sales segment of the wholesale electrical markets. Although there is a cost associated with forward purchase commitments, they offer the advantage of locking in the rate of electricity purchases for the period. Should more electricity than forecasted be required, the utility has to purchase this extra electricity on the spot market.

Three NH utilities (NH Electric Co-op, Unitil, and Liberty Utilities) have just gone through the round of forecasting for this winter electricity supply. The utilities have estimated the number of default service customers and their total electricity consumption, and have gone out to markets and solicited bids for supplying this forecasted electricity through the winter months. The bids for Unitil and Liberty were reviewed, documented, and submitted as part of their default electrical service rate application to the NH Public Utilities Commission (PUC). The costs associated with these forward purchases of electricity are then included, without any mark-up by the utility, in the calculation of a single rate for winter months. The NHEC Co-op (NHEC) is unregulated and is not required to submit its rate adjustment calculation to the PUC.

The problem for default electricity customers is that the future prices for electricity for the next six months are high, as shown in the chart below. As the utilities lock in their supply and prices for the winter months, they are buying right into the winter price spikes.

The difficulty with this approach is that the utilities are trying to forecast in September what their electricity sales in the winter will be. This is an enormous challenge because they have to forecast how cold the winter will be, how many customers they might have and their consumptions. They must then commit to purchasing that electricity in advance. However, if the winter is mild, the spot price could be lower. Of course, the opposite could happen: it could be a brutal winter, natural gas consumption could be sky high, and electricity prices could skyrocket like last winter.  This is the challenge that the utilities and their regulators face. Is it better to lock in the price now – called “hedging” – or subject your customers to the gyrations of the spot markets where prices could be higher or lower than the forward market, or should some balance be struck between committing to a 100% hedge or a partial hedge? This is exactly the same decision we face at home. Do we commit to a fixed price for oil or natural gas over the winter months, or do we take our chances and hope it will be a warm winter and that oil and natural gas will be cheaper than that fixed-price contract. What would you do?

The regulators currently require Unitil and Liberty to hedge 100% of their six-month forecasted amounts and commit to the high winter prices. This has lead to the higher winter default service rates posted by these utilities.

This brings us to the question of why future prices for electricity are so high in winter.  In two words: natural gas. As we have closed down nuclear and coal-fired power plants in NE, we are now generating 46% of our electricity using natural gas. Depending on your viewpoint, that could be a good thing: it is a domestic fuel, cheap, and less polluting than coal. It does, however, make us very dependent on the natural gas market and fluctuations in natural gas prices. Natural gas is also used for heating and cooking and, in winter, we do not have the pipeline infrastructure to bring in enough natural gas for heating and electricity generation. During winter, the natural gas utilities and  electricity generators suck very hard on the end of the natural gas straw and when demand increases, markets do what they are wont to do and prices increase accordingly. When natural gas prices increase, so do the prices of electricity. NE has experienced price spikes for both natural gas and electricity during the past two winters, as shown in the chart below.

Source: ISO-NE

Sam Evans-Brown, in a recent NHPR report, does a great job of summarizing the natural gas situation in New England. The political cartoon by Bob Englehart of the Hartford Courant points to the irony of situation: there is an enormous amount of natural gas available in the US, but NE is at the end of the pipeline and that causes problems for us in the high-use winter months.

(click here to view)

Bob Englehart

Hartford Courant

Dec 19, 2013

EditorialCartoonists.com

The future electricity prices are joined at the hip to the future natural gas prices. In the figure below, the leftmost chart shows the future prices of electricity and natural gas for the next three years, as provided by the forward markets. (The forward price of natural gas is calculated for the Boston Algonquin Citygate, which is a good proxy for NE natural gas pricing. See The Price for a discussion of natural gas citygate prices.) The winter spikes in forward electricity prices match the winter spikes in forward natural gas prices. Should you need convincing, the right-hand figure shows a direct and very strong correlation between future electricity  future natural gas prices. In fact, the correlation coefficient is 0.966, which indicates a super-strong correlation. (Correlation coefficients vary between 0 and 1. A coefficient of 1 indicates a perfect correlation, whereas a value of zero indicates no correlation.) Although correlation does not necessarily mean causation, in this case we can indeed be comfortable in concluding  that high future natural gas prices lead to high future prices for electricity.

