Should I Stay or Should I Go?* - PSNH and Electricity Deregulation in New Hampshire

Over the past few blogs, I have taken a look at electrical utilities in NH and at the State's largest electrical utility, PSNH, in particular. I have also highlighted the regulatory compact that exists between a state and its public utilities. That compact can change through policy changes, so in this post, we take a look at the start-and-stop process of electricity deregulation in New Hampshire and how it has impacted PSNH. 

Until 1996, PSNH's business model was pretty simple, as shown in the figure below. It was a regional monopoly, solely responsible for generating, transmitting and distributing electricity to consumers within its franchise area. It totaled all the costs associated with its services (generation + transmission + distribution), built in its regulated return on assets, divided it by the number of kilowatt hours of electricity sold and came up with a price for supplied electricity. This price then had to be reviewed and approved by the New Hampshire Public Utilities Commission (NHPUC). PSNH was the classical, vertically integrated, regulated utility company.  

 

In 1996, however, in response to high electricity rates and the electricity deregulation wave that was sweeping the country at that time, NH deregulated the electricity business and introduced competition into the generation (or electricity supply) part of the business. The logic behind deregulation was that competition would remove the monopolistic position of the electrical utilities, it would increase competition, and the outcome would be lower prices for electricity and more services for consumers.

At the same time, it was recognized that, while the electricity generation side of the business could be opened up to competition, the other two parts of the electricity business—transmission and distribution— should remain as monopolies. In the primer on public utilities, I pointed out that one of the reasons for allowing monopolies in the provision of public services, such as electricity, is that it avoids the congestion problem: if we allowed competition in the transmission and distribution of electricity, our state would be crisscrossed with transmission towers and power lines from different companies and our streets would be cluttered and festooned with wires and poles from different distribution enterprises - perhaps like the picture below.

 

An essential aspect of deregulation was that the public utilities should get out of the generating business altogether and sell off their generating assets as it was determined that true competition could only arise if the monopoly controlling the wires did not run their own product (electricity) through their wires. The concern was that the entity that owned the transmission and distribution network would naturally favor their own generated electricity and would put up overt, as well as subtle, barriers to competition. That was the initial deregulation plan for New Hampshire and so electricity restructuring in NH required the utilities to sell their generating plants.

But then in 2000, there was a major bump in the road to deregulation.

California was one of the first states to deregulate electricity supply in 1996. The California utilities had to sell off their generation assets and they were also prevented from setting up long-term power supply agreements with generators. Moreover, retail rates for many consumers were capped but wholesale rates were allowed to float. It soon became apparent that this system was very fragile and ripe for being gamed. Electricity suppliers rapidly figured out that closing down of in-state plants, for maintenance or other reasons, would increase wholesale power prices and increase their profits. This, combined with dry weather, which created a shortage of imported hydro power, led to electricity supply shortages in California, blackouts and sky-high wholesale prices in 2000 and 2001. With a cap on retail sales in some areas, utilities soon found themselves selling retail electricity at lower costs than they were purchasing at wholesale. Clearly this could only last so long: it ended up crippling some of the larger California electricity utilities and driving one of the largest, Pacific Gas and Electric, into bankruptcy.

The State of California declared a State of Emergency and had to scramble to set up long-term power purchase agreements to ensure electricity supply — at an enormous cost to California rate payers. Much of the blame was subsequently leveled at Enron, who were accused of market manipulation. Careful reading of the California electricity crisis, however, indicates that market manipulation was only one of many causes of the problem. Poorly constructed deregulation policy seems to have been the more important aspect. Regardless of the reasons, electricity deregulation in California was viewed as little short of a disaster.

NH legislators had the benefit of observing California's travails from afar and quickly took their foot off the deregulation pedal and in 2001 the State delayed the divestiture of PSNH's non-nuclear generating assets. This left NH with the hybrid system, or partial deregulation, that we have today, with competition in the supply of electricity but with PSNH also supplying electricity from its own generating assets. The structure of the electricity business in the PSNH franchise area now looks like the figure below.

 

We now have 18 competitive electric power supply companies and 92(!) aggregators who have the opportunity to offer competitive prices to their customers. Their prices are based on market rates and whatever supply agreements these companies can establish. We also have PSNH supplying electricity to its customers, but this price is regulated and is calculated on the basis of the costs required to run their generation facilities and guaranteed return on their generation plants divided by the amount of electricity supplied. As a regulated supplier of electricity with high fixed costs due to their generating facilities, the cost basis for PSNH's electricity is therefore higher.  As a result many PSNH customers have migrated to lower cost competitive suppliers, leaving PSNH with less customers over which to spread these costs — which then drives their costs for electricity even higher.

In the table below, I have provided a sampling of the residential electricity supply rates in New Hampshire which include those from other NH electrical utilities as well as competitive suppliers in the PSNH franchise area.

 

 

As can be noted from data in this table, PSNH's standard rate for electricity supply (referred to as their default rate) is higher for their customers than that of competitive suppliers as well as other NH electrical utilities. This has now become cause for concern for legislators and regulators alike. Earlier this year, NHPUC commissioned a report to review the situation and their recommendation is that the State needs to complete the process of deregulation and compel PSNH to divest their generation assets. PSNH strongly disagrees with this position, as shown by Gary Long, the previous long-term CEO of PSNH, in his recent testimony and in a PSNH report. Completing deregulation and getting PSNH to divest their assets is a perennial issue in NH politics, but the argument has become far more intense during the past two years due to the flood of customers leaving PSNH for cheaper electricity supply rates and the increasing burden the remaining customers face via increased energy service rates.

