Charlie Arlinghaus

March 23, 2012

As originally publish in the New Hampshire Union Leader

Requiring the sale of PSNH’s generating assets has the potential to cost New Hampshire ratepayers millions of dollars without a corresponding benefit. There may or may not be a long term benefit from selling off plants but today, there are more questions than answers and the issue is poorly understood.

PSNH is the state’s largest regulated utility. It is the electric company for the majority of the state’s customers and the only one of the four which owns some of its own power generation. Electric companies are part private company and part quasi-state agency. While they are organized as private companies, they don’t set their own prices or essentially do anything without permission and oversight from the Public Utilities Commission.

The provision of electricity is seen as a public purpose like the roads. While the roads for cars are state owned, the roads for electricity – the power lines – are instead contracted out to a privately managed company with a state overseer.

The misnamed electric deregulation didn’t deregulate the industry as much as it broke the monopoly on the provision of electricity itself. The transmission lines, the roads if you will, are still a monopoly but the power itself can be purchased from a number of suppliers. In practice, there is competition for larger business customers but little or no competition for residential customers.

Currently, the legislature is considering a plan called divestiture which would require that PSNH sell off all of its power plants and purchase its power on the market instead of generating it itself.

The debate over the wisdom of this plan is essentially between other electric generating companies which might now sell PSNH power to replace the plants it will be forced to sell and PSNH which would like to keep its own plants and own employees.

The debate is not really between market forces on one side and regulators on the other. No one is suggesting PSNH become a market company. It will still be regulated by the Public Utilities Commission, it will not have the authority to set its own prices, it will merely not produce any power.

The debate is over whether or not owning the plants saves ratepayers money. The costs associated with the power plants have been part of the state’s rate structure. Ratepayers have been paying off the plants for decades and now own them, largely, like a car that you finally paid off. The major exception is the mercury scrubber the legislature required the company to build on its coal plant, the cost of which would have to be recovered if sold

Because the plants are largely paid for, the power produced by those assets costs less than the price on the open, New England-wide power market. For many years it was much cheaper and saved ratepayers millions of dollars a year. With currently low prices for natural gas, the price difference is less but the in-house power is still cheaper. In each year, including the most years of lower gas prices, the utility’s own captive power has saved customers money over buying on the open market.

That alone is not enough reason to keep the assets. Frankly, if the price of coal skyrocketed and natural gas dropped even more, the past wouldn’t matter, only the future. To some extent, the legislature must make some broad guesses about the longer term trends of prices before it acts. Today, the price difference is a small factor weighing against selling the assets but we probably need much more information to decide.

The second critical factor in the sale of assets is the potential sale itself. Would a sale result in a price that doesn’t recover our stranded costs? Or is there potential to make money and give ratepayers a windfall?

Sale proponents are optimistic but it’s hard to find reason for their optimism. There is more research to be done (which is true of so much about this issue) but recent transactions do not indicate much interest in the purchase of old coal plants. Given the uncertainty of both regulation and fuel prices, this seems sensible today but could change in the near future.

A sale four or five years ago would have cost ratepayers millions in extra charges for electricity. Have things changed enough to require PSNH to sell its assets today or would that sale cost us millions? The short answer is that we don’t have enough information.

1 reply
  1. John MacDonald
    John MacDonald says:

    My hypothesis for the root cause current push for PSNH power plant divestiture, stems from the uncommon national situation of low Natural Gas prices. On a $/BTU basis Natural Gas is half the cost of coal here in New England, and multiple times cheaper than oil. Interesting paradigm shift that this energy market place excursion where ultra low Natural Gas power plants have the lowest cost of new entry ( CONE), should be capturing ” permanent” electric generation market share away from existing Coal and oil plants, as well as deffering the building up or of new Nuclear, Canadian hydro imports, and large scale renewables. In what is the most capital intesive industry in the US, a market share for Natural gas of over 50% would be a powerful position, and a cash flow machine. Two powerful forces are at work to make this happen, environmentalist like Sierra Club’s “Beyond Coal” campaign, according to Rolling Stone Magazine article by Jeff Goodell, took $26 m in support payments to oppose coal plants, from natural gas speculator company Chesapeake Energy. Secondly the US EPA is in over-drive issuing air emission regulations that are overlapping, confusing, destablinzing investments in existing plant, and excessively costly, for energy suppliers using coal and oil technology. These same electric energy suppliers are fuel switching and are permenantly giving up a fuel diverse market share to Natural gas, in an extrodinary wave of older coal plant retirements, and cancelation of new coal plant builds. HB1238 is another means to the ends of this paradigm shift to have PSNH divest of its power plants that don’t fit into, the new power players quest to capture the lucrative “unregulated” merchant based power plant model of a single fuel; natural gas. I project when all the pieces are in place; such as a majority of the market share of US energy on domestic natural gas, the low price Ponzie scheme of natural gas will burst its bubble, and OPEC style natural pricing will evolve. HB 1238 if passed will eliminate the customer hedge or protection from this price escalation. The electric retail customer again is being set up for sticker shock by big gas.

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