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

Gimme Some Money* – The PSNH Divestiture Settlement Deal - Part 2

In my last post, I covered some of the details regarding the PSNH/Eversouce divestiture deal that rolls the three big outstanding PSNH matters – the scrubber costs and recovery investigation, the sell-off of PSNH generating assets, and the impact  of PSNH’s ownership of generating assets on its default service customers – into a single settlement. Legislation related to the deal, in the form of Senate Bill 221, made its way through the NH General Court.  This Bill is not an approval of the deal but does permit the securitization of stranded costs to take place once the PSNH electricity-generating assets have been sold. The details of the settlement have been outlined in the agreement between the State negotiating team and PSNH but it will be up to the NH Public Utilities Commission to finalize all the details and to figure out who will pay what and when.

In Last Fair Deal Gone Down, I laid out my general understanding of the big issues at stake in this complex deal. However, I have a particular interest in the numbers and where the various piles of money will end up once this particular money tree gets shaken. As is usual with utility rate cases, when the numbers are spread out over billions of units of electricity, kilowatt hours (kWh), they don’t seem so bad but, when the absolute dollar amounts are calculated, they can be staggering. In utility cases there are two sets of numbers that need to be tracked: the total dollar amount and then that amount divided by the number of kWh. Both are important and both are relevant.

Let’s start with some of the big kWh numbers.

According to the  PSNH customer migration reports, there were approximately 390,000 customers getting their electricity supplied through PSNH’s default electricity supply service in 2014. The total amount of electricity supplied through this service in 2014 was ~3.8 billion kWh. This means that the average amount of electricity consumed by each customer was 9800 kWh/year or 810 kWh/month. These so-called default-service (DS) customers are largely residential in nature along with a few smaller industrial and commercial customers.

However, PSNH also has another set of customers. These customers purchase their electricity from competitive suppliers but that electricity still has be delivered over PSNH’s transmission and distribution lines. This pool of transmission and distribution customers is larger because it includes the DS customers. There are some 504,000 transmission and distribution (T&D) service customers and, in 2014, the total amount of electricity transmitted through the PSNH lines was ~7.9 billion kWh. This means that 52% of the electricity transmitted by PSNH was supplied by their competitors. These non-DS customers are largely the big commercial and industrial users of electricity, however it is notable that ~20% of residential customers buy their electricity from competitive suppliers. Graphically, the two sets of customers appear as follows:

Now that we have a sense of PSNH’s two customer pools, let’s turn to the big piles of money that are involved in this deal.  Bear in mind that these numbers are approximate only and they will change as the calculations are refined. They are also very dependent on the exact timing of the approval and completion of the deal, the final sales price for PSNH’s generating assets, as well as when the sale of the generating assets actually takes place.

These are the big piles of money:

1.  Lower DS Rates: Let’s start with the good news. The whole point of deregulation is to provide utility customers with access to lower cost electricity that should result from a competitive market. Generally speaking, default service rates from utilities that access electricity supply from the competitive wholesale markets in NE have been lower, as shown in the chart below.
   