There are good reasons for and against divestiture on both sides. I have attempted to summarize below the main points for and against compelling PSNH to sell of its generating assets.

Arguments for Holding onto Generating Assets 

1. Deregulation in California was a disaster for the state and for some utilities that went bankrupt as energy supply companies were able to game the system. This would not have occurred if utilities had been allowed to hold onto their generating assets.
2. Many states have pulled back from deregulation or have not completed their deregulation plans. Only 15 states offer retail choice.
3. Owning generating assets like hydro and coal-fired power stations allows the diversification of energy supply, which better serves NH customers as energy commodities go through different cycles of high and low prices.
4. Reliability of electricity supply could suffer because the only motivation for independent power producers is profit. If it is not in their best interest to supply power at market rates, they can simply turn off their generating plants.
5. PSNH provides a safety net for its customers. If you cannot or do not sign up with any of the other providers, PSNH is obligated to serve you. The generating assets are part of that safety net.
6. High energy service rates in NH are more a result of policy created by law makers than PSNH's doing.
7. The region has become heavily dependent on natural gas, for which there is no storage. Any interruption of natural gas supply, such as a pipeline problem, will have an immediate impact on electricity supply. Coal plants have at least some stocks of coal on site.
8. Divestiture can result in a increased costs to all PSNH customers increase because PSNH would need to be compensated for lost returns on the sale of the assets via stranded cost recovery.
9. Winter energy prices for New England would be higher if PSNH did not continue to operate their plants especially during the high demand winter months.

Arguments for Divestiture:

1. The original intent of deregulation was to have all electrical utilities sell their generating assets. PSNH is the only utility not to have done so and, to complete the deregulation process, they must be compelled to divest the generating plants.
2. If PSNH owns their own generation operations, they will be likely to favor their own generating plants and make it expensive and challenging for competitive suppliers of electricity.
3. There has been considerable migration of customers away from PSNH, which has led to PSNH distributing the costs associated with its generation operations over a smaller and smaller group of remaining customers, which will continue to increase the costs for electricity supply to these customers. Higher prices will, in turn, prompt further migration away from PSNH, and eventually leave PSNH with no customers. This has been characterized as the PSNH "death spiral".
4. PSNH energy customers are paying higher than market rates due to the generating assets. This is taking money out of NH consumer pockets and passing it onto PSNH,  their parent company, Northeast Utilities and their shareholders.
5. PSNH coal-generating plants are polluting, expensive to run and sit idle for a great deal of the time, but they still earn a continuous and assured return for their shareholders which is extracted from their energy customers.
6. NH ratepayers are the only New England rate payers that are on the hook for paying the costs of utility-owned electricity generation plants.
7. Reliability and resource adequacy of electricity supply is not the responsibility of one utility. We have a regional electrical grid shared by the New England states and as such is the responsibility of the regional grid authority, the Independent System Operator – New England, also know as ISO-NE, to maintain reliability and supply adequacy.

It is important to note that I am not making judgments on the merit or correctness any of these "Should I Stay, or Should I Go?"* arguments. Indeed, each one of them is worth its own blog posting, hours of legal debate and a thick consultant report. They are simply some of the for and against reasons that have been advanced in this debate. There are, no doubt, some that I have missed, so if you see a big omission in the listing of arguments, please share it with me.  

This knotty situation is further complicated by the fact that the generating assets are listed on the PSNH books at $674 million and, in the present coal-unfriendly and low-priced natural gas environment, it is unlikely that buyers are going to be lined up, like on new iPhone release day, to purchase PSNH's coal-fired assets. Regardless, this is a complicated issue, and it is one that the regulators and legislators in NH are presently wrestling with: one way or another, it is going to impact the wallets of PSNH rate payers.

In a future post, I will look at possible outcomes of this debate. Until next time, remember to turn off the lights when you leave the room—even if you do have cheaper electricity from a competitive supplier.

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
10/24/13 
 

(*Should I Stay or Should I Go - A fine 1982 tune from The Clash, my second favorite British punk group off their appropriately titled "Combat Rock" album. Rated at 228 on Rolling Stone's "The 500 Greatest Songs of All Time" list. That's about right, I'd say.)

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Wind in the Wires* - New Hampshire Electrical Utilities and a Closer Look at PSNH

In this post I build on our knowledge of public utilities and take a look at electrical utilities in New Hampshire. I will take a particularly close look at the largest electrical utility in New Hampshire, Public Service of New Hampshire (PSNH), as it has had a rather checkered history and it also provides a useful case study of the challenges faced by electrical utilities in these days of deregulation, low natural gas prices and waning interest in coal-fired electricity generation. 

In my last blog, I discussed the regulatory compact that exists between utilities and the communities they serve. The essence of this compact is that we provide the utility with a monopoly to provide service so they can earn predictable profits and we gain by getting build out of the required service infrastructure, the ability to negotiate reasonable rates as well as safe and reliable service.

