Fracking for gas to thank for Maine’s growing electricity market

It has taken a dozen years, but Maine residents and small-business owners can finally choose an electricity provider the same way they choose a cellphone carrier or an oil company.

The competitive market for selling electricity to consumers has developed over the past year with at least five companies — Dead River Co. and Gulf Oil being the latest — jumping into the business, offering electricity to Maine consumers that’s cheaper than the standard offer available through Bangor Hydro-Electric and Central Maine Power.

The results are clear. The number of CMP residential and small-business customers buying electricity from competitive providers has increased from 14,000 in August 2011 to 155,000 the same month this year.

Bangor Hydro’s customers are also moving toward competitive providers, but not as quickly. Maine Public Service Co. isn’t part of the New England power grid, and so is subject to different market factors and not considered in this article.

The Maine law that deregulated the state’s power industry went into effect March 2000. So what took so long?

Tom Welch, chairman of the Maine Public Utilities Commission, says an “interesting confluence of events,” both national and local, generated the right conditions for Maine’s market to germinate a dozen years after the seed was planted.

One of the main reasons can be traced to a rather infamous energy issue that has received national attention, but likely not considered directly relevant to Maine’s general populace — fracking for shale gas.

In a nutshell, fracking for shale gas has increased the natural gas supply, thus reducing its price for power plants that use it to generate electricity, according to Dan Dolan, president of the New England Power Generators Association.

That’s good news in New England, where gas-fired power plants generate the majority of the region’s electricity. As a result, the wholesale price of electricity in New England tracks the price of natural gas.

The promise of deregulation

Before the restructuring of the state’s power industry in March 2000, Bangor Hydro and CMP had vertical monopolies: They had exclusive service territories, owned the power plants and dams needed to generate the electricity and the transmission infrastructure to deliver it to consumers.

After deregulation, the utility companies sold their power generation assets, but remained in the delivery business. That meant Bangor Hydro, for example, would still deliver electricity to Bangor residents, but those residents were now free to buy the electricity from whatever supplier they chose.

“At the time, everybody thought the phone would be ringing off the hook at dinner time” because of all the electricity providers that were going to be competing for customers, says Eric Bryant, who was involved in deregulation in 2000 as part of Maine’s Office of the Public Advocate, where he still works as senior counsel.

Instead, the phones were silent, leaving many people “scratching our heads,” Bryant says.

A competitive market did form for the largest electricity users, the paper mills and other industrial customers, because providers could make a profit on them from the economies of scale. They were the “low-hanging fruit,” Bryant says.

However, profit margins on residential and small-business customers were so thin that competitive electricity providers didn’t see value in spending the time, money and effort to attract enough small customers to make it worth it.

Maine didn’t force anyone into the competitive market, as other states did in an attempt to spur development of a competitive electricity market — as of 2010, there were 15 states with deregulated electricity markets, according to the U.S. Energy Information Administration.

Maine’s PUC created a “standard offer” as a default option for consumers who didn’t want to choose a competitive provider. However, since no competitive providers materialized for small-scale consumers, the standard offer became the only option.

The standard offer is created by taking a three-year average of the cost of electricity the PUC sources through a competitive bid process on behalf of Maine consumers, and is central to the explanation of why a competitive market has developed in Maine.

Using a three-year average protects Maine consumers from volatility in the wholesale market for electricity, Welch at the PUC says. That system protects consumers when the price of electricity — and, therefore, natural gas — goes up, but it also means they don’t benefit as greatly when electricity prices go down, as they have the past few years.

This has allowed competitive electricity providers, such as Auburn-based Electricity Maine, which launched in the summer of 2011, to buy electricity on the wholesale market and undersell the standard offer.

In the past 14 months, Electricity Maine has signed up 170,000 Maine customers and expanded into New Hampshire, says Kevin Dean, the company’s owner.

Before Electricity Maine launched, “no one had figured out how to make money off small customers who don’t use a lot of electricity,” Bryant at the public advocate’s office says. “My hat’s off to them because they took a risk.”

Electricity Maine’s success created a “certain herd mentality,” says Welch.

Several companies, including Gulf Oil, Dead River Co. and FairPoint Energy, a subsidiary of FairPoint Communications, now sell electricity to Maine consumers, promising savings between 6 and 10 percent below the standard offer. C.N. Brown is selling electricity in New Hampshire and plans to enter Maine’s market soon, according to its website. More than a hundred competitive providers are registered with Maine’s PUC, though the majority are not active in the state. A full list of competitive electricity providers is available on the PUC’s website.