   The other NH utilities—Liberty, New Hampshire Electricity Cooperative, and Unitil—completed their deregulation activities a while ago and sold off their generating assets. As can be noted from the chart above, their rates, in general, have been about 20% or 2 cents/kWh lower than the PSNH rates. This has not always been the case because competitive markets are subject to supply constraints and growing demand. As a consequence, prices can increase and sometimes quite sharply. We saw this just this past winter when the rates for these three deregulated utilities shot up above the PSNH rate. Going back to the historical savings of 2 cents/kWh, the hope is that, going forward, PSNH DS customers will benefit from these savings. If this is indeed the case, then this 2 cents/kWh savings multiplied by the 3.8 billion kWh of electricity sold to DS customers every year would result in annual savings of $76 million. This would end up in the pockets of DS service customers only. A nice chunk of change—but not at all guaranteed because this is very much subject to the constraints of the New England wholesale electricity market which, in turn, is held in check by natural gas supply and pricing. As mutual fund and investment gurus continually remind us, “Past performance is not an indicator of future results.”
2. Stranded costs: This is the difference between the book value of PSNH assets and their eventual sale price. This is estimated to be of the order of ~$400 million. PSNH will get a check for this amount which will be funded by the issuance of rate reduction bonds (see Walking on the Wild Side) – which is the purpose of Senate Bill 221. In other words, PSNH customers—including those buying from competitive suppliers—will end up borrowing money at market rates, hopefully at about 4%, to pay PSNH for these stranded costs. PSNH customers will be on the hook for these costs for the next 15 years. The $400 million borrowed at 4% over 15 years will result in an annual cost of $35 million. Spread over the 7.9 billion kWh of electricity delivered to all PSNH customers annually, this will result in an increased cost to both DS and non-DS customers of about 0.44 cents/kWh.                                                                          
3.  Deferred payments on the scrubber returns: The scrubber went into service in 2011. It was estimated then that the payments to PSNH to cover their operations and maintenance (O&M) costs as well as their return on the scrubber should have been ~$65 million per year. This cost would typically have been recovered through DS rates. However, as I have noted in previous posts, the scrubber costs have been controversial and a prudency review was initiated to investigate the cause of the cost overruns. In the meantime, an agreement was negotiated that allowed PSNH to recover 2/3 of the scrubber-related costs. These were built into the DS rates. PSNH has therefore not been collecting their full costs and return on the scrubber and that unpaid amount has been accumulating. By the end of this year, it will have grown to about $140 million. Per the proposed PSNH deal, these costs will be recovered from all PSNH customers over seven years. The annual cost is $20 million ($140 million/7 years) which, spread over the 7.9 billion kWh of electricity delivered to all PSNH customers, will result in an additional  0.25 cents/kWh for all PSNH customers. This amount will likely change as starting in January 2016, all scrubber costs, including the deferred amounts will go into the DS rates, until such time divestiture is complete.
4. Power purchase agreements:  PSNH has long-term power purchase agreements (PPAs) for renewable energy with the Lempster wind project, owned by Iberdrola, and the converted Berlin paper mill that was turned into a large wood-burning electricity generator, Burgess Biopower, that need to be honored as part of the deal. The costs will be picked up PSNH customers. The consultant report commissioned by the PUC estimated that the Lempster PPA is contracted at close to market prices and there $5 million gain to PSNH if it were sold. The Burgess Biopower PPA, however, is an entirely different matter. The consultants have estimated that, if this agreement were sold, PSSH would have to pay the acquirer ~$125 million to compensate for the above-market prices. The costs for these PPAs are likely to be paid by all PSNH customers. These costs are estimated to be of the order of $10 million per year, which, when divided by the 7.9 billion kWh supplied to DS customers, results in a further cost of 0.13 cents/kWh. The annual costs will vary depending to market prices for electricity and renewable energy credits and could be higher.                                                      
5. Two-year moratorium on T&D Rate Increases. As part of the deal  PSNH agreed to hold off on annual increases in their T&D rates for two years (except for reliability enhancement projects). This should result in an annual savings of $35 million, which is equivalent to 0.44 cents/kWh for all PSNH customers but just for two years.

All these savings and costs are summarized in the table below. The grey columns show the total savings or costs and how they will be spread between DS and non-DS customers. The green-highlighted columns show the costs in cents per kWh after dividing by the annual kWh in each customer pool.

It should be noted that my numbers differ somewhat from those that have been published in press releases. In the original press release, a savings of $300 million over five years was touted for DS customers. My calculations shows a savings to DS customers of  $273 million over five years – most likely because I used a higher interest rate for securitization. My estimate is that over the 15-year life of securitization, the savings to DS customers could be over $800 million dollars, but—and this is important—this is based on, as I noted earlier, a very squishy DS savings of $80 million per year.

