As large customers flee PSNH, what can the utility do?

Nearly all of Public Service of New Hampshire’s largest customers have gone, ever since they were allowed to buy their power elsewhere at a cheaper price. That raises the questions: Will these customers come back soon, or at all? In the meantime, what can be done about it?These are serious questions. Nearly a third of the entire load that PSNH used to sell is now being sold by suppliers — PSNH’s competitors — leaving residential customers and small businesses behind to maintain a system that is much larger than is needed right now. Doing so is driving up customers’ electric bills by 8 percent. These higher costs are causing more customers to flee and could result in a “death spiral,” claim PSNH critics.That’s why PSNH wants those dropping its service — but still staying in its service area — to pay a special “non-bypassable” charge, which would cover the fixed costs of generation assets, even though they aren’t using them.”We see this as a matter of fairness to all customers,” said PSNH spokesman Martin Murray. “We incur costs as a result of being prepared to serve all PSNH delivery customers, whether they are currently purchasing energy from PSNH or not, but not all customers are paying those costs.”Competitors say that it is unfair to force large customers to pay to maintain a system that they don’t need.”We shouldn’t have to pay for PSNH’s security blanket,” said Cleve Kapala, director of the government affairs office of TransCanada, which owns New Hampshire’s major hydroelectric plants, among other generation assets. “It’s sort of a dinosaur, utility-owned generation. For a while, they (PSNH’s power plants) were competitive, but they have become old, dirty, and above market.”In reality, it’s more complicated than that. That’s the reason humongous .pdf files are flying across the Public Utilities Commission website at Docket 10-160.Whatever the PUC decides – and it may make its ruling before you read this – the loser is going to take its case to the Legislature, in a debate that may go on for years.Falling electricity pricesYou could say all this is the natural outcome of efforts to restructure electric utilities in New Hampshire, but that law passed a decade ago, and the major migration of PSNH’s larger customers really started three years back.Under restructuring, utilities were supposed to sell off their generation assets and hold on to their wires, buying energy on the open market. Under this system, customers were also free to do the same.There would be two charges for electricity customers: the generation charge and the line, or distribution, charge. Everybody would pay the utility line charge, because all customers used the utilities’ poles and wires. But the energy charge would be paid by those customers being supplied with it.The New Hampshire Legislature put restructuring on hold in light of the scandal at Enron, a massive energy broker that went broke, leaving utilities in the lurch, customers in the dark, and executives in prison.PSNH did get rid of the Seabrook nuclear power plant, but kept the coal-burning plant in Bow, as well as several plants in Newington. PSNH also purchases energy through long-term contracts. This hybrid system worked well when PSNH assets were producing power cheaper than that available on the open market. But in 2008, electricity prices went south. This was partly because the economy crashed, but it was also due to plummeting natural gas prices. Meanwhile, environmental regulations drove PSNH’s costs up, and PSNH secured some long-term energy contracts at the height of the market.Suddenly, PSNH’s competitors were attractive, especially to larger customers.”I can tell you it’s saving us $500,000 to $1.2 million a year,” said Thomas Benzel, director of supply chain management at Freudenberg-NOK’s facility in Manchester, which uses 44,000 megawatt-hours annually. Freudenberg, which left PSNH in 2006, sends bids out for energy at short intervals, and only once – during a two-month period – did PSNH rates prevail. “It’s not like we are going back and forth. We’re gone.”‘Incurred for all customers’Freudenberg was one of the first large customers to drop PSNH, but it is far from the last. The statistics are staggering.According to testimony before the PUC, at the end of May 2011, PSNH total sales were 34.8 percent lower than they would have been if no customers had migrated. At the end of 2009, the figure was 24 percent.In the fall of 2010, according to PSNH’s quarterly report provided to the PUC:Of the 117 largest customers in PSNH’s service area – commercial and industrial users with a peak demand of more than 1,000 kilowatts – 78 percent had left, taking with them 92 percent of the large customer load. • Of the 1,400 mid-size commercial and industrial users in the service area – those with a peak demand between 100-1,000 megawatts – 51 percent had left, depriving PSNH of 61 percent of that load. • Some 10 percent of the 73,500 small businesses (using less than 100 megawatts) have ditched PSNH, taking with them over a fifth (21 percent) of the load in that category. • Meanwhile, almost all of the 422,300 PSNH households have stayed behind. Only a third of a percent have migrated.The loss of large customers was getting too big to ignore, so on June 11, 2010, the PUC opened a docket on what has become a yearlong regulatory battle.PSNH, as