You asked the following questions regarding the recent Connecticut Light and Power (CL&P) rate increase:

1. What was CL&P’s rationale in seeking the increase?

2. How did the state respond to the proposal?

3. What was the final Department of Public Utility Control (DPUC) decision in the case?

4. Are there on-going efforts to reduce the increase?

SUMMARY

In November 2004, DPUC reopened its decision setting rates for CL&P’s transitional standard offer service. CL&P argued that it needed a rate increase to recover (1) increased costs for power it had purchased on the wholesale market for this service pursuant to state law and (2) increases in federally mandated costs associated with congestion on the transmission system. The proposal also reflected an increase in the company’s distribution costs that DPUC had already approved.

The governor, the attorney general, and the Office of Consumer Counsel opposed the proposal. They argued that DPUC should defer the increase or take various steps to mitigate it. The attorney general moved to dismiss the proposal, arguing that it violated the statutory cap on electric rates. DPUC denied the motion to dismiss and subsequently approved CL&P’s application on December 22, 2005. The increase went into effect January 1, 2005. The decision will result in a residential customer who uses 700 kilowatt-hours per month paying approximately $ 8. 41 more per month. There will likely be a further increase in May 2005, when an existing credit on customer bills expires.

To date, no one has appealed the DPUC decision; the deadline for doing so is early February. If there is no appeal, or an appeal is unsuccessful, the rate increase will remain in effect.

On the other hand, DPUC, the Office of Consumer Counsel, and the attorney general have appealed a decision by the Federal Energy Regulatory Commission that they believe would substantially increase rates starting in 2006. The issue is discussed in a DPUC press release (attached).

BACKGROUND

By law, CL&P and United Illuminating must provide transitional standard offer service to consumers who do not choose a competitive supplier (only about 1% of consumers are currently served by a supplier). The companies must procure power for this service using a bidding process, following principles approved by DPUC and subject to the oversight of a DPUC-retained consultant.

The rate for this service is capped at the companies’ 1996 rates. However, federally mandated charges associated with congestion on transmission system do not count towards the cap. In addition, the energy adjustment clause remains in effect and is not subject to the cap. The clause modifies rates, up or down, to reflect the cost of power that the companies buy from wholesalers and certain other costs.

In December 2003, DPUC set CL&P’s rate for transitional standard offer service for 2004. At that point, CL&P had entered into contracts for all of the power it needed to provide standard offer service to its customers in 2004, and part of the power it needed for 2005.

In a separate December 2003 decision, DPUC authorized an increase in the company’s distribution rates, which covers the cost of the company’s local distribution system. The increase was $ 25. 1 million in 2005, $ 11. 9 million in 2006, and $ 7 million in 2007. The 2005 increase would raise overall rates by about 1%.

The overall rate covers, in addition to the distribution component, the company’s costs of purchasing power on the wholesale market, transmission costs (including federally mandated charges related to transmission congestion), and several charges established by the legislature in connection with its opening of the electric industry to competition. The charges appear as separate lines on customers’ electric bills. Several of the charges are designed to cover specific costs incurred by the company. In some years a charge may overrecover these costs, while in other years it may underrecover costs.

In 2004, DPUC ordered the company to provide two credits against customers’ bills. The first credit, equal to 1. 1 cents per kwh, reflected a settlement between CL&P and its wholesale supplier with regard to liability for congestion costs incurred during 2003. This credit ended on December 31, 2004. The second credit arose from an overrecovery. In 2003, CL&P collected more revenue from a charge called the competitive transition assessment (CTA) than it needed to pay that year’s share of its stranded costs, which the charge is designed to cover. Stranded costs are DPUC-approved costs that were previously recovered in the company’s rates, but whose continued recovery was jeopardized with the introduction of competition in the electric industry. The CTA credit is 0. 63 cents per kwh and will run through April 2005.

On November 24, 2004, DPUC reopened its transitional offer service decision to set the rates for this service in 2005. The size of the rate increase that was ultimately approved depends on the period used to make the comparison.

The DPUC decision increases rates from January 2004 (when neither credit was in effect) to January 2005 (when the second credit remained in effect) by 10. 3%. In contrast, the increase from December 2004 (when both credits were in effect) to January 2005 (when the first credit was no longer in effect and the rate increase went into effect) was approximately 32%. Actual rates in 2005 may vary due to (1) steps that DPUC took in its decision to mitigate the impact of the expiration of the second credit and (2) changes in congestion costs.