This might all seem well and good for DS customers, however, it needs to be appreciated that these savings are occurring on the backs of the PSNH customers that are presently getting their electricity supply from competitive suppliers. These non-DS customers will not realize any savings – they will only pick up costs, as shown in the table above.  I have calculated that this will cost them about $128 million over the first five years and $373 million over the 15 years of the securitization. When you look at these numbers, it is clear why the large industrial electricity users who migrated to competitive suppliers many years ago are not at all impressed with this deal.

So there you have my understanding of where and how the big piles of money will end up in this deal. A lot of details need to be worked out and there is still much discussion and negotiation underway to determine how the various costs will be allocated between DS and non-DS customers. One of the proposals under consideration is that the DS customers will pick up a larger portion of the securitization costs.

This deal is a complicated matter but it seems to provide more certainty than the alternative which is not proceeding with divestiture. However, the time aspect of this deal cannot be overstated. The longer this is dragged out, the more expensive and more complicated it will become: interest rates will go up, the accumulation in the deferred scrubber cost account will increase, and costs will generally increase. Timely resolution would seem to be the prudent course of action.

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

Mike Mooiman
Franklin Pierce University

mooimanm@franklinpierce.edu
6/8/2015

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(*Gimme Some Money – A tune from one of my favorite rock movies “This is Spinal Tap”, the mockumentary of the fictional Spinal Tap rock group. Some great tunes in this movie and the famous Stonehenge scene still makes me chuckle. Gimme Some Money features The Thamesmen appearing on British TV, a la early Beatles and Stones. Enjoy and Go Nigel Go!) 

Last Fair Deal Gone Down* – The PSNH Divestiture Settlement Deal

It has been some time since my last blog but I have been out and about, immersing myself in the solar energy field and working on combined heat and power consulting projects. There is an awful lot happening in the NH energy field – there are natural gas pipeline routing issues, there are grabs for renewable energy fund money to balance budgets, and there is the recently announced PSNH divestiture deal. In this blog, I am going to focus on the PSNH deal as I have written quite a bit about this topic in the past. (I know that PSNH and its parent company have been rebranded under the new name “Eversource” but I will continue to use the “PSNH” terminology as it is still useful.)

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

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

Mike Mooiman
Franklin Pierce University

mooimanm@franklinpierce.edu
4/26/2015

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(*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.)

Jumping Jack Gas* – Natural Gas in NH – Part 1

In this post I start a series which looks at natural gas from a New Hampshire perspective, but, as we will learn, we do not stand alone in NH as a natural gas consumer. Natural gas is very much a regional issue, and natural gas supply and consumption can, like electricity, only really be understood from a regional perspective.

Let’s start right away by looking at the history of natural gas consumption in New Hampshire, shown in the chart below. The first thing we note is that that natural gas consumption was relatively low and growing only slowly until 2003 when there was an enormous leap in consumption.

Data Source: EIA

This big increase in NH natural gas consumption was created by the commissioning, at the end of 2002, of the two combined-cycle natural gas combustion turbines at the then new Newington Power Facility. These turbines have a combined capacity of 525 MW and run exclusively on natural gas. This generation operation is owned by Essential Power (formerly known as North American Energy Alliance) which owns a number of other natural gas burning plants. Essential Power itself is owned by Industry Funds Management (IFM) which is a global investment fund held by 30 pension funds. [The Newington Power Facility should not be confused with the similarly named and nearby Newington Station owned by Public Service of New Hampshire, PSNH. The PSNH plant is a much older plant, put into service in 1976, and is a flexible operation that can burn oil or natural gas. This operation is rated at 406 MW capacity, its equipment is old and inefficient by modern standards, and it is used for peaking needs, i.e., it is only fired up when demand for electricity is high and prices are high.] 

