June 10, 2002
ELECTRIC DEREGULATION TIMETABLE
By: Kevin E. McCarthy, Principal Analyst
You asked for a timeline of electric industry deregulation in Connecticut.
Connecticut adopted legislation in May1998 (PA 98-28) that allowed consumers to choose their electric suppliers. The act required the state's two electric companies and the Department of Public Utility Control (DPUC) to take steps to establish a competitive market. Among other things, the act required the companies to unbundle (separate) their generation components from the rest of their businesses by October 1, 1999. It required them to auction their power plants and other generation assets.
The act required DPUC to begin licensing suppliers by April 1, 1999. It required DPUC to determine the companies' stranded costs, i. e. , costs that it had previously approved for recovery through rates that might not be receoverable after the start of competition. DPUC made its initial determinations in the summer of 1999. The act established, as of January 1, 2000, four charges that are paid by all consumers. It established charges to fund energy conservation and renewable energy initiatives and required DPUC to set charges to ensure recovery of approved stranded costs and to pay for various public policies.
The act allowed consumers in distressed municipalities to choose their electric supplier as of January 1, 2000 and opened most of the rest of the state to competition as of July 1, 2000. It required the companies to provide standard offer service to consumers who do not chose a supplier. It required that the rate for this service be at least 10% below the rates the companies charged on December 31, 1996.
Most of the act's provisions have already been implemented. Under current law, standard offer service ends on December 31, 2003. After that date, utilities must provide default service to consumers who have not chosen a supplier. The law does not specify a rate for this service. A bill considered, but not adopted, this session would have established a pricing method for this service, with separate rules for low-income consumers, other small consumers, and large commercial and industrial consumers.
Under the act, a supplier must obtain part of its power from renewable sources, and the proportion will increase over the next ten years. The charge on electric bills that is used to promote renewable energy will increase on July 1, 2002 and July 1, 2004. The act also includes several sunset provisions.
Unbundling and Divestiture
PA 98-28 opened the state's retail electric industry to competition. (The federal government had previously deregulated the electric wholesale market. ) The act required the companies to unbundle their generation functions from their other functions by October 1, 1999. It required them to auction their power plants and other generation assets. In the case of non-nuclear assets, the auction had to take place by January 1, 2000. Both companies successfully competed their auctions by the deadline. In the case of Connecticut Light & Power (CL&P), an affiliated company, Select Energy, submitted the winning bid for part of the company's assets. In contrast, United Illuminating decided to leave the generation business. All of these plants were sold for more than their book value, and the excess was used to reduce the companies' stranded costs.
The act required the companies to auction off their nuclear generation by January 1, 2004. In fact, the companies submitted their plan to auction the Millstone plants on September 15, 1999, and DPUC approved the plan with modifications on April 19, 2000. On August 7,
2000, DPUC announced that Dominion Resources had submitted the winning of approximately $ 1. 3 billion. The two companies subsequently auctioned their interests in the Seabrook plant in New Hampshire.
Determination of Stranded Costs
The act allowed the companies to seek recovery of their generation-related stranded costs, notably the above-market costs of their plants and purchased power contracts with non-utility generators. CL&P submitted its application on March 15, 1999 and DPUC made its initial determination of $ 3. 6 billion on July 7, 1999. UI submitted its application on March 24, 1999, and DPUC made its initial determination of $ 801 million on August 4, 1999. In both cases, DPUC modified its stranded costs determinations following the auction of the nuclear power plants.
The act required DPUC to begin licensing suppliers by April 1, 1999, and it issued its first licenses in December 1999. It has currently licensed 12 suppliers, although most are not currently seeking customers. It has also licensed 12 entities as aggregators, which gather customers together to make them more attractive to suppliers. Several entities are licensed under both categories. DPUC has a Webpage, http: //www. dpuc. state. ct. us/Electric. nsf/ByElectricApplicants?OpenView&Start=1&Count=30&Expand=2#2, which provides additional information about licensees.
Opening the Market to Competition
Consumers in distressed municipalities were allowed to choose their electric supplier as of January 1, 2000. Consumers in most other parts of the state were allowed to choose as of July 1, 2000. Municipal utility customers are not allowed to choose a supplier unless their municipal utility seeks to serve customers outside of its service territory; to date none has.
Provision of Standard Offer Service
The act capped retail electric rates at their 1998 levels until December 31, 1999. It required the companies to provide standard offer service, from January 1, 2000 until December 31, 2003, for consumers who did not choose a competitive supplier. It required that DPUC set the rates for
this service at levels at least 10% below the level the companies charged on December 31, 1996. Currently, approximately 99% of consumers are on standard offer service.
The act also required all consumers (whether they choose a supplier or remained on standard offer service) to pay four charges as of January 1, 2000. The largest of these is the competitive transition assessment (CTA), which is used to recover the companies' stranded costs. The act allows for the issuance of securitization bonds, backed by the CTA, in connection with certain stranded costs. (OLR Report 97-R-1006 describes how securitization works. ) The systems benefits charge covers the costs of public policies associated with the restructuring of the electric industry, including provisions for dislocated utility workers and municipalities that lost property tax revenue from power plants. The act required DPUC to set these charges; the act itself established charges to provide funding for energy conservation and renewable energy promotion.
Most of the act's provisions have already gone into effect. The one major future change will occur on December 31, 2003, when standard offer service expires. Thereafter, the companies will be required to provide default service to customers who do not choose a supplier (to date, fewer than 1% of customers have selected a supplier). Unlike standard offer, the law does not specify the rate to be charged for this service. A bill considered this session (sHB 5428) would have specified (1) the method by which the companies would have been required to obtain power for default service and (2) how this service would be priced. The bill would have made many other changes in the deregulation law, including its provisions requiring suppliers to obtain part of their power from renewable sources (the renewable portfolio standard). The legislature took no action on this bill, which had passed the Energy and Technology and several other committees.
Under current law, the renewable portfolio standard will increase each July 1st for the next ten years. The renewable energy charge will increase from its current level of 0. 05 cent per kilowatt-hour (khw) to 0. 075 cent per kwh on July 1, 2002 and 0. 1 cent per kwh on July 1, 2004.
As noted above, the systems benefits charge covers public policy costs associated with deregulation. These include costs associated with dislocated utility workers and municipal property losses attributable to deregulation. By law, the property tax losses must occur before the 2005 assessment year to be recoverable. PA 02-64 broadened the dislocated worker provision to cover workers affected by tighter emission standards for older fossil fuel plants. It also delayed, from 2006 to 2008, the last date these costs could be incurred and still be recoverable by the systems benefits charge.
As noted above, the law permits the issuance of securitization bonds backed by the CTA. Such bonds were issued on behalf of CL&P; United Illuminating determined that this option did not provide economic benefits for the company. Under the act, the bonds must mature by December 31, 2011.