N.H. Staff Recommend Requiring PSNH to File Proposal Addressing Transfer of Generation to Affiliate, Given Utility's "Optimistic" View of Portfolio's Value

Staff of the New Hampshire PUC have recommended that Public Service Company of New Hampshire be directed to submit proposals addressing the transfer of its utility generation assets to an affiliate, given the "optimistic" value placed on the assets by PSNH.

Staff's recommendation came in a report on the challenges presented by PSNH's ownership of above-market generation assets which have pushed default service rates about 2¢/kWh above competitive retail market prices. Continued migration to competitive supply leaves fewer default service customers over which to recover the fixed costs of such generation, leading Staff to conclude, "[w]e find no supportable basis for optimism that future market conditions will reverse this unsustainable trend, especially in the near term."

"To the contrary, the PSNH fossil units face uncertainties that combine to create a risk of further, potentially substantial increases in costs," Staff reported.

PSNH, however, according to Staff, has justified continued ownership of the plants by arguing that natural gas prices may soon reach levels that would make the PSNH fossil units market competitive. Additionally, PSNH has cited its assets as providing fuel diversity versus constrained natural gas pipeline capacity.

Staff, however, said that, "even at the level that [pipeline] constraints have occurred recently, their frequency and severity have not served to give the PSNH fossil units enough of a boost to overcome their negative value. Further 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.

"We ... 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," Staff said.

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Staff said that its preliminary strongly supports the following observations:

• The fossil units have minimal economic value, far below the net book costs.

• The hydro units have economic value far in excess of their net book costs.

• Taken together, however, the fossil/hydro fleet has value substantially less than net book costs.

Staff, noted, however, that if PSNH believes the assets remain valuable, its parent has the opportunity to justify this belief by accepting a transfer of the assets to an affiliate at net book cost, which would allow the affiliate to reap the gains that PSNH is forecasting.

"The fundamental difference in view of fossil fleet value between PSNH, on the one hand, and the overwhelming weight of stakeholder opinion, on the other hand, suggests an interesting alternative: a transfer of the fossil/hydro fleet to an affiliate at net book cost would enable PSNH's parent to gain value if its views of value are strongly held. Such a transfer would eliminate stranded costs as an issue, which is important, given the prevailing view that the fleet does not have positive economic value. The transfer would also eliminate contention over stranded cost sharing," Staff noted.

"We recommend that PSNH bring forth immediately proposals that would address a transfer of energy supply assets to an affiliate in accord with the optimistic views that the company has expressed with regard to the value of those assets," Staff said.

Staff also recommended that the PUC should consider opening a proceeding to receive comments and recommendations from PSNH and other stakeholders regarding the Staff report and the issues it addresses. Particular focus should include the following:

• Whether PSNH's default service rate remains sustainable on a going forward basis

• What "just and reasonable" means and what it requires with respect to default service in the context of competitive retail markets

• Analytically supported views of the current and expected value of PSNH's generating units under an appropriately designed range of future circumstances.

• What means exist to mitigate and address stranded cost recovery

"We also recommend that consultation with legislative and executive leadership begin," Staff said.

Staff noted that should PSNH no longer own generation, it would likely procure default service in a manner similar to the state's other two utilities, where residential migration to competitive supply is negligible and default rates more closely track market prices. "If PSNH were to no longer own its generation fleet, and PSNH were then to procure its default service requirements as do the other New Hampshire distribution utilities, it may be that existing opportunities for competitive suppliers in PSNH's service territory would diminish, given that PSNH's default service rate would more closely mirror prevailing market prices," Staff noted.

However, Staff reported that retail suppliers are far less interested in the "headroom" created by the significant gap between market and PSNH's default prices, as compared with supporting a market that is conducive to competition over the longer term. "Their interests focus more on a market that operates under a stable policy framework and rules. Their concerns about PSNH focus less on current default service prices and more on the institutional barriers created by the presence of the distribution company in the energy portion of the business," Staff reported.

As of March 2013, some 50,000 PSNH residential customers were on competitive supply, or about 12%.

Total migration at PSNH had increased to 49.9% of load as of the end of April 2013.