Energy and Technology Committee

JOINT FAVORABLE REPORT

Bill No.:

HB-6510

Title:

AN ACT ESTABLISHING A PUBLIC POWER AUTHORITY.

Vote Date:

3/19/2009

Vote Action:

Joint Favorable Substitute

PH Date:

2/24/2009

File No.:

SPONSORS OF BILL:

Energy and Technology Committee

REASONS FOR BILL:

To establish the Connecticut Electric Authority (CEA) to purchase electricity for residential and business customers, finance and own our selected power plants and to create efficiency measures to lower electricity costs for Connecticut electric consumers.

Proposed substitute LCO No. 3140: This amendment makes numerous minor and technical changes. The substantive changes in the amendment include:

1. clarifying that the CEA is under the state ethics code;

2. requiring that any action by the CEA must be in accordance with the IRP so that no purchase of electric generation plants or building such plants can take place unless the IRP requires such additional capacity;

3. retaining the CEAB role in energy planning;

4. requiring the same disclosure of bids for standard service as currently in statute for IRP bids for electric generation;

5. requiring the utilities solicit bids for standard service supply, submit the bids to the CEA which shall approve such bids pursuant to the RFP process and have the utilities to purchase the electricity in accordance with such contract terms. This eliminates any CEA bonding requirements as collateral for such purchases. The DPUC biennially shall review the efficacy of the RFP process.

6. authorizing the CEA to negotiate contracts for standard service outside of the RFP process (which may include agreements in conjunction with the financing of new generation facilities) and have the utilities to purchase the electricity in accordance with such contract terms. The DPUC shall review and may approve such contracts if in the best interests of the consumer. This eliminates any CEA bonding requirements as collateral for such purchases

RESPONSE FROM ADMINISTRATION/AGENCY:

The Department of Public Utility Control DPUC opposes this bill. Their contention is that the DPUC has adapted to the changing electricity market and is well-equipped to address a variety of ongoing and emerging issues facing energy planning and policy in the state. DPUC also believes that it is problematic for this proposed agency to be charged with the ability of owning and operating electric generation facilities for two reasons: First, the responsibility of owning and operating electric generation facilities is not an insignificant task. This requires substantial knowledge, people and resources to administer, let alone the financial capital and cost associated with this endeavor and whose risk would once again be borne by the rate payer. Secondly, it is well documented that Connecticut is already well placed to have all the capacity it needs or the next decade or two according to the IRP, LMP, LFRM and FCM. As such the DPUC questions the timing of creating more bureaucracy to focus on procuring assets when this challenge has already been met.

Lastly the DPUC has serious reservations should this bill pass that players in the market will be willing to contract with what amounts to a paper entity that lacks any real assets. Today's market requires serious financial securities to enter into any contract. To gain control of assets would require upwards of four to five billion dollars which as previously mentioned ratepayers should not be forced to bear.

The Office of the Attorney General supports this bill because Connecticut currently pays the highest electricity rates in the continental United States. The CEA would potentially reduce rates by up to 20% at no cost to taxpayers. This legislation would assure public review and scrutiny of electricity procurement. The CEA would provide long-term relief, providing consumers with a much needed break from some of the highest electricity rates in the nation.

The Office of Consumser Counsel (OCC) is open to the power authority concept and stands ready to work with other interested parties as needed to consider enhancements to this legislation. They acknowledge the potential benefits of allowing the state to remedy a shortfall of a certain type of power plant or resource need on a cost-of-service basis and the potential benefit of centralizing some authority into a single entity. Centralization could be beneficial if it promotes greater efficiency and public understanding, but it could also eliminate some of the healthy tension that now exists among the various energy agencies. The existing division of roles and responsibilities among Connecticut's energy agencies is working well in some situations, including the Connecticut Energy Advisory Board's role in the Integrated Resourcce Planning function.

NATURE AND SOURCES OF SUPPORT:

Connecticut Municipal Electriic Energy Cooperatice (CMEEC) generally supports this legislation and says that if properly structured and operated a power authority would be in a position to implement policies and programs that could serve as an effective hedge or mitigant against price volatility in the wholesale electric market. This price volatility has historically driven the retail price spikes which Connecticut has experienced over the last several years. Given that CMEEC has, by design, the flexibility to build a more blended portfolio of resources, it can provide a unique example of the Power Authority model in Connecticut.

