Is natural gas price spike an omen for N.H.?
Resident Power and its sister energy supplier PNE Energy Supply were spunky pioneer challengers to Public Service of New Hampshire, rolling along, buying energy off the spot market, eventually selling it to more than 8,500 households and small businesses across the Granite State.
That was until the natural gas "price tsunami" hit, in the words of August "Gus" Fromuth, an owner in both related but separate companies.
PNE couldn't survive the winter's economic storm. It couldn't buy the power it needed, and before it was too late, Resident Power desperately tried to unload its 8,800 resident and small business customers to a competitor, FairPoint Energy, which was being marketed by FairPoint Communications.
But it was too late.
ISO New England — which regulates the region's power grid — suspended PNE for defaulting on its promise to buy power.
The New Hampshire Public Utilities Commission banned PNE from operating until the completion of an investigation into whether it has been upfront with its customers. No one lost any power, but most of Resident Power's customers wound up in the hands of the very utility they fled — PSNH.
The Resident Power/PNE Energy Supply story was made possible by the freewheeling free market of electricity economics, a world fueled by cheap natural gas that enabled numerous competitors to enter the market.
In New England, the stakes are particularly high because the supply is limited by the size of the pipelines transporting gas into the region. In periods of high demand, such as the recent cold spell, a glut can be choked into a scarcity, causing prices to soar. When that happens, big winners can suddenly become big losers.
"They gambled on the energy market poorly, and they lost," said PSNH spokesman Martin Murray. "Who would have thought that the supplier to thousands of customers couldn't pay for the energy they promised? Who is looking out for the customers?"
But Resident Power is — or at it's least trying – to look out for customers, said Fromuth. And when all the facts came out, the "gamble" won't seem as reckless as it does now.
"We are like Gandhi," he said. "We take a beating, respond with facts and smile."
In fact, when all is said and done, Resident Power might re-enter the marketplace, said Fromuth, "but we are focusing on one thing right now: Clearing our good name and finding a good replacement energy supplier for our customers."
The price of natural gas used to track the price of its fossil fuel cousin, oil, but the two parted ways about five years ago, thanks to the controversial extraction process known as fracking, which led to an abundance of natural gas from U.S. suppliers.
The falling price of natural gas fueled the kind of competition that free marketers dreamed of when they deregulated the New Hampshire electric utility market two decades ago.
At first, only larger businesses noticed, and almost all sought sources of cheaper power. That migration from PSNH began trickling down to small businesses and eventually residential customers. Eventually the exodus from PSNH led to an unusual PUC investigation — just opened in January — into whether PSNH could and should remain one of the few utilities in the nation to hold on to its power generation assets.
For its part, PSNH has argued that the state was becoming too dependent on natural gas, which now accounts for half of the state's energy supply. The utility also has said that low natural gas prices can't last forever, and when they rise, those departed customers will turn to PSNH as a default electricity supplier.
The utility had proposed that those customers pay a fee to maintain PSNH's system while they were away. But the proposal was scoffed at by competitors and ultimately rejected by the PUC.
However, the latest spike in natural gas prices may lend credence to PSNH's argument. Even before the suspension, PNE switched its largest customers to that default service, as natural gas prices began rising.
Still, while nothing lasts forever, it's expected that cheap natural gas prices should continue in the U.S. for a long time.
According to a recent study reported by The Wall Street Journal, enough gas is in the ground in the United States to last a generation. (The studies don't take into account how public opposition might result in expensive environmental regulation.)
However, while the price of gas stayed at about $5 for a million Btu nationwide in February, it averaged four times that amount in New England.
That's because almost all of region's gas gets here through three pipelines — two via Maine and a third, the Tennessee Gas pipeline that comes up the coast, grabs the gas out of Pennsylvania shale and passes though New York City. Eastern New England gets what's left over.
Last winter, when the climate was mild, there was enough left over. But with this year's cold winter, there wasn't. And, aside from overall increased demand for cheaper gas over the last three years, there was an additional shortage of liquefied natural gas, due to the Japanese tsunami that knocked out several of that country's nuclear power plants, resulting in a worldwide spike in the demand for natural gas, said Mark Roberts, managing director of natural gas sales and marketing for Sprague Energy in Portsmouth.
New Hampshire's natural gas utilities – like Liberty Utilities and Unitil — have first dibs on whatever gas comes through the pipeline. Those utilities purchase gas through long-term contracts, so the winter peak is spread out for them and their customers in semiannual tariffs.
But Sprague, which sells gas to commercial customers, did take a hit.
"We feel a bump in the process on demand days," but "we never had prices like we had this winter," Roberts said.
