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OLR Research Report


February 11, 2009

 

2009-R-0090

MUNICIPAL ELECTRIC UTILITIES

By: Kevin E. McCarthy, Principal Analyst

You asked for background information about municipal electric utilities in Connecticut. You were particularly interested in learning (1) how a municipality can form a municipal utility and (2) what types of resources the existing municipal utilities own. With regard to the first question, we discuss laws that apply to municipal utilities that are formed under the statutes (CGS 7-213 et seq.). Several of the existing municipal utilities were formed under special acts. OLR report 2009-R-0086 provides additional information about the statutes that apply to municipal utilities.

SUMMARY

Among the steps that a municipality must take to form a municipal utility are (1) complying with the law's requirements, including those governing the utility's establishment, governance, and rate-setting; (2) meeting requirements imposed by the wholesale market in order to buy or sell power and related products; and (3) financing its capital investments and operations.

Under CGS 7-214, forming a municipal utility requires the approval of two-thirds of the municipality's legislative body, its chief executive officer, and the municipality's voters. If approved, the municipality's legislative body must appoint a board of commissioners to administer the utility. The board must set the utility's rates to allow it to earn a net profit per year of 5% to 8% on the cost of the investment in plant made by the municipality. The utility must buy the local facilities of the electric

company serving the municipality upon the company's request. The municipality must pay the fair market value of the purchased facilities. The law does not appear to authorize municipalities to take electric company facilities by eminent domain.

If a municipal utility desires to build its own generation or transmission facilities, it must obtain a certificate from the Connecticut Siting Council. Municipal electric utilities comply with other statutory requirements, e.g., restrictions on when they can terminate power to their customers for nonpayment of their bills.

Municipal utilities that wish to participate in the wholesale market by buying or selling power must several requirements imposed by the Independent System Operator-New England (ISO-NE), which administers the market. Among other things, the utility must demonstrate that it is financially viable. Under some circumstances, it must provide financial assurances that it will meet its contractual obligations. A municipal utility can reduce the cost of meeting these requirements by becoming a member or participant in the Connecticut Municipal Electric Energy Cooperative (CMEEC).

The law allows municipalities to issue revenue and general obligation bonds and notes to finance municipal utilities. As a practical matter, the utility would probably need to appropriate funds for the utility's start up costs.

Connecticut's six existing municipal electric utilities were created in the late 19th and early 20th centuries. All of them own their local distribution systems (the poles and wires in front of homes and businesses). In most cases, the municipal utility built rather than bought these systems. Several utilities each own a small amount of transmission facilities. The municipal utilities financially participate in CMEEC's generation facilities, notably the 77 megawatt (summer rating) Pierce power plant in Wallingford. This means that the utilities are responsible for the costs of these facilities and share in their benefits. Most of the utilities buy power through CMEEC rather than participating directly in the wholesale market. Several of the utilities also provide water and other types of utility service.

FORMATION OF A MUNICIPAL UTILITY

Statutory Requirements

Municipalities can build, buy, lease, or establish a municipal electric utility. A municipality cannot exercise this authority unless the initiative (1) receives a two-thirds vote of the members of its legislative body, (2) is approved by the municipality's chief executive officer, and (3) is ratified by a majority of the electors voting at a regular municipal election where at least 15% of the voters have voted.

The selectmen of the town, common council of the city, and warden and burgesses of the borough, as the case may be, must appoint a board of commissioners to administer the utility. A municipality that establishes a utility, or that reconstructs, extends, or enlarges its facilities may finance them by issuing revenue bonds with a term of up to 30 years. It can also issue temporary notes that can be backed by the municipality's taxing authority as well as other revenue sources.

If an electric company serves the municipality when the municipal utility is established, the municipality must buy the company's facilities at the company's request. The municipality must pay the fair market value of the company's electric system. The Superior Court can adjudicate disputes as to how much of the company's property the municipality must buy and the terms and conditions of the sale.

The utility's board must set its rates to allow the utility to earn a net profit per year of 5% to 8% on the cost of the investment in plant made by the municipality. In setting rates, the utility's cost of gas and electricity must be passed through without a profit. Rates can change rates no more than once every three months.

