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ENERGY CONSERVATION; MUNICIPALITIES; UTILITIES

OLR Research Report


January 4, 2010

 

2010-R-0004

ENERGY PERFORMANCE CONTRACTS AND DPUC DOCKETS

By: Kevin E. McCarthy, Principal Analyst

You asked for (1) a discussion of energy performance contracts and the ability of municipalities to enter into such contracts and (2) a primer on Department of Public Utility Control (DPUC) dockets describing when DPUC is required and allowed to conduct dockets. With regard to the first question, the Office of Legislative Research is not authorized to provide legal opinions, and this memo should not be viewed as one.

Much of the information in this memo on performance contracts comes from a 2007 document prepared for the Environmental Protection Agency (EPA), which is available at http://www.energystar.gov/ia/partners/spp_res/Introduction_to_Performance_Contracting.pdf.

SUMMARY

In an energy performance contract, an energy services company (ESCO) or other entity provides customers with a comprehensive set of energy efficiency measures. A typical project includes all of the services needed to design and implement a project, starting with an energy audit and ending with monitoring and verification of the energy savings. The provider normally arranges for long-term project financing from a third-party and guarantees that the project's savings will be sufficient to cover the cost of project financing for the life of the project. The contract may also cover such things as on-site generation.

Connecticut courts have consistently held that municipalities have only the specific powers granted them by the legislature. While the statutes explicitly allow municipalities to enter into contracts and to provide various services, they do not specifically authorize them to enter into energy performance contracts. However, a wide range of municipal entities have entered into such contracts, suggesting that they believe that there is adequate legal authority for them to do so.

DPUC uses the term “docket” to refer to a variety of proceedings the law requires or allows it to conduct. Under the Uniform Administrative Procedure Act (UAPA), some of these proceedings, such as rate cases, are contested cases while others, such as actions on applications for declaratory rulings, are not. UAPA specifies the procedures DPUC and other agencies must follow in contested cases and in responding to applications for declaratory rulings. UAPA allows, but does not require, agencies to conduct proceedings in response to an application for a declaratory ruling. In contrast, Title 16 (public utility law), requires DPUC to conduct a wide range of other proceedings and specifies whether the proceeding must be conducted as a contested or uncontested case.

ENERGY PERFORMANCE CONTRACTS

Description

Energy performance contracts are typically provided by an ESCO. About 80% of the contracts are performed by ESCOs that are subsidiaries of large companies, primarily equipment manufacturers. In some cases, nonprofit entities provide performance contract services. For example, the Connecticut Conference of Municipalities provides such services for municipalities in the state.

Under the contract, the ESCO or other provider provides customers with a comprehensive set of energy efficiency measures. These can address: lighting; heating, ventilation, and air conditioning; energy management systems; and building envelope improvements such as insulation, new roofs, and windows. A contract may also include on-site renewable energy, distributed generation, and water conservation measures. The ESCO guarantees that the project's savings will be sufficient to cover the cost of project financing for the life of the project.

A typical project includes all of the services needed to design and implement a project. These can include energy audits, design engineering, construction management, arrangement of long-term project financing, commissioning (verifying that the project works the way it was designed), operations and maintenance, and savings monitoring and verification.

One common approach to performance contracting is a shared savings agreement. Under such agreements, the value of the measured energy savings is divided between the customer and the ESCO, based on a distribution that is agreed upon in advance and documented in the performance contract. The ESCO normally receives a higher percentage of the savings at the beginning of the contract to pay the cost of the equipment. If there are no savings in a given period, the customer pays the energy bill and owes the ESCO nothing for that period. The ESCO typically arranges for project financing as well as project development. The ESCO bears the risk of interest rate changes and utility cost increases beyond the escalation clause agreed. The ESCO typically agrees that the customer will in no instance pay more for utilities than it did at the start of the contract. At the end of the contract, ownership of the energy improvements transfers to the customer as specified in the contract.