As can be noted from chart, other uses of natural gas, such as industrial applications or home and commercial heating, rose slightly from 1980 but have fallen off since the early 2000s. The decline in residential natural gas consumption since 2005, shown below, took me by surprise. I had assumed that with the decrease in natural gas prices, especially when compared to that of home heating oil over the same period, droves of people would have signed up for natural gas and that residential consumption would have increased. In fact, it turns out that the number of natural gas customers did increase from 2005 to 2012 but the increase was small. The number of customers rose by 5.8% from 94,466 to 99,940.  The fall-off in residential natural gas consumption during this period is more likely a reflection of the decade-long warming trend that I highlighted in Crude Oil Blues. I anticipate that the cold winter we are presently enduring here in New England will boost the residential natural gas consumption numbers.

Data Source: EIA

Natural gas is important to us here in New Hampshire for industrial usage and residential and commercial heating but the tail that is wagging the NH natural gas dog is electricity generation. When we talk about electricity generation and natural gas consumption, we really need to think regionally: in truth, this is what we need to do with all energy matters. New Hampshire (as much as the independent Yankee folks up here might like it to be so) is not an energy island. It has few natural energy resources, except for a little hydro, some wind and wood, as well as a slowly growing amount of solar, so we need to think regionally in terms of energy imports and exports as well as our own consumption.

Before we jump into the complexities of regional natural issues, which I will tackle in future posts, let’s take some time to better acquaint ourselves with natural gas.

Natural gas consists largely of methane which is the simplest of the hydrocarbon fuel molecules. Methane is built from one carbon and four hydrogen atoms. Natural gas also contains varying amounts of other hydrocarbons, such as those in the figure below.

Natural gas is produced by the biological decay of vegetation and waste under anaerobic conditions (i.e., in the absence of oxygen or air). It is recovered from natural gas wells, it is often associated with crude oil, and it is found in coal seams. In the US, we have, in the past decade, been able to release vast quantities from shale gas deposits by horizontal drilling and fracturing shale deposits deep underground.

When natural gas is pumped up from underground deposits it is pretty dirty and a good amount of cleanup is required before it can be transported in a pipeline. 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 which contains a lot of these other hydrocarbons is referred to as "wet" gas. These other gases are removed during processing, which also removes water, sulfur, mercury, and other byproducts from the natural gas. The hydrocarbon gases are also separated into natural gas liquid (NGL) fractions, such as ethane, propane, butane, etc., each of which has its own specific use. As noted in Under Pressure, this is the source of much of the propane we use.

The composition of natural gas delivered to consumers therefore varies, depending on its source and the processing it has been through. Typical compositions are shown below.

Source: Union Gas

The most attractive feature of natural gas is that it is clean burning with fewer harmful combustion products than oil or coal. The main emissions are carbon dioxide and water. Of all the carbon-based fuels, methane has the lowest amount of carbon released, per unit of energy released. This is the reason that carbon emissions in the US have dropped as we have shifted 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. The emissions of natural gas are almost half of those of coal.

Source:EIA

Natural gas is odorless and colorless. Its distinctive smell is due to the odorant that distributors are required to add to the gas for safety reasons. The odorant is normally a smelly sulfide compound, a mercaptan, that smells like rotten eggs: if you smell it, it means that you have a gas leak—you should leave the area and call the gas utility right away. Natural gas explosions, although rare, can have devastating consequences, causing loss of life and enormous property damage.

Natural gas is normally transported across the country by pipeline. These steel pipelines are 20 to 42 inches in diameter and buried underground along 100 ft rights of way. The gas flows at a rate of about 30 mph. The pressures range from 200 to 1500 psi and regular compressor stations maintain the pressure along the pipeline routes The natural gas is directed to distribution points where it passes through a gate station. Here it becomes the responsibility of the local distribution company that then drops the pressure, adds the odorant, and directs the gas to homes and business through a smaller diameter and lower pressure natural gas grid. Service lines bringing the gas directly into homes or businesses, through a gas meter, tap into this distribution grid. These service lines can be smaller diameter plastic pipes in which the gas pressure can range from 0.25 to 200 psi, depending on the amount of gas needed by the customer.  

