PSNH says forcing it to divest power plants not the answer

Public Service of New Hampshire said in a June 8 blog post that it has issues with a report issued the prior day by the staff of the New Hampshire Public Utilities Commission that questions the economic benefit of PSNH continuing to own and operate state-regulated power plants.

“We have not yet had an opportunity to fully review the report, but at first glance the scope of the report appears to ignore consideration of how to protect customers from the significant energy challenges facing New Hampshire and the region, namely its growing over-reliance on a single fuel source, natural gas, for generating electricity,” said PSNH.

“In our opinion, PSNH’s generation assets have and continue to provide customers with both a safety net against volatility in the energy market and fuel diversity, at a time when regulators and energy leaders are sounding alarm over an historic over-dependence on natural gas,” the utility added. “In fact, PSNH’s generating plants have provided more than $700 million in savings to its customers over the past decade. The plants ran during the first quarter of this year during periods of high demand, and were called upon as recently as last week to provide much-needed electricity supply during a multi-day heat spell.”

PSNH is a unit of Northeast Utilities (NYSE: NU).

The report said that the aim of a late 1990s electric restructuring was to hold down rates for New Hampshire residents. The state legislature, the New Hampshire Public Utilities Commission and the overwhelming number of stakeholders involved in restructuring saw the fossil and hydro resources of PSNH as a major asset in achieving that goal.

“A little over a decade later, those resources, taken as a whole, have gone from saving customers money to costing them significantly, relative to available market alternatives,” said the report. “One measure of the gap that now exists is to measure the difference between PSNH’s default service rate, 9.5 cents per kilowatt-hour (kWh), and prevailing retail market prices, 7.0–8.0 cents per kWh, which are lower than PSNH’s rate by approximately 15 to 25 percent.”

On Jan. 18, the commission opened an investigation to review market conditions affecting the default service rates of PSNH in the near term and how PSNH proposes to maintain safe and reliable service to its default service customers at just and reasonable rates. The investigation was also to explore the impact on the competitive electric market in New Hampshire of PSNH’s continued ownership and operation of generation facilities. To assist in its investigation, staff retained The Liberty Consulting Group.

Commission staff says taking no action not an apparent option

Taking no action in this matter threatens to leave a dwindling yet still substantial number of the state’s residents and small businesses facing ever higher costs for service relative to market alternatives and could eventually threaten the financial health of PSNH, the report said. Setting PSNH’s default service rates closer to market rates and opening a proceeding to address recovery of deferred costs could provide short-term relief. Nonetheless, simple deferral of recovery is ultimately likely to do no more than postpone the burden that over-market costs represent, the report added.

“PSNH does not appear to have the ability to significantly reduce those costs without potential financial consequences to the company,” the report added. “Cost reductions could be attained through existing Commission authority; however, legislative action may also be required.”

Securitization represents one possible measure. It has the potential for producing a large reduction in the capital cost component of default service rates. The staff analysis, using current market conditions, demonstrates that, under a wide range of assumptions, a post-divestiture combination of market-procured power plus costs for amortizing uneconomic (“stranded”) costs may very well produce total costs less than what default service customers now pay. Considering the very strong likelihood that the gap between market and PSNH default service prices will increase over time, an option that would not only prevent growth in that gap, but actually reduce it, may prove a very powerful tool, albeit one that invites consideration of not just regulatory, but also statutory change, staff wrote.

Spreading responsibility for stranded costs beyond default service customers would represent another such cost-reduction measure.

Divestiture of generating assets seen as an option

If it were determined that PSNH should exit the energy supply business, some of the options for facilitating that exit would take a lot of effort, the report pointed out. Divestiture is one of those options. It could be through a public, competitive sale or a transfer of generation assets to a PSNH affiliate at a determined price, such as net book value. Either option would require a means for addressing the difference between the sale or transfer price and book value.

“PSNH has very recently observed that natural gas prices may soon reach levels that would make the PSNH fossil units market competitive,” the report said. “If PSNH is correct, then one would expect the fossil/hydro fleet as a whole to generate more than book value, particularly given that recent sale prices and preliminary indications from market participants show that the hydro units have value substantially in excess of their book cost.”

The report added: “We, however, do not share the view of PSNH, nor has the company in response to our requests provided any analysis confirming its view of fossil fleet value. Our analysis shows that the fossil units have very little market value.”

PSNH has made the case that the fossil units, apart from whether they have net positive value, provide an important form of fuel diversity insurance. The company cites recent instances of natural gas price spikes in New England. Such price spikes (resulting from constraints in the regional pipeline system) present a serious challenge to the region’s reliability and are unlikely to be resolved through additional pipeline expansion in the near-term, staff pointed out.

Evidence that this insurance role is not viewed as viable comes from recent sales at low prices of New England fossil assets that operate similarly to those of PSNH, staff said. “In addition, we find notable the failure of ISO-NE to assign value to coal as a source of fuel diversity, even though the issue of fuel diversity is a region-wide one,” the report said. “In fact, the ISO-NE’s current interest in implementing a ‘pay-for-performance’ program, if approved, will likely do little to enhance the ‘insurance value’ of PSNH’s fossil units.”

The PSNH plants total 1,149.9 MW of winter rated capacity.

Fossil Units:

  • Merrimack Unit 1 (coal) 108 MW (winter rating);
  • Merrimack Unit 2 (coal) 330.5 MW (winter rating);
  • Newington (oil/natural gas) 400.2 MW (winter rating);
  • Schiller Unit 4 (coal/oil) 48 MW (winter rating); and
  • Schiller Unit 6 (coal/oil) 48.6 MW (winter rating).

Combustion Turbines:

  • Merrimack CT 1 (jet fuel) 21.7 MW (winter rating);
  • Merrimack CT 2 (jet fuel) 21.3 MW (winter rating);
  • Schiller CT (jet fuel) 19.5 MW (winter rating);
  • Lost Nation (jet fuel) 18.1 MW (winter rating); and
  • White Lake (jet fuel) 22.4 MW (winter rating).

Biomass Plant:

  • Schiller Unit 5 42.6 MW (winter rating)

Hydroelectric Plants:

  • Amoskeag 17.5 MW (winter rating);
  • Ayers Island 9.1 MW (winter rating);
  • Canaan 1.0 MW (winter rating);
  • Eastman Falls 6.5 MW (winter rating);
  • Garvins Falls/Hooksett 14 MW (winter rating);
  • Gorham 2.1 MW (winter rating);
  • Jackman 3.6 MW (winter rating); and
  • Smith 15.2 MW (winter rating).
About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.