UI Warns Rejecting Rate Hike Could Hurt Investors, Customers

The new Pequannock Substation in Bridgeport with the shuttered PSEG coal plant in the background. (CT Examiner).


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While state officials hailed the pending rejection of United Illuminating’s request to hike distribution rates, the utility warned that the decision would lead to higher electric costs for customers, and stymie needed borrowing and investment in the electric grid.

The draft decision – which the Public Utilities Regulatory Authority will vote on Aug. 25 – comes at a time of heightened public anger over high utility costs, and concern from utilities and investors that Connecticut’s regulatory environment would dampen investment in the state’s utilities.

UI asked to raise distribution rates about 5 percent to increase its revenue by $130.7 million over the next three years. In its draft decision, PURA signaled it would allow only a $2 million increase.

The choice was praised by Attorney General William Tong, who criticized UI’s request as “bloated,” and as a “clear message” that utilities won’t be rewarded for failing to meet their obligations to their customers.

But the electric utility, which serves about 341,000 customers across 17 municipalities in Fairfield and New Haven counties, warned in a written response to PURA that it expects the decision would have “devastating” impacts and lead to 40 percent lower profits in 2023 and 2024.

“We all know that things are more expensive today than they were in 2019. We have inflation pegged at around 18 percent,” UI Vice President of Regulatory Affairs Dan Canavan told CT Examiner. “PURA is asking us to run this system and provide safe and reliable service to our customers based on budgets that are four or five years old at this point.”

Consumer Counsel Claire Coleman applauded the draft decision for penalizing UI for what PURA said were customer service failures and a failure to remediate the abandoned English Station power plant in New Haven, among other issues. 

The decision would cut UI’s return on equity by 0.52 percent from 8.8 percent, which Coleman called an “appropriate reduction.”

But Canavan argued that by not allowing UI to charge for many operating expenses and capital investments, the decision would leave it with an effective rate of return of just 5.48 percent, pushing investors to look elsewhere.

Canavan said half of UI is run on debt, and the company will have to offer investors a higher rate to hedge the risk of Connecticut’s regulatory environment, adding to the company’s costs.

“That will eventually be passed on to consumers,” he said. “This decision may feel good today, but it’s going to have implications going forward as there’s less and less incentive for capital to be invested in the system.”

The company is obligated to provide safe and reliable service, and it will, Canavan said, but it’s going to have to be “more selective” on where it spends its money going forward.

“The first example that comes to mind is the company’s very aggressive greenhouse gas emission reduction goals,” he explained. “We’re happy to be a part of that solution, but when you’re not funding our basic core business, it’s hard for us to spend capital on expanding electric vehicle charging stations.”

PURA Chair Marissa Gillett hinted the authority would be more aggressive in rate cases in February, when it ordered a rate cut for Eversource-owned water company Aquarion that the authority said would save customers about $67 a year. She also said she intended to hold all utilities to the same high standard to prove what they’re charging customers for is necessary.

Aquarion has since appealed that decision to the New Britain Superior Court, where Judge Matthew Budzik agreed to the company’s request for a stay. Budzik also said that if the company was successful in its appeal, customers would have to repay Aquarion $40 million in “lost” revenue during the appeal in addition to a 20 percent rate increase.

Both decisions have come at a time of renewed public anger and political pressure against high utility costs in Connecticut. UI and Avangrid have pointed to global energy prices and a lack of regulation on generators in New England.

While supply costs have skyrocketed, Canavan said the distribution rates that UI makes money on have stayed “relatively flat” since the last rate case in 2016. He argued that rejecting UI’s rate will just pass down even higher costs to consumers later.

“Without continuous investment in the system and continuous attraction of capital to support that system here in Connecticut, you’re going to create much more expensive problems in the future,” Canavan said.

State Rep. Jonathan Steinberg, D-Westport, co-chair of the Energy and Technology Committee, said it’s reasonable to assume that some of the investments UI is seeking to charge customers for will be essential in the future and that customers will be faced with larger bills in the future. But he told CT Examiner that UI did a poor job making its case for a rate increase. 

“They thought they’d show up, ask for an increase and get it because, frankly, that’s pretty much been the history in Connecticut for a long time,” Steinberg said. “I think they were taken aback. They didn’t make a compelling case, and PURA didn’t buy it.”

PURA’s stance noticed

Gillett’s tack has sparked a wave of concern from utility companies and their investors. In its brief, UI cited several reports from investment analysts that criticized Connecticut as one of the most challenging regulatory environments. 

While Avangrid, the corporate parent of United Illuminating, saw its profits increase by 25 percent in 2022, the company said its profits from providing electric service in Connecticut were down 10 percent – from $125 million in 2021 to $113 million in 2022. 

On a recent earnings call, Avangrid CEO Pedro Azagra said they were working on the rate case and assured investors that Connecticut was a small part of its overall business.

Eversource CEO Joe Nolan was less circumspect in his comments to investors last week. While Nolan has said Eversource likely won’t file a rate case until 2025, he said the company is “obviously concerned” about the UI draft decision, saying it follows the Aquarion decision in “discouraging investment” in Connecticut.

“As you know, we will have our day in court [on subsidiary Aquarion], and if this remains as is, I assume that UI will be in court as well,” Nolan said. 

Steinberg told CT Examiner that that has been Eversource and UI’s argument since lawmakers started working on the Take Back Our Grid Act – a wide-ranging bill aimed at tightening accountability of the utilities in the wake of Tropical Storm Isaias in 2020.

He said it’s not surprising the utilities are reacting negatively to change because they’ve had “a pretty free rein” in Connecticut. Now, Connecticut stands out as it transitions to performance-based regulation, but he said he expects other states will follow Connecticut’s lead.

“Maybe initially, investors might choose another state over ours in the short term,” Steinberg said. “But there’s money to be made on infrastructure in Connecticut, so the investment will come.”

State Sen. Ryan Fazio, R-Greenwich, the ranking Republican on the Energy Committee, agreed that the talk of stifling investment is overblown. 

Consumers want a reasonable rate of return that will attract capital for utilities to invest in the state, he said, but “open-ended recovery of costs that don’t actually improve service for consumers” is bad for both sides.

A recent report by Moody’s analysts after lawmakers approved a bill to further tighten utility regulations concluded that the new law and “an already challenging Connecticut regulatory construct” could potentially lower utility returns.

But Fazio said that report misrepresented two key pieces of the new law, including a critique from Moody’s that changes to how utility cases can be settled would lead to longer and more contentious rate cases.

“Settlements should generally reflect the statute in the same way that rate cases do,” Fazio said. “But the idea that you should be settling out of the adjudicatory process, with less transparency, rates for an eight-year period, without an open and fully argued case, I think undermines the confidence of ratepayers and hurts everybody in the long run.”

This story has been updated to include additional details regarding the Aquarion appeal