OLR Research Report


December 4, 2008

 

2008-R-0659

PROSPECTS FOR DECREASING ELECTRIC RATES

By: Kevin E. McCarthy, Principal Analyst

You asked for a discussion of the implications of falling fossil fuel prices on electric rates, specifically with regard to the rates charged by Connecticut Light and Power (CL&P).

SUMMARY

The recent declines in fossil energy prices, particularly for natural gas, are likely to lead to lower electric rates, but it will take some time for the change to occur because CL&P had already procured much of the power it will need in 2009 before fuel prices began to fall. Rates for residential and small business customers will actually increase by a small amount in 2009 over current rates.

ELECTRIC RATES AND THE COST OF FOSSIL FUEL

The law that restructured the electric industry to permit competition (PA 98-28) effectively required CL&P and United Illuminating to auction off their power plants and buy power for their customers on the wholesale market. As described in OLR memo 2008-R-0452, the price of natural gas is a major factor in setting wholesale electric prices. (While the price of oil plays a large role in setting natural gas prices, it plays a less substantial role in setting wholesale electric prices because few power plants in Connecticut and the rest of New England use oil.) The price of natural gas spiked in 2008 but has fallen substantially in recent months. The price for delivery on the New York Mercantile Exchange rose from $6.42 per million British Thermal Units in December 2007 to a record high of $14.25 in August 2008 before falling to a current (December 2) level of $6.31.

CGS 16-244c requires the electric companies to buy power for their residential and small business (“standard service”) customers in a way that mitigates price volatility. The companies must buy power under a plan that is approved by the Department of Public Utility Control. They must buy a portfolio of wholesale power contracts that overlap in time. Thus, CL&P bought part of the power it anticipated it would need in 2008 in 2006, part in 2007, and part in 2008. As a result, electric customers were largely insulated from the 2008 spike in natural gas prices because the company had already bought power for this period before the spike occurred. Conversely, the procurement method required by CGS 16-244c will delay the benefit customers will see from the recent decline in natural gas pieces. CL&P had already bought most of the power it will need in 2009 while natural gas prices were still rising. As a result, the generation services component of electric bills (which reflects the cost of purchased power) will increase slightly in the near future. CL&P estimates that this component will rise from the current 11.8 cents per kilowatt-hour (kwh) for residential customers to 12.3 cents per kwh in the first half of 2009 and then decrease to 11.9 cents per kwh in the second half of the year.

The Energy Information Administration (EIA) projects that the wholesale price of natural gas sold in 2009 will be 24% below the average 2008 price. The electric companies will purchase much of the power they anticipate they will need in 2010 and 2011 in 2009. Assuming that the EIA projection is correct, it is likely that the price of power will fall significantly in 2010 and 2011.

The fall in natural gas prices will not affect other components of electric rates, such as charges for transmission and distribution. The transmission charge will increase slightly in 2009 as the Norwalk-Middletown transmission line is completed and placed in the company's rate base.

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