OLR Bill Analysis

sHB 6636 (as amended by House "A" and "B")*

AN ACT CONCERNING THE CONNECTICUT CLEAN ENERGY FUND.

SUMMARY:

This bill eliminates, as of January 1, 2010, the ability of small electric customers (those with demand of less than 100 kilowatts) to choose a competitive electric supplier if they have not done so by this date. But, the bill does not affect existing contracts or the ability of such customers who have chosen competitive suppliers to switch suppliers. It also continues to allow small customers to choose “green options,” described below.

By law, the electric companies must provide “standard service” for customers with demand of less than 500 kilowatts who do not choose a competitive supplier. They must provide “last resort service” to customers with higher demand who do not choose a competitive supplier. The bill (1) splits standard service into two segments and (2) allows electric companies to offer additional supply options to their last resort customers.

By law, electric companies must file with the Department of Public Utility Control (DPUC), for its approval, long-term power purchase contracts with certain renewable energy generators. The bill delays the deadline companies had to make this filing and expands the requirement to reflect attrition in project development after contracts are signed. The bill modifies how new contracts will be priced and allows DPUC to modify existing contracts under certain circumstances. It is unclear how the latter provision comports with the Contracts Clause of the U. S. Constitution (see COMMENT). The bill also modifies how the costs of the contracts are recovered in electric rates. The bill requires DPUC to study the operation of the contracts and report its findings and recommendations to the Energy and Technology Committee, by September, 1, 2011. DPUC must do so in consultation with the Office of Consumer Counsel and the Renewable Energy Investment Board, which develops the plan for spending money in the Clean Energy Fund.

Under current law, the consumer counsel is a member of the Renewable Energy Investment Board. The bill allows the consumer counsel's designee, in lieu of the counsel, to serve on the board.

*House Amendment “A” expands the contracting requirement to account for attrition, requires that an expansion of capacity under a modified contract reduce electric prices, extends deadlines, and adds the reporting requirement. It also makes minor and technical changes.

*House Amendment “B” adds the provisions on competition and standard and last resort service and makes technical conforming changes.

EFFECTIVE DATE: Upon passage

STANDARD SERVICE AND COMPETITION

Under current law, the electric companies must provide standard service to customers who do not choose a competitive supplier and who (1) have a demand of less than 500 kilowatts or (2) do not use a demand meter. The bill allows standard service to be split into two segments, one for customers with a maximum demand of less than 100 kilowatts and one for customers with a demand of 100 kilowatts or more.

The bill eliminates, as of January 1, 2010, the ability of customers with demand of less than 100 kilowatts to choose a competitive electric supplier if they have not done so by this date. But, the bill does not affect existing contracts (those in effect in the date the bill passed) or the ability of customers who have chosen competitive suppliers to switch suppliers.

Under current law, DPUC can direct the electric companies to offer, through one or more suppliers, one or more alternatives to standard service. These “green options” (1) must include one in which the proportion of renewable power exceeds the amount required by the renewable portfolio standard under which electric companies and competitive suppliers must get part of their power from renewable resources and (2) may include one using conservation strategies or technologies. The bill explicitly provides that these options will continue after January 1, 2010.

LAST RESORT SERVICE

By law, electric companies must provide last resort service to customers who have not chosen a competitive supplier and are ineligible for standard service. Current law requires the electric companies to procure power for this service quarterly.

The bill allows electric companies, starting January 1, 2010, to provide alternative supply offerings to these last resort customers. DPUC must approve these offerings, which may at least include (1) providing power to these customers under one or more fixed price, fixed term contracts; (2) providing power by including them in the standard service procurement process; or (3) providing other alternatives that may result in lower price options. Under the last option, the offerings may require customers who choose it to take this service for prespecified periods.

All of the offerings must be offered to customers no more than twice per year and cannot run for more than two years. The electric companies are entitled to recover their actual costs in procuring and providing power under these offerings. These offerings are in addition to, and cannot result in the elimination of, the existing quarterly procurement for last resort service.

LONG-TERM POWER PURCHASE CONTRACTS

Under current law, the electric companies were required to file with DPUC by July 1, 2008, one or more long-term power purchase contracts from Class I renewable energy source (e. g. , wind power or fuel cell) projects. To be eligible, the projects had to (1) have received funding from the Clean Energy Fund, (2) be located in Connecticut, and (3) be at least one megawatt (MW) in size. (A megawatt is the amount of power used by 750 to 1,000 homes. ) The contracts had to provide for 125 MW of generating capacity prior to October 1, 2008, and 150 MW thereafter. The electric companies have not fully met these requirements and the projects covered by approved contracts have not yet been built.

