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It’s no secret that electricity in Connecticut is expensive. Connecticut electric customers pay the highest monthly bills in the country outside of Hawaii, and they know it – routinely commiserating over electric bills in the hundreds of dollars.
Answering why is more complicated. There’s the cost of state policies that support renewable energy, the cost of regional policies that support natural gas, and the cost of living in the Northeast, where prices are high across the board. And customers are quick to point at the massive profits their utilities’ parent companies continue to earn as evidence that shareholders come before customers.
But to PURA Chair Marissa Gillett – the state’s chief utility regulator – there isn’t one place to lay the blame. Speaking to the legislature’s Energy and Technology Committee on Thursday, she said Connecticut customers are suffering “death by a thousand cuts” – a series of obscure policies that go unnoticed, but add up to shift a utility company’s risk away from its shareholders and onto its customers.
The result of those policies, stacked on top of each other like the layers of an onion, is that Connecticut has the fifth-highest residential electric rates in the continental United States, with nobody truly understanding why their rates are so high, she said.
Gillett said a bill proposed by the leadership of the Energy and Technology Committee would start to peel back some of the layers: It would force companies to return more money to customers when they earn more than their allowed rate of return, give regulators more authority to scrutinize a utility’s spending on capital projects, and force the companies to disclose more details about how they spend customer money on advertising.
“Is [this bill] enough? No, but it’s still a critical step forward,” Gillett said. “The only way we’re going to get to a future where folks understand why the rates are what they are is if we’re peeling back all these different layers that took a decade, two decades, to get layered on there.”
Eversource, joining United Illuminating in opposition to the bill, said the changes proposed in the bill would make it more difficult to fund capital projects on its distribution system, which could make the system less reliable without doing much to save customers money.
“If the intent of this bill is to be able to tell our customers that we’ve solved the problem, Eversource’s bills will now be materially lower, this is not going to achieve that objective, and it will make it much more challenging to be able to do the other things our customers want, and to serve them safely and reliably,” Doug Horton, Eversource vice president of distribution rates and regulatory requirements, told the committee.
Regulator: Too many costs approved without detailed review
A major spike in electric bills in July 2020 surprised and enraged many Connecticut customers, and Eversource pointed to the cost of a 10-year contract state lawmakers signed to keep Dominion Energy from shutting down the Millstone Nuclear Power Plant in Waterford – a crucial source of baseload power for New England.
The rate hike came as such a surprise because it was part of the company’s twice-a-year “rate adjustment mechanism” proceedings, Gillett said. Historically, companies give a two-week notice to PURA outlining how they are going to change their rates to adjust for changing costs, forcing the regulator to treat it “almost exclusively like an administrative proceeding,” she said.
“We’re talking in weeks, as opposed to a [full] rate case, which has 350 days to get into the weeds on these things,” Gillett said. “Coming from Maryland, I can say with absolute certainty that the [rate adjustment mechanism] process that Connecticut has puts the regulator and its stakeholders at a disadvantage.”
Because the rate adjustment process is so short, it should only be used for costs that deserve limited scrutiny, she said. But it includes the Energy Security Investments mechanism that comes with $300 million a year worth of capital expenses between Eversource and United Illuminating that should be evaluated more closely in a full rate case, Gillett said.
The Energy and Technology Committee’s bill would take that out of the administrative rate adjustment process so that those costs would have to be scrutinized in a rate case – a move Gillett said would give regulators time to make sure those costs are reasonable and necessary, but which Eversource said would make it more difficult to pay for important capital projects.
Horton of Eversource said the mechanism came out of the company’s last rate case, and was meant to allow the company to recover capital costs to pay for “core capital investments” without having to wait several years for full approval.
Eversource President of Connecticut Operations Steve Sullivan – a longtime Eversource employee who was tapped three months ago to fill the newly created position, agreed, saying he is sure PURA is capable of “determining the prudency of our investments” without changes that could harm the company’s ability to access capital for those projects.
“We are striving to be at the forefront of the country – if not the world – in decarbonizing the electric sector,” Sullivan said. “The electric system is not currently designed and built to enable that reliably, so if we want to decarbonize the sector while improving reliability and resiliency, we need to transform the distribution system to the extent we haven’t seen in decades.”
Who should receive excess revenues: customers or shareholders?
The utilities have a set percentage rate of return that they are allowed to earn. They are allowed to earn a rate up to 1 percent higher and keep all the money, but if they earn more, it’s considered “over-earnings” that the company can’t keep.
“As long as they don’t hit that 1 percentage point, they keep all of the over-earnings,” Gillett said. “So if they were authorized at 9.1 percent, and they just consistently earn at 10 percent, ratepayers will never see any of that.”
