January 24, 2011
GOVERNOR'S TRANSITION GROUP RECOMMENDATIONS ON ENERGY
By: Kevin McCarthy, Principal Analyst
You asked for a summary of recommendations made by the governor's energy working group. This report also summarizes energy recommendations made by the governor's environment working group. This report does not cover recommendations made by individual members that were not adopted by either group as a whole.
The recommendations of the two groups are available at http://www.governor.ct.gov/malloy/lib/malloy/4-Energy.pdf and http://www.governor.ct.gov/malloy/lib/malloy/5-Environment.pdf, respectively.
The governor's transition team established working groups in 12 policy areas, including energy and the environment. The working groups included representatives of affected industries, advocacy groups, and state agencies.
Among the energy group's recommendations are:
1. give electric companies more flexibility in procuring power for standard service for residential and small business customers,
2. use competitive markets to procure power and energy efficiency measures for state government and make state-developed procurement documents available to municipalities,
3. use requests for proposals (RFPs) to obtain renewable energy to meet the renewable portfolio standard (RPS), and
4. establish a new Energy Policy Office to modernize and coordinate energy policy.
The group also recommends that the legislature (1) avoid “raiding” energy efficiency and renewable energy funds in the future in order to overcome short term deficits in the budget and (2) review the public policy decisions that account for about 10% of the cost of electricity to make sure that Connecticut is making the best investment of its money.
The environment group recommends:
1. clarifying the current integrated resources planning (IRP) law that requires electric companies to meet their customers' needs by first using all cost-effective efficiency measures and extending this requirement to gas companies,
2. reducing or eliminating the diversion of conservation charge revenue to the General Fund pursuant to PA 10-179, and
3. amending the law that requires the Department of Public Utility Control (DPUC) to decouple distribution charge revenues from sales volumes in order to eliminate a disincentive for efficiency programs.
ENERGY WORKING GROUP RECOMMENDATIONS
Procuring Power for Standard Service
The group recommends giving electric companies more flexibility to procure power for the standard service they offer to residential and small business customers who do not choose competitive suppliers as a step to lower electric rates in the near term. It suggests separating residential and small business standard service customers for procurement purposes. This may allow for options that appeal to businesses (e.g., allowing for time of use pricing) while serving the needs of residential customers who may be as concerned about rate volatility as overall price. It also suggests that the administration review the “ladder” mechanism, under which electric companies buy power in a series of wholesale contracts that overlap in time.
Procuring Energy and Energy Savings in Government
The group recommends that the administration seek to lower state and municipal energy costs by using the competitive market to procure energy and energy efficiency programs. It suggests using existing solicitation and contract documents for procuring energy for state buildings as a template for municipalities. It recommends that the Office of Policy and Management (OPM) or Department of Administrative Services develop similar documents for energy efficiency measures. Once these documents are finalized, municipalities could use them to reduce energy costs.
Connecticut's RPS requires that electric companies and competitive suppliers get part of their power from renewable resources. DPUC estimates that by 2020 the annual cost of complying with the RPS will range from $153 million to $380 million. The group notes that while importing renewable resources such as hydroelectric power from Quebec or wind energy from the Midwest may help meet the RPS, the transmission needed to bring this power to Connecticut may increase electric costs. Developing in-state renewable energy resources would have a greater impact on job growth and help to make Connecticut a leader in this area, but may be more expensive than using distant resources.
According to the group, Connecticut must balance three competing goals: keeping electricity costs low, procuring renewable power, and fostering locally-generated renewable power. The group recommends that the administration work with the legislature to pass legislation authorizing the DPUC to conduct renewable energy RFPs annually over the next five years. Electric companies could participate in such RFPs in some form and at some level. Projects previously approved but not yet built under the Project 150 renewable energy program could participate in the RFP but would have to rescind their Project 150 contracts to do so.