Returning now to the table that shows the default service rates for the four utilities, we note that Unitil, Liberty, and NHEC reflect increases of 59%, 76%, and 71%, respectively, over last winter’s rates. Although NHEC also shows a large increase, their winter rates are substantially lower. Based on what I have been able to learn, these lower rates are due to diversification in the way NHEC purchases its electricity. NHEC does not hedge 100% of its forecasted needs just six months ahead. Instead, it commits to forward purchases many years out and to some just a few months out. It also purchases electricity directly from generators through long-term (20-year) power purchase agreements and will also purchase some of its power on the spot market where it is able to take advantage of lower spot prices at times. As an unregulated utility, NHEC clearly has more discretion than the regulated organizations and some might suggest that these direct comparisons are unfair. I disagree, because comparisons of these different approaches are important in trying to figure out what works best for NH ratepayers.

The Co-op model has a lot of attractive features. The customers are the shareholders and they are not incentivized by returns on capital or dividends. They want reliable supply and the lowest possible prices for electricity and the whole organization is focused to deliver this. With the other utilities, I don’t see the same incentives to keep down electricity prices. The regulated utilities, Unitil, Liberty, and PSNH, are required to pass on the costs of electricity to their customers without any mark-up so there is little motivation for them to search out alternatives to minimize energy prices.

NHEC has a long-term view of electricity prices and, to my mind, the “next six months” approach at Unitil, Liberty and PSNH, as required by regulation, is far too short-term. Wholesale reliance on short-term forward markets does not seem to be the best approach. There is certainly merit to the diversification and flexibility of supply model used by NHEC and I wonder whether consideration should not be given to incentivizing the regulated utilities to develop a longer-term view of electricity supply. One way to do this may be to allow the utilities the flexibility to diversify their electricity supply and reduce the price of electricity below that of the short-term forward markets and to share significantly in any resultant savings.

While researching this post, it struck me that there is considerable variety in the types of electrical utility and a great deal of experimentation occurring in NH. NH arrived early to the deregulation ball and then pulled back when things went awry in California (see Should l I Stay or Should I Go?). As a result we have an integrated utility, PSNH, still in the generation, transmission, and distribution business; we have two deregulated utilities, Unitil and Liberty, that are out of the generation business and who buy all their electricity on the wholesale markets; we have a cooperative in NHEC which is not regulated by the NH PUC; and we have a few municipal electric companies. With all of these options in NH, we have a unique opportunity to figure out which model is the best, and which consistently and reliably delivers low cost electricity to NH ratepayers.

The past two winters have seen a refrain of “Gonna Take You Higher”* and I anticipate that the NH annual average electricity price will rise again this year. When deregulation was introduced, we expected the markets to automatically deliver lower electricity costs. This has not always happened. Sure, we have run into cold winters, natural gas pipeline capacity issues, and the shutdown of nuclear and coal plants, but deregulation appears to have fallen short on some of its promises. This requires some reflection and is certainly worthy of a future blog post.

Electricity markets are different from other energy markets, many of which have an inventory buffers in the form of storage or stockpiles to overcome temporary interruptions and market dislocations. Electricity, on the other hand, needs to be simultaneously generated and consumed: it cannot be stored, and the underlying market components and structures are hellishly complicated. There are a limited number of market players, liquidity can be problematic at times, and − regardless of the cost − it needs to be “on” all of time. Moreover, in NE, the market for electricity now rests on top of the local market for natural gas – another commodity for which local storage is very limited and where delivery constraints come into play. With so much of our electricity dependent on natural gas, we could even reach situations where there is insufficient natural gas to generate the electricity we need. From this viewpoint, it appears that heavy dependence on natural gas has compromised the reliability of our electricity supply. This is all frightfully messy.   

I am a proponent of the letting the invisible hand of the market do its work, but it does need to do so under the very visible and intelligent hand of regulation. My 1/8 of a KWh worth is that progress has been made but there is still work to do to get things right for NH electricity rate payers.

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

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

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(*Gonna Take You Higher – A line from the chorus of Sly and the Family Stone’s tune,  Want to Take You Higher, and a great example of the funky soul music from the 1960s. This was one of the tunes in the Family Stone’s set at Woodstock when they played it at 3 am and had the crowd chanting “Higher”. Here is a video of a 1969 show that gives you a sense of the power and drive of Sly and the Family Stone. Enjoy I Want to Take You Higher.)