We have all benefitted from this monopolistic business model that permitted the rapid electrification of the USA with electrical supply even spreading into rural areas. We have gained enormously from the reliability of our electrical supply – it is there all the time when we need it. (If you have reservations regarding the reliability of the US grid, I encourage you to spend some time in any of the less-developed countries to gain an appreciation for the dependability of US grid.) It makes possible our modern lives, it cooks our food, lights our homes and powers our communications and - increasingly - our transportation. Moreover, as knowing and unknowing investors in utility companies, we have benefitted from the regular profits and dividends produced by utilities that have funded part of our retirement and pension plans.

As noted previously 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, 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 focus on the distribution part of the business. Others, such as the merchant wood-fired power plants or the wind farms in NH, just focus on generation, whereas other utilities, such as PSNH ,are fully integrated organizations involved in all three aspects of the business.

 

 In NH we find several types of electrical utility companies:

• There are those that are owned by shareholders who are seeking a financial return on their investments. These are referred to as investor-owned utilities (IOUs) which are most commonly public-traded companies. In NH the big three are (1) PSNH, which is wholly owned by Northeast Utilities (NU), (2) Granite State Electrical Company, which is part of the Liberty Utilities group owned by the Canadian company, Algonquin Power and Utilities Corporation, and (3) the NH-based Unitil company. The key to these organizations is that you do not have to purchase electricity from these organizations to be an investor and the more shares you own, the greater say you have in the running of the company. Because these companies are investor owned, they are driven by the need to maintain profitability and regular dividend payouts.

• Electrical cooperatives are organizations that focus on supplying electrical services to their customers who are the members and owners of the cooperative. New Hampshire Electric Cooperative is a good example. Each member of the cooperative has an equal voice in the organization and profits are used for infrastructure investments, maintaining low electricity rates or are paid out as dividends to members. These types of utilities are very customer focused as they don't have to face the investor pressure that the IOUs are subject to. These organizations are largely in the distribution business as they purchase their power from a number of generators.
 
• There are also electrical utilities that are run by local government organizations, such as municipalities. These are called "munis" and they are only responsible for the distribution of electricity within their communities. In NH we have a few of these organizations: Ashland, Littleton and Wolfeboro, among others, have their own municipal electric companies that are responsible for the distribution of electricity within their town limits.

A map of the service areas for the various NH electrical utilities is presented in the figure below. The blue areas belong to PSNH, the yellow to NH Electric Cooperative, the light green to Granite State Electrical Co. and the pink to Unitil. The few cross-hatched areas are the municipal electrical companies. If you want to examine this map in more detail follow this link.

 

The history of electrical utilities is a fascinating one and it started in 1882 with Thomas Edison's first generating plant in New York City that initially supplied electricity within a single square mile to 59 customers in what is now Manhattan's Financial District. Within a few years, there were over 30 generating plants supplying electricity in that city. However, the key player in the rise of electrical utilities was Samuel Insull, who was sent off to run the Edison electrical company in Chicago in 1892.

When Insull started his career in the electricity business, electrical companies were then limited local enterprises that generated and distributed electricity to customers within the vicinity of the generating facility. But Insull was a superb businessman and very astute, and he soon realized that to cover the enormous cost associated with generating plants, he needed to sell a large volume of electricity. To do so, he needed to increase his customer base to more than the customers in close proximity to the generating plant. To sell more electricity, he set up tiered electrical rates with lower rates available in lower demand periods, he invested in alternating current transmission technology which allowed him to transmit electricity over long distances and he invested in large coal-fired generating plants. He also bought up his competitors and, with his transmission capability and tiered rates, was able to diversify his customer base, sell more electricity over a wider area and increase the utilization of his equipment.
 
Insull also saw the benefits of a natural monopoly as it eliminated competition and would provide the returns necessary to raise money for the big infrastructure investments. He actively advocated for government regulation of utilities in order to ensure their status as a natural monopoly. As a natural monopoly he could be assured of a large customer base, steady revenue and profits and, with these, he could provide steady returns to investors and he would also be able to borrow money for large infrastructure projects at low interest rates. Insull's model was soon adopted by electrical companies throughout the country.

State regulation of utilities started in 1907 when New York and Wisconsin enacted regulations that required state oversight of utility financial performance and the establishment of electricity rates based on the revenues and costs of a utility. By the start of the World War I in 1914, most states had established regulatory bodies for electrical utilities. In NH, regulation of electrical utilities started in 1911 with the establishment of the Public Service Commission which was given oversight and rule-making authority over railroad and public utilities. In 1951, the Commission became the Public Utilities Commission and, in 1985, regulation of transportation activities and railroad were moved to the Department of Transportation.

Samuel Insull's influence even stretched into New Hampshire. In 1925 the Chicago-based, Insull controlled Middle West Utilities holding company purchased the NH-based Manchester Traction, Light and Power Company which supplied power to the City of Manchester and other companies on the Merrimack River. Middle West Utilities established the New England Public Service Company (NEPSCO) in 1925 to consolidate all of its New England acquisitions under one holding company. One year later, Public Services of New Hampshire was established as a formal company to operate all of the New Hampshire electrical companies that Insull's group had purchased (Source: History of PSNH). In the early years, PSNH operated steam, gas, electrical railway and bus services but, by the 1950s, many of these non-electricity businesses were closed or sold to allow PSNH to focus on supplying electricity. In those early years, a lot of PSNH electricity was generated by hydroelectric plants located on various rivers in NH but, as demand grew, PSNH built the large fossil fuel plants located in Bow and Portsmouth.
 
