The Anteroom

Policy Summary: HB 1602, An Act Relative to the Divestiture of PSNH Generation Assets

Prepared by the The NH Independent Energy Council and EmpowerNH


Background

Public Service of New Hampshire (PSNH) is the only electric utility in the country that owns power plants but whose customers have the full right to leave and purchase electricity from retail suppliers. The intent of New Hampshire’s original 1996 electricity restructuring law was to require PSNH to divest its generation resources. However, this changed when a 2003 law was enacted to allow PSNH to retain its generation assets and keep its customers financially responsible for those power plants.

Over time, the customer base that was in place in 2003 to support the cost of PSNH’s aging fleet of power plants has diminished, as about half of PSNH’s electric load is now supplied by third-party independent energy suppliers. The pace of this migration has accelerated as the growing costs of PSNH power plants have resulted in PSNH’s retail power being priced above the market and a growing number of customers have chosen lower competitive retail price offerings. As fewer customers are available to absorb the cost of PSNH’s inefficient generation, the prices will increase for those who remain, leading to even more customers leaving. This situation has been referred to as the “death spiral.”

Nearly all of PSNH’s large commercial customers meet their electricity needs with competitive suppliers; more than half of mid-size commercial customers are also purchasing from competitive suppliers, and of the 420,000 residential customers in the service area, about 100,000 have chosen to purchase their power from competitive suppliers.

As two companion NH Public Utilities Commission (PUC) staff reports have highlighted, PSNH’s fleet of mostly older fossil fuel plants is typically much more expensive than supply purchased in the wholesale electricity market. It has become common for these plants to operate only one third of the year or less, and for the company to buy wholesale power in the market to serve its remaining customers. However, because of the legacy rate-base system that compensates PSNH for its plants with full cost recovery and a guaranteed rate of return, the remaining 300,000 PSNH customers must pay the costs of maintaining and operating these power plants even when they do not operate.

There is no question that New England energy markets are in a time of transition. As more natural gas infrastructure is developed to meet growing gas demand, some power plants are retiring and being replaced by new investments. The regional market operator and entity responsible for electric reliability, ISO New England, is in the midst of market improvements to ensure that consumers continue to pay the most competitive price for reliable and environmentally-responsible power supplies. Divesting the remaining PSNH rate-base power plants is not a move to change the electricity fuel mix for New Hampshire, nor will it impact reliability. It is simply a question of finally ensuring that all consumers in New Hampshire can benefit from a competitive marketplace, and ending guaranteed cost recovery and profits for utility generation.


PUC Response

In recent months, the PUC staff has issued two reports that examined the risks associated with PSNH’s continued ownership of the generation plants from the viewpoint of the overall economic benefit to customers. The first report, issued in June of 2013, detailed the emergence of this problem; the second report, issued in April of 2014, took a hard look at the value of PSNH’s power plants and explored the consumer impacts associated with the most obvious solution: compelling PSNH to sell (or “divest”) its power plants to one or more new operators. By removing the ongoing risk to PSNH customers, this process would lead to a system where consumer needs would be met through wholesale purchases in the open market, in exactly the same manner as customers of other utilities in New Hampshire (Unitil and Liberty Utilities) obtain their power.

The PUC reports addressed how the PUC’s authority to pursue the divestiture option is unclear: some take the view that under current law only PSNH itself can initiate such a step.

However, because PSNH has a strong commercial interest in the plants staying in the rate base, which entitles PSNH to all its costs and guaranteed returns (or profit) of as much as $80 million per year (assuming the PUC fully allows the scrubber into rates), it can be concluded that an independent source such as the PUC should address the issue. This state law problem was addressed in the PUC report, and corrective legislation was suggested.


Legislation

HB 1602 takes several measured steps to address this emerging set of problems. While some called for HB 1602 to directly order divestiture, the bill instead would advance the issue to the PUC, which would conduct a detailed economic analysis in a public proceeding. Specifically, the bill clarifies that the PUC has the same authority to authorize the sale of PSNH generating plants that it has for the other utilities in the state. In addition, the bill would authorize the PUC to undertake a regulatory proceeding to determine if divestiture is the economic interest of PSNH customers.

