You asked:

1. how electric rates in Connecticut have changed since the legislature passed PA 98-28, which restructured the electric industry in the state;

2. how PA 98-28 and subsequent restructuring legislation has affected electric rates;

3. whether such legislation has limited the ability of the Department of Public Utility Control (DPUC) to constrain rate increases; and

4. what the attorney general is doing to address rate increases.

SUMMARY

PA 98-28 opened the state's retail electric market to competition; required the electric utilities to serve those customers who did not choose a competitive supplier, initially at a discount; and effectively required the utilities to sell off their power plants. Subsequent legislation changed how the service provided to customers who do not choose a competitive supplier is priced, among other things.

Electric rates fell in the wake of passage of PA 98-28. Rates have subsequently increased, primarily due to increases in wholesale costs. The average rate for Connecticut Light & Power (CL&P) customer in 2005 was approximately 30% higher than the average rate in 1998. In addition, the DPUC has approved a rate increase for 2006 that will raise CL&P's rates by 22. 4% compared to 2005. The increase in average rates for United Illuminating (UI) customers between 1998 and 2005 was approximately 10%. UI is currently seeking an increase in the transmission and distribution component of its bills that, if approved, would increase overall rates by 9. 3% by 2009, of which 5. 1% would occur in 2006. In addition, that part of UI bills attributable to the cost of power will likely increase in 2007, given current market conditions.

It is unclear what overall effect, if any, Connecticut's restructuring legislation has had on rates since there is no good basis of comparison, either across states or over time. It appears that opening the market to competition, in itself, had little effect on rates because a competitive market has not yet developed.

The restructuring legislation did not affect the law that requires DPUC to set rates to reflect a utility's prudently incurred costs. It did, however, require the utilities to buy power on the wholesale market rather than generating it themselves, which might have been a less expensive option. It also limited DPUC's ability to defer rate increases.

The attorney general participated in the recent CL&P rate case as a party and unsuccessfully sought to defer half of the rate increase. The attorney general is also participating in two federal proceedings, attempting to change how electricity is priced at the wholesale level in order to reduce pressure on retail rates.

RECENT RATE CHANGES

Table 1 describes how electric rates changed from 1998 (when the initial restructuring legislation was adopted to 2005) for CL&P and UI. The rates are expressed in cents per kilowatt-hour, calculated by dividing each company's revenues by its total sales. The two utilities serve approximately 95% of the customers in the state. Fewer than 1% of the customers in the service territories of the utilities are served by competitive suppliers, whose rates have been slightly lower than those of the utilities. In addition, about 4% of Connecticut residents are served by municipal utilities.

Table 1: Changes (%) in Connecticut Electric Rates, 1998-2005

Source: Department of Public Utility Control

As required by PA 98-28, the utilities' 2000 rates were 10% below the rates charged in 1996 (the discount requirement did not apply to those large customers who were already paying reduced rates under special contracts). Rates for both companies were fairly stable through 2003. In 2004 and 2005, both utilities incurred significant federally-mandated costs related to congestion on the transmission system, which they passed on to their customers. In addition, CL&P incurred higher purchased power costs. In contrast, UI had been able to procure contracts in 2003 that covered its demand for the 2004-2006 period.

As discussed in OLR Report, 2006-R-0034, DPUC has approved a significant rate increase for CL&P for 2006. As of January 1, 2006 average rate increased by approximately 17. 5%. On April 1, 2006, rates will increase by an additional 4. 9% to a total of 22. 4%. As a result of these increases, the average residential CL&P customer using 700 kilowatt hours per month will experience an increase of approximately $ 18. 25 in their monthly electric bill in January 2006 compared to December 2005 and an additional increase of $ 5. 11 beginning April 1, 2006.

UI is currently served by a three-year supply contract that ends in December 2006. DPUC staff anticipate that, unless wholesale market prices decrease dramatically, UI customers will face a very large rate increase in 2007, perhaps 40% or more.