In 1972, PSNH started planning for the construction of the Seabrook Nuclear Power plant. The intent was to build two 1.2 GW reactors. Opposition to nuclear power, cost overruns and construction delays led to the commissioning of only one unit - 18 years later in 1990, at a cost of about $7 billion. The second unit was never completed and the huge debt taken on by PSNH lead to its formal bankruptcy in 1988 and its consequent acquisition by Northeast Utilities in that same year. It was the largest US bankruptcy at that time.
 
Northeast Utilities, the parent company of PSNH, is a publicly traded holding company that owns four electric companies, two natural gas companies and electric transmission business serving NH, MA and CT. Six of these are key companies here in New England: Connecticut Light and Power, NU Transmission, Western Massachusetts Electric Company, Yankee Gas Service Company, the recently acquired NStar Electric and Gas Company and, of course, Public Services of New Hampshire. The bulk of Northeast Utilities' revenue comes from the distribution and transmission of electricity rather than from its generation. Electricity generation only contributes 6% of NU's revenue, largely from the generating plants in NH.
 
Northeast Utilities is a profitable company with over $7 billion in revenues, a profit margin of about 11% and it pays out about 57% of its earnings as dividends. Return on net property, much of which is regulated, is about 8%. Based on its present stock price of $41/share, it earns its investors a dividend yield of about 3.6% - certainly much better than you and I earn by keeping our money in a savings account at a local bank. A great deal of NU's stock is held by institutional investors, mutual funds, retirement funds, insurance companies, etc., which means that a good number of us with 401K or retirement plans end up indirectly with an interest in NU.
 
If we take a closer look at the PSNH part of the NU business we learn the following:

In 2012 PSNH delivered 7821 GWh hours of electricity in NH and earned $946 million dollars doing so. This equates to revenue of 12.1 cents per kWh. Remarkably, only about 26% of this electricity came from PSNH's own generating fleet. The rest came from long-term power purchase agreements with other independent generators, such as the Iberdrola wind farm in Lempster, NH, and purchases on the short-term and spot electrical market administered by ISO-New England.
 
PSNH owns 13 transmission substations, over 100,000 distribution transformers of different sizes and more than 13,000 miles of transmission and distribution lines. PSNH also owns generating assets and, except for some small solar operations in Western Massachusetts, these are the only generating plants in the Northeast Utilities stable of assets.
 
The generation assets of PSNH include ~1200 MW of generating capability, of which the Merrimack and Newington plants are the largest. The table below provides some more detail on PSNH's generating assets in New Hampshire.

 
These generating assets are listed at $1.1 billion on the NU balance sheet and, based on the overall depreciated value of all PSNH assets (which include generation, transmission and distribution), the depreciated or remaining value of these generating assets are of the order of $700 million. The bulk of this value seems to be the $421 million spent on the scrubber at the Merrimack plant a few years ago. It is this scrubber, and its associated costs, that feature heavily in the ongoing deregulation and PSNH debate here in NH and which we will take a look at in future posts.

Operating an investor-owned regulated utility like PSNH used to be an easier task. They had a monopoly to serve customers, and every time they made an investment, they could pass on the costs to the rate payers and earn a reliable and quite generous return for their investors. The challenge was that they had to think long term - sometimes thirty years out or more and they had to make large investments in infrastructure and, to make those investments, they had to raise money that then needed to be returned over the long term. Electrical utilities had long depreciation timelines as it was assumed that their monopoly position would continue. All that would be fine if the world did not change - but it has. There is now a wind in the wires* as economic thinking has changed, consumers demand choice and competition, fuel prices have shifted and regulations allowing competition have been introduced.
 
With these winds of change blowing through the wires, many integrated utilities with generation assets find themselves in competitive, instead of monopoly, generation markets, and with a great deal of non-depreciated capital on their books, as well as the obligation to service the long-term debt they incurred when they originally funded the investments. This, in turn, leads to the issue of stranded cost recovery, in which the utilities, having made their long-term investments, seek compensation for those investments when they cannot realize their anticipated returns due to regulatory changes. This is a very critical part of the present debate about PSNH and its generation assets and we will take a closer look at these issues in future posts.
  
In my next post, we will take a look at the very different world that the integrated electrical utility companies now face. In the meantime, be sure to turn off the lights when you leave the room - but keep in mind that every time you do, there is an electrical utility investor who will be unhappy that you did.

 
Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
10/6/13

(*Wind in the Wires – A dark tune about electricity from Patrick Wolf, a young UK artist who draws a lot of chamber music influences into his arrangements. If you are a Smiths or a The Cure fan, this will appeal to you. Don't forget to apply the black mascara beforehand.)

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

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

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

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

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

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

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

 

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

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

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

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

 

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

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

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
9/25/13


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


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Crossing Muddy Waters* - Trying to Understand Retail Propane Pricing - Propane in New Hampshire – Part 2



As a consequence of the upturn in natural gas recovery from shale gas deposits, a great deal of propane has been produced as a byproduct, so much so that the US is now exporting significant quantities of propane. However, here in New England we don't seem to be benefitting from this surge in propane production. In this week's post, I endeavor to understand why we pay so much for propane in New Hampshire. 