If passed, HB 1602 will ensure that the PUC proceeding would undertake a comprehensive review of the problem to examine the benefits of divestiture, evaluate the risks of continuing the status quo, and consider any other solutions that might be offered by interested parties. Much of the testimony during the public hearings on HB 1602 recommended that these questions be examined at the PUC, as it is the proper regulatory agency with the tools to consider evidence and reach an objective decision. In fact, PSNH supported this approach and did not oppose the bill.


FAQs


What happens if the current situation continues and HB 1602 is not enacted?

As the PUC staff reports point out, the current system is simply unsustainable. With customers migrating away from PSNH and the continued increasing costs of PSNH’s rate-base generation, the state faces two options: divest the power plants or provide tax payer or ratepayer subsidies to PSNH through a non-by passable charge on all consumers for out-of-market cost recovery. The first option, divestiture, ensures that the costs already incurred to maintain and operate these plants are the last ones that consumers will be at risk for. Should any further investments be needed, such as installing cooling water towers or other environmental upgrades, those costs would be borne by the new plant owner, just as they are at nearly every other plant in New England.[i]  Divestiture also guarantees that even customers who choose to remain PSNH default service customers can receive competitive electricity prices, just as the standard offer service customers of Unitil and Liberty Utilities enjoy.

The second option, a non-by passable charge, simply addresses the symptom and not the illness. The unsustainable market structure that drives higher risks and higher costs for consumers will continue. Setting a precedent that those who chose to leave a failing system are responsible for its short sighted choices is not a good choice overall.


Is the region too dependent on natural gas plants?

Natural gas has become the dominant fuel to generate electricity in New England because it has been cost-effective to meet consumer demand while meeting state and federal environmental regulations. In 2013 about 46% of New England’s electricity generation came from natural gas plants. A substantial portion of the region’s generation potential still comes from non-gas units, including oil, nuclear, and renewable power plants. This diversity has helped provide reliability, as was demonstrated this past winter.

Five interstate gas pipelines serve New England and two modern, combined cycle gas plants are located in New Hampshire (Granite Ridge Energy in Londonderry and Essential Power in Newington). There has been recognition that additional investments in fuel supply can help further support reliability and economic development. In response to the current market signals, four major natural gas pipeline expansions have been proposed and are at various stages of development.


How will a new structure protect ratepayers for wild swings in the market?

PSNH default customers who choose not to switch to alternative suppliers will finally be provided fully competitive electricity prices. This ensures that, like the customers for Unitil and Liberty Utilities, their electricity prices will be determined by the outcome of periodic competitive auctions for fixed-rate market power, not by obligations to provide guaranteed cost recovery for risky infrastructure projects like the Merrimack Station scrubber or guaranteed profits. For example, the PUC could oversee a series of staggered annual electricity auctions for portions of consumer demand, so that no single year’s price movements will cause rate shocks for consumers.

More generally, in the wholesale electricity market, infrastructure investments will now be determined and recovered through competitive market signals. New England has enjoyed years of low and stable wholesale prices due to an excess of generation in the region. As plants retire and prices rise (due to basic supply demand economics), a signal is sent to the marketplace for new investment to occur. This situation is being borne out today with the regional price signals from this winter and the wholesale capacity market (a forward market designed to ensure reliability three years into the future) stimulating substantial interest by investors. ISO New England recently documented this fact, noting that more than 10,000 MW of new generation has expressed an interest in participating in the next forward capacity auction to come on line by June 2018.[1]

As the market responds to investment signals and new supply is brought online, power and capacity prices will moderate and price volatility will decline. Most importantly, these investments are done without guarantees from consumers and without putting customers at risk due to over-budget or behind-schedule infrastructure projects. The markets have worked in New England for over a decade and are responding to today’s signals.


Haven’t PSNH power plants saved ratepayers money this winter?

The claim of PSNH plants having saved ratepayers money this winter is an apples to oranges comparison that is misleading at best. Those who have suggested this sometimes talk about a $115 million or even $200 million benefit of having purchased power from these plants this winter. In fact, that analysis is based on the theory that if these plants were not used, and PSNH purchased power instead on the daily spot market to serve its customer obligations, it would have cost millions of dollars more to do so.