RELATIONSHIP BETWEEN RESTRUCTURING AND RATE CHANGES

Connecticut's restructuring legislation (1) opened the industry to competition at the retail level; (2) required CL&P and UI to provide standard offer service to customers who did not choose a competitive supplier, initially at a discount from the rate they had previously charged; (3) effectively required CL&P and UI to auction off their power plants and other generation assets (they would have been exposed to a loss of more than $ 1 billion if they did not conduct the auction), and (4) imposed several charges to reflect public policies, e. g. , to increase funding for conservation programs.

Evaluations of the impact of state legislation routinely take two forms (1) comparisons of what happened in states that have adopted the legislation with what happened in similar states that did not and (2) trends over time in the state that adopted the legislation. For a variety of reasons, it is difficult to determine the impact of Connecticut restructuring legislation on rates using either of these approaches. It does appear that the opening of the market to competition did not, in itself, affect rates since a competitive market has not yet developed.

Comparing Connecticut with Other States

It is difficult to determine the impact of Connecticut's electric restructuring legislation on rates by comparing Connecticut to other states. In part this is because nearly all of the northeastern states restructured their electric industries at about the same time that Connecticut did. Moreover the legislation in these states is broadly similar to Connecticut's, particularly in how it affected residential customers. As a result, there is effectively no baseline for a comparison in the region.

Vermont is the only state in the region that has not restructured its electric industry. Electric rates in Vermont were higher than in Connecticut in late 1990s, but are currently lower than Connecticut's rates. It is unclear to what extent these differences are attributable to restructuring. Vermont obtains most of its electricity from nuclear and hydroelectric plants, while Connecticut relies much more on natural gas and oil plants, which have had significant price increases in recent years. In addition, a large part of the recent rate increases in Connecticut have been due to congestion on the transmission system, which is a less significant problem in Vermont.

Comparing Connecticut to states in other regions, about half of which adopted restructuring legislation, is also difficult. Many of these states rely heavily on coal-fired power plants, which have experienced far less volatility (ups and downs) in fuel prices than the plants serving New England. The way that electricity is used also varies by region. For example, electricity is commonly used for space heating in the southeast, while most homes in the northeast use oil or natural gas. As a result, electricity use in the southeast tends to be more balanced between summer and winter, which tends to moderate prices.

Comparing Connecticut's Electric Rates Over Time

Projecting how electric rates in Connecticut would have changed if the state had not adopted restructuring legislation is inherently speculative. As noted above, rates did fall during the period that standard offer was in effect (2000 through 2003), as required by the legislation. More recently, several events not directly related to restructuring have significantly affected electricity rates. Fuel prices, particularly for natural gas, have increased substantially, in part because of the destruction caused by the 2005 hurricanes. The increase in natural gas prices has a great impact on electricity prices across the northeast because practically all of the power plants built since the passage of restructuring legislation have been designed to use this fuel.

Other factors increasing electric rates have been the charges associated with transmission line congestion and uncertainty regarding the future of these charges. The demand for electricity in some regions, including the southwestern third of Connecticut, significantly exceeds supply available at normal market rates, while constraints on the transmission system limit the ability to import power to these regions. As a result, older, less efficient power plants in these regions must continue to run and their owners receive supplemental payments to cover their higher costs and to make their plants available as a form of insurance to guarantee system reliability. These “federally-mandated congestion costs” have increased substantially in recent years as the growth in demand in these regions has outpaced supply.

The Federal Energy Regulatory Commission (FERC), which has jurisdiction over the wholesale electric industry, has proposed replacing this system with one called Locational Installed Capacity (LICAP). LICAP would impose market-based charges on utilities serving congested areas. The idea is that this would encourage the construction of new power plants and transmission lines and promote conservation in these areas. However, the DPUC and others believe that this system could increase the cost of electricity in the state by several hundred million dollars per year. Originally, the LICAP system was scheduled to go into effect on January 1, 2006, but FERC is now reconsidering its decision. It is unclear how and when LICAP will be implemented. The uncertainty regarding the future of this charge may be another factor behind the increase in wholesale prices incurred by CL&P which was reflected in its recent rate increase.