Since certain renewable resources are more expensive than others and the state should have a broad array of renewable options, the group suggests that the RFP process set aside a certain percentage of the RFP for solar, wind, and other renewable technologies. At least 50% of the contracts awarded under the RFP process should go to the lowest bidder, regardless of the technology used. The implementing legislation would also likely have to set aside an absolute maximum on dollars to be spent on renewable projects under this RFP procedure, so that the total costs
to the ratepayers can be ascertained. Once projects are selected under the RFP, their developers should obtain long term contracts which will allow the projects to obtain financing on the open market and actually be built.
The group states that the RFP process may not be an efficient way to foster the deployment of smaller scale Class I renewable generation, such as solar systems serving individual homes. It recommends that the DPUC (1) investigate developing a feed-in tariff program to be administered by the electric companies and (2) determine what size of generation will be considered eligible for this program. The tariff should be designed in concert with industry and the electric companies to balance encouraging smaller scale Class I capacity and costs to ratepayers.
The group recommends that the administration consider expedited permitting and approvals for renewable energy projects that benefit the state. In addition, the group argues for a full evaluation of the cost and benefits of renewable energy, including jobs they produce and the attainment of environmental and security goals such as the RPS.
State Energy Office
The group finds that the state lacks a coherent energy policy and that there is insufficient coordination between state, regional, and federal energy policy. While DPUC has a great deal of technical expertise in energy matters, it is limited by statute to regulating utilities and does not regulate many aspects of the energy market, including independent power generators, oil companies, and other non-utility entities.
According to the group, a variety of other state entities have taken on roles relating to energy policy, including the Siting Council, Office of Consumer Counsel, Attorney General's Office, OPM, Clean Energy Fund, Energy Conservation Management Board, Connecticut Energy Advisory Board, Fuel Oil Conservation Board, Low Income Energy Advisory Board, and others. In all, at least 14 state entities involve themselves in energy policy on a regular basis.
The group recommends that the administration develop and staff a new energy policy office to develop and implement a coherent and unified state energy policy. The administration should (1) evaluate where such a policy office should be located (the group suggest in New Britain, the location of DPUC, Siting Council, and Office of Consumer Counsel); (2) determine how to staff the new office; and (3) address how it will interface with other agencies, notably the DPUC.
With regard to the last point, the group suggests that one possibility is to have a separate energy policy office, which interfaces with the DPUC on a regular basis. Another possibility is to have one DPUC commissioner assume a policy and executive function, while leaving the remaining commissioners to the traditional adjudicatory function. If this model is used, the group urges that care be taken to make sure that these functions are kept strictly separate at the commissioner level, so that no one can be accused of ruling on policies that they have developed. Regardless of the model used, the group believes that it is important to consolidate energy policy under one roof and clearly delineate how the office responsible for energy policy will coordinate with other agencies, particularly the DPUC.
The group believes that once the administration makes this change, it should make clear what its intended goals and desires for the agency are and allow it to do its work for a period of time (the group suggests two years). The administration should then thoroughly evaluate the new office to ensure that the structure in place is working as it is designed to do.
The group also argues that it is especially important that the Connecticut Development Authority, Connecticut Innovations, the Connecticut Clean Energy Fund, and Connecticut Energy Efficiency Fund be closely integrated together to evaluate, assist, fund and promote renewable energy in the state. The coordination of these funding organizations could serve as the functional equivalent of the New York State Energy Research and Development Authority.
DPUC Structure and Functions
The group recommends examining the workings of the DPUC. It notes that DPUC was set up to regulate vertically integrated utilities, but currently only water companies have this structure. In light of the new entities playing crucial roles in Connecticut's energy infrastructure, the group argues that it makes sense to ensure that DPUC is structured correctly and has sufficient powers and staff to regulate energy in the 21st century. The group also notes that DPUC is currently organized by utility; i.e., there is a “water unit,” a “gas unit,” and an “electric unit.” The need for such delineations based on utility may not make as much sense as it once did.