This comparison is not accurate, as a daily purchase plan by PSNH would never have been allowed by the PUC. Rather, if the PSNH power plants were not used, PSNH would have done what the other utilities in NH do: gone out to bid in the wholesale market for a power provider who would sell power at a fixed rate. Unitil and Liberty Utilities used this approach this winter, and in fact their prices are now lower than PSNH. In fact, Liberty Utilities’ prices were lower than PSNH throughout the winter and are now almost 25% lower than PSNH’s proposed rate for the second half of 2014.

There were a certain number of winter days when power prices in the day-ahead bidding were high enough that PSNH’s plants did not lose money when they operated. Thus, it might be more accurate to suggest that the plants were not as uneconomic this winter as they have been in past winters, as they are in each of the other three seasons, and will continue to be in the future.


Will the sale of PSNH power plants hurt the supply issue so often talked about?

The divestiture of PSNH power plants will most likely involve a sale to a new owner who will operate the plants as part of their portfolio of power plants, or to a PSNH-affiliated entity (spin off). While there is sometimes confusion between divestiture and the straight-out retirement of a power plant, HB 1602 only deals with transfer of ownership. An important factor the PUC will consider will be continued operation of the plants when an auction is conducted.

ISO New England is the regional authority that operates the New England power system and market. It is tasked with protecting the reliability of the system and has a variety of tools at its disposal to ensure the region has enough capacity to meet our energy needs. A process called delisting takes place when power plants determine if it is economically viable to continue to run and involves the ISO determination as to whether retiring a plant would harm the reliability of the electric system.


Will anyone buy the power plants?

Each year, many of the region’s 350 power plants are bought and sold by major energy companies both inside and outside of the region. We can expect that if PSNH power plants were put on the market, there would be interest in the plants. The PUC will likely retain an experienced firm to conduct the auction and maximize the value for ratepayers. The sales strategy will likely allow for the fleet of plants and contracts to be purchased as a group, or for individual assets to be offered separately. Ultimately, the question of buyer interest will be resolved through an actual auction.

In a PUC staff analysis of the value of the PSNH assets, it was suggested that one method of divestiture of the power plants would be for PSNH or its parent company, Northeast Utilities, to set up an unregulated affiliate, much as other companies around the country have, and to have that new entity bid in the auction. While PSNH initially declined this opportunity, the process would still allow for this structure.


How does the issue of the scrubber on Merrimack Station affect this situation?

Legislation was passed in 2006 that authorized PSNH to install a mercury scrubber on the Merrimack Station coal plant in Bow. At the time, the plant was emitting mercury pollution in to the air in substantial quantities. Rather than close the nearly 50-year-old power plant, New Hampshire’s Department of Environmental Service (DES) and PSNH crafted a plan that would allow PSNH to spend what was at the time estimated to be $250 million on a scrubber to clean up emissions from the power plant. The $250 million, plus a 10% PSNH profit on the investment, would be collected from PSNH’s default service ratepayers as part of their energy service charge. As the project advanced, but before major construction began, it was learned that the cost was greatly under-estimated and the real price would be nearly $450 million. Meanwhile, regional natural gas prices began to drop dramatically, raising serious questions about the value of the investment in the scrubber. Nonetheless, the project moved forward, and in the end the cost was $437 million, nearly 70% higher than was anticipated.

Once the scrubber was completed and operating, PSNH petitioned the PUC to add those costs into the default service rate passed onto to consumers. A lengthy proceeding has been underway to determine the prudence of the project. In the meantime, the PUC has allowed two thirds of the cost of the scrubber to be included in rates; the balance is being deferred until the outcome of the proceeding. If the PUC allows for full recovery, the amount held back, plus interest, will be added to PSNH’s already high-energy rates. This additional cost recovery could add more than half a cent per kilowatt hour to PSNH’s current rate of about 10 cents per kilowatt hour. If fully recovered, PSNH default customers will pay an above market cost of at least 1.5 cents or more for 15 years. (And if more customers migrate off of PSNH rates, this cost will increase for the remaining customers.)


Was the scrubber a mandate that ratepayers will have to pay for?