If a municipal utility desires to build generation or transmission facilities, it must obtain a certificate from the Connecticut Siting Council. The council weighs the need for the facility against its environmental impacts in making its decision. OLR report 2008-R-0279 discusses how the Siting Council regulates power plants; OLR report 2006-0719 describes the specific criteria the council uses in approving the location of energy facilities.

Municipal electric utilities must comply with other statutory requirements, e.g., restrictions on when they can terminate power to their customers for nonpayment of their bills. For example, municipal utilities cannot terminate service to “hardship customers” during the heating season. In addition, power plants built by municipal utilities or other entities need a variety of Department of Environmental Protection air and water permits.

Wholesale Market Requirements

ISO-NE administers the regional wholesale electric market pursuant to federal law. Generally, utilities and other entities that seek to participate directly in this market can do so by becoming a member of Northeast Power Pool (NEPOOL) or as individual participants. (Most market participants, as well as several other entities such as the Office of Consumer Counsel, are members of this organization, which sets policies for the wholesale market). Applications by public entities to participate in the market are subject to a $5,000 initial fee, a $5,000 annual fee, and an annual assessment for approximately $12,500, regardless of whether the entity is a NEPOOL member. There are also transaction-based fees that apply to all market participants.

Under ISO-NE's rules, a municipal entity that wishes to participate in the market must (1) submit a credit application and proof of financial viability to demonstrate that it is able to meet its obligations or (2) provide financial assurances, as described below, before its membership becomes effective.

As part of the financial viability review, applicants must submit all current rating agency reports to ISO-NE, with each report indicating an investment grade rating for the applicant's bonds. If the applicant does not meet this criterion, it must provide financial assurances, as described below. (ISO-NE staff observe that a new municipal utility would be unlikely to have a credit rating.) Applicants must also provide, at ISO-NE's request, audited financial statements for the immediately preceding three years and unaudited financial statements for its last fiscal quarter if they are not included in the annual financial statements. The unaudited statements must be certified for accuracy by a senior officer of the applicant. They include balance sheets, income statements, statements of cash flow, and notes to financial statements. Applicants also must provide at least one bank reference and three utility credit references (three major trade payable vendor references if the applicant does not have the utility credit references).

The amount of financial assurances required is based on the entity's projected level of activity (sales or purchases) in the regional market. For municipal participants, it is set at three and one half months of transactions, as estimated by ISO-NE. The financial assurances generally take the form of a letter of credit or cash.

In addition to meeting these conditions, participants must have information technology systems that meet ISO-NE standards for such things as billing and market monitoring. Further information about the wholesale market participation requirements is available at http://www.iso-ne.com/support/reg_info/membership/index.html.

A municipal utility can reduce its costs to participate in the wholesale market by buying power through CMEEC. Among other things, this can avoid the need for the municipality to upgrade its information technology systems and pay for the staff needed to buy power on the market. However, the financial assurance costs remain the same whether a municipal utility participates directly or indirectly in the market.

Financing the System

Bonds. Under CGS 7-217, a municipality that establishes a municipal utility or that reconstructs, extends, or enlarges the utility's facilities may finance them by issuing revenue bonds with a term of up to 30 years. The bonds cannot be issued until the municipality votes to authorize it. All receipts from the sale of electricity must be paid to the municipality's treasurer. The gross expenses of running the utility, including interest on the bonds and the requirements of the sinking fund, if one has been provided for the payment of the bonds, must be included in the municipality's appropriations and paid from its treasury. The proceeds of any notes issued to purchase capacity or energy are be considered income of the utility by the municipality issuing the notes and are applicable against the expenses related to the utility.

Notes. Under CGS 7-217a, the municipality may also issue temporary notes to finance any capital project related to the system or to purchase capacity or energy. Any notes for purchasing capacity or energy must be authorized by a resolution adopted by the municipality's legislative body and approved by the utility's board, notwithstanding the provisions of the municipality's charter or any special act.