Class III Resources
By law, electric companies and competitive suppliers must meet part of their customers' needs with class III resources (power from cogeneration and savings from energy efficiency programs). They meet this requirement by buying credits from producers of these resources and current policy sets a $10 floor on the price of the credits. As a result of the current glut of these resources on the market, many of the credits go unsold. The group suggests that the floor be reduced or eliminated to create a viable market for the credits. However, this might reduce funding for the Energy Efficiency Fund, which receives part of the proceeds of the sales of the credits. Accordingly, the group suggests increasing the class III purchase requirement under the renewable portfolio standard.
Repowering Generating Facilities
The group notes that about 53% of Connecticut's fossil-fueled generation facilities are over 35 years old and the state may be able to replace them with newer, more efficient units. The group recommends that the state examine this issue in detail to determine what mix of resources is needed and how best to pay for those assets. In doing so, all options should be examined, considering approaches taken in Connecticut and in other states. This should be a broad examination of assets, including, but not limited to considering repowering, retrofitting, developing new assets, and retiring assets.
Integrated Resources Planning
The report notes that Connecticut does not have a “one stop shop” planning mechanism that balances the options of building transmission, transmission alternatives, and generation options from an integrated system reliability and cost perspective. According to the group, the current IRP process is a good starting point for such analysis, but it could be made more robust. The group believes that the IRP process does not allow for analyzing transmission alternatives early enough to get such non-transmission resources into place. The IRP process would also benefit from greater transparency when evaluating transmission versus non-transmission alternatives.
The group believes that while the Connecticut Energy Advisory Board (CEAB) tries to balance the benefits and costs of transmission, generation, and efficiency measures, more could be done to ensure that this planning addresses cost, security, reliability, and environmental impacts in a comprehensive fashion. The group suggests that the administration may wish to investigate combining the roles of the Siting Council and the CEAB so that assets and resources are not only appropriately sited and developed, but are also provided at the lowest possible cost and consistent with environmental goals.
ENVIRONMENT WORKING GROUP RECOMMENDATIONS
Integrated Resources Planning
The IRP law requires electric companies to meet demand through all available cost-effective efficiency measures. DPUC has interpreted this provision as applying only when at least one of three criteria are met, including that projected demand exceeds projected resources. The group proposes legislation to supersede this policy. It proposes to amend DPUC's statutory rate-setting principles to require gas as well as electric companies to meet resources needs first through cost-effective efficiency measures, without being subject to DPUC's three criteria test.
The group also proposes requiring electric and gas companies to develop efficiency investment plans every three years. Under the proposal, each company must acquire all available efficiency measures that are cost-effective and designed to achieve a 2% annual cost savings for electric companies and a 1.5% cost savings for gas companies. It broadens what counts as benefits under the cost-effectiveness analysis to include avoided costs and deferred or avoided investments in energy supply and delivery. It also includes environmental and energy independence benefits when calculating the cost-effectiveness of efficiency investments. The proposal includes other requirements for the plans, including performance incentives for the electric and gas companies when they exceed the plans' goals. It establishes how the plans will be reviewed by the Energy Conservation Management Board and DPUC.
Securitizing Energy Efficiency Revenues
PA 10-179 authorizes the issuance of bonds backed in part by approximately 35% of the revenue from the conservation charge on electric bills, with the bond proceeds used to address the deficiency in the FY 11 budget. The deficiency is somewhat smaller than originally anticipated, due to a surplus in the FY 10 budget. As a result, the working group recommends reducing or eliminating this diversion of the conservation charge revenue.
Decoupling Rates from Sales
Under current law, DPUC must order electric and gas companies to adopt one of three mechanisms to decouple the amount of money they earn from their distribution charges from their sales volumes. This is meant to eliminate a fiscal disincentive to the companies implementing efficiency programs, since under traditional rate-making reduced sales from efficiency programs jeopardizes the ability of the companies to recover their fixed costs, for example for distribution systems. The group's proposal instead requires the use of one new type of decoupling mechanism that annually reconciles the amount of revenue DPUC has determined the company needs for its distribution function with its actual revenues. In the case of gas companies, it allows the use of a mechanism that allows the company to earn a specified amount of revenue per customer, independent of sales.