Overall, this is a big deal—and in more ways than one. The three big outstanding PSNH matters – the scrubber costs and recovery investigation, the sell-off of PSNH generating assets, and the investigation of PSNH ownership of generating assets on its default service customers are lumped together in a single settlement. It involves a lot of money, is complicated, and is likely to have an impact on all PSNH customers for a long, long time. A big deal indeed!
I have been
trying to understand this settlement and learn more. For a deal of this complexity,
I will remark that there is surprisingly little documentation: there is only the term sheet posted on the PUC website and a single press release. I have chatted to several people
trying to understand more. For a deal so important to NH, PSNH electricity rate
payers, and the New England electricity market, it certainly—at the moment—lacks
transparency. I hope that this will
improve over time.
So this is
what I know:
- The deal bundles the scrubber settlement, divestiture of generating assets, stranded cost recovery, and a bunch of other odds and ends into one agreement. In so doing, it completes the deregulation process that started in 1996.
- PSNH will take a $25 million haircut on the cost of the scrubber. To recap: the original deal was supposed to cost $250 million but, by the time it was done, it cost $422 million and PSNH was looking to electricity ratepayers to pick up the entire tab and to pay their ~10% return on the investment. PSNH had been partially successful in this regard and had negotiated to get ratepayers to start paying two-thirds of the costs. The $25 million in this deal is a discount of 15% on the cost overrun.
- From Jan 2016, PSNH’s default electricity customers will be paying the full amount of the scrubber (minus that $25 million) over 7 years, while allowing PSNH to earn their 9.67% regulated rate of return. This will continue until the generating assets are sold.
- However, since PSNH ratepayers have only been paying for 2/3 of the scrubber costs so far, the obligations and returns on the remaining one-third have been accumulating. The total in this account is now of the order of $105 million. Someone is going to have to pay for this in one way or another.
- The deal requires PSNH to sell their generating assets but the new owners will be obligated to keep the plants in service for at least 18 months. PSNH has several generating assets (shown in the table below) and some of the new owners will want to keep them running. Some of the hydro-generating plants have been running for close to 100 years and probably could do so for another 100. The coal-fired power plants are, however, another issue. In a low-priced natural gas market, their value is marginal: requiring the new owners to keep them running for 18 months after purchase when they may have only salvage value could further depress the price. Consider the table below, which presents data on the utilization of the PSNH plants. One has to question who would buy those plants and keep them running until they can be scrapped, redeveloped, or re-engineered to burn natural gas. They might have some value on the electrical-capacity market, but only time will tell. I don’t believe these old plants will be sold very easily or quickly – PSNH may even have to pay someone to take on those assets.
- According to a consultant report commissioned by the PUC, the differences in book value and the estimated market value for the various generating assets are as follows.
- The difference between the book value and actual market value is termed “stranded costs”, because this is the amount that PSNH invested in generating assets that they are now obligated, due to deregulation, to sell at loss. PSNH will also not earn a return on the stranded costs. By law, PSNH is eligible to recover these stranded costs from its ratepayers. In other words, PSNH is entitled to get a check for this amount that they can invest elsewhere to earn a return.
- We have the book value, $660 million, of PSNH assets. From this, we subtract the value that PSNH may realize from the sale of the assets, ~$225 million, as well as the $25 discount on the scrubber. This leaves us with approximately $410 million of stranded costs.
- The check for $410 million in stranded costs that must be paid to PSNH will be funded through a 15-year stranded costs securitization deal at a lower interest rate, which hopefully will be of the order of 3 to 4%. This is exactly like refinancing a mortgage on a home – instead of continuing to pay PSNH their 9.67% on the depreciating book value of their generating assets, PSNH ratepayers are going to pay someone else 4%. My post Walking on the Wild Side discusses securitization of stranded costs in more detail.
- My stranded costs calculations do not take into account the fact that PSNH had entered into some pretty sweet long-term deals with the Lempster wind-power plant and with the wood-burning operation at the converted Burgess paper mill in Berlin. According to a consultant report commissioned by the PUC, the market value of these deals is a negative $120 million (!). These costs could be bundled into the stranded costs calculation and increase the amount that will need to be funded.
- The odds and ends in this deal involve the setup of a $5 million renewable energy fund, another fund that will be used to compensate municipalities for the decline in property taxes that are sure to result from the decreased property valuations that will occur after the sale of the generating assets and some as-yet unquantified protections for union workers at the affected properties.
As I noted
earlier, this is a complicated, messy, and expensive deal, with long-term
obligations for PSNH ratepayers—but here is the rub. Ratepayers could get angry
and annoyed and royally ticked off. NH legislators could fight it and try to
renegotiate it and drag it out for the next few years, and then it will be
taken through the courts which will take a few more years. In the meantime, PSNH, as a regulated utility responsible for supplying default electricity to
their customers, will charge their customers for the scrubber and those aging
assets and coal plants. PSNH will be making money all the time while legislators
try to renegotiate the deal.
In meantime,
it is highly likely that interest rates will rise and the very low interest
rates that are currently available for refinancing will increase. Ratepayers will then have to pay more for the deal and—even though it might be viewed as unfair— the very
pragmatic approach is to pay PSNH a big chunk of change as soon as possible so
that NH can move along with deregulation. Some might view it as being in the utility’s best interest to drag along this process as long as possible but this is what happens when a process
is not completed –someone ends up paying.