The ESCO typically arranges for long-term project financing from a third-party. Among the major finance companies are Bank of America, Citibank, and GE Capital. Financing is most commonly in the form of an operating lease or municipal lease. The latter, also called tax-exempt lease purchase agreements, allows the customer to finance a project without carrying a liability on its balance sheet. Municipal and state governments sometimes finance projects by issuing bonds.

The 2007 EPA study notes that the use of performance contracting in governmental and institutional buildings has been hindered by landlord and financial control agencies that resist large-scale program implementation in the face of executive and legislative mandates. The study asserts that performance contracting is disruptive for these agencies, because it displaces longstanding contract methodologies and contractor relationships. The financial control agencies are generally unfamiliar with, and suspicious of, the economics of performance contracting and so resist its widespread implementation.

Authority for Municipalities to Enter into Contracts

Connecticut courts have consistently held that (1) municipalities have only the specific powers granted them by the legislature; (2) an enumeration of powers in a statute forbids things not enumerated; and (3) in determining whether a municipality has the authority to do something, the court does not search for a statutory prohibition but rather for statutory authority. In Windham Taxpayers Association, et al. v. Board of Selectmen, the Town of Windham, et al., (234 Conn. 513 (1995)), the state Supreme Court found that, as a creation of the state, a municipality has no inherent powers of its own. It only has those powers that the state has expressly granted or that are necessary to discharge its duties and carry out its objects and purposes.

The statutes do not specifically address whether municipalities are authorized to enter into energy performance contracts. CGS 7-148 explicitly allows municipalities to enter into contracts and authorizes them to provide a wide range of services that require the use of buildings. It could be argued that municipalities need to be able to enter into energy performance contracts to efficiently operate buildings for these purposes. In some cases, town attorneys have found authority for such contracts in their town charters.

We have not found any relevant case law on this issue, but several municipal entities including the Bridgeport Housing Authority, the towns of Cromwell, Mansfield, and Stamford, the borough of Naugatuck, and Regional School District 19 have entered into such contracts. The Meriden Housing Authority has recently issued a request for qualifications for such services. This suggests that these municipal entities believe there is legal authority for them to enter into such contracts.

DPUC DOCKETS

Introduction

DPUC opens dockets to address a wide range of issues, ranging from applications by utility companies to modify their rates to requests for declaratory rulings. (The statutes and DPUC regulations refer to these dockets as proceedings or cases.) Dockets are typically heard by a panel of three DPUC commissioners; complex dockets, such as major rate cases, are heard by all five DPUC commissioners. A docket is assigned a six digit number, where the first two digits indicate the year the docket began, the second two digits indicate the month it began, and the final two digits indicate the order of dockets within that month. Thus docket 09-11-01 was the first docket to be opened in November 2009. Dockets are sometimes re-opened; docket 03-02-10 RE 01 would be the first reopening of a docket that was initially the 10th docket opened in February 2003. Final decisions in DPUC dockets are available at www.ct.gov/dpuc/cwp/view.asp?a=3364&q=413412.

Table 1 presents examples of instances where Title 16 requires DPUC to conduct a proceeding and specifies whether the proceeding must be treated as contested or uncontested.

Table 1: DPUC Proceedings Mandated Under Title 16

Section

Proceeding

Contested

Uncontested

16-19b

DPUC approval of rate changes

under purchased gas and energy adjustment clauses

 

X

16-32f

DPUC approval of

gas company conservation

plans

 

X

16-43

Allocation of proceeds of

water company land sales

X

 

16-243i

Setting incentives for electric company customers who install distributed generation

X

 

16-243n

Setting time of use and seasonal electric rates

X

 

16-245l

Setting systems benefits charge on electric bills

X

 

16-245n

DPUC approval of the Clean Energy Fund plan

 

X

16-247m

DPUC approval of a telephone company's withdrawal from the retail market for a competitive service

X

 