Impact of Opening the Market to Competition

It appears that the provisions of PA 98-28 that opened the retail market to competition did not, in themselves, affect rates. As noted above, fewer than 1% of customers are currently served by competitive suppliers and this proportion has not exceeded 2% at any time since the adoption of PA 98-28. Most of the states that adopted restructuring legislation have seen little development of a competitive market for residential and small business customers.

Connecticut is unusual, if not unique, among the states that have adopted restructuring legislation in that very few large customers have chosen competitive suppliers. It is unclear why this is so, although suppliers have pointed to the way that DPUC has set rates for the utility service and the fact that the legislature has significantly modified the restructuring legislation several times since the passage of PA 98-28.

Proponents of restructuring have asserted that the development of competitive markets in other states, at least for large customers, has substantially reduced costs. For example, the Center for the Advancement of Energy Markets estimates that consumers in the PJM region (most of the mid-Atlantic and parts of the Midwest) will benefit by over $ 30 billion due to restructuring. On the other hand, a 2005 study by Carnegie Mellon University researchers argues that restructuring has introduced several elements into the industry that act to raise costs. These include uncompetitive markets for essential services, paying market clearing prices for all generation, and a large increase in the cost of capital due to increased uncertainty.

DPUC'S ABILITY TO CONSTRAIN RATE INCREASES

Under CGS § 16-19e, utilities are entitled to recover, through rates, costs that they prudently incur in serving their customers. This provision dates back to the beginning of utility regulation in the early 20^th century and was not affected by the restructuring legislation. Historically, changes in an electric utility's cost of fuel and purchased power were reflected through the energy adjustment clause component of rates. Again, this provision was not affected by the restructuring legislation.

However, the legislation did effectively force the utilities to sell off their power plants and instead buy power on the wholesale market. Prior to 2005, the law also precluded them from re-purchasing power plants or building new plants. As a result, the law did constrain DPUC's ability to allow the utilities to re-enter the generation business or order them to do so, even if this option would have been less expensive than buying power on the wholesale market. It is unclear whether rates would have been higher or lower had the utilities remained in the generation business. PA 05-1, June Special Session, does allow the utilities to re-enter the generation business, under specified circumstances and with DPUC approval.

The restructuring legislation also constrained DPUC's ability to defer rate increases. Prior to restructuring, DPUC occasionally deferred the utilities' recovery of certain cost increases in order to minimize rate shock. The deferred costs were treated as a regulatory asset for accounting purposes. The utilities ultimately did fully recover these costs, plus interest. This mitigated the rate increase, although it increased rates in the long run.

ATTORNEY GENERAL'S INITIATIVES

The attorney general participated in the recent CL&P rate case as a party. It sought to amend the bidding process in order to, in its perspective, make it more open. After DPUC issued its draft decision, the attorney unsuccessfully argued that it should defer half of the increase and treat it as a regulatory asset. (The final decision does not address this proposal. ) After the final decision was issued, the governor requested that the attorney general help develop legislative proposals to amend the process by which DPUC approves rates, which he anticipates issuing later this month.

Currently, the attorney general is participating in two FERC proceedings where he is seeking to reduce upward pressure on electric rates. The attorney general, DPUC, and other Connecticut parties have been contesting the LICAP proposal. Among other things, the parties argue that while the LICAP system is designed to encourage the construction of new power plants in areas such as southwest Connecticut, such construction cannot take place until the transmission lines currently under construction go into service (2007-2009). The attorney general asserts that LICAP will result in consumers paying even more money to the generators that already are earning excess profits. This proceeding is currently before a FERC administrative law judge who is seeking to develop a settlement among the generators, the Connecticut parties, and others.

In addition, September 2005, the attorney general, the Office of Consumer Counsel, the Connecticut Municipal Electric Energy Cooperative and the Connecticut Industrial Energy Consumers filed a complaint at FERC asking that it modify rules governing the wholesale market to prevent what they refer to as price gouging. If successful, the attorney general believes that the proposed changes should reduce Connecticut's overall electric bill by nearly $ 1 billion a year. It is unclear when or whether FERC will act on this complaint.

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