Electricity deregulation in NH took place more than a decade ago, but the open market it was designed to spur only exploded in the last three years. There are currently 63 companies licensed in NH as third-party energy aggregators to purchase electricity for clients on the open market, 56 of which entered NH in the last three years.
These companies are assisting in a mass migration of customers away from purchasing power directly from the regulated utilities. The increased availability of cheaper prices has been triggered largely by low natural gas prices, which have a hit a low not seen in a decade, according to the Federal Energy Regulatory Commission. And given that about 50 percent of electricity in New England is produced using natural gas-and NH's biggest utility, Public Service of NH, depends heavily on coal-businesses are finding the robust open market appealing.
Before deregulation, there was no market. The owner of the power line running to a business provided the electricity and set prices with state approval. Now that same utility-PSNH for most businesses-services the lines and infrastructure, but businesses can choose their supplier.
Through 2011, about 60 percent of large business customers and 11 percent of small business customers have migrated to third-party suppliers-that's about 39 percent of all the power flowing through NH power lines as of last December. But those numbers are only part of the story. About 77 percent of the power purchased by large customers is through a third party, up from 69 percent two years ago.
Third-party suppliers have a simple, effective sales pitch. Switch to them and save between 5 percent and 20 percent off the supply side of your electricity bill-a savings that includes fees. Depending on how much energy a business uses, savings range from hundreds to tens of thousands of dollars a month. It's amazing to me when I see many people haven't moved to a third-party. Wait a minute, you're choosing to overpay an expense you could easily get down? says Jeff Hiatt, president of Performance Business Solutions in Hampton Falls, which helps clients buy power at auction.
This migration is gaining more traction. Between January and December 2011, the percentage of power that small business and industrial customers purchased from third-party suppliers-and not directly from the state's three regulated utilities (Public Service of NH, Unitil and National Grid)- almost doubled to 26 percent. As of December 2011, 77 percent of all power used by large business and industrial customers was purchased through a third party.
The question is, how long will natural gas prices remain low and what effect would a house bill under consideration requiring PSNH to sell its generation facilities have on market prices?
Choosing Your Market
There are a variety of options available on the open market that include sealed bid auctions (all suppliers submit their best price), reverse auctions (suppliers bid against each other to win business), buying power from the New England power pool as a wholesaler, and hiring a broker to negotiate with suppliers. Contracts vary in length and can have fixed rates, variable rates or both. They can include purchasing power in off peak or peak times.
There are many choices, though like the stock market, the larger your energy portfolio, the more options you have. Freedom Energy Logistics in Manchester is one of the companies catering to large customers-those buying more than a million kilowatt-hours a year. (A small business might use fewer than 100,000 kilowatt-hours a year.) The eight-year-old company is the BJ's Wholesale Club of power, helping large commercial and industrial customers buy power at wholesale prices directly from the ISO New England power grid. ISO New England manages the electricity supply for New England.
Freedom manages the procurement of more than 300 million kilowatt-hours a year and its customers include Saint Anselm College in Goffstown and The Union Leader Corporation. The idea is if you have the large load, that is an attribute you can use to your advantage, says Bart Fromuth, an executive with Freedom Energy Logistics. They are basically getting the raw cost of energy. Fromuth says Freedom Energy Logistics manages power for 61 percent of the end users in the ISO pool and has increased its staff from three to 22 people since 2008. Fromuth is also managing director of Resident Power, which started last year to aggregate small businesses and residential user. It now has a pool of 2,000 customers, who they claim save on average $5 to $10 dollars a month.
Performance Business Solutions serves both ends of the spectrum. Hiatt uses reverse energy auctions, aggregating his clients-which run the gamut from mom-and-pop stores to large manufacturers, into one pool called the Rochester Buying Power, because it began with Rochester businesses.
During the 15-minute online auction run by Taylor Auction, suppliers bid against each other to supply energy to the pool of businesses, which now nears 200 statewide. Hiatt says as of November his clients were saving from $200 to $3,500 a month each depending on usage, a savings that includes a fixed brokerage fee. He aims to bid at any one time for 15 to 50 million kilowatt-hours of power for the auction pool. Contracts are typically for one year and auctions are usually held every nine months.
