Non-Advocate Staff Opposes PSNH Attempt to Place Energy Supply Costs in Distribution Rates

Non-advocate Staff of the New Hampshire PUC have opposed Public Service Company of New Hampshire's request to place energy supply-related costs in distribution rates, in order to mitigate above-market PPA costs, but Non-advocate Staff did offer some alternatives which would allow nonbypassable cost recovery for the PPAs (DE 11-184).

As only reported by Matters (8/24), a settlement among PSNH, Advocate PUC Staff, and several wood-burning IPPs would require PSNH to enter into short-term (about two-year) PPAs with the IPPs. The PPAs, meant to maintain the economic viability of the wood-burning plants, are expected to costs up to $24 million above market prices for energy, on an aggregate basis.

The costs of the PPAs would be included in PSNH's energy (default) service rate. However, to prevent migration from occurring due to the above-market costs, PSNH and settling parties have requested to remove $8.5 million annually from energy service rates to offset the above-market costs, with the $8.5 million in costs moved to distribution rates.

This $8.5 million represents uncollectible expenses and regulatory assessment expenses that are allocated to default service and currently included in the bypassable energy service rate.

Whether this transfer of supply costs to distribution rates is intended to be permanent is unclear. In a data response, PSNH said that, "[t]hese costs are not energy related, i.e. they do not correlate with the quantity of energy service provided, and were considered by the negotiating parties to be candidates for transfer to the distribution rate."

"The duration of the transfer should be permanent since these expenses are not energy related," PSNH said.

However, Advocate Staff stated that, "[t]he duration of the transfer is up to the Commission to decide, but it was not intended to be permanent."

Non-advocate Staff, contrary to PSNH, said that, "there is a definite relationship between uncollectible expenses and regulatory assessment expenses on the one hand and the quantity of energy service provided on the other hand."

"This reality is reflected in the Commission-approved rate settlements ... that included the $8.5 million as allocable to energy service rather than to distribution service," Non-advocate Staff added.

Non-advocate Staff explained that supply-related uncollectibles and regulatory assessment costs were included in the energy service rate calculation as part of settlements reached in PSNH's two most recent distribution rate cases, DE 06-028 and DE 09-035, whereby the costs were allocated to functional rate components.

"I view the transfer as no more than a clawback of items that were previously bargained for, especially as PSNH's position is that the transfer should be permanent," Non-advocate Staff said.

While Non-advocate Staff does not support the proposed transfer of costs, Non-advocate Staff said that if the transfer is approved by the PUC, the placement of supply costs in distribution rates should be temporary, until the PPAs expire or are otherwise not above market.

Overall, Non-advocate Staff does not make a recommendation on the settlement agreement, citing a lack of information. However, if PSNH is concerned that there be no upward pressure on its energy service rate as a result of entering into the PPAs, Non-advocate Staff offered alternatives to the proposed transfer of supply costs to distribution rates.

One alternative would be to defer all above-market costs of the PPAs for future recovery through the energy service rate. Recovery of the deferred amount could commence at any such time when either the energy price in the PPAs becomes below market or PSNH's energy service rate becomes lower than its marginal cost of supplemental power, Non-advocate Staff noted.

A second alternative is recovering the above-market costs of the PPAs through the nonbypassable stranded cost recovery charge (SCRC). Although the SCRC has been limited to pre-restructuring contracts, "an argument could be made that the contracts qualify as 'new mandated commitments approved by the commission' pursuant to RSA 374-F:2, IV(c)," Non-advocate Staff said.

Finally, all above-market costs of the PPAs could be deferred for future recovery in a method to be determined by the legislature, Non-advocate Staff offered.

One legislative solution could address the treatment of the PPAs as stranded costs.

Alternatively, Non-advocate Staff said that the legislature could relieve PSNH from alternative compliance payment obligations under the renewable statute due to the above-market PPA costs.

"Considering the support for renewable generation encompassed in that statute, the legislature could consider allowing the over-market energy costs paid by PSNH to the Wood IPPs to be made in lieu of Alternative Compliance Payments that would otherwise be required from PSNH pursuant to RSA 362-F. Under this alternative, the over-market power costs would be recovered through PSNH's energy service rate, but there would be no net rate impact as those costs would substitute for Alternative Compliance Payments which are included in the energy service rate calculations," Non-advocate Staff said.