The PUC has been engaged in hearings on the $437 million project that installed the scrubber at Merrimack Station in Bow. At issue is the question of whether PSNH acted prudently in having the scrubber installed, and how much of the cost should be passed along to ratepayers. The NH Consumer Advocate, Susan Chamberlain, says the case is not a clear-cut mandate. “The state made a law and the company had to comply and make its best effort,” she said, “but the company also has an obligation not to spend money foolishly and to monitor the marketplace, and to monitor everything that would have an impact on their rates, and keep the Legislature and PUC informed. They didn’t do that. You can argue if they had done that, the decisions would have been different.” New Hampshire Union Leader, September 10, 2013.

In a September 2008 letter to the PUC, then-President of PSNH Gary Long took credit for crafting the scrubber law and spearheading the effort to get it passed. Public records show that PSNH spent more than $130,000 on two outside lobbying firms in 2006 when the scrubber law was passed, and over $250,000 on three outside lobbying firms in 2009 as part of the effort to defeat legislation that would have required additional study of the scrubber project before it proceeded. PSNH thus played a key role in getting its “mandate” passed by the Legislature and then ensuring that it was not changed.


Will customers have to pay a new stranded cost charge if divestiture is pursued?

If the plants are sold below their book value, the investments are indeed stranded, and regulators would need to determine how to allocate these costs. In the past, some combination of a company write off, securitization (spreading the costs out over 10 or 12 years at low interest rates), and allocation of the balance to ratepayers was used.

Stranded costs are those power plant costs that are above what could be gained in the market. These uneconomic costs exist whether the power plants are divested or not, and they are currently being paid for today by PSNH ratepayers. Continued ownership of these uneconomic plants also increases the burden because annual guaranteed rates of return need to be paid. Divestiture of the plants would stop the continued carrying costs of uneconomic plants, and eliminate the future risk of new uneconomic investments.

Ultimately, unless and until the power plants are put to the market, and price is known, the extent of stranded costs will remain unknown. PSNH argues that the plants are very valuable, and if they are right, the price will be high and stranded costs low or perhaps will not exist at all.


Will the current customer migration trend continue?

More than 98 percent of the utility’s large commercial and industrial customers have switched to competitively priced power, and more than half of all the electricity consumed in PSNH’s distribution service territory is supplied by a competitive retail provider. The latest statistics filed with the PUC show that almost 100,000 residential electricity customers have left PSNH for a competitive supplier, continuing a trend that reflects the utility’s long-term consistent above-market costs. In the winter of 2014, a small number of large businesses temporarily switched back to PSNH default service, but with higher PSNH rates expected in the summer and fall, migration is expected to continue increasing. The experience in states where retail competition has been in place for longer periods than New Hampshire is that once consumers leave for the market, they tend to stay there.


What does the business community think about divestiture?

Today most businesses are benefiting from a maturing competitive market and they would most certainly be opposed to steps that would move New Hampshire backwards. Left unchecked, the risks to the market of the death spiral and negative market signals associated with non-by passable charges would be problematic for a robust competitive market. However, the question of how any uneconomic costs might be allocated needs to be balanced against this risk. In testimony on HB 1602, the NH Business and Industry Association supported the bill, but indicated they want the PUC to undertake a meaningful analysis before moving forward with any divestiture in light of the transitional issues that will be addressed in such a proceeding. HB 1602 accommodates this concern.


[1] Motion for Leave to Answer and Answer of ISO New England Inc., Federal Energy Regulatory Commission Docket No. ER14-1639 (page 16)

[i] A report conducted for the Public Utilities Commission by EES Group, and published on March 31, 2014 examined the potential costs of environmental upgrades on PSNH existing power plants, and showed a range of costs that could add as much as $200 million in required investment. Such costs, if the plants remain in PSNH rate base would be paid for by default service ratepayers.


About the New Hampshire Independent Energy Council: 
The New Hampshire Independent Energy Council is an energy trade association that advocates for public policy and market structures that support a robust competitive market for electric power. The Association includes most of the electric generating companies in New Hampshire as well as competitive energy suppliers.

About EmpowerNH:  EmpowerNH is a broad-based coalition of environmental and consumer organizations, business and trade groups, and power providers. The coalition aims to educate New Hampshire consumers about the power they have to save money and protect the environment through their choice of electricity supplier, and to make it easy to access information and compare offers from competitive suppliers