July 1, 2002
RHODE ISLAND ELECTRIC RESTRUCTURING LEGISLATION
By: Kevin E. McCarthy, Principal Analyst
You asked for a summary of Rhode Island's recently adopted revisions to its electric restructuring law.
Rhode Island adopted legislation in 1996 to restructure its electric market to allow customers to choose their electric supplier. However, very few customers have chosen a supplier to date. This year Rhode Island passed H 7786 (2002 R.I. Pub. Laws ch. 144), which substantially modifies the 1996 legislation.
By law, Rhode Island utilities must provide standard offer service to customers who do not choose a supplier. This year's legislation modifies the way the standard offer service rate is set and how the utilities must acquire power for this service. It allows the Public Utilities Commission (PUC), under certain circumstances, to allow customers of Narragansett Electric (the dominant utility in the state) to return to standard offer service after having chosen a supplier.
By law, utilities must provide service of last resort to customers who chose a supplier but are unable to maintain service from it. The act requires utilities to acquire power for such service under a plan approved by the commission.
The act allows municipalities to serve as aggregators (entities that gather customers together to make them more attractive to suppliers) on an opt-in or opt-out basis. It extends by six years a charge on electric bills that is used to promote energy efficiency and renewable energy. It transfers the administration of renewable energy programs funded by this charge from Narragansett Electric to the State Energy Office. The act requires utilities to provide back-up and supplemental power to self-generators, and allows the PUC to require the utilities to subsidize this power.
In addition to its restructuring provisions, the act increases the commission from three to five members (the number Connecticut currently has). It adds “energy matters” as one of the fields to be represented on the commission. It requires that at least three of the commissioners not have worked for regulated companies or their affiliates in the previous five years. (Connecticut law has a similar provision.) The act requires enhanced Internet access to the Division of Public Utilities and Carriers (DPUC) and PUC filings and records. (The 1996 legislation separated the PUC and DPUC.) It also requires that information on utilities, non-regulated power suppliers, and energy efficiency programs be put on line.
In 1996 Rhode Island became the first state in the country to restructure its electric utility industry to permit consumers to choose their supplier. However, fewer than 1% of customers have done so to date. Moreover, the price of standard offer service increased by 66% over nine months in 2001.
At the beginning of the 2002 session, the House Speaker Harwood directed Rep. Kennedy, chair of the Corporations Committee, to conduct comprehensive hearings on the 1996 law and to report back with proposals to update the act. Both the speaker and Rep. Kennedy previously concluded that the original legislation had not delivered competition or brought lower prices to Rhode Island residents or businesses. H 7786 was introduced on February 27, 2002, and signed by the governor June 18, 2002.
STANDARD OFFER SERVICE
Under Rhode Island's law, utilities must provide, until January 1, 2010, standard offer service to customers who do choose a supplier. The act repeals provisions that require:
1. the utilities to obtain the power for this service by public competitive bid and
2. the price for the service be set at the September 30, 1996 price, plus an inflation factor equal to 80% of the increase in the consumer price index, plus other costs beyond the utility's control and approved by the commission.
Instead of the second provision, the act requires that the price of standard offer service just cover the utilities' costs. However, cost recovery issues pending before the commission as of the act's passage are governed by prior law.
The act allows utilities, with the commission's approval, to hedge variable costs such as fuel, with the cost of hedging being recoverable in standard offer rates. Any under–recovery of a utility's costs must be recovered through a commission-approved uniform adjustment factor. The commission may apply the adjustment factor to any or all customer classes as it considers equitable. Any over-recovery must be refunded to customers.
The act entitles the utilities to recover their costs from supply agreements that were in effect before January 1, 2002, agreements approved by the PUC after this date, and other prudently incurred costs. The act requires a utility to obtain the DPUC's permission to terminate any existing supply contract.
The act allows the commission to allow Narragansett Electric customers who would not be eligible to receive standard offer service to receive it under certain circumstances. (These provisions do not apply to the state's two small utilities.) First, the commission must hold a hearing to determine whether there are a sufficient number of suppliers offering service at a reasonable rate in the state. If the commission determines that these conditions are not present, it must direct the utilities to file a plan giving customers the option to return standard offer service. The plan must include the terms and conditions for a return to this service and the way power will be acquired for it. The plan may include notice requirements or term commitments before non-residential customers may leave standard offer service.
Once the commission approves the plan, the utility and the DPUC must (1) develop a request for power supply proposals (RFP), (2) develop bidder qualifications, (3) issue the RFP, and (4) jointly pick the winning bidder or bidders. If DPUC and the utility agree that the bids are too high, they may reject them and re-bid power supply. If the DPUC and the utility disagree on any issue, the dispute must be submitted to the commission for resolution. Once the winning bid is selected, the utility must enter into a supply contract or contracts.