In my last post, Under Pressure, I presented some facts and figures about propane usage in New Hampshire. I pointed out that propane was a versatile fuel as it can be easily stored, it can be used for both heating and cooking and it is particularly useful in remote areas where there is no natural gas supply. I also presented data showing that propane usage in NH is higher than in the other New England states and that propane, on an energy output basis, is presently the most expensive fossil fuel in New Hampshire.

Before we dig into propane pricing, it is useful to understand the production, processing and distribution of propane. To do so, let's follow the fate of a propane molecule that is associated with a natural gas deposit down in Texas - as that is the origin of a lot of our propane supply here in New England. The raw natural gas drawn from a natural gas well can contain between 70 and 90% methane but also, depending on the deposit, between 0 and 20% of hydrocarbon gases like ethane, propane, butanes and sometimes longer hydrocarbon chain molecules, like pentanes and hexanes. There might also be 0 to 8% carbon dioxide, as much as 5% sulfur as hydrogen sulfide, some nitrogen and water, and a host of other minor level contaminants. The first processing step is the removal of any easily condensable material, like water and long-chain hydrocarbons. This is normally done close to the natural gas well. The gas is then pumped to a natural gas processing plant where sulfur, mercury, nitrogen, and carbon dioxide are removed. Our propane molecule is all the while being batted along these various separation processes following the methane.
 
The gas mixture is then subjected to a low temperature cryogenic process in which all the other hydrocarbons, like our propane molecule as well as natural gasoline, a mixture of pentanes and hexanes, isobutene, butane and ethane, are condensed into liquid, hence the term natural gas liquids or NGL. The methane gas, now free of the bulk of contaminants, is fed into a natural gas pipeline for storage or distribution. The mixed natural gas liquids, now known as Y grade, along with the propane molecule we are following, are then routed through a pipeline to the fractionation plant where the mixture is slowly warmed up and separated into various component fractions. First to be recovered is the natural gasoline fraction, followed by butane and isobutene and then, finally, propane and ethane are separated. Our propane molecule, along with the rest of the propane fraction, after the pummeling in the fractionation plant, is then pumped to large underground storage caverns in Mont Belvieu, Texas, which serves as the main distribution hub for propane throughout the country. Pricing of propane at the Mont Belvieu hub also serves as the basis for commodity pricing of propane used by energy traders in the US. As I mentioned in my previous post, propane is also a byproduct of the crude oil refining processes: propane from Gulf Coast crude oil refining operations can also be piped to and stored in the Mont Belvieu depot.
 
To make its way to New Hampshire, our propane molecule is then pumped across country in the Texas Eastern Transmission pipeline, known as TET, to distribution points in New York State. From there it is distributed to New England retailers in rail tanker cars or propane tanker trucks. Propane is then stored onsite at various propane retailers (see photo below) and from there it is transported by a smaller propane truck to be pumped into storage tanks at residences. Propane also makes its way into New England from East Coast petroleum refineries, natural gas operations in Pennsylvania, imports from Canada and, occasionally, waterborne imports from East and Gulf coast locations, or even Europe.

 
An illustrative diagram from the EIA, showing the flow of propane from well head to a home, is presented below.

There are two large propane storage terminals in New England. Both are located on the coast - one is in Providence, RI, and the other is in Newington, NH. Both are used to receive large shipments of waterborne propane but it is my understanding that these shipments are far and few in between at the moment as a result of low propane prices and the economics of waterborne propane shipments. In April this year, a plan to install a 22 million gallon propane storage facility in Searsport, Maine, was shelved due to local opposition and changing economic conditions in the propane business. The original intent of the project was to bolster propane storage for the State of Maine which was faced with a severe propane shortfall in the winter of 2007.

Let us now turn our attention to the matter of propane pricing. Presently propane is selling for $2.99/gallon for bulk residential delivery in NH but its price at the Mont Belvieu hub is $0.85/gallon. (Just last week, I filled my 5 gallon propane tank for my gas grill and it cost me $4/gallon.) I find these spreads between the commodity and retail prices very interesting, especially as we have to bear them. I want to understand how a product that costs less than $1/gallon in purified form at the main hub ends up costing us $4/gallon or higher. I find it useful to compare fossil fuel price spreads to those between crude oil and gasoline at the pump. Crude oil last week was about $106 per barrel (Brent pricing) and at 42 gallons per barrel, this calculates out to $2.53 per gallon of crude. Compare this to refined gasoline prices at the pump at $3.53 per gallon, which gives us a $1/gallon spread to cover refining, transportation, storage, taxes, marketing and a profit margin. Now I know this comparison of crude oil to refined gasoline at the pump is, at best, an approximation - as 1 gallon of crude does not necessarily lead to one gallon of gasoline but, for our purposes, it will suffice. The table below provides some spreads for hydrocarbon fuels and, even though these spreads are not exactly comparable, they provide a useful basis of comparison for the propane spread.

I have highlighted the propane ratio - which is on the low end at the moment. There are times, particularly in the high usage winter months, that this ratio will climb to 4.5 or as high as 5.
 
What are the reasons for these high spreads in propane prices? Why should propane cost more than 3.5 to 4.5 times its wholesale price at the hub - especially at a time when we are swimming in excess propane in the USA? In fact, we now have so much propane in the US as a result of the natural gas boom, that we are exporting large amounts of propane from the US.

