Topic:
ELECTRIC UTILITIES; LEGISLATION; PUBLIC UTILITY RATES; STATISTICAL INFORMATION;
Location:
UTILITIES - RATES;

OLR Research Report


May 29, 2008

 

2008-R-0328

2006 UNITED ILLUMINATING RATE DECISION

By: Kevin E. McCarthy, Principal Analyst

You asked the following questions about the January 2006 decision by the Department of Public Utility Control (DPUC) allowing United Illuminating (UI) to increase the distribution component of its electric rates:

1. what was the rate increase allowed under this decision, both in terms of overall revenue and percentage;

2. did average electric bills increase under this decision and if so, by what percent;

3. what was the rate of return that the decision allowed UI to earn for its shareholders on their equity;

4. under what circumstance could DPUC agree to reopen this decision; and

5. was there an “understanding” as to how long the rate increase would remain in effect.

SUMMARY

In the case (docket 05-06-04), UI requested a rate increase of $64.5 million over four years, primarily for its distribution costs. DPUC granted a $35.6 million increase, increasing the average bill by 4.88% over four years. The decision reduced the company's authorized rate of return on its equity from 10.45% to 9.75%.

DPUC can re-open rate cases and other decisions for good cause shown, which can include such things as a material change in circumstances or an error in the original decision. We are aware of no “understanding” in the 2006 decision as to how long the rate increase would remain in effect, and DPUC has already re-opened this decision three times.

2006 UNITED ILLUMINATING RATE DECISION

Introduction

Electric bills have several components, with the distribution component currently accounting for approximately 23% of an average UI residential customer's bill. In contrast, the generation service component (the price of the power itself) accounts for approximately 52% of an average residential UI bill.

DPUC sets the distribution component based on how much revenue the company needs to provide distribution services (basically shipping power from electric substations to customers). The revenue requirement consists of (1) the cost of recovering the company's DPUC-approved capital investments for such things as poles and wires; (2) the return DPUC allows the company to earn on these investments, consisting of a return on equity (ROE) for shareholders and a return on debt; and (3) the company's operating costs associated with providing distribution services, such as the salaries of linemen. The distribution rate is the revenue requirement divided by DPUC's projection of sales over the distribution system. For example, if DPUC determines that a company's revenue requirement for distribution services is $1 million and that the projected electric sales are 50 million kilowatt-hours (kwh), the approved distribution rate would be 2 cents per kwh ($1 million/50 million kwh).

Rate and Bill Increases

On July 18, 2005, UI sought to increase its revenue requirements over four years, with most of the proposed increase ($39.8 million of a total of $64.5 million sought) occurring in the first year. The vast majority of the proposed increase was for distribution costs, but the proposal also included an increase in the competitive transition assessment (CTA), which is used to recover the company's stranded costs. (Stranded costs are DPUC approved costs incurred by the company whose future recovery was jeopardized by the introduction of competition in the electric industry under PA 98-28.) DPUC issued its decision on January 27, 2005, approving an increase in the revenue requirement of $35.6 million over four years. Table 1 compares the amounts sought by UI and the total amount granted (in revenue and percentage terms) by DPUC.

Table 1: UI Request for Revenue Requirement Increase

and DPUC Action

Year

UI Request-

Distribution

(millions)

UI Request-

CTA

(millions)

UI Request-

Total

(millions)

DPUC Approval-

Total

(millions)

Percent of operating revenues

2006

37.2

2.6

39.6

14.3

5.7

2007

41.2

2.2

43.4

18.6

7.4

2008

53.4

2.5

55.9

28.9

11.5

2009

61.6

3.0

64.5

35.6

14.1

The decision increased overall rates by an average of 4.88% across customer classes (1.98% in 2006, 0.6% in 2007, 1.4% in 2008, and 0.9% in 2009). However, DPUC found that the existing rate structure did not accurately reflect costs among customer classes. To more closely align rates with the cost of providing service, DPUC allowed UI to increase the residential rate by 3% in 2006, while increasing rates for commercial and industrial customers by 0.75% to 1%. As a result, the decision authorized an increase of approximately 5.9% over four years on the average residential bill.

Rate of Return

Prior to the application, DPUC allowed UI to earn a 10.45% return on its equity. DPUC allowed the shareholders to keep half of any earnings that exceeded the authorized ROE. Customers would benefit from the other half, with 25% being returned to them in the form of bill credits and the other 25% used to write off the company's stranded costs from its investment in nuclear power plants. (PA 98-28 effectively required the electric companies to sell off their power plants. To the extent that the sales price of a plant was less then its value for ratemaking purposes, the difference was treated as a stranded cost.)

In its application, UI proposed to increase its ROE to 11.6%. It also proposed that shareholders be allowed to keep all, rather than half, of excess earnings for the first 1% it earned in excess of its authorized ROE under the earnings sharing mechanism.

DPUC denied the company's request to modify its earnings sharing mechanism. Rather than increasing the authorized ROE, it reduced it to 9.75%, to reflect the reduction of risk to the company resulting from its sale of its power plants, lower costs of capital, and the guaranteed return on its stranded costs.

Term of the Rate Increase and Re-openers

While the decision phased in the rate increase over four years, it did not address the term of the rate increase. We are aware of no “understanding” as to when UI could seek to modify the increase and in fact DPUC has already modified the decision.

Under CGS 16-9, DPUC may rescind, reverse, or alter any of its decisions or authorizations. This provision authorizes DPUC to reopen a case and rehear the matter after providing notice to the parties. Andover's Appeal from the Public Utilities Commission, 133 Conn. 494 (1931). The law requires DPUC to hold a hearing on such actions after giving notice to all parties, but otherwise gives DPUC broad discretion as to whether and when it may reopen a rate case or other proceeding. CGS Sec. 16-19 imposes additional customer notice requirements when a utility seeks to reopen a rate case and increase its revenue or rates by 5% or more.

In practice, DPUC often reopens rate cases when there has been a material change in circumstances. It has reopened docket 05-06-04 three times after issuing its initial decision. The first re-opener dealt with employee compensation. On February 10, 2006, UI filed a petition for reconsideration of the initial decision. It argued that DPUC had understated its 2006 average salary per full-time equivalent employees and that if the errors were not corrected, UI might be unable to meet its projected employee levels. UI sought an increase of $9.4 million over four years. On March 1, 2006, the DPUC reopened the proceeding for the limited purpose of addressing this issue. On August 1, 2006, UI advised DPUC that it had reached a settlement with the department's prosecutorial unit, which acts as a party in rate cases involving large utilities. On August 22, 2006, DPUC approved the settlement, which increased the company's revenue requirements by $5.6 million, with no rate increase in 2006.

DPUC re-opened the docket again on October 25, 2006, primarily to set the generation service component and other non-distribution components of rates. The decision, issued on December 20, 2006, resulted in an overall increase of 52% in UI's rates. The decision also addressed the implementation of time-of-use rates set in the initial docket, and made a small change in how distribution costs were allocated among various types of non-residential customers.

The Office of Consumer Counsel (OCC) appealed the December decision regarding the implementation of time-of-use rates and DPUC reopened the docket for a third time. The legislature subsequently modified the requirements for such rates, which are higher during periods of peak demand and lower during other periods. After reviewing the written comments, DPUC concluded that the issue that formed the basis of the appeal had been removed and closed the re-opened docket on November 30, 2007.

KM:ts