The bill instead requires the electric companies to file contracts with DPUC by July 1, 2011. The contracts must consist of, starting October 1, 2010, 150 MW of capacity, plus at least an additional 45 MW to address project attrition after contract execution with the intent that at least 150 MW of capacity reach commercial operation. (Although the bill allows the companies to file the contracts as late as July 1, 2011, it appears that they would be required to file substantially earlier to meet this condition. ) The bill allows DPUC to approve or disapprove a proposed contract as the public interest requires.

Pricing

Under current law, the generation project owner has two pricing options under the contracts: (1) the wholesale electricity price plus 5. 5 cents per kilowatt-hour or (2) the sum of the following: (a) half of the wholesale electricity price; (b) the projected cost of natural gas used to fuel the project, based on the futures price of contracts measured at the Henry Hub, Louisiana; (c) the charge for delivering the fuel to the project; and (d) 5. 5 cents per kilowatt-hour.

The bill instead requires that contracts entered into on or after August 1, 2009 include a requirement that the project owner be compensated at a cost-based rate, in cents per kilowatt-hour, that gives the project an opportunity to earn a reasonable rate of return if it operates at a reasonable capacity factor. DPUC must determine the rates, the capacity factor, and other factors before any contract starts and may adjust them not more than once every five years. DPUC may establish a five-year review proceeding at its discretion or if the project owner asks.

The bill allows a project owner who has signed a contract on or before April 1, 2009, and whose compensation is not indexed to the cost of natural gas, to make a single request to DPUC to adjust its contract due to financial issues. The request must be made before September 1, 2009. The request may ask that the existing contract be expanded to include the project's full output, measured in megawatts, based on the design that existed at the time of contract approval. Any such expansion of the portion of the project under contract must reduce the cost of electricity under the original contract on a per kilowatt-hour basis.

DPUC, upon receiving the request, may open a proceeding to consider whether to adjust a contract, including converting it to a cost-based contract that may include a fuel cost adjustment clause, as it determines is in the public interest. The fuel adjustment clause must be based on a project's reasonable and prudent cost of fuel. If there is a case, it must be conducted as an uncontested proceeding. But the project developer must present evidence and testimony of a financial expert to DPUC, at the developer's expense, as to the need to adjust the contract.

The bill repeals a provision that generally counts the power purchased under these contracts toward meeting the electric company's obligation under the renewable portfolio standard, which requires it to get part of its power from renewable resources. It also eliminates the right of an owner of a fuel cell project principally manufactured in Connecticut to all available air emissions credits and tax credits attributable to the project and at least 50% of the class I renewable energy credits (RECs) attributable to the project. (RECs are bought and sold on the wholesale electric market to meet renewable portfolio standards in Connecticut and other states. ) The bill is silent on whether these provisions apply to existing contracts that are not renegotiated.

Cost Recovery

Under current law, the electric company can recover the cost of the contracts and the direct administrative costs for procuring them in its rates for standard service (the service it provides to small and medium-size customers who have not chosen a competitive supplier). The bill alternatively allows DPUC to include these costs in nonbypassable federally mandated congestion charges (FMCC). These charges apply to all customers, including those served by competitive suppliers. The bill allows DPUC to recover the costs of the contracts in the nonbypassable FMCCs charged to large customers.

Under current law, in order for the contract costs to be recovered in rates, the contracts must run long enough to provide financing for the selected projects, but at least 10 years; and the projects must have begun operation on or after July 1, 2003. The bill requires that these two conditions be met in all cases.

COMMENT

Possible Contracts Clause Violation

The bill permits DPUC to modify, under certain circumstances, existing contracts between developers of renewable generating facilities and electric companies at the request of the facility developer. The bill does not require the electric company's consent to the modification. The bill also appears to modify the compensation provided to developers under existing contracts, whether or not they seek modifications to these contracts. It is possible that these provisions could be challenged as a violation of the Contracts Clause of the U. S. Constitution (Article I, Section 10).

The Contracts Clause of the U. S. Constitution bars states from passing any law that impairs the obligation of contracts. However, the U. S. Supreme Court has held that claims of a contract clause violation must first undergo a three-step analysis. Courts must determine whether (1) there is a contractual relationship, (2) a change in a law has impaired that relationship, and (3) the impairment is substantial (General Motors Corp. v. Romein, 503 U. S. 181 (1992)). If the court determines that the contract has been substantially impaired, it must then determine whether the law at issue has a legitimate and important public purpose and whether the adjustment of the rights of the parties to the contractual relationship was reasonable and appropriate in light of that purpose. A challenged law will not be held to impair the contract clause if the impairment, although substantial, is reasonable and necessary to fulfill an important public purpose (Energy Reserves Group v. Kansas Power & Light, 459 U. S. 400, 411-412 (1983)).

COMMITTEE ACTION

Energy and Technology Committee

Joint Favorable

Yea

21

Nay

0

(03/19/2009)