It proved challenging to find someone in the NH propane industry to chat to me about these price issues. In every case, my calls to various propane dealers and even to the New England Propane Association went unanswered. I suppose one could generously assume that these folks were busy and simply did not have time to share with me the complexity of the propane business. Without an insider's understanding of the business, one is left with publically available information so here is what I know:  

• The propane industry is an unregulated industry and, as such, does not come under the purvey of the Public Utilities Commission.
• There are a large number of propane distributors in New Hampshire, ranging from small operations to larger ones.
• The Consumer Protection and Antitrust Bureau of the NH Attorney General's office receives approximately 30 propane-related complaints per year.
• The propane business is highly seasonal, with sales peaking in the winter months -see the figure below.

 

 
• Propane dealers have to hold inventories of propane through the slow summer months and they have to bear the carrying costs associated with their propane inventories throughout the year.
• There are various different types of retail propane contracts out there. Some dealers will lease a storage tank to a customer. However, should a customer want to change suppliers, they have to pay significant costs to have the leased tank emptied and removed. These high changeover costs can essentially "lock in" a customer, making it difficult to change propane suppliers. A better solution would seem to be to own one's own tank but this requires a big upfront investment and some propane dealers only service their own tanks. It would seem that propane users would be beholden to a regional group of propane dealers and some propane users have complained of being held "captive" by their propane dealers.
• Generally, there is little transparency in the propane market as it is not a regulated commodity like natural gas or electricity. As such, residential propane users are subject to the whims and fluctuations in their regional distribution markets which may make getting competitive prices challenging.
• Propane prices fluctuate considerably from dealer to dealer and direct comparisons are sometimes difficult. Sometimes quoted prices are "all-in" delivery prices and sometimes they exclude delivery charges and other miscellaneous charges that get tacked on, such as hazardous material handling fees. According to the folks at the NH Office of Energy Planning, OEP, the spread of propane prices can sometime vary as much as a $1/gallon across the State.

As I worked to understand more about the propane industry, local pricing started to perplex me, especially when I compared it to national pricing averages. Consider the following facts:

• Propane production has increased in the past few years due to the natural gas boom – see the chart below.

• Due to the surfeit of propane, prices are down. In fact, propane prices used to be tightly coupled to those of crude oil. For many years, the commodity price of propane, the Mont Belvieu hub price, would run at between 60 and 70% of that of crude oil. Now the relationship has broken down and propane commodity prices are averaging about 40% of crude oil prices. This is reflected in lower propane commodity prices during the past two years as shown in the figure below. Since the peak in June 2008, propane prices are now 54% lower. In fact, commodity propane prices are close to what they were in 2004.

And what of retail propane prices in NH? Retail propane prices are collected by a survey conducted by the NH OEP and are passed along to the Energy Information Agency, EIA, where the data are made available for access. However, pricing data are only collected during the heating season, from October to March, which is the reason for the annual gaps in the NH retail propane price data I have presented in the chart below.

As can be seen, we in NH seem to have been subjected to a steady increase in the price of propane since 2004 and prices this past heating season were 226%(!) higher than those in 2004. It is interesting - and puzzling at the same time - to try to understand why long-term retail propane pricing has not reflected longer term changes in the underlying commodity prices. As I have noted earlier in this blog, the residential propane business is a very seasonal one and the challenge for propane dealers is that the bulk of retail propane sales are made in the winter months. However, they seem to be able to compensate for this by generally pushing prices higher during each heating season.

Even though I write from a NH perspective, the reader should appreciate that NH is not being singled out regarding residential propane prices: similar variations in residential propane prices have been observed throughout the US. But, here in NH propane consumers feel them more acutely as NH residential propane prices are, on average, 19% higher than the national average. That 19% average is perhaps reflective of the fact that we are pretty far down the propane distribution chain and it takes a lot to get that propane from Mont Belvieu, Texas, all the way to NH. It should be noted that I determined the 19% figure by averaging the retail prices for the individual heating seasons for the US and for NH and then calculated the ratio of the NH average heating season retail prices to those of the overall US numbers. In the figure below you can see the results of these calculations. The premium of NH propane prices to those of the US average fluctuates from year to year around the 1.19 average line but it is rather notable that the premium associated with NH retail propane this past 2012/2013 heating season is way above the average and NH propane cost 30% more than the US average. This clearly shows that NH propane consumers are not benefitting from lower commodity prices. While the US is now awash in propane and is exporting it, propane users in NH would seem to be subject to the whims of an unregulated propane market.

There is clearly much I do not fully understand about pricing issues in the retail propane market but, when compared to other fossil fuel sources, it is certainly lacking in transparency. The retail propane market is like crossing muddy waters* - one looks down and wonders what lies below the surface. Perhaps the readers of this blog might know more.

Regardless, the data clearly indicate that propane premiums in NH are presently excessive, compared to historical averages, and it will be interesting to see if they come back into line during the next heating season. For propane consumers in NH, it could be an expensive experiment.

Until next time, fill up your propane tank to the brim during the summer and remember to turn the lights off when you leave the room.

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
8/16/13

(Crossing Muddy Waters* - A John Hiatt tune from a 2000 album with the same name. John Hiatt has always been one of my favorite singer songwriters and has been covered by dozens of artists including Bonnie Raitt, Bob Dylan, Keith Urban, Iggy Pop, etc. etc. He is worth discovering if you don't know his music. Enjoy Crossing Muddy Waters.)