CMEEC requests that in future iterations of the bill, that the Committee consider including CMEEC along with electric distribution companies in the Request for Proposal process outlined in section 12 of the bill. Also, CMEEC is willing to consider the provision of administrative support pursuant to section 2c of the bill or oher expertise it can bring to the new authority.

American Association of Retired Persons (AARP), supports this bill. AARP is concerned about the rising price of energy for their constituents who live on fixed incomes. They further point to evidence that the process for bidding energy contracts leads to higher retail prices and point to two major problems with the bidding process overseen by the regional transmission organization, New England Independent System Operator, the “single price auction” and an almost complete absence of transparency. While there is nothing intrinsically wrong about single price auctions for the commodity, AARP likens it to forcing consumers to purchase their groceries from a designated supermarket, where they cannot buy in bulk for long-term supply from large discount grocers. And in Connecticut, “supplies” that you have already purchased, like the electricity from Bridgeport Harbor and Millstone, have been re-priced to market prices to the benefit of the plant owners.

On the issue of transparency, in New England, the bids and identities of the bidders are secret. In effect, Connecticut might not like the available prices, but your state government, the public, and decision-makers are not allowed to find out where the prices come from. Months later the bid amounts are made available, but the bidders remain secret. Transparency problems are present in all of our nation's ISOs. In Texas, they changed the delay on the release of market bids from 180 to 90 days and average bids fell by $12/MWh and maximum bids fell by $82MWh. Not surprisingly, an efficient way of policing manipulative bidding behavior is to reveal the bids and the bidders. Some bids are nonsensical, such as $1,000/MWh. You may well conclude that in a market that produces absurdly high prices and that is characterized by inexplicable bids, some degree of Enron-style problems are at work. Unfortunately only FERC can force the New England ISO to add transparency to their markets.

The solution AARP proposes is the creation of a Connecticut Electric Authority (CEA) similar to the Illinois Power Agency as this bill proposes. A CEA could finance new plants either by outright ownership or by long-term contracts. By signing long-term contracts with resource developers, the CEA could beat New England ISO's wholesale price and provide power at fully allocated cost to Connecticut consumers and businesses, it could buy power more cheaply because there is no longer an auction process and because long-term bilateral contracts should result in lower prices. Plus the CEA would have authority to issue both taxable and tax-free revenue bonds to build in-state generation plants. The use of tax-free bonds would lower the overall costs for new generation and allow the CEA to compete with the market to push the price of electricity closer to the cost-of-service.

Furthermore, the CEA could extend financing to a non-state-owned plant in exchange for traditional regulatory treatment and could help streamline Connecticut's complex energy planning/procurement. It is desirable for a CEA to administer the procurement process in order to avoid the mistakes of the secret auction that has led to record-high utility bills. A CEA could also be funded efficiently.

The American Public Power Association (APPA) also supports this bill. APPA is a national service organization representing the interests of the more than 2,000 not-for-profit publicly owned electric utilities that collectively serve more than 45 million consumers. APPA supports this legislation because it has the potential to remedy some of the reliability and cost difficulties facing consumers in retail choice states located within restructured wholesale markets operated by regional transmission organizations (RTOs). Connecticut, which is located in the RTO market operated by ISO New England, has been particularly impacted by these difficulties. They point out that state public power authorities have a proven record of success in efficiently providing reliable and affordable electricity with direct accountability to the citizens they serve.

The Connecticut Citizen Action Group also supports this bill, for similar reasons as outlined by AARP and APPA. They believe that a CEA is vital for changing the way electric rates are figured now to a cost of service system.

Connecticut Legal Services supports this bill because a public power authority such as the one proposed in this bill, is the best possible approach to substantial long-term electricity rate reduction.

Jerrod Oppenheimer of Democracy and Regulation, supports this bill because when the provision of electricity was by fully integrated and regulated utilities, all power was provided at cost of service and pursuant to a plan overseen by the regulator. With a long-term planning horizon and no competitive risk, the utility and the regulator could make long-term investment decisions that would reduce costs in the long run (by investing in plants with high capital costs and long lead times) as well as enhance reliability and security through fuel diversity. Deregulation removed the ability to perform such planning, leaving all such decisions to short-term market participants. One result is that long-term purchasing, selling or investing decisions are too risky to make. Establishing a CEA would return Connecticut to a rationally planned electricity system. The CEA will be able to assure that long-term, statewide electricity resource planning is done in a way that minimizes costs to Connecticut ratepayers.

