PUBLIC UTILITY RATES; ELECTRIC UTILITIES;

UTILITIES - ELECTRIC;

You asked for a summary of the Department of Public Utility Control’s (DPUC) recent decision authorizing a rate increase for the Connecticut Light & Power Company (CL&P). The decision (No. 03-04-07) is available on DPUC’s Website http: //www. state. ct. us/dpuc.

SUMMARY

In April 2003, CL&P petitioned DPUC for an 8% rate increase through the end of the year to cover costs incurred by its wholesale suppliers that were passed on to CL&P. The increases resulted from changes in the way the federal government regulates wholesale prices, particularly those related to congestion on the transmission system.

Although DPUC believes that CL&P wholesalers, rather than the company itself, may be financially responsible for paying the cost increase, on May 1, 2003 it granted CL&P’s petition but only for a short period, in order to maintain the reliability of standard offer service, which covers nearly all of its customers. DPUC allowed the increase to run for the next 60 days only. It ordered CL&P to file a bond equal to the amount of revenue raised by the increase. This money is subject to refund and CL&P must report to DPUC within 60 days after collection begins on the steps the company has taken to recover the money from its wholesalers.

BACKGROUND

By law, CL&P and United Illuminating must provide standard offer service to their customers who do not chose a competitive supplier. (To date, fewer than 2% of customers have done so. ) The rates that the utilities can charge for this service are capped at their 1996 rates, minus 10%. But DPUC may adjust these rates using the energy adjustment clause, to reflect changes in the costs of the power that utilities buy to provide the service. The law allows, and in some cases requires, DPUC to adjust rates to reflect other changes in the utilities’ costs.

CL&P APPLICATION

On April 22, 2003, CL&P petitioned DPUC to raise its standard offer rate to reflect new costs arising from the federally mandated standard market design (SMD) that had been charged to CL&P’s wholesale suppliers. In March, 2003, these costs amounted to $ 15. 5 million. CL&P sought to recover part of the money through the energy adjustment clause and part through generation service component of electric bills.

SMD changed several pricing rules in the wholesale electric market, which is regulated by the Federal Energy Regulatory Commission (FERC) rather than by DPUC. The most salient of these changes, which went into effect in March 2003, deals with the recovery of costs associated with transmission congestion. Transmission congestion in an area limits the ability to bring in relatively cheap power from outside the area. Instead, power plants in the area must be used to meet local demand, even if they are less efficient and more expensive than plants outside of the area. As described in OLR memo 2002-R-0292, southwest Connecticut has significant transmission congestion. Southwest Connecticut includes approximately one-third of the state, including most of New Haven County and part of Litchfield County, as well as all of Fairfield County. Historically, ratepayers across New England paid for the costs of this congestion, but under SMD these costs have been assigned to Connecticut since March 2003. OLR memo 2002-R-0909 discusses SMD in greater detail.

In its petition, CL&P requested 0. 57 cent per kilowatt-hour increase in its standard offer rate, resulting an increase in the total rate of approximately 8%. CL&P asked that the increase run through December 31, 2003, when the standard offer service requirement is scheduled to

end. The petition implicitly asked DPUC to accept the company’s interpretation of the contracts it has with its wholesale suppliers. These are NRG Power Marketing, Duke Energy, and Select Energy (which is affiliated with CL&P).

On April 24, 2003, the Attorney General sought a ruling that the proposed increase was imprudent. The Attorney General argued that the wholesale contracts place the risk of SMD cost increases on the wholesalers, rather than on CL&P. He noted that CL&P itself had made a similar argument in a pending federal court case against NRG Power Marketing.

DECISION

In its decision, DPUC observed that there are strong arguments that can be made that the wholesalers, rather than CL&P, are financially responsible for the SMD costs. But it noted that this issue is under FERC’s jurisdiction and is the subject of a federal court case. DPUC held that it is of “paramount importance” that the reliability of power for standard offer service be maintained. It therefore approved the recovery of the SMD costs, but only for 60 days. It required that the costs be recovered solely through the energy adjustment clause, since modifying the generation service component would require re-opening a quasi-judicial contested case (different laws govern the two components of electric rates).

The recovery is subject to a refund to ratepayers (presumably if FERC determines that the wholesalers are responsible for the cost). CL&P must file a bond with DPUC for the amount of the recovery. Within the 60 days, CL&P must report to DPUC the legal steps it has taken against its wholesale suppliers if they continue to resist accepting liability for the SMD charges.

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