Extraordinary Machine* - ISO New England

I had the opportunity early this summer to take a week-long course from the folks at ISO New England (ISO-NE) on Wholesale Electricity Markets.  ISO-NE is the regional organization that is essentially responsible for keeping the lights on in New England. ISO stands for Independent System Operator. This is the organization that coordinates the generation and transmission of electricity in New England through a variety of regulated and free market mechanisms.

In previous blogs, What’s It All About, Alfie? and Wind in the Wires, I discussed the structure of the utility industry and particularly the electrical utility industry. There are three aspects to the electrical utility business, as shown in the figure below: there is the generation of power, typically at a large power plant located in a central location, then there is the transmission of electricity over long distances from the generation point to towns and cities, and, finally, there is the distribution of electricity through the community via the sub-stations, transformers, and wires to individual homes and businesses. 

ISO-NE is the organization that coordinates the generation and transmission aspects of the electricity business. It is your local electrical utility, such as PSNH, Unitil, or Liberty Utilities, that is responsible for the distribution step, which involves drawing the electricity from the transmission lines and getting it to your home and place of work. ISO-NE is not reading your individual electrical meter - that is also the task of your local electrical distribution company. It is important to note that ISO-NE does not own or operate generation plants or transmission lines. Instead, through a variety of market mechanisms, it is responsible for the coordination of generation and supply by a host of generation and transmission companies.

This turns out to be an extraordinarily complicated task because electricity cannot be stored (or very little of it) and so there needs to be a consumer for every electron of electricity produced by a power generation plant at every minute of the day. When you increase your demand for electricity by turning on your laptop or tablet to read this blog, someone needs to ensure that generating companies are supplying just the right amount of electricity to do so: that is what ISO-NE does.

ISO-NE operates the electrical grid in the six New England states of New Hampshire, Vermont, Maine, Massachusetts, Rhode Island, and Connecticut and has three primary responsibilities:

1. Operating the Power System: ISO-NE ensures the correct balance between electricity supply and demand every minute of the day by centrally coordinating the generation and transmission of electricity in the New England region and into (and from) other neighboring regions, if necessary.
2. Supervising Wholesale Electricity Markets: ISO-NE provides and supervises the market platforms on which wholesale electricity is bought and sold.
3. Power System Planning: ISO-NE assures that present and future electricity needs are meet through the development of reliable generation and transmission systems.

In the days before electrical deregulation, electrical utilities, such as Public Service of New Hampshire (PSNH), were given a monopoly to provide electrical service to large regions. As such, the utility was responsible for the generation, transmission, and distribution of electricity across the region. This was done largely through operating its own generation plants, running the electricity through its own transmission lines, and supplying it to its own customers through its own distribution network. However, as noted in Shall I Stay, or Should I Go?, this model has changed as consumers have demanded choice and competition. We have been swept up in the deregulation wave that has worked to unbundle the electrical industry and break it up into separate generation, transmission, and generation companies, and to allow competition in each of these areas. Although deregulation has had varying levels of success, it soon became clear that this environment required a single controlling entity to coordinate open access electricity supply, transmission, and use across all a range of independent and competitive regional companies and regulated utilities, hence the need of an Independent System Operator such as ISO-NE. 

The seeds for ISO-NE were sown in the 1965 Northeast blackout that affected some 30 million people in Ontario and large parts of New England, New York, and New Jersey. This blackout was caused by a single poorly set relay at a New York power plant that created a series of cascading electrical surges, tripped relays, and imbalances that moved through the electrical grid and shut down generation plants. In the aftermath of the blackout, several reliability councils were set up to improve coordination between electrical utilities. One of the organizations formed in 1971 was New England Power Pool (NEPOOL), which was a trade organization of New England power companies. The focus of their work was to improve cooperation and coordination among the regional power utilities. In the process, they organized much of the NE electrical grid and established a central electricity dispatch organization.

For almost three decades, NEPOOL was responsible for the coordination of the NE electrical grid, but, in the 1990s, with the advent of deregulation, the Federal Energy Regulatory Commission (FERC) – the Federal “godfather” of the electricity business – decided that deregulation required open access to the electrical grid by independent power companies and well-run competitive markets. FERC concluded that this was best done under the auspices of an independent organization, rather than a trade organization of existing participants which may not be open to increased competition. ISO-NE is one of several regional organizations that were established in 1997 to monitor deregulation, establish open and competitive wholesale markets, as well as coordinate and operate the regional electrical grid. Essentially ISO-NE assumed some of the functions that had been carried out by NEPOOL. In 2005, FERC provided ISO-NE with greater authority and independence over the transmission grid and designated it as the six-state Regional Transmission Organization or RTO. The map below shows the location of other ISOs or RTO in North America.