RATIONALE FOR CL&P PROPOSAL

CL&P proposed to raise its average rate, disregarding the credits, from 10. 78 cents per kilowatt-hour (kwh) to 12. 59 cents per kwh, a 16. 7% increase. It attributed the bulk of the increase (10. 8%) to higher supply costs it incurred in procuring the remainder of the power it needed to provide transitional offer service in 2005. It attributed 4. 9% of the increases to higher federally mandated congestion costs, including under recoveries of previously incurred congestion costs. Finally, it attributed about 1% of the increase to DPUC-approved increases in the distribution rate. The company argued that the higher supply costs were beyond the company’s control and were incurred in a DPUC-approved bidding process. It argued that the congestion costs were mandated by federal law.

CL&P proposed that part of the increase in the supply cost (0. 25 cents per kwh) be recovered through the generation services component of electric bills, which is subject to the rate cap. It proposed that the remaining portion of the increase (0. 82 cents per kwh) be recovered through the energy adjustment clause, which is not subject to the cap.

STATE RESPONSE

The governor sent a letter to DPUC, arguing that the proposed increase would place an undue burden on families and businesses already struggling with high energy costs. She urged DPUC to test CL&P’s assertions and ensure that the supply contracts that CL&P entered reflected stable rates rather than just recent spikes in energy prices. In the DPUC proceedings, the Office of Consumer Counsel argued that DPUC had to provide closer oversight of the company’s procurement process and should conduct a review of the bid process in an open forum.

Motion to Dismiss

The attorney general moved to have the proposal dismissed, arguing that the proposed increase violated the rate cap. He claimed that using the energy adjustment clause to recover the bulk of the increase in supply costs violated the plain meaning and intent of the cap. His argument centered on CGS Sec. 16-244c(b)(2)(B), which specifies the charges that are subject to the cap. CL&P countered that the law specifically exempted the energy adjustment clause from the cap. As discussed below, DPUC denied the motion.

Agency Proposals to Defer or Mitigate Increase

The attorney general and the Office of Consumer Counsel next argued that DPUC should defer the part of the increase attributable to under recovery of the company’s transmission congestion costs in 2003 and 2004, amounting to $ 150 million.

The agencies also suggested several ways to mitigate the rate increase, including:

1. suspending the CTA, other than the amount need to pay off securitization bonds that had already been issued;

2. refinancing these bonds;

3. recalculating the transmission congestion cost estimate for 2005 based on more recent and higher sales forecasts for this period, and

4. using the excess revenue the company had collected from the CTA and another charge on electric bills as an offset to the increase.

In addition, the attorney general advocated rolling back the DPUC-approved 2005 increase in distribution rates.

DPUC DECISION

Motion to Dismiss

DPUC denied the attorney general’s motion to dismiss. It found that the law, taken as a whole, allows the energy adjustment clause to be used in the way proposed by CL&P and that this does not violate the rate cap. It also noted that the law entitles the company, notwithstanding the cap, to recover the costs it reasonably incurred in providing transitional standard offer service. It found that denying the company’s proposal with regard to its supply cost would force it to absorb more than $ 350 million in 2005, which would be inconsistent with this provision.

Deferral and Mitigation of the Increase

DPUC also rejected the idea that the rate increase be deferred. It stated that deferrals were most appropriate for one-time capital costs. In contrast, the vast majority of the costs at issue in the case were ongoing costs for purchased power and transmission congestion costs. It stated that customers should pay these costs on a current basis, while maintaining rate stability where possible.

DPUC rejected several of the proposals to mitigate the rate increase. It found that refinancing the securitization bonds would increase rates in the longer run. It held that rolling back the increase in distribution rates would undermine the finality of its decisions. It held that using the revised sales forecast, without considering other factors, would be inappropriate with regards to the distribution and transmission components of rates. It noted that the other rate components will be adjusted to account for changes in sales and other factors.

On the other hand, DPUC agreed that over-recoveries of the CTA and the other charge should be used to offset the rate increase. It ordered that this money be used to offset the rate increase attributable to the expiration of the second credit in May 2005. DPUC estimates that the overrecoveries will amount to approximately $ 72 million. CL&P anticipates that this money will substantially reduce, but not eliminate, this part of the increase. However, further increases in its 2004 transmission congestion costs may result in further rate increases.

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