The municipality may renew such notes for up to 15 years for notes of financing capital projects, provided in the first year immediately following completion of the project or in the sixth year following the date of issue of such notes, whichever is sooner, and in each year thereafter, at least 1/15 of the total of the notes must be retired. The municipality may renew notes for purchasing capacity or energy for up to six years from the original issuance date, provided no later than two years after this date and in each year thereafter at least 1/5 of the total of the notes are retired. Payment of principal and interest on the notes may be secured by a pledge of (1) the municipality's taxing authority, (2) revenues from use charges, (3) revenues from system connection charges, (4) revenues to be derived from benefit assessments related to the plant, (5) any other revenues which are collected by the municipal department or authority which is authorized to set rates and other charges or (6) any combination of these sources.

Any notes that are secured by a pledge of the municipality's taxing authority are municipal obligations even if they are also backed by other revenues. In each year when these notes are outstanding, the municipality must appropriate a sum of money that, together with all other revenues, is enough to pay the principal, interest, or mandatory annual retirement payment on the notes. The municipality's tax levy must be sufficient to provide for this appropriation.

The municipality's legislative body must determine the maximum authorized amount of notes to be issued and may determine other aspects of the notes, such as the rights and remedies of the note holders. The legislative body may determine the rate or rates of interest for each issue of such notes or may provide that such rate or rates of interest shall be determined subsequently by a municipal officer. The notes are tax exempt.

Start-up Costs

The law does not address how a municipality would cover the utility's costs until the bonds or notes are sold. As a practical matter, it appears that the municipality would have to appropriate funds to hire staff, retain bond counsel, purchase office equipment, and meet other operational costs.

EXISTING MUNICIPAL UTILITIES

There are six electric municipal utilities in the state: the city of Groton, the borough of Jewett City, the second and third taxing districts of Norwalk (South Norwalk and East Norwalk, respectively), the city of Norwich, and the town of Wallingford. All of the municipal utilities own distribution facilities (the poles and wires in front of homes and businesses). Several utilities own a small amount of transmission facilities.

Groton Utilities was formed by special act adopted in 1903. The legislation gave the former borough of Groton taxing and bonding authority. The borough used this authority to buy the assets of the private Groton Electric Company (founded in 1900) and the Groton Water Company (founded in 1891). Groton Utilities provides electric service in the city and town of Groton. In addition to its distribution system, it owns a limited amount of transmission lines that connect its substations to the grid. In 1995 Groton Utilities purchased Bozrah Light & Power (BL&P), which previously had been a small electric company. BL&P currently operates as a wholly-owned subsidiary of Groton Utilities. It serves 3,000 customers, including all of Bozrah and parts of Lebanon, Franklin, Montville, and Salem. In addition to providing electric service, Groton Utilities provides water, cable TV, and internet service in its territory.

The Jewett City Department of Public Utilities was founded by special act in 1897. It serves parts of Griswold and Lisbon. It owns only distribution facilities.

Norwalk's Second Taxing District is a municipal corporation created by special act in 1913. The district owns and operates South Norwalk Electric and Water (SNEW), a water and electric utility. The utility serves approximately 5,000 electric customers in South Norwalk as well approximately 9,000 water customers in Norwalk, Rowayton, Silvermine, and Wilton. In addition to its participation in the CMEEC projects, SNEW is seeking to redevelop a 17 megawatt plant that it took out of service on economic grounds. The district also maintains parks and other public spaces in South Norwalk.

The Third Taxing District encompasses East Norwalk. The taxing district was created in 1913 and is the successor of the East Norwalk district, which also ran an electric utility. The district is governed by a board of three commissioners elected by the area's residents to 6-year terms. The district operates an Electric Department that serves East Norwalk residents. It also owns and maintains several mini-parks, the East Norwalk Historical Cemetery, and the East Norwalk Library building.

Norwich Public Utilities was founded in 1904. It is governed by a five-member Board of Public Utilities Commissioners. The board, which also serves as the city's sewer authority, is appointed by the city council. CMEEC owns 17 megawatts (summer rating) of generation in Norwich.

Wallingford's Electric Division was established by special act by the former borough of Wallingford in 1899. It provides power to customers in Wallingford and part of Northford and maintains the municipal street light system in Wallingford. In addition to its distribution system, the utility owns a little more than one mile of transmission lines. CMEEC owns the 77 megawatt (summer rating) Pierce generating plant in Wallingford, as well as several small generators there.

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