USource also procures power using auctions, but those auctions are quite different from Hiatt's. This wholly owned but independent subsidiary of Unitil runs blind auctions where suppliers are invited to submit a sealed bid. We focus on a very dynamic bidding process that is not an invitation to negotiate but one chance to win, says Tom Withka, managing director of USource. Seven of the 10 NH counties use USource for their county buildings including courthouses and nursing homes and save about 10 to 20 percent off the supply side of their utility bill. Contracts typically last 1.5 to two years and the company manages 5 million megawatt hours a year.
Deregulation in NH
You don't have to be an energy analyst to see there are big savings to be had in the current electricity market. Much of that savings comes from customers switching away from PSNH, which owns its generation facilities-a unique position for a deregulated utility. Much of that generation runs on coal, which is now more expensive. PSNH accounts for 27 percent of NH's generating capacity, but only 3.4 percent for New England.
As of Jan. 1, PSNH's rates for resident energy supply were 8.31 cents per kilowatt, which does not include the costs of the scrubber in Bow. That rate will be readjusted this month to include some recovery funds for the scrubber. That rate compares to 7.75 cents per kilowatt for National Grid and 8.03 cents per kilowatt for Unitil, according to The New England Power Generators Association, a trade association representing competitive companies that produce two-thirds of NH's generating capacity. The trade association supports HB1238, which requires PSNH to sell its generation.
PSNH, meanwhile, supports keeping its generation assets. President and COO Gary Long says it's a matter of finances-not profit. Some people like to think we're against open access in the market, but we are not, says Long, stressing that PSNH sells energy at cost and by law cannot make a profit off sales of its energy. We're a cost-based service. Other companies are market based pricing. We serve as a price cap in the market.
The challenge for the utility is fixed costs. As more customers migrate away from PSNH for the supply part of their bill, those that remain must shoulder the fixed costs of owning and maintaining generation and power lines. The fewer supply customers the utility has, the higher the bill is for those that remain as it is spread over fewer people. If PSNH were to sell its $700 million investment in its generation, Long says it could not get that amount from the sale and prices would go up to cover those fixed costs. "Then PSNH's rates would be based on market volatility," says PSNH spokesman Mike Skelton.
Competitors say divestiture is important because then PSNH will purchase its power from the open market like everyone else and will not be shouldering customers with the added risks associated with owning and maintaining generation. Competitors compare making decisions about generation infrastructure-such as the money PSNH was required to spend on a scrubber to clean its Bow plant-to making customers liable for increased costs.
Private generators, on the other hand, choose how to invest, but can only charge what customers are willing to pay. It's a little like saying continuing to own and operate a big coal plant in Bow is insurance. Our view is, you should buy your own insurance on the open marketplace, says Dan Allegretti, vice president of energy policy for Constellation NewEnergy, the third-largest electric supplier in NH behind PSNH and Unitil Energy Systems. When we invest in our plants in Massachusetts, for example, we either make or lose money in the open market. It's our shareholder dollar we put at risk. Throughout the debate about selling PSNH's generation, a lot of attention has been paid to a PSNH filing in June 2010 before the NH Public Utilities Commission (PUC) requesting a nonbypassable charge for all customers-both those that get their supply from PSNH and those that just pay for distribution and upkeep but use a third-party supplier. In that motion, PSNH says that there was $28 million in fixed costs lost from customers migrating away.
Long says too much is made of that request-which was denied-and too little is made of the fact that over the 10 years since deregulation, regulated generation has saved customers more than $700 million. As an example, he cites a 2003 filing before the PUC where the utility requested to pay large customers a credit per kilowatthour to migrate away. That was because beyond its own generation, PSNH must buy power on the open market. At that time, rates were lower for all customers if PSNH purchased less supply from the competitive market and paid large customers to migrate.
"I really want PSNH to have the lowest rate we can get, Long says. The lower our rate is, the more savings you can get. We need to get our cost recovery, but how can we can do it in a way that will get the lowest cost to customers [is our challenge]. As part of the 2010 filing denying the non-bypassable charge, PSNH must design an alternative rate to address the fixed cost issue. Its answer is the alternative default energy service rate, which it will be filing with the PUC this spring. Under that plan, customers who return to PSNH from a competitive supplier will pay a rate similar to the wholesale market. That rate will include the fixed costs of the utility's investment in scrubber technology, but is intended to help pay down the total fixed costs with owning generation, Skelton says. The more customers who rejoin under this lower rate, the more money PSNH can use to reduce rates for all customers.
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