16-262w

DPUC approval of water infrastructure and conservation rate adjustment

 

X

16-331f

DPUC review of certified competitive video service provider's services

X

 

16-331cc

Setting eligibility requirements for allocations from the Public, Educational and Governmental Programming and Education Technology Investment Account

X

 

Contested Cases

Under CGS 4-166, a contested case is a proceeding where the statutes or regulations require an agency to determine the legal rights, duties, or privileges of a party after an opportunity for hearing or a proceeding in which a hearing is in fact held. Rate cases and licensing proceedings are specifically included as contested cases, while proceedings on a petition for a declaratory ruling are not contested cases

are quasi-judicial proceedings, in which parties and intervenors file briefs and other documents, introduce witnesses, and cross-examine other participants.

The persons conducting the proceeding must allow a petitioning person to participate as a party if they find that the petitioner demonstrates that his or her legal rights, duties or privileges will be specifically affected by the agency's decision in the case. (In addition, under CGS 16-2a, the Office of Consumer Counsel is entitled to participate as a party in all DPUC contested cases.) The persons conducting the proceeding may grant a person intervenor status in a contested case upon finding that the petition demonstrates that the petitioner's participation is in the interests of justice and will not impair the orderly conduct of the proceedings. In both cases, the petitioner usually must submit a written petition to the agency and mail copies to all parties at least five days before the hearing date. This requirement may be waived before or after the hearing starts on a showing of good cause.

The persons conducting the proceeding (1) may limit an intervenor's participation to designated issues in which the intervenor has a particular interest as demonstrated by the petition and (2) must define the intervenor's rights to inspect and copy records, physical evidence, papers and documents, to introduce evidence, and to argue and cross-examine on those issues.

In a contested case, all parties must have an opportunity for hearing after reasonable written notice. The notice must include: (1) a statement of the time, place, and nature of the hearing; (2) a statement of the legal authority and jurisdiction under which the hearing will be held; (3) a reference to the particular sections of the statutes and regulations involved; and (4) a short and plain statement of the matters asserted. If the agency or party cannot state the matters in detail when the notice is served, the initial notice may be limited to a general statement of the issues involved and a more definite and detailed statement provided subsequently upon application.

At the end of the hearing, the agency must issue a proposed final decision in writing. The proposed decision must contain a statement of the reasons for the decision and a finding of facts and conclusion of law on each issue of fact or law necessary to the decision. The agency must render a final decision within 90 days following the close of evidence or the due date for the filing of briefs, whichever is later, in these proceedings. A final decision in a contested case may be in writing or orally stated on the record. If it goes against any party, it must include the agency's findings of fact and conclusions of law necessary to its decision. Findings of fact must be based exclusively on the evidence in the record and on matters noticed. The agency must state in the final decision the name of each party and the most recent mailing address of the party or his authorized representative. The final decision must be delivered promptly to each party or his authorized representative, personally or by certified or registered mail, return receipt requested. The final decision becomes effective when it is delivered or mailed, unless the agency specifies a later date.

A party in a contested case may, within 15 days after the final decision is issued, seek reconsideration of the decision on the ground that: (1) an error of fact or law should be corrected; (2) new evidence has been discovered that materially affects the merits of the case and was not presented in the proceeding for good reason; or (3) there is other good cause for reconsideration. Within 25 days of the filing of the petition, the agency must decide whether to reconsider the final decision. Failure of the agency to make that determination within 25 days of the filing constitutes a denial of the petition. Alternatively, an agency may decide to reconsider a decision on its own within 40 days after it is issued.

If the agency reconsiders a final decision, it must conduct additional proceedings it needs to modify, affirm, or reverse the final decision within 90 days after deciding to reconsider it. If the agency fails to render its decision made after reconsideration within 90 days, the original final decision remains the final decision and can be appealed to the courts.