Source: ISO/RTO Council

Today, ISO-NE is responsible for over $10 billion of wholesale electricity transactions from 400 market participants. It is a private, non-profit organization with operations located in Western Massachusetts. It has about 550 employees, most of whom are power system engineers, computer scientists, and economists. ISO-NE does not have trucks and power line crews that go out repair the grid. That is the responsibility of the transmission and distribution companies. The ISO-NE folks do not get their hands dirty: it is a coordinating, monitoring, and planning body for the electrical grid.
Here are some key facts about ISO-NE:

•    Serves 14 million residents with 6.5 million meters across six NE states;
•    Coordinates 32,000 MW of generating capacity;
•    Coordinates 350 generators;
•    Covers 8400 miles of high voltage transmission lines;
•    Highest peak demand for electricity ever recorded is 28,130 MW;
•    Peak load in 2013 was 27,379 MW;
•    Generation of electricity in 2013 was 129,336,000 MWh;
•    Average Day Ahead Wholesale Price in 2013: $ 54.42/MWh (= 5.4 cents/kWh);
•    $8 billion in transactions from electricity sales in 2013;
•    2013 operating expenses: $157 million.

ISO-NE Control Room (Photo Courtesy of ISO-NE)

ISO-NE has created several markets, the most important of which is the wholesale market for buying and selling electricity and which accounts for the bulk of ISO-NE transactions. Another important and growing function is the capacity market, which is a forward market in which bidders commit generation capacity that will meet the electricity needs in the future. For example, a new start-up power plant can auction off its generation capacity to supply electricity in three years’ time. Of course, if this future capacity is bought, the start-up is obligated to deliver that generating capability in three years. This market provides an additional revenue stream for power plants, it allows capacity planning at least three years out, and it provides incentives for the construction of new power plants.

As a result of my research, I now have a much better understanding of ISO-NE and their function. My most important takeaway, however, was that I was simply stunned at the engineering and economic complexity involved in getting electricity from generators, moving it across transmission lines, and getting it to users in a complex deregulated market. As I noted earlier, ISO-NE folks do not get their hands dirty repairing transformers and power lines but they have built and are responsible for a very complex machine. A useful way of understanding this machine is to view it, as other authors have, as a mechanism responsible for controlling three types of flows, as in the figure below.  It is responsible for the flow of information about generation, transmission, and demand, which leads to transparent market operations and both short- and long-term planning for the electrical grid. It is also responsible for the coordination and flow of electricity from generators to users across transmissions lines. Finally, through its market mechanisms, it is the conduit for money flows from buyers of electricity or generation capacity to sellers.

I am very impressed with this machine and now understand more completely the need for an organization like ISO-NE. We often hear grumbling in NH that we export a great deal of the electricity we produce. That is true, but only up to a point. It is important to understand that NH is not an “electrical island” responsible for its own generation and use of electricity. That is old school “PSNH will take care of everything for New Hampshire” thinking. We now live in a time of deregulated (or partially deregulated) markets. The State of New Hampshire is part of the New England grid and, along with our neighbors, we generate, transmit, and use electricity. Largely due to the Seabrook Nuclear Plant in Portsmouth, we presently generate more than we use so other NE users benefit from NH generation capacity, but, should there be an interruption of supply from Seabrook, we will be very grateful that we are indeed part of the NE grid. Likewise, access to the NE markets allows us to participate in long-term planning and in large wholesale electricity markets whose structure and competitive nature work to keep wholesale electricity prices down.

There is, of course, a cost associated with a controlling body such as ISO-NE. The 2013 operating expense for ISO-NE was $157 million, which we as rate payers end up paying for. If we divide the costs of ISO by the electricity produced in 2013, this yields a figure of about 0.11 c/kWh. For an average household using 800 KWh per month, the ISO-related costs turn out to be about a dollar per month. From my perspective, that is cheap insurance for a reliable electrical supply and efficient markets.

Until next time, remember to turn off the lights when you leave the room—and when you do so, think about the extraordinary machine* that adjusts to that small reduction in electrical demand. It is indeed remarkable.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu
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(*Extraordinary Machine – A cool little old timey tune by the extraordinarily talented Fiona Apple. Here is a performance from the Today Show. Enjoy.)