Consumer Advocate Calls for Default Energy Service Reforms

Nearly 28 years after New Hampshire’s Legislature passed its landmark legislation restructuring the state’s electric industry, it’s time to take a new look at a key aspect of restructuring – default energy service.  That’s the recommendation made by the Office of the Consumer Advocate (“OCA”) to the Public Utilities Commission this week.

“We need to revisit some of the fundamental assumptions that drive the electric service we provide to customers who do not choose a non-utility supplier of their energy,” said Consumer Advocate Donald Kreis.  “Default energy service, as presently offered by our three investor-owned electric distribution companies, is not meeting the needs of the residential customers whose interests we represent.”

The OCA filed a memorandum with the PUC authored by Director of Economics and Finance Marc Vatter, PhD.  “Customers should not be discouraged from using default service, and utilities should not be prevented from making default service attractive,” Vatter recommended.

Since the advent of restructuring, almost without exception, the state’s three investor-owned electric distribution companies (Eversource, Liberty, and Unitil) have served their residential default energy service load by issuing Requests for Proposals from wholesale suppliers every six months on an “all-requirements” basis.  This is a blunt instrument; the PUC has precluded utilities from doing anything to manage their default service portfolio to make it cheaper, better, and more competitive with what is available from non-utility sources.

As a result, the New Hampshire Electric Cooperative – whose “Co-op Power” service is the equivalent of default energy service, but not subject to PUC review – has consistently been able to beat the investor-owed utilities’ default energy service prices in recent years.  So, too, with the prices offered by the Community Power Coalition of New Hampshire, which began offering service last year and is on its way to serving 40 percent of the state’s electric load.

That particular façade has recently taken on a major crack.  Last year, the PUC signaled to Eversource, Liberty, and Unitil that it wanted them to experiment with purchasing some of their default energy service power from the “spot” market through which wholesale energy trades in New England via the regional grid operator ISO New England.  On March 29, the Commission issued its first order approving such a plan, directing Liberty to make the spot market 20 percent of its default energy service portfolio beginning in August.  The Commission is expected to issue similar orders for Eversource and Unitil soon.  In a recent hearing, Liberty suggested purchasing call options on the futures market, where prices are less volatile than on the spot market, and the Commission expressed interest in the idea.

On the same day the PUC issued its Liberty order, the New Hampshire Department of Energy released its long-awaited report on “Solicitation and Procurement of Default Electric Service in New Hampshire,” compiled by the consulting firm Exeter Associates.  The Exeter Report calls for few changes to default energy service in New Hampshire beyond the possible addition of so-called “laddering.”

Basically, “laddering” would allow the utilities to stagger their purchases, similar to the dollar-cost averaging that individual investors often use to manage their savings.  Exeter equivocated on its laddering recommendation, noting that it should only be adopted if “key stakeholders value rate stability over market reflectiveness.”

The OCA, in effect, is urging the Commission and the utilities to go farther.  “Given the economies of scale in retail sales that we have quantified, rates cannot be reduced through competition among small independent suppliers” as hoped for by the drafters of the 1996 Restructuring Act, Vatter wrote.  “[B]ut they can be reduced by allowing utility default service providers the same flexibility allowed to community aggregators, who are also default service providers.3 Not, of course, the flexibility to exercise market power, but to make utility default service as attractive as possible to customers.”

As noted above, Vatter in his memorandum to the PUC noted that the Restructuring Act also defines retail electricity provided by municipalities, through their emerging opt-out community power aggregation programs, as default energy service.  Therefore, Vatter urged the Commission to consider designating community power aggregation programs as the sole provider of default energy service in the municipalities they serve.

In making these recommendations, the OCA knowingly parts company with its counterparts in neighboring states, who have recommended an end to retail electric choice for residential customers.  On April 1, Massachusetts Attorney General Joy Campbell issued a report concluding that residential customers who switched to and received their electric supply from competitive suppliers paid over $577 million more on their electric bills than they would have paid if they stayed with their utility company’s basic service.  This prompted Campbell to renew her office’s longstanding call for an end to retail electric choice for residential customers in Massachusetts.

“I agree with my counterparts in Massachusetts, Connecticut, and Maine that residential customers have received essentially no benefits from switching away from default energy service or its equivalent,” responded Kreis.  “But retail choice is a big deal here in the ‘Live Free or Die’ state, so we are not recommending that New Hampshire’s retail customers be stripped of their right to choose a competitive electric supplier.”

In his memorandum filed on behalf of the OCA, Vatter stated:

The economies of scale in provision of commodity are not as great as those in distribution, and the OCA does not, at least at this time, seek a mandatory end to retail choice in New Hampshire.  Retailers with small market shares cannot underprice default service if default service providers are freed to make default commodity as appealing as possible to customers.  Independent retailers may be unable to compete, and exit the market of their own accord.  If they generally do, the benefits of economies of scale will be secured for customers without running afoul of letter of the [Restructuring] Act, if not of its mistaken premise regarding the cost structure of the industry (which is that there is a cost-minimizing level of sales for the firm that is small relative to demand).

The OCA filed its memorandum on the future of default service, at the invitation of PUC Chairman Daniel Goldner, in the docket that led to the agency’s order directing Liberty to purchase some of its default power from the spot market.  Consumer Advocate Kreis said he was not sure where or how the discussion would unfold from here, but he predicted the relevant policy discussions will take place at both the PUC and at the State House.