On a showing of changed conditions, the agency may reverse or modify the final decision, at any time, at the request of any person or on its own motion. The parties who were the subject of the original final decision, or their successors, if known, and intervenors in the original contested case, must be notified of the proceeding and allowed to participate in the proceeding. Any decision to reverse or modify a final decision must address the rights or privileges of any person who has been shown to have relied on the final decision.

In addition to these statutory provisions, DPUC regulations (Conn. Agencies Regs. 16-1-16 et seq.) prescribe how a person can apply to become a party or intervenor, additional notice requirements for rate cases, recordkeeping requirements, and rules of evidence, among other things. Conn Agencies Regs. 16-1-116 et seq. requires DPUC to follow contested case rules of practice and procedure when it conducts an investigation.

Declaratory Rulings and Other Uncontested Cases

Under CGS 4-176, any person may petition an agency for a declaratory ruling on the validity of a regulation or the applicability to specified circumstances of a provision of the statutes, a regulation, or a final decision on a matter in the agency's jurisdiction. The agency can initiate a declaratory ruling on its initiative as well. A proceeding on a declaratory ruling is not considered a contested case under UAPA.

All agencies must adopt regulations that specify (1) the form and content of petitions for declaratory rulings, (2) the filing procedure for such petitions and (3) the procedural rights of persons with respect to the petitions. DPUC's regulations are found at Conn. Agencies Regs. 16-1-113 et seq.

Within 30 days after receiving a petition for a declaratory ruling, the agency must give notice of the petition to all persons who are required to be notified by law and all persons who have requested notice of declaratory ruling petitions on the subject matter of the petition.

If the agency finds that a person has filed a timely petition to become a party or intervenor under its regulations, the agency may allow the person: (1) to become a party if it finds that the petition states facts demonstrating that the petitioner's legal rights, duties or privileges will be specifically affected by the agency proceeding; and (2) to become an intervenor if the agency finds that the petition states facts demonstrating that the petitioner's participation is in the interests of justice and will not impair the orderly conduct of the proceedings.

Within 60 days after receiving a petition for a declaratory ruling, the agency must: (1) issue a written ruling declaring the validity of a regulation or the applicability of the provision of the statutes, the regulation, or the final decision in question to the specified circumstances, (2) order the matter set for specified proceedings, (3) agree to issue a declaratory ruling by a specified date, (4) decide not to issue a declaratory ruling and initiate regulation-making proceedings on the subject, or (5) decide not to issue a declaratory ruling, stating the reasons for its action.

If the agency holds a hearing, the persons conducting the hearing may allow persons not named as parties or intervenors to present oral or written statements. The same rules of evidence apply as in contested cases, and the panel must issue a proposed final decision in the same

way as in a contested case. A declaratory ruling must contain the names of all parties to the proceeding, the particular facts on which it is based, and the reasons for its conclusion.

A copy of all rulings issued and any actions under these provisions must be promptly delivered to the petitioner and other parties personally or by certified or registered mail, return receipt requested. A declaratory ruling becomes effective when delivered or mailed, unless a later date is specified by the agency in the ruling. The ruling has the same effect as an order issued in a contested case and is a final decision, which means it can be appealed to the courts.

If an agency does not issue a declaratory ruling within 180 days after the filing of the petition, or within a longer period as agreed by the parties, the agency is considered to have decided not to issue the ruling.

Under CGS 16-19pp, DPUC may not hold an uncontested proceeding on any issue affecting ratepayers in the state unless it allows them to participate on the same footing as a utility company. For this purpose ratepayers include, among others, nonprofit organizations formed to protect the environment, to promote consumer interests, to represent commercial and industrial groups, or to promote the orderly development of the areas in which the facility is to be located. DPUC must allow such organizations to participate in the proceeding if it has filed a notice of intent to be a party. DPUC can allow other entities to participate in these proceedings.

In addition to these provisions, Conn. Agencies Regs. 16-1-45 et seq. establish procedures to be followed for all applications and petitions filed with DPUC.

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