You asked for a summary of the Department of Public Utility Control's (DPUC) recent decision on the Connecticut Light and Power (CL&P) company's rates, the securitization provision of the budget act (PA 10-179), and how they will affect CL&P's rates in 2011.

SUMMARY

CL&P applied for an increase in its distribution rates that, taken by itself, would have increased its overall rates by 5.5%. CL&P stated that it needed the increase to account for higher pension expenses, lower sales, the need for additional employees to improve customer service, and additions to its rate base (the plant and equipment it uses to serve its customers). CL&P also sought to increase its authorized return on equity (ROE) from 9.4% to 10.5%. The application also addressed several other issues, including the relationship between the company's sales and its revenues (decoupling).

On June 30, 2010 DPUC granted CL&P an increase in its distribution rates that, taken by itself, would cause the overall rate to increase by approximately 2.9% starting in January 2011. The increase will vary by rate class, with residential customers seeing a somewhat higher increase. DPUC rejected CL&P's request to increase its ROE.

Under prior law, CL&P's competitive transition charge (CTA) would have largely expired at the end of 2010, reducing its overall rates by approximately 5.5%. The budget act extends the CTA at a level of approximately one-third of the current CTA. The CTA revenue and part of the revenue currently raised by the conservation charge on electric bills will be used to back bonds using a financial mechanism called securitization. The bond proceeds will fund a $956 million transfer to the General Fund. The act also requires DPUC, from January 1, 2011 through June 30, 2011, to have electric companies assess all customers a charge per kilowatt-hour of consumption that will raise another $40 million for the General Fund. As a result, overall rates will decrease due to the reduction in the CTA, but less than would have been the case absent this legislation.

In addition, due to declining wholesale electric prices, the generation services component (the cost of the power itself, as distinct from distribution and other charges) of standard service rates will fall in 2011. CL&P has already bought most of the power it will need for 2011 for this service, which it provides to small and medium size customers who have not chosen a competitive supplier. CL&P estimates that this factor will decrease overall rates for standard service customers by about 6% to 9%. The market determines the price of the generation service component for customers served by competitive suppliers.

Taken together, these factors will reduce overall rates for CL&P's standard service customers by somewhat more than 5% compared to current rates. The actual decrease will depend on (1) the price CL&P pays for the remaining amount of power it purchases for 2011, (2) how DPUC allocates the costs associated with securitization between CL&P and United Illuminating (UI), (3) the amount of surplus in the state's FY 10 budget (under PA 10-179, part of this surplus must be used to reduce the transfer to the General Fund and thus the level of the CTA), and (4) changes in other rate components.

RATE CASE

CL&P Proposal

On December 9, 2009, CL&P notified DPUC of its intent to apply for an amendment of its distribution rates (the part of electric bills that pays for shipping electricity from substations to customers). CL&P filed its application on January 8, 2010. The application sought to increase distribution rates by $133.4 million for the rate year starting July 1, 2010 and an additional $44.2 million for the rate year starting July 1, 2011, for a total increase of $177.6 million.

As an alternative to increasing distribution rates on July 1, 2010, the company proposed to defer recovery of one-half of the 2010 rate year increase until January 1, 2011, at which time the company proposed to implement a one-time $210 million increase in distribution rates. (The difference between the $210 million and the $177.6 million reflects the carrying costs due to the later start date for the rate increase.) The $210 million would represent an increase of approximately 27.5% in current distribution rates and a 5.5% increase to overall rates. CL&P anticipated that combining the distribution rate increase with the expected decrease in the CTA would keep rates at their current level.

CL&P stated that the major factors behind the rate request were higher pension expenses and lower sales due to the economy, the need for additional employees to improve customer service, additions to rate base, and a higher authorized ROE to attract capital needed to make system investments. CL&P submitted its application in conjunction with a proposed capital expenditure program of $310 million, $331 million and $314 million for 2010, 2011 and 2012 respectively, to maintain system reliability.