the “supplier of last report,” is obliged to provide cost-effective and reliable energy 24-7, and it maintains a portfolio of supply both in generation assets and in contracts to provide it, said Robert A. Baumann, director of revenue regulation and load resources for Northeast Utilities, parent of PSNH.”We believe that fixed costs that have been incurred for all customers should be supported by all customers in their rates.” Those fixed costs – depreciation, property taxes and debt costs – add up to about $43 million a year, said Baumann.And, Baumann added, those large customers will return someday, because the “unprecedented” drop in gas prices is a result of worldwide economic decline that “may very well be short-lived.”Migration is clearly a problem for PSNH, but the Office of Consumer Advocate reminded the PUC that “competitive electric choice is the goal of state policy; migration therefore is not ‘the problem’ in and of itself. In fact, some would view high migration as success.”The problem, it said, is that the small user has not been migrating, which creates a “cost-shifting” problem that needs to be solved, because it is driving up residential rates.However, Unitil and National Grid contract with other companies to provide the reserve energy that PSNH is supplying with its assets and long-term contracts.”As a result, the migration risks are assumed by competitive suppliers,” the Consumer Advocate wrote.Bow scrubber costsSo what is PSNH to do? The Consumer Advocate outlined four possibilities: • Divest assets and bid for energy on the open market, leading a third party to take the risk. • Give two different rates for residential (and perhaps small commercial) and larger commercial users when it comes to figuring out the cost of maintaining infrastructure for those who may return. • Allow PSNH to impose a surcharge. • Put limitations on when migrating customers can come back at will.PSNH’s competitors are arguing for divestiture, or at least putting out requests for proposal for power. That will not only save the utility money, but is more transparent, they maintain.But if PSNH were to sell off its assets, “you’re then losing the value of the backup service that we believe is very significant,” said Baumann.The cost of those assets will be going up significantly in the future, due to the installation of a $450 million mercury scrubber at PSNH’s coal-burning plant in Bow.Still, PSNH isn’t asking that debt charges incurred for the scrubber be passed on to its fleeing larger users – at least not yet.”I think, generally, the scrubber is a project that benefits all customers. And, probably, in my opinion, would be closer to a non-bypassable charge than a bypassable charge,” Baumann said.Under state law, the cost of the scrubber must be recovered through the energy service rate. “I think you’d have to have some change in the legislation to enact that,” said Baumann.As the two-day PUC hearing dragged on, it seemed that PSNH – rather than being on the offensive, arguing for a non-bypassable charge – was simply struggling to hold on to its assets. As commissioners pressed PSNH about the advantages of divestiture, Stephen Hall, PSNH’s rate and regulatory service manager, fired back, “The thing to remember is, once you divest, there’s no going back. Once plants are sold, they are gone forever.””Is there a point at which the hedge benefit of your own generation may flip and become a liability … a greater pressure on rates than just working with the market?” asked PUC Commissioner Amy Ignatius.”I think there’s always going to be a hedge benefit to generation,” replied Hall, though he admitted that there comes a point when the costs outweigh the benefits.The commission still has to make a decision. The Office of Consumer Advocate and the PUC staff firmly rejected the non-bypassable charge and favor looking into restructuring.The Business and Industry Association of New Hampshire filed as an intervener, but has yet to intervene.”This is pretty tricky for us,” said BIA Vice President Michael Licata, noting that the BIA represented both large business that benefit by migration and small businesses that are hurt by it.In addition, Gary Long, president of PSNH, chairs the BIA board.”We are acutely aware of the appearance of that,” said Licata, but he said that Long leaves board meetings when any conflict of interest comes up – and besides, this hasn’t risen to the level of a board meeting. Though sooner or later, an issue of “this magnitude” will get there, as well as to the Legislature.How will lawmakers sort this out?Suppliers look like they have a friend in Rep. James Garrity, R-Atkinson, chair of the House Science, Technology and Energy Committee. Garrity called the non-bypassable charge a “ridiculous” idea.”What’s the use of having customer choice if the default provider can recover money from them? I think it is crazy,” said Garrity.Garrity said he looked forward to “reopening the debate on finishing restructuring.”But Sen. Jeb Bradley, R-Wolfeboro, the Senate majority leader who was the go-to person on restructuring as a member of the New Hampshire House a decade ago, wasn’t so sure about that. Energy prices couldn’t continue at such a “historically low level,” said Bradley, and he agreed with PSNH with the value of maintaining a system that will be available when prices go back up.”It’s a complicated issue,” said Bradley.