There is
another concern to consider if this deal drags out. PSNH’s default electric
service rates this summer will most likely be above market rates, which could
promote migration to competitive suppliers. Such a process has the potential to
accelerate rapidly, leaving fewer and fewer PSNH customers on the hook for all
of PSNH’s costs associated with those generation plants. This will increase
prices for the remaining customers, which will promote more migration and
eventually the one remaining PSNH customer is going to be responsible for all
the PSNH costs. This so-called “death spiral” would create a crisis both for
PSNH and for NH because someone is going to have to pick up the tab. I am not
clear as to what the end game would be in this situation, but I do know that some
nasty legal battles will ensue and a lot of money would be wasted in the
process. There is clearly a price to be paid for dragging out this deal.
So what do
PSNH default electricity rate payers get out of the deal if it closes soon?
Well, they will have to pay PSNH for the stranded costs and enable PSNH to get
their full return on the scrubber until the Merrimack plant is sold. Over time, this deal should result in savings
for PSNH default electricity ratepayers because they will benefit from the
lower mortgage on those assets. They should also benefit from lower
default service rates going forward because all of PSNH electricity supply will
be sourced from the New England wholesale market. Various amounts have been
touted for these savings. The PSNH press release indicated savings of $300
million over the first five years of the deal. I plan to dig deeper into these
savings figures in a future blog.
However—and
this is a big However—this refinancing deal will only work if
all PSNH customers pick up the tab, i.e., all residential, commercial, and
industrial customers in the PSNH service areas, even if they buy their
electricity from a competitor. The deal will not work if just default
electrical service customers have to pay, because they can leave. Every time a
default customer leaves, the remaining customers must carry a larger piece
of the remaining costs. It is important that these charges cannot be bypassed. This
means all PSNH customers, and especially the industrial and commercial customers who buy their
electricity from other competitive suppliers, will be caught up in the payment
net and will see their rates increase. The essence of the settlement is that to
complete deregulation and to get the remaining PSNH default electricity service customers off the hook, all customers in the PSNH service areas are going to have to pay for the stranded cost recovery charges.
Here are
some of the questions I have been asked about the deal.
- Is this a good deal or a bad deal? – It all depends on your perspective and your level of pragmatism. Some may say “Hey, it's a deal”—which is better than no deal. Customers who migrated to competitive suppliers on the understanding that they would not be held responsible for the scrubber costs will now be gathered up in the net of payers. For large industrial and commercial customers, who feel the sting of high electricity prices acutely, this is going to be particularly painful. Their costs will rise and it will put them at a competitive disadvantage: some may even consider relocating to states with lower energy costs.
- What is the alternative? – We take the deal off the table and continue with the scrubber cost prudency review. If the outcome is that PSNH overspent on the scrubber and are entitled to a smaller recovery, you can be assured that a long-winded legal battle will ensue. Perhaps in this process, PSNH will take a larger haircut on the scrubber than the $25 million that they have presently agreed to. In the meantime, default service rate payers will continue to pick up the tab, their rates will rise, and more will leave PSNH for competitive suppliers, pushing PSNH closer to that death spiral. Some larger users of electricity might see some benefits from this, because it pushes the obligations and costs of having to contribute to stranded cost recovery out into the future but it could end up being a lot messier and expensive in the process.
- Does PSNH make out? – To a degree, but less than they were entitled to, as per the regulatory compact that we have with utilities and that they are entitled to by law. Monopolistic and regulated utilities are a necessary part of our energy infrastructure: this is the price we have to pay if we want the lights to turn on at a flick of a switch.
- Do PSNH default customers save money? – Yeah. They will be paying a lower interest rate on the assets and there will now be a larger group of PSNH customers helping to pick up the tab. Default electricity customers, mainly residential customers, should eventually see some rate relief.
- Will all PSNH customers and distribution and electricity supply customers pick up the tab? – Most probably.
- Is there a better deal out there? – I’m not sure, but I do know that it will take years to negotiate and that, in the meantime, PSNH will continue to earn a return on the book value of their generating assets. Default electricity service customers pay above market rates and increasing migration could cause a crisis. Bear in mind that there are some looming environmental mandates out there, such as the EPA requirement for cooling towers at the Merrimack plant, which will further burden rate payers.
Some have
characterized this deal as “suck it up, pay up and move on”. This might be a
harsh characterization and, even though I do not have horse in this race, it
might well be time for some well-considered pragmatism. This situation is a
mess due to the stop/start approach to deregulation, poorly crafted
legislation, lack of oversight and transparency on the scrubber costs, and some
bruising utility related legal battles in the past in which the State of NH has not come out
well. Indeed, there is plenty of blame to go around but, at this stage, I am
not sure what is gained from digging up old graves and beating on the remains.
Perhaps it is time to buy the expensive headstone, agree to pay for fresh
flowers every month for the next 15 years, and put this matter to rest.
When
thinking about this deal, the words of the late great Robert Johnson, the blues
guitarist, in his song “Last Fair Deal Gone Down”*, come to mind:
Ida Belle, don't cry this time
Ida Belle, don't cry this time
If you cry about a nickel, you'll die about a dime
She wouldn't cry, but your money won't mine
Ida Belle, don't cry this time
If you cry about a nickel, you'll die about a dime
She wouldn't cry, but your money won't mine
Until next time, remember
to turn off the lights when you leave the room.
Mike
Mooiman
Franklin Pierce University
Franklin Pierce University
mooimanm@franklinpierce.edu
4/26/2015
4/26/2015
(*Last Fair Deal Gone Down: A tune by the great blues guitarist
Robert Johnson covered here by Eric Clapton on his 2004 Me and Mr. Johnson album.)
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