A number of parties and intervenors, including the Office of Consumer Counsel and the attorney general, opposed the proposed rate increase, arguing that it would harm ratepayers during difficult economic times. On the other hand, none of the parties or intervenors contested CL&P's proposed capital expenditure program.

DPUC Decision

DPUC's decision grants an increase in the company's revenue requirement (the basis of its rates) of $63.4 million in the first rate year and $38.5 million in the second rate year. This represents a reduction of $70 million and $5.7 million, respectively, from the proposed increase requested by CL&P.

The decision also approves the alternative rate scenario so that the approved rates will not go into effect until the CTA declines on January 1, 2011. Distribution rates therefore will increase by $111 million on January 1, 2011. This is an overall increase to distribution rates of 14.2% and an increase of approximately 2.9% of total rates. The actual rate increase varies by rate class and will be somewhat higher for residential customers.

DPUC made other adjustments to the request, including reductions in expenses for payroll, incentive compensation, fringe benefits, and materials and supplies. On the other hand, DPUC allowed $2.6 million more than the company requested for tree trimming in order to provide greater service reliability for customers. It approved the company's capital expenditure program.

DPUC rejected CL&P's request to increase its ROE to 10.5% and instead set rates to allow its current ROE of 9.4%. It also rejected CL&P's proposal to fully decouple the company's revenues from its sales.

SECURITIZATION

Funding for Securitization Bonds

The budget act authorizes the state to issue securitization bonds to provide a $956 million transfer to the General Fund. Securitization is a mechanism whereby the state or another entity sells bonds backed by a future revenue stream, in this case the CTA and part of the conservation charge, in exchange for an immediate lump sum payment. The CTA and conservation charge apply to all customers, whether they buy power from the electric company or a competitive supplier.

Under prior law, the CTA for CL&P customers would have largely expired at the end of 2010. The act instead extends the CTA through the term of the bonds. The maturity date for the bonds must be no more than eight years after they are authorized, unless a longer term is needed for economic reasons.

Financing Orders

The act requires, by October 1, 2010 (1) CL&P and UI to each submit an application for a financing order to DPUC and (2) DPUC to issue a financing order for each company. DPUC may provide, in the financing order, that other revenues intended to pay off the bonds be taken into account in adjusting the CTA. These other revenues can include charges on municipal electric utility customers. Any hearing with respect to a financing order regarding the transfer and the issuance of the bonds is not a contested case. The act ends DPUC's authority to issue these financing orders as of December 31, 2012.

In the financing order or other appropriate order, DPUC must reduce the conservation charge by 35% and instead collect the same amount of money through the CTA. The reduction becomes effective April 4, 2012, or on an earlier date set by DPUC in the financing order. (When the state agreed to accept funding under the American Recovery and Reinvestment Act, it pledged not to reduce funding for energy efficiency programs before this date.) All receipts from the remainder of the conservation charge must continue to go to the Energy Efficiency Fund.

The state treasurer or an entity she designates can issue securitization bonds after DPUC approves the financing order. The bond proceeds must be used for DPUC-approved purposes as specified in the financing order. The bonds and the financing order are not state debt, and do not count towards the state's debt limit. Neither the state nor its municipalities bear any contingent liability for them.

After the state's accounts for FY 10 are closed, if the comptroller determines there is an unappropriated surplus in the General Fund, this surplus must first be used to reduce the obligations incurred under these provisions, e.g., pay off the bonds, and thereby reduce the CTA.

Allocating Costs between the Electric Companies

Under the act, DPUC must allocate the responsibility for funding the transfer to the General Fund and paying the expenses of the bonds equitably between the CL&P and UI. The allocation may provide that each company's customers may start paying the charges on different dates and the charges may vary while the bonds and the related operating expenses are being paid. However, the charges must be equitably allocated to the customers of each company. DPUC must determine that, over the bond repayment period and taking into account the timing of charges, the charges on a kilowatt-hour basis assessed to each company's customers has substantially the same present value.

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