“I think that some of the rush, frankly, is by … people chasing our coattails,” says Dean.

Electricity Maine was hitting its stride as Dead River, which began selling electricity this month, was discussing the addition of electricity supply to its services. Electricity Maine’s success wasn’t the only reason Dead River jumped into the business, but it certainly was noted, says Claudette Townsend, Dead River’s director of new products and services.

“If Electricity Maine is signing up 150,000 customers, [that means] consumers are interested,” she says. “You can’t help but see that.”

Dead River, through it’s subsidiary DR Power, is selling electricity for 6.99 cents per kilowatt hour. The current standard offer rate is 7.44 cents per kilowatt hour for CMP for residential and small-business customers and 7.13 for similar Bangor Hydro customers, according to the PUC. Depending on how much electricity a customer uses, that could mean anywhere between $2 and $6 a month in savings, Townsend says. “It’s not a lot of money, but every little bit helps,” she says.

DR Power has a few hundred customers so far, and that’s without marketing the new service, Townsend says. “We’re hoping once we do [market the service], it will be a natural fit,” she says.

Fracking, natural gas and Maine’s competitive electricity market

Hydraulic fracturing is the technique in which pressurized liquids are sent into rock formations hundreds of feet below the earth’s surface, releasing and capturing natural gas. This is called shale gas, which is an increasingly important factor in the country’s energy sector.

Shale gas represented less than 1 percent of domestic gas production in the United States in 2000. In 2010, it represented more than 20 percent, according to a report from independent analysis firm Chatham House. The U.S. Energy Information Administration projects that shale gas will account for 46 percent of U.S. gas supply by 2035.

The increased natural gas supply has reduced its price in the United States, and New England, according to Dolan at the New England Power Generators Association.

New England’s gas-fired power plants no longer need to buy natural gas from the Gulf of Mexico or import it from overseas, Dolan says.

“Now it’s just coming from Pennsylvania and Ohio. It’s cheap gas and there’s a huge amount of it,” Dolan says. “Projections say over 100 years worth of new gas supply.”

Welch at Maine’s PUC admits fracking for natural gas, especially in the Marcellus Shale along the Appalachian Basin, has had a significant effect on Maine.

“It is fair to say that, generally speaking, the development of the Marcellus Shale … has had an impact on Maine’s electricity rates probably to the tune of at least a couple hundred million dollars a year in electricity savings,” Welch says. “Pretty big money.”

As natural gas prices have fallen, gas-fired power plants have become the dominant player in New England’s power generation sector. In 2000, gas-fired plants were responsible for 15 percent of the electricity generated in New England, according to ISO New England, the organization that manages the region’s power grid. In 2011, they generated 52 percent of the region’s electricity.

The falling natural gas prices have spurred development of competitive electricity markets in New Hampshire and Connecticut, as well as Maine. — Vermont is the only state in the region that has not restructured its electricity industry.

“Ten years ago it was a different world. We relied on oil and coal for power generation,” Dolan says. “Now after we’ve switched to natural gas we’ve seen lower costs and tremendous reductions in emissions. It’s been a great story for New England in that regard. It’s not often you get the best of both worlds, but this is one of them.”

Is the competitive market here to stay?

The development of a competitive market for electricity has begun what Welch calls “a virtuous circle” and could eventually lead to the standard offer’s demise.

“In the long term there will be fewer and fewer people on the standard offer, and that will make the standard offer more difficult to supply,” Welch says, which in turn will make it more expensive for the standard-offer provider. “And that will push more people into the competitive market.”

But there are ways the PUC could help foster the future of Maine’s competitive market, says Dean at Electricity Maine.

For one, while the standard offer’s three-year average helps competitive providers when wholesale electricity prices are low, it will also hurt them if the market shifts and wholesale electricity prices increase.

“If you truly want a competitive market, you need to make the standard offer provider … more accurately reflect near-term market pricing,” Dean says. “If you don’t, what you do is create waves of opportunities, so you see competitive markets come and go.”

Welch says Dean’s point is well taken and is sure the PUC will reassess how best to handle the standard offer now that a competitive market has developed.

“I think any time you have gained additional real-world experience with a market — in this case the residential market for electricity — it always makes sense to take a look at whether the rules you established before you had that experience still make sense,” Welch says.

For now, though, Welch, who was chairman of the PUC when deregulation occurred, is just happy to see a competitive market develop in Maine, even if 12 years later than expected.