Connecticut Industrial Energy Consumers (CIEC) supports this bill and urges the Committee to fully explore the creation of a power authority that adds capacity under a cost of service model without monopolizing the generation market.

NATURE AND SOURCES OF OPPOSITION:

The Hess Corporation opposes this bill because it would contribute to harm to Connecticut consumers in the form of higher costs, lost investment, and lost jobs.

Constellation NewEnergy and Constellation Energy Commodities Group oppose this bill because they believe it would undermine both retail and wholesale competition and as such harm Connecticut rate payers. They state that the history of public power authorities has demonstrated great public benefit in areas that are underserved by the public sector. However, power authorities have had a very poor record of performance in areas of managing risk, such as with portfolio management and owning and operating large energy infrastructure. They conclude that in addition to the inability of power authorities to truly deliver cheaper, cleaner and more reliable power, these authorities undermine one of the primary benefits of competition, thus putting risk back on captive customers and tax payers.

CBIA opposes creation of a power authority because they believe that the role designated for the authority are better accomplished by the electric distribution companies, under the regulation of the DPUC and the DPUC. Adding another layer of bureaucracy into the fray is not what electricity customers want or need. Additionally, CBIA opposes this bill because it will increase current electric rates for all customers, by increasing customer's surcharge for energy efficiency from 3 to 3.5 mills per kilowatt hour of electricity sold. The current 3 mill charge is already the highest in the nation.

GDF Suez Energy NA opposes this bill primarily because the power authority's two primary functions (owning and operating electric power plants and entering into contracts with electricity suppliers) are both very capital intensive and carry substantial risk. They also point out that in the past when Connecticut had regulated utilities conduct these activities, it led to more than $3 billion dollars of stranded costs that were paid by the state's ratepayers over many years as well as California's experience instituting a similar concept and state run procurement activities resulted in billions of dollars of over-market contracts and years of costly litigation related to those contracts.

Manufacturing Alliance of Connecticut (MAC) opposes this bill because they do not support increasing the energy efficiency mill rate and that this bill takes some responsibilities from the DPUC and switches it to this new authority, thus creating a second regulatory body. It is MAC's view that as proposed this is avery costly and an unwarranted expense to rate payers of the state.

NRG Energy Inc. is opposed to this bill because they believe this legislation is redundant and unnecessary as the issues it seeks to address are already being addressed by energy legislation passed in 2005 and 2007. There 3 points are: 1) The comprehensive legislation passed in 2005 and 2007 is working and should be allowed to continue to work. 2) a business climate that guarantees sound and prudent investments through a consistent regulatory and legislative environment is essential for infrastructure development and job creation in Connecticut, and 3) Competition remains the most appropriate mechanism to ensure the most reasonable costs for obtaining resources, and protects ratepayers from cost-overruns and stranded costs associated with imprudent infrastructure investments.

PSEG Power Connecticut does not support the bill as written although they acknowledge the CEA would be charged with responsibility to achieve a number of laudable goals, including promoting energy efficiency, developing and deploying new technologies and promoting energy sustainability. However, they are concerned about the prospect of the state building and owning generating facilities due to the potential costs to rate payers. Also they point to ample evidence that public power authorities don't necessarily provide a better deal for consumers and cite a report from U.S. GAO that highlighted considerable problems at the federal Bonneville Power Authority, and an audit by the New York State Comptroller of the New York Power Authority that called the NYPA “an agency adrift” and found poor planning and major operational losses.

Northeast Utilities is opposed to the bill but acknowledged that some provisions, taken separately, they could support. For example they would support increased energy efficiency funding and support the concept of possible cost-of-service, utility-owned generating plants to the extent that the market does not produce the desired outcomes. Yet they do not see the benefit of creating yet another entity to oversee and regulate electric service for customers. They are already subject to regulation and oversight by this Committee, the DPUC, the Consumer Counsel, Attorney General, ECMB, and the Siting Council. Under this proposed bill, many responsibilities are shifted from the DPUC to the CEA and could cause duplication of staffs and substantially increase the costs of regulatory functions, furthermore, the bill as drafted does not have any administrative process contemplated for the CEA's decision making, clearly something that will have to be developed since the CEA would have regulatory responsibilities.

Reported by: David MacDonald

Date: 3/31/09