Most of Sprague's customers are locked in to long-term contracts, but some have played the spot market – something they don't want to talk about now. "It would look like they have egg on their face," Roberts said.
Power brokers that peddle gas-generated electricity to commercial users have a similar setup.
"We hedge our supplies and most of our customers lock in the rates," said Larry McDonnell, spokesman for Constellation Energy.
If a customer plays the spot market, "it's their decision" but most only do it with 10 to 20 percent of their needed energy.
"We don't recommend it, but some choose that risk," said Mike Hachey, a vice president of TransCanada Corp. "It can be a budget-buster when you have one of these extreme fluctuations."
Competitors in the residential market, like ENH Power, also were able to ride out the storm thanks to hedging. But PNE Energy Supply's ride was anything but smooth, even though it also hedged in the energy market.
"We had a lot of hedges in place, but I can't discuss the transaction now that caused us to be in this financially distressing situation," said Fromuth.
Many of PNE and Resident Power's PUC filings detailing that situation are redacted. But one filing explained the "cash flow position was overwhelmed by well-documented market events behind its control" and that those financial issues "arose and concluded in approximately 21 days."
During those 21 days – the end of January and the first half of February – "we had to purchase on the open market at exponentially the normal average, and we had to pay for it immediately," Fromuth told NHBR. "But we get paid by our markets (residential customers) significantly later."
Resident Power sought another provider that would honor the low rates it promised it customers, and turned to FairPoint Energy, a subsidiary of Connecticut-based Crius Energy, which is itself a subsidiary of Crius Energy Trust, a publicly held Toronto company financed out of Australia. Crius entered the market just last summer via a marketing agreement with FairPoint Communications, the state's major phone company, which agreed to an undisclosed commission on each customer.
Crius offers power purchased from wind farms throughout the country (including some in New Hampshire) at prices about 10 percent below PSNH rates. The Feb. 6 deal it reached with Resident Power would be different — simply honoring PNE prices.
Traditionally, PSNH makes these transfers at the end of each customer's billing cycle, but as the economic situation deteriorated, Fromuth asked PSNH for a bulk transfer. Fromuth said he could not get a firm price out of PSNH and the transfer stopped after 1,196 customers were switched and PNE had run out of money.
"I simply didn't have the resources to pay ISO [for power]," Fromuth said.
On Feb. 14, ISO then suspended PNE – the first such suspension in the state's history – meaning that customers would be switched to PSNH at its higher rate.
Fromuth initially said the customers would be transferred to FairPoint Energy, but the PUC would have none of that. If the customers wanted to leave PSNH again, they would have to sign a contract with another provider.
Conflicting reports from media outlets, and from Resident Power itself, prompted some 83 customers to complain to the PUC, causing the commission's staff to order an investigation into what it called an "unprecedented series of events."
The staff faulted PNE for not disclosing to its customers a number of things — its financial default, advance notice about the transfer to FairPoint or PSNH, the relationship between Resident Power (an aggregator) and PNE (a supplier).
"Representatives of PNE and Resident Power alternatively seem to speak for one entity, the other or both, but at other times appear to fall back to relying on the companies' status as separate entities to declaim knowledge of each other's actions."
The PUC staff also alleged that PNE enrolled commercial customers without PUC approval and mentioned "the possibility of … misleading, or incomplete statements."
The staff then ordered that the companies provide information to the PUC by March 7 for a hearing to be held March 20 and that PNE cease enrolling new customers, although Resident Power could still continue to operate.
In a joint reply, PNE said it couldn't be faulted for not giving advance notice of its own suspension:
"PNE has never had any attention to cease selling in the state permanently. To the contrary, PNE has made it clear that they intend to be … serving customers again as soon as they are allowed to do so."
The relationship between the companies is well known to the PUC, said Fromuth, who is an investor in both firms. His son, Bart Fromuth, is a managing director of Resident Power and is corporate counsel of PNE Energy Supply. Fromuth also heatedly denied enrolling customers improperly.
Whatever the outcome, the questions the Resident Power-PNE Energy Supply story raises will continue for some time because the natural gas situation isn't going to change soon in New England, with prices remaining low nationwide but the chance of sudden peaking in the region.
ISO New England, which warned of such a situation in 1994, right now is considering some technical fixes having to do with price timing and performance incentives.
Hachey, of TransCanada, thinks something more substantive is needed, such as coming up with a new way for companies that need the extra gas pipeline capacity to pay for it, and in the meantime, enable generators to burn light oil rather than natural gas in times of a shortage.
PSNH would like to offer special pricing on a temporary basis to lure some of those customers back, in order to maintain the viability of alternative service.