You asked for a discussion of legislative options to address substantial increases in sewer rates in your district, including the possibility of giving the Department of Public Utility Control (DPUC) jurisdiction in this area.

SUMMARY

Town and regional water pollution control authorities (WPCAs) provide sewer service in most parts of the state. The law specifies the process WPCAs must follow in setting rates, but does not subject them to DPUC rate regulation.

Among other options, the legislature could (1) subject WPCAs to traditional DPUC rate regulation; (2) subject them to alternative forms of regulation such as rate indexing; (3) retain the WPCAs jurisdiction over their rates, but make them subject to rate-making principles similar to those that apply to DPUC in its regulation of private utilities; (4) provide for a ratepayer advocacy function in the setting of WPCA rates; or (5) require that particularly large rate increases be phased in.

Among the issues the legislature might wish to address in reviewing WPCA rate regulation is the fiscal impact of additional oversight and the precedent that changes in this area might set for the regulation of other municipal utilities that are not currently regulated by DPUC.

BACKGROUND

WPCAs provide sewer services in most urban and suburban areas in the state. (OLR Report 2004-R-0667 describes their powers and responsibilities. ) Under CGS § 7-246(a), a municipality may adopt an ordinance to establish a WPCA and can designate a new or an existing board or commission or the legislative body to be the authority. Under CGS § 7-255, a WPCA can set “fair and reasonable” connection charges and usage rates, including minimum charges and rates. It can establish separate rate classifications for industrial and other types of customers. It can consider six factors when establishing charges, including the volume of water the customer discharges to the system and the types and size of the customer's building.

The WPCA must hold a public hearing on proposed charges and rates and must publish a newspaper notice describing the charges and rates at least ten days before the hearing. It also must file the proposed charges and rates in the municipal clerk's office. After adopting or revising charges and rates, the WPCA must file them with the municipal clerk's office and publish another newspaper notice. Customers can appeal charges to the courts within 21 days after the proposed change is filed in the clerk's office. Municipalities can adopt ordinances to provide for alternative payment procedures for elderly customers who are eligible for the circuit breaker tax relief program.

The Metropolitan District Commission (MDC) provides sewer services in the greater Hartford area (Bloomfield, East Hartford, Hartford, Newington, Rocky Hill, West Hartford, Wethersfield, and Windsor). For most MDC customers, the cost of these services is recovered through their property taxes on an ad valorem basis rather than through sewer charges and rates. However, industrial and commercial customers with an average daily sewage discharge of over 25,000 gallons and tax-exempt organizations pay sewer rates based on their water use.

LEGISLATIVE OPTIONS

DPUC Jurisdiction with Traditional Rate Regulation

DPUC currently regulates a wide range of energy, water, and telecommunications companies. Under CGS § 16-19, DPUC would also have jurisdiction over for-profit sewer companies, if any were established in the state.

The legislature could subject WPCAs to traditional DPUC rate regulation. Under traditional rate regulation, a utility is authorized to charge rates that just cover its operating costs and pay for its DPUC-approved capital investments, including a DPUC-approved rate of return on these investments. (These regulatory principles are specified in CGS § 16-19e. ) DPUC sets rates in a quasi-judicial proceeding, in which the utility and other parties in the proceeding must respond to interrogatories and are subject to cross-examination.

Alternative Rate Regulation

While traditional rate regulation ensures that a utility's rates accurately reflect its costs and can discourage utilities from making unnecessary expenditures by denying them rate recovery for such expenditures, it can be cumbersome and expensive. Rate cases can take several months and, in the case of larger utilities, cost several hundred thousand dollars per case.

The legislature might want to place WPCAs under DPUC jurisdiction but subject them to alternative forms of rate regulation. Examples of alternative regulation include allowing rates to rise with inflation or to fluctuate within preset limits, in both cases without the need for a rate case. CGS § 16-247k already allows DPUC to use these forms of regulation for telephone company services that are not fully competitive. Similarly, the law allows rates for private water and electric companies to be modified, in an expedited proceeding, to reflect changes in utility costs such as taxes that are beyond the utility's control.

Require WPCAs to Set Rates in Accordance with Statutory Principles

The legislature could require WPCAs to follow the same principles in setting rates as the DPUC must follow in regulating private utilities under CGS § 16-19e. Among other things, DPUC must ensure that (1) utilities perform their duties with economy, efficiency, and to promote economic development in the state; (2) rates be just sufficient to cover the utility's costs, including a reasonable rate of return on their investments; and (3) the level and structure of a utility's rates reflect prudent and efficient management of its franchise.

Establish a Ratepayer Advocate for WPCAs

The Office of Consumer Counsel (OCC) serves as the advocate for ratepayers in DPUC proceedings. It routinely participates in rate cases for DPUC-regulated utilities, often challenging proposed rate increases. Currently, OCC has no jurisdiction over WPCAs or other municipal utilities. The legislature could expand OCC's jurisdiction to cover these utilities.

Alternatively, the legislature could require larger WPCAs to establish their own ratepayer advocacy offices. One precedent for this approach is the South Central Connecticut Regional Water Authority, which serves the greater New Haven area. The authority has established an Office of Consumer Affairs to act as the advocate for consumer interests with regard to rates, water quality and supply, and other matters. The authority pays the expenses of the Office of Consumer Affairs from ratepayer funds.

Phase In Large Rate Increases

In past practice, DPUC has phased in large utility rate increases over several years. Customers ultimately pay more under this approach, since the utility is entitled to earn interest on that part of the rate increase that is deferred. But this approach can limit “rate shock” that occurs when customers face a particularly large increase.

The legislature could allow or require that WPCAs use this approach in the case of large increases in sewer rates or charges. For example, it could require that rate increases of more than 25% be phased in over two years and rate increases of more than 50% be phased in over three years.

DISCUSSION

In considering these options, the legislature might want to consider their potential fiscal impact on the state and municipalities. Currently, DPUC and other economic regulatory agencies are funded by assessments on the entities they regulate (the OCC's expenses are also recovered through the DPUC assessment). Since DPUC does not currently regulate the sewage industry, neither it or the OCC have staff with expertise in this area. If DPUC were given rate regulatory authority in this area, or the OCC's responsibility was expanded to include representing WPCA customers, they would need to hire new staff or consultants. The additional funding would presumably come from expanding the assessment to cover WPCAs or from appropriations. Similarly, if WPCAs were required to have their own ratepayer advocates, a mechanism would need to be established to pay for them.

The legislature may also wish to consider how any changes to the regulation of WPCA rates might serve as a precedent for the regulation of other municipal utilities. Currently, DPUC does not regulate the rates of municipal water, electric, or gas utilities. Expanding DPUC's jurisdiction to cover WPCAs might be viewed as a diminution of home rule that could serve as precedent for it regulating other municipal utilities. Historically, legislation affecting municipal utilities has referred to the Planning and Development Committee as well as the Energy and Technology Committee.

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