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Under Pressure* - Propane in New Hampshire – Part 1

As I drive through New Hampshire, I have seen a good number of the distinctive white propane storage cylinders dotting the landscape next to homes and commercial buildings, in backyards or sometimes rusting in fields. I got the sense, which I later confirmed, that propane usage in NH is higher than other New England states and I decided to do some research on this fuel source and its usage.

Image: 'Propane tank' http://www.flickr.com/photos/10031227@N07/3745353765

Natural gas, which consists largely of methane, and propane are similar in some respects. They are both hydrocarbon gases and they are both odorless and colorless. The distinctive smell of propane and natural gas that we know is due to the odorant distributors are required to add to the gas for safety reasons. The odorant is normally a smelly sulfide compound, like ethanethiol in the case of propane.

Methane consists of a single carbon and four hydrogen atoms and propane has three carbons and 8 hydrogen atoms. The chemical structures of the various hydrocarbon gases one might find in natural gas and store-bought propane are shown below.

Both gases can be compressed for storage purposes but a particularly attractive feature of propane is that it can be readily converted to a liquid form by compressing the gas at moderate pressures. It is this easy conversion of propane gas into liquid form, enabling useful amounts to be stored on-site in steel storage tanks of various sizes, that makes it a versatile fuel. At 80^oF the pressure in a propane storage tank is about 150 pounds per square inch (psi) which is not much higher than the pressures in my road bike tires which I typically inflate to 110 psi with a bicycle pump. Natural gas can also be liquefied, but very low temperatures and higher pressures are involved.

Most of us are familiar with propane in its liquefied form in those 5 gallon propane tanks that many of us have attached to our backyard barbeques (unless you are a charcoal purist - which I used to be). Once condensed into a liquid, propane weighs quite a bit. In fact, a full 5 gallon tank of propane can contain almost 20 lbs of propane - which is why those little cylinders are so heavy once they are filled. The weight of the 5 gallon empty tank is about 20 lbs so a full tank weighs about 40 lbs. Liquid propane is readily converted back into a gaseous form simply by turning open the valve on the tanks and releasing the pressure.
 
Propane, like methane, is a clean-burning hydrocarbon gas with fewer harmful combustion products than oil or coal. The main emission products are carbon dioxide and water, but on a per energy unit basis, propane does release ~20% more carbon dioxide than natural gas. Out of all the carbon-based fuels, methane has the lowest amount of carbon released, per unit of energy released, which is the reason that carbon emissions in the US have dropped as we have moved from coal-fired to natural gas-fired electricity generation. The table below shows the carbon dioxide emissions per million BTUs produced by the combustion of different fossil fuels.

Other than backyard barbequing, propane has a host of other uses including petrochemical production, home heating and cooking, a fuel for industrial forklifts and extensive use in powering farm-based irrigation and refrigeration systems. It also has a growing importance, due to its portability and easy storage, as a back-up fuel for renewable energy systems such as solar power.
 
Some of the attractive features of propane include the following:

• High energy density once liquefied and available in many different storage sizes.
• Highly portable fuel.
• Bulk transportation by pipeline, rail car or tanker truck.
• Useful alternative to natural gas where natural gas pipelines are not available. It is often the fuel of choice in remote areas.
• Versatile home-based fuel that can be used for heating, hot water and cooking applications.
• Easy onsite storage and, if leaks occur, they do not contaminate the ground like oil.

To get an understanding of the propane business, it is helpful to know where propane comes from. Propane is a byproduct of the natural gas and oil business and it is not produced for its own sake. The byproduct nature of propane means that propane supply, and thus pricing, are highly dependent on oil refining output and natural gas supply. When natural gas is recovered from conventional or shale gas deposits, it is often accompanied by other hydrocarbon gases, such as ethane, propane, propylene and butanes. Natural gas that contains a lot of these other hydrocarbons is referred to as "wet" gas. These other gases are removed during the processing of natural gas, which serves to remove water, sulfur and other byproducts as well. The hydrocarbon gases are also separated into separate fractions - ethane, propane, butane, etc., - each of which has its own specific use. Propane is also a byproduct of the crude oil refining process, during which longer chain hydrocarbon molecules are cracked into shorter chain molecules such as propane, butane, pentane, etc.

Propane was first harvested and liquefied as a useful byproduct of oil refining which is why it is also sometimes called Liquid Petroleum Gas, or LPG. Because the propane we get is a byproduct of various gas separation processes, it does contain other components. The consumer grade we purchase is known as HD-5 (Heavy Duty – no more than 5% propylene) and it is required to contain over 90% propane, a maximum of 5% propylene and 5% ethane and butanes. It can also contain trace amounts of water and sulfur.
 
As with other energy forms, propane usage in New Hampshire has increased over time. Recent data indicate that over the 1960 to 2011 period, usage has increased 3.8% on a compounded annual basis, outstripping total NH energy use which grew by 2.4% over the same period. Even though growth in propane usage has been greater than that of general energy consumption, propane is a very small percentage of our total New Hampshire energy use: in 2011 it represented only 3.6% of the total consumption of energy in NH. So, in the larger scheme of things, some might view propane as unimportant, but for folks out in remote areas, without access to natural gas, it is very critical. The consumption figures for 2011 were 3.7 million barrels of propane, which is equivalent to 152 billion gallons (at 42 gallon/barrel) or 13.9 trillion BTU. The figure below shows the growth in NH propane consumption since 1960.