All of the costs of the contract or contracts must be recovered through the utility's standard offer rates. The rates for all residential customers returning to standard offer service must be uniform. The commission must determine the rates for nonresidential customers after reviewing the cost of power supply resulting from the bide process. Customers cannot use this provision to engage in arbitrage, i.e. they cannot resell the power they obtain at a profit.
Under Connecticut law, utilities must provide standard offer service until January 1, 2004. The rate for the service must be at least 10% below the utility's rates as of December 31, 1996. The rate can be increased under limited circumstances.
SERVICE OF LAST RESORT
Under prior Rhode Island law, utilities had to provide a service of last resort to customers who were no longer eligible for standard offer service and were unable to obtain or retain service from a competitive supplier. The act instead requires utilities to provide last resort service to customers who had left standard offer service for any reason and are not receiving service from a supplier.
Under prior law, utilities were required to periodically solicit bids for the supply of last resort service. Under the act, the utilities must acquire supply under a plan approved by the commission. The plan must include the supply acquisition process, pricing options being sought, and the proposed term of the contracts. The acquisitions may take place at different times and run for different lengths of time. The commission may approve proposals by the utilities with regard to (1) the amount of time that a customer must remain on last resort service, (2) separate rates different customer classes, and (3) provisions to encourage customers to leave last resort service.
The commission must approve all aspects of the acquisition plan and may periodically review the approved plan. Last resort service is subject to same provisions regarding under- or over-recovery of costs that apply to standard offer service. The act repeals a provision of prior law that specified that the utility's costs in acquiring supply its costs in subsidizing such service were recoverable through its charge for distribution service.
Connecticut law requires utilities to provide default service, starting January 1, 2004, to customers who are unable to arrange for or maintain service from a supplier. Utilities must procure power for this service through a competitive bidding process.
Rhode Island's act authorizes a municipality to establish an 'opt-in' or 'opt-out' aggregation program by adopting an ordinance. Under opt-in aggregation, the municipality groups together local residents or businesses who choose to participate in the program. Under opt-out aggregation, the municipality serves as an aggregator for all local resident and businesses, unless they inform the municipality that they do not want to participate in the program. If the municipality chooses the latter option, the program must be approved by its residents in a special election. The municipality must inform its residents of their ability to opt out of the program. A customer can opt out without paying a fee before the program begins and every two years thereafter. The customers then receives last resort service.
Under both options, the municipality must develop a plan for implementing the aggregation program and hold at least two public hearings on it. The aggregation plan must identify who can participate in the program, the program's structure and funding, methods for entering into agreements with other entities, and the rights and responsibilities of program participants. The municipality must submit the plan to the commission for its review and approval. After the commission approves the plan, the municipality can solicit bids for the power in accordance with the plan. The municipality must report the results of the solicitation to the commission. The commission can reject the winning bid within five days of the report if it will cost more than the standard offer rate in the aggregation program's first year of operation. This provision does not apply if the higher cost is due to the purchase of renewable energy.
Under Connecticut law, municipalities can act as aggregators under the opt-in option. They do not have to be licensed as suppliers, but must register annually with the Department of Public Utility Control.
ADMINISTRATION OF RENEWABLE ENERGY PROGRAMS
The act extends, from January 1, 2007 to January 1, 2013, the sunset date on the charge on electric bills used to promote energy efficiency and renewable energy. The energy efficiency component of the charge is .2 cents per kilowatt-hour (kwh) and the renewable energy component is .03 cents per kwh.
The act also shifts administration of the renewable energy portion of the charge, which is administered by the Narragansett Electric Company. As of January 1, 2003, the act instead requires the State Energy Office to administer and distribute this portion of the charge. The office must retain, by competitive bid, a qualified administrator for these funds. The administration contract must run for three years and be rebid every three years.
Under current Connecticut law, the renewable energy charge is separate from the demand-side charge and is administered by Connecticut Innovations, Inc., a quasi-public agency. The renewable energy charge is currently .05 cents per kwh. Under current law, the charge will be .075 cents per kwh as of July 1, 2002 and .1 cents per kwh as of July 1, 2004.
BACKUP POWER FOR SELF-GENERATORS
The act finds that self-generation and co-generation (the simultaneous production of electricity and steam) can benefit the public. The act requires utilities to permit the transmission and distribution of such power from own site owned by the generator to another, if this does not harm the utility's other customers. It requires utilities to provide back-up and supplemental power to self-generators that meet reasonable interconnection standards to protect the grid. (Self-generators need such power to cover circumstances when their generation facilities are out of service.) The act requires that the rates the utilities charge for such power be just, reasonable and non-discriminatory. Starting January 1, 2005, the rates must be cost-based, but the commission may allow or require that utilities provide the power at a discount. In determining whether to authorize or require a discount, the commission must consider the environmental benefits of decentralized power, its increased energy efficiency, and effects on reliability, among other things. The costs of any discount must be borne by all customers.