Bar News - September 20, 2013
Opinion: Former PUC Chair: PSNH Should Exit Power Generation Business
By: Doug Patch
Editor’s note: An edited version of this opinion article appeared in the print version of Bar News. The full version is below.
The time has come to finish the restructuring of the electric industry in New Hampshire and remove the barriers to full and fair competition in the supply of electricity to customers. The process which the NH Legislature and the PUC started in 1996 (see RSA 374-F), but never finished with Public Service Company of New Hampshire, is supported by the directive contained within part II, article 83 of the New Hampshire constitution which reads in part: "Free and fair competition in the trades and industries is an inherent and essential right of the people and should be protected against all monopolies and conspiracies which tend to hinder or destroy it.” PSNH, the only electric public utility in New England that still owns generation, should come to the table and voluntarily sell off the electric generating assets that it still owns (it sold its share in the Seabrook nuclear plant in 2002) or be directed to do so by the Legislature and/or the PUC. It no longer makes any sense, economically or otherwise, for PSNH to retain ownership of generation.
Natural gas prices have driven down the price of electricity and have made PSNH-owned generating facilities uneconomic for the foreseeable future. Instead of wasting ratepayer money on outdated generating assets, PSNH should be a distribution and transmission company like the other NH electric utilities, and the other electric utilities around New England. Its ownership of generation costs default service customers (those who do not shop for their power on the market) far too much money. PSNH’s default service rate is the highest in New England and most of its generating plants do not operate anywhere near full capacity because they are so uneconomic. In other words – PSNH’s fossil fuel plants lie idle while ratepayers pay the Company in excess of $75 million annually in returns on investments in plants that are no longer “used and useful.” See RSA 378:28. Completing electric restructuring will complete the transfer of the risk of investment decisions from ratepayers to stockholders.
Most of PSNH’s customers have received solicitations in the last year from competitive electricity suppliers, so you probably know that there is a competitive market, not just for large business customers, but also for residential and small business customers. In fact recent reports show that over 55% of the electricity provided to customers in PSNH’s service territory is supplied by a company other than PSNH -- and those “migration” numbers are climbing. PSNH’s generation is no longer needed to supply its customers – those customers can get their power for less from the marketplace. Meanwhile, customers who are, for whatever reason, still getting their power from PSNH are paying much more than they should for their electricity. As more customers take advantage of the market, those who remain with PSNH will pay ever higher rates because there will be a dwindling base of customers from whom to collect PSNH’s fixed generation costs -- what amounts to a classic death spiral.
Until PSNH either voluntarily or otherwise divests of its generation there will be an ongoing debate – and likely litigation – over whether PSNH gets to recover all of the costs associated with the generating facilities it owns, what the law refers to as “stranded costs”. See RSA 374-F:4. In other words – if PSNH sells its generating plants for less than certain of its investments, ratepayers could be liable to pay the difference, even after the facilities are sold. The current “hybrid” situation under which PSNH still owns generation means that PSNH ratepayers, not stockholders, are still on the hook for bad investment decisions, something which restructuring was intended to eliminate.
Although PSNH has, for a number of years, asserted that its generating assets hold significant value, the reality is that those assets, particularly the coal-fired ones, may not fetch much on the open market. Underlying fundamental public utility regulatory principles like whether the assets are “used and useful”, whether investments PSNH made, like the $420 million scrubber project at Merrimack Station in Bow, a forty year old plant, were “prudent”, and whether the PUC’s ultimate determinations on these issues result in rates that fall within a “zone of reasonableness” will come into play. See RSA 125-O:18 and RSA 378:28. NH Supreme Court and US Supreme Court decisions regarding constitutional restraints on the process of public utility rate regulation are likely to be invoked, such as Federal Power Comm’n v. Hope Natural Gas Co., 320 U.S. 591(1944), which our Supreme Court (Petition of Pub. Serv. Co. of N.H., 130 N.H. 265, 274 (1988)) has said stands for the proposition that “the constitution requires only that the regulatory body engage in a rational process of balancing consumer and investor interests to produce a rate that is just and reasonable.” As courts have noted the “zone of reasonableness” is “bounded at one end by the investor interest against confiscation and at the other by the consumer interest against exorbitant rates.” Jersey Cent. Power & Light Co. v. F.E.R.C., 810 F.2d 1168, 1177 (D.C. Cir. 1987) (quoting Wash. Gas Light Co. v. Baker, 188 F.2d 11, 15 (D.C. Cir. 1950)). “In cases where the balancing of consumer interests against the interests of investors causes rates ... which [are] insufficient to ensure the continued financial integrity of the utility, it may simply be said that the utility has encountered one of the risks that imperil any business enterprise, namely the risk of financial failure.” Petition of Pub. Serv. Co. of N.H., 130 N.H. 265, 277 (N.H. 1988) (quoting Pennsylvania Elec. Co. v. Pennsylvania Pub. Util. Comm’n, 502 A.2d 130, 134 (Penn. 1985)).
Under the current circumstances a strong case can be made that PSNH is not entitled to full recovery of the difference between what the sale of the generating assets will bring and the book value of those plants. How this is resolved will be an important issue for the economy of the state because of the impact that electric rates have on business and residential customers; it is likely to take some time for it to be resolved through legislative, administrative and possibly judicial processes.
Disingenuous scare tactics have been used to frighten public officials and members of the public into thinking that a relinquishing of PSNH’s generating assets will somehow jeopardize the flow of power to customers. Nothing could be further from the truth. ISO New England, which oversees the regional electric grid and dispatches generating facilities, manages and designs markets to ensure that there is sufficient power to meet the demand for electricity and provides incentives for new generation to be built as needed. In contrast to PSNH’s generation, the risk of which is borne by ratepayers, competitive generation sources provide the vast majority of the power needed in New England and at no financial risk to customers. Other electric utilities (including Unitil and Liberty in New Hampshire) obtain reasonably priced power needed for default service customers through Request for Proposal processes that make sure everyone has the power they need. PSNH can and should remain a “poles and wires” company, ensuring that the distribution and transmission infrastructure works well and serves all customers, and it should be fully and fairly compensated for providing that service. It no longer makes sense, however, for PSNH to be in the generation business and the sooner it is removed from that business the better off New Hampshire will be.
Doug Patch, former Chair of the New Hampshire Public Utilities Commission, is a partner at Orr & Reno, P.A. The views expressed in this article are his own views.