The following chart shows the 2011 annual consumption of propane in the New England States and it shows that my original hunch, that propane usage in NH was high, was correct.

However, if the numbers are adjusted to a per capita basis as I have done in the table below, it is Vermont and then New Hampshire that lead the pack on a per person basis. The state that uses the most propane overall is Texas, which is responsible for 60% of the US propane consumption. The reason for this high consumption is the large petrochemical industry in Texas and the bulk of propane consumption in Texas is for the production of petrochemicals used to produce plastics and other organic compounds.

Propane is a useful fuel but one of the biggest concerns associated with propane is its cost. In the table below, I show a listing of the costs of the various home energy sources we use in NH along with their recent energy prices. This is an update of one previously published in Closer to Home. Included in the table are the energy content per BTU/unit, the cost in $ per million BTU ($/MMBTU) and then, using energy conversion efficiency concepts for each fuel, I have calculated the cost of the useful energy produced from each type of energy, assuming the energy source is used for heating only.

It is easier to examine this information in graphical form and, to this end, I have generated the chart below which allows us to directly compare the costs of the input and useful heating output values for each of these fuel sources on a common basis, $ per million BTU. The chart tells us a lot but if we focus on propane which is right at the top of the chart, it is clear that at this time, propane is the most expensive fuel in the State on energy output basis. Presently, natural gas is by far the cheapest energy source in NH.

Like other energy sources, propane prices have risen over time as shown in the figure below and, for the most part, propane prices have moved in lock step with oil prices. The figure also clearly shows the decrease in natural gas prices since the large-scale advent of fracking technology in 2008 which is used to harvest natural gas from shale deposits. The tight relationship between propane and oil prices is somewhat explained by the fact that propane is a byproduct of oil production but propane is also a byproduct of natural gas drilling and there is presently a surfeit of propane due to all the natural gas we are harvesting. What's more, there is now so much propane being produced that we are now exporting propane from the US. New Englanders do not appear to have benefitted much from the increased supply of propane: that will be the topic of Part 2 of this blog where I will be looking at the supply, demand and pricing issues pertinent to propane usage in New England.

Many of us use propane at some time or another so a few safety comments about propane are appropriate. In terms of home usage, whether using a gas grill or for home heating, it is important to understand that propane is a highly combustible gas under pressure* and it is crucial to make sure that all the gas line fittings are tightly fastened and that there are no leaks. You can easily check for leaks using a soapy water solution and for those of you using propane for home heating and cooking, I would strongly recommend the installation of a combustible gas monitor in your home which can detect dangerous levels of methane and propane. If there is a propane leak you might be able to smell it, but sometimes, because propane is heavier than air, it can accumulate to dangerous levels in basements and trenches in or around your home where you might not be able to smell it. My advice is to back up your nose with technology. A home combustible gas detector unit only costs about $50 and is a wise investment. It will also work if you have natural gas in your home.

To wrap up this week's post, I thought I would cover a topic that is of great interest to all us home grillers. One of the great mysteries of gas grilling is how to determine how much propane is left in the propane cylinder and whether you will run out before all the hamburgers are grilled. Now, if you are like me, you have run out of propane when grilling on a Sunday evening when no refilling stations are open and you have had to endure dirty looks from your significant other and beer-fueled jibes from friends. Well, those days are over - there is an easy way to determine how much propane you have left. Simply weigh the cylinder on a regular bathroom scale and subtract the tare weight which you can find stamped on the top ring of the cylinder. The pictures below are of my propane cylinder just a few days ago. As you can see the weight of the cylinder is 28.5 lbs and the tare weight is 18lbs so my tank contained 10.5 lbs of propane – it was about half full.

The next thing to figure out is how much propane a grill will consume. Typically a home barbeque with all the burners running has a rating of about 40,000 BTU/hr. The BTU content of propane is 91,333 BTU/gal and, at 4.23 lbs propane per gallon, this is equivalent to 21,550 BTU/lb. This means that you should be able to grill for about 1 hour for every 2 lbs of propane you have in the propane tank. So, based on the photos above, I have enough in my tank to grill for about five hours. By the way, those pressure gauges that you can buy for propane tanks are pretty useless. Because propane is a liquefied gas, the vapor pressure is constant as long as there is propane in the tank. The pressure will only begin to drop when there is no longer any liquid in the tank and by then it might be too late and you are likely to run out of propane while grilling.

Until next time, don't run out of propane and remember to turn the lights off when you leave the room.

Mike Mooiman
Franklin Pierce University
mooimanm@franklinpierce.edu
7/14/13


(*Under Pressure – A big 1980s hit for Queen and David Bowie who put this song together while improvising in a recording studio in Montreux, Switzerland. It retains some of its improvisational roots in its "Um, boom, ba, bay.." type lyrics and its distinctive bass riff is something every bass player fools around with one time or another. It is easy to find this song on Youtube but here is an interesting version featuring Annie Lennox and David Bowie practicing for the Freddie Mercury tribute concert. David Bowie could not be more relaxed, singing and smoking at the same time.)

 

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