You requested a discussion of the arguments for and against splitting the state into two retail electric pricing zones.

BACKGROUND

Currently, retail rates for the state’s two electric companies are uniform within their service territories. Recently, the Federal Energy Regulatory Commission (FERC), which has jurisdiction over the wholesale electric market, ordered that the state be split into two zones with regard to certain wholesale costs. One zone will encompass 54 towns in southwestern Connecticut, the other the remainder of the state. (Table 1 lists the towns in the southwestern zone. ) All of United Illuminating customers are in the southwestern zone, while Connecticut Light and Power’s customers are split between the two zones.

The decision whether to split the state into zones for purposes of retail rates is up to the legislature or, in the absence of legislative direction, the Department of Public Utility Control (DPUC). This report addresses arguments for and against establishing two zones for retail pricing, rather than the merits of the FERC order, which the DPUC, Office of Consumer Counsel, attorney general, and others have appealed to the federal courts. On the other hand, the report assumes that wholesale and retail zones would be coterminous.

Table 1: Southwestern Connecticut Whole Electric Price Zone

The growth in power demand in southwestern Connecticut has exceeded the growth in supply there. This has contributed to congestion in the electric transmission system in this region and increased the cost of serving the region. Because of the congestion, owners of older, less efficient power plants in the region are paid to make their plants available during periods of peak demand. In addition, the Independent System Operator-New England, which runs the regional transmission grid, has implemented other supply and demand response programs to ensure system reliability. The cost of these measures will be approximately $ 300 million in 2005 and more in the next few years, with all Connecticut consumers paying this cost. The companies have received approval to build a transmission line from Bethel to Norwalk, and are seeking approval to build a line from Norwalk to Middletown to address the congestion. While these lines would substantially reduce the annual congestion costs, they will cost more than $ 1 billion.

ARGUMENTS FOR TWO ZONES

Proponents of establishing two zones make economic and equity arguments in favor of their position. Establishing two retail zones would increase electric rates in southwestern Connecticut, as the congestion-related costs described above would be assigned to customers in the region rather than to all Connecticut customers. Economic theory suggests that this would lead to increased energy efficiency in southwestern Connecticut. It could also encourage some customers to install on-site generation. This would reduce the supply/demand imbalance in the region and reduce pressures on the transmission system. Establishing two retail zones would also be consistent with the establishment of two wholesale zones, which would provide incentives for building new power plants in southwestern Connecticut (although the retail rate structure does not directly affect plant owners, who operate in the wholesale market).

Proponents of establishing two retail zones also believe that it is unfair to ask residents of the rest of the state to pay for costs that are created in southwestern Connecticut. They believe that the costs are largely the result of the region’s reluctance to accept new power plants and transmission lines. The proponents believe it is particularly unfair to require residents outside of this region to pay for costs, notably the added costs of burying parts of the Bethel-Norwalk and Norwalk-Middletown transmission line, for which they receive no obvious benefit. Moreover, residents of southwestern Connecticut can take steps to alleviate the supply/demand imbalance in the region, while residents of the rest of the state are powerless to affect this situation.

ARGUMENTS AGAINST TWO ZONES

Opponents of creating two retail zones believe that it would jeopardize economic development in southwestern Connecticut. While the region has fewer than one-third of the towns in the state, it accounts for 50% of the state’s electricity demand, indicating that it generates a comparable proportion of the gross state product. Creating two zones would raise the cost of living or doing business in the area, which could make it less competitive with regions of other states. This could harm state tax revenues as well as the state’s overall economic climate.

Creating two retail zones may also serve as a precedent, promoting parochialism in the way the state addresses its problems and challenges. For example, the rationale behind establishing two retail electric pricing zones could be used to support a two-tier gasoline tax, with higher rates charged in Fairfield County to address its traffic congestion problems. This type of approach could set one part of the state against another, to the detriment of the state as a whole.

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