But not all of the excess revenues are returned to customers in Connecticut. The company is only required to give half of its excess revenues to customers, and can give the other half to its shareholders.
The companies don’t always earn more than their allowed return – Eversource hasn’t exceeded its allowed return at all in the last three years, according to data provided by PURA. But United Illuminating’s earnings did exceed its allowed return in each quarter of 2019 and the first three quarters of 2020, with the excess earnings ranging from one-tenth of a percent, to more than 1 percent.
In 2019, United Illuminating earned about $13 million more than it was allowed, exceeding the 1 percent threshold. It was required to give back $6.48 million to customers in the form of a bill credit. Another $1.4 million went to cover costs from storm damage that customers otherwise would have been charged for the next year, and the rest went to the company’s shareholders.
The bill would lower that threshold to half a percent above the companies’ allowed rates of return, which Gillett said would strike a better balance between the interests of their customers and their shareholders. It would also require 80 percent of the over-earnings to go back to customers, –which would have returned another $1.3 million to United Illuminating customers in 2019.
Eversource, in written testimony said that, while the change looks attractive, it takes away “the best tool PURA has” for controlling a utility’s costs. The company said that the only way for it to earn more than its allowed rate of return is to cut costs below what they projected when the rates were set.
Eversource said that allowing them to keep some of the money they “over earn” gives them an incentive to keep their costs in check. And having lower costs could lead to lower rates in their next rate case, they said.
The changes in the bill – which would also give PURA more authority to hold interim proceedings to lower rates if it finds a company’s return is too high – could put the company in the position of having to “claw back” money from customers later on if they end up earning less than their allowed return, Eversource testimony said.
“If it were the other way around, and Eversource were to say, ‘Hey our cost of equity has gone up because interest rates are going up,’ which is what’s happening today, we would never be allowed to come in and request an increase to our rates for that single issue without PURA reviewing our entire cost to serve our customers to evaluate if any other costs went down,” Horton said.
Eversource: No conflict between customers and shareholders
Gillett said that, at the root of the issue is the fact that Connecticut’s large electric utilities – like Eversource, Connecticut’s largest utility, with 1.2 million electric customers across the state – are publicly traded companies that have a responsibility to make money for their shareholders.
“It’s not my job to vilify Eversource or UI or any of these companies,” Gillett said. “They have a fiduciary duty to their stakeholders, and I think it’s incumbent on us to recognize that they do have that duty, and as a result, it’s even more important for me, for the [Office of Consumer Counsel], for all of our stakeholders to act as if they are not going to act in our ratepayers’ best interests, because that’s just simply not their legal duty.”
The regulator’s job is to make sure these utilities are forced to balance their duty to shareholders with the needs of their customers who have no other options to get essential electric, gas and water service.
Sullivan from Eversource pushed back on the idea that the company’s dual roles are conflicting. He said any company with shareholders has a “natural tension” between profits and customer service, but his aim on the operations side is simply to make sure electricity gets to their customers.
“My people aren’t spending their time and effort every day thinking about rates; we’re thinking about our obligation to serve our customers,” Sullivan said. “We do that through maintaining the system, connecting new customers, restoring the customers quickly if they do experience an outage, and building and rebuilding the system through capital improvements.”
While Gillett framed the changes proposed by lawmakers as small ways to start shifting unnecessary costs away from customers and onto shareholders, Eversource and United Illuminating argued that the current rules are the best way to push their companies to control costs, and that the changes would end up hurting customers.
The changes would do little to “materially” lower customer bills, and would make it more challenging for the company to serve customer needs, Horton from Eversource told lawmakers.
Horton said the proposal would only make small changes in distribution costs — which make up a quarter of customers’ bills – while doing nothing to address the cost of the electricity supply that makes up half of bills, or the quarter of the bill that deals with the costs of transmission and public policies.
“It’s focusing on 25 percent of the bill – which is certainly significant, and it’s our portion of the bill that we control – but it’s nibbling around the edges within that, in terms of some things that may modestly reduce rates,” Horton said. “But it will not, in our view, help customers in a way that we think they need to [be helped], while it will make it much more difficult for us to be able to attract the capital we need.”
State Sen. Norm Needleman, D-Essex, co-chair of the Energy and Technology Committee, said that, despite criticisms he’s made of the company’s storm response, he doesn’t blame them for high rates. But the tension between the company’s duty to its customers and to its shareholders exists, and a strong regulator is necessary to balance that.
“This model does not work without a strong regulator,” Needleman said. “This is a model that is meant to be gamed by businesses that have the resources to game it and strong-arm [the regulator].”