Similar to electricity, there are three main components to the natural gas business. The generation/production side is carried out by natural gas companies who explore for, drill, pump, and treat the gas before it is fed into a pipeline. The transmission part of the business is the large network of natural gas transmission pipes and underground storage caverns across the country. The distribution network is the responsibility of the local distribution company (LDC).

The LDCs have a franchise for a specific area and, because they are monopolies, are regulated by the Public Utilities Commissions. Like electricity in deregulated markets, supply of natural gas is separate from distribution, so if you are able to buy your gas from a competitive supplier, it will have to be transported through the distribution pipeline of the LDC. In New Hampshire, we only have partial natural gas deregulation. Large industrial and commercial customers can purchase natural gas from competitive suppliers but residential natural gas users don’t have a choice and have to purchase their gas from the LDC.

Natural gas has different units to those of the other energy industries, such as electricity or oil. The basic unit of natural gas is a cubic foot of gas which has an energy content of 1027 BTU. This is not a great deal of energy. By comparison, a cubic foot of home heating oil (~7.5 gallons) would have about 1 million BTU. Because the energy content of a cubic foot of gas is so low, we normally talk in terms of hundreds of cubic feet or millions of cubic feet. Also, because a cubic foot of gas has an energy content of approximately 1000 BTU, we often talk about millions of BTU (MMBTU) when discussing natural gas and assume that 1 million BTU (1 MMBTU) of energy  is approximately equal to 1000 cubic feet of natural gas. Returning to the first chart in the post, we note that NH natural gas consumption in 2012 was just over 70,000 MMBTU or approx. 70 million cubic feet.

 A useful set of conversions is provided by the American Gas Association (AGA).

Most home owners pay for natural gas in terms of the heat content measured as therms. One therm is equivalent to 100,000 BTU or approximately 100 cubic feet. The AGA also notes that  193 cubic feet or ~2 therms is enough to meet the daily heating, hot water, and cooking needs for an average US home using natural gas. A few points are noteworthy on the natural gas bill for a NH resident, shown below.

There are three main components to the bill: 1) A minimum service charge; 2) a distribution charge; and 3) a fuel charge. Natural gas is metered into a home in hundreds of cubic feet but is charged in therms. . The conversion from cubic feet to therms involves multiplying by a therm factor (Note 4 in the figure above), in this case 1.035. I noted previously that a cubic foot of natural gas contains 1027 BTU, but this is an average which leads to 1.027 therms per 100 cubic foot. However, the actual BTU content of natural gas is very dependent on the amounts of the other hydrocarbon gases in the natural gas. The higher hydrocarbon gases have a higher heat values, so if the natural gas contains higher amounts of these, the therm factor will be higher than 1.027.

The chart below shows the 13-year fluctuation of retail natural gas prices, courtesy of the NH Office of Energy and Planning. Over this period, there has been considerable price fluctuation, ranging from a low of $0.71 in Oct 2002 to a high of $1.75 per therm in Oct 2008. In fact, as I have highlighted on the chart, at the start of 2013 natural gas prices were relatively low at $0.82 but there has since been a substantial increase, with recent prices getting close to $1.45 per therm. Prices in March are even higher at $1.60 per therm. These Jumping Jack Gas* price increases have been driven by increases in commodity gas prices, which, in turn, have been driven by the increased demand we have experienced due to this very cold winter. We will look more closely at natural gas prices in future blogs.

In my next post, I will take a look at regional natural gas issues and particularly at how it makes its way into New England through the natural gas pipeline network.

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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(*Jumping Jack Gas - A play on the famous Rolling Stones’ tune, Jumping Jack Flash, with the classic line that most of us have lip synced to at one time or another, “Jumping Jack Flash, it’s a gas, gas, gas.” I am a cover tune fan, so enjoy a great but short version of the tune by the frenetic Tina Turner, rocking it out as only she can)

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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