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Power Play
What Connecticut business people need to know about the electricity they buy in 2004-and beyond
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Business New Haven
1/5/2004
By: Karen Singer
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This year, a new energy era begins in Connecticut.
Electricity rates are going up, and pending state, regional and federal decisions will shape the energy landscape - and business climate - for years to come.
Unresolved matters include improvements to an antiquated electric transmission system, and political wrangling over other types of power lines.
Business New Haven takes a closer look at some of the issues of import to companies in the coming year.
Rising Rates
Be prepared to pay more for electricity. Although the state's Department of Utility Control (DPUC) was not scheduled to release the final tariffs until December 29 (after this edition of BNH went to press), residential customers can expect a rate hike of around one percent over 2003 bills.
Business costs will continue to depend on load and time of use, and rates for United Illuminated Co. (UI) and Connecticut Light & Power Co.(CL&P) customers will be slightly different.
The 2004 rates are based on an update of rates capped at ten percent below 1996 levels since 2000, when restructuring began following deregulation of the electric industry. The capped rate, known as the "standard offer," expired December 31.
Concerned that removing the cap might result in dramatically large rate hikes, the General Assembly decided instead to implement a transitional standard offer, allowing bills to rise only to the level of the December 31, 1996 increase.
Under the transitional standard offer, total capable costs include generation, transmission and distribution charges as well as some smaller line items. The DPUC recently set UI customer rates at 9.9 percent above current rates for the entire three years of the transitional standard offer, which expires on December 31, 2006. This is because UI has a three-year contract with its supplier.
The CL&P rate increase was set at 7.1 percent for 2004 only, because the company hasn't finalized contracts for 2005 and 2006. [The rate includes funding to upgrade CL&P's distribution infrastructure and workforce, a proposal radically slashed by the DPUC after harsh criticism by state Attorney General Richard Blumenthal and Consumer Counsel Mary J. Healey].
But these aren't the only price increases business owners face.
Consumers have been paying additional fees under a new federal pricing system implemented last March. The system changes the way wholesale power is priced by ISO New England Inc., which operates the region's bulk electric power system and administers its wholesale electricity marketplace.
All ISO members had previously shared costs for "congestion" caused by transmission line limitations requiring the use of more expensive electricity. But since March, areas where congestion problems occur, including Connecticut, must pay for their own congestion.
UI suppliers have agreed to absorb the congestion charges, which are built into the cost to customers. CL&P customers, however, have experienced price hikes of approximately 12.7 percent since March for congestion, according to DPUC spokesperson Beryl Lyons.
"We are trying to work out some mechanism for smoothing these things out so bills will not vary substantially month to month," says DPUC Chairman Donald W. Downes. "Customers deserve some degree of predictability."
The new rates also may be influenced by the price of fuels needed to produce electricity.
"The DPUC has the statutory authority to make adjustments based on any wild fluctuation of fuel costs," explains State Rep. Kevin M. DelGobbo (R-70) of Naugatuck, House ranking member of the legislature's Energy & Technology Committee. "It should be noted they had the same mechanism the last four years but did not utilize it, which caused great consternation on the part of suppliers, whose costs to generate electricity had increased. So that was good news for consumers."
Indeed, Downes estimates ratepayers have saved between $400 million and $800 million on their electric bills since January 2000. "The standard offer has been one of the great bargains of our decade," he notes.
DelGobbo says the legislature approved the cap because "letting the marketplace take its course could have resulted in an extremely volatile situation for business because there's no retail market. But now there are some opportunities for competition, and a reasonable chance for a commercial and industrial marketplace, especially for large industrial customers."
Business groups such as the Connecticut Business & Industry Association (CBIA) and Manufacturing Alliance of Connecticut (MAC) have been gearing up to help members find options for discounts on electricity, as they already do for natural gas. Several suppliers, including Constellation New Energy, Select Energy and Levco Tech Inc., are among those expressing interest.
But it may take a while for outside vendors to make deals.
"It does not seem as though a competitive market will be available in Connecticut at least until the first half of the year," says Jeffrey Gaudiosi, MAC's vice president for regulatory matters, after speaking with a potential supplier following the DPUC rate decisions. "The reason is the cost of producing electricity cannot produce a product priced below the transitional standard offer."
A list of state-licensed electric aggregators and suppliers is on the DPUC's Web site, wattsnewct.com.
When shopping around, compare the generation-services charge you're paying with offers from outside suppliers.
"Large companies already have special contracts with the utilities at much lower prices," notes DPUC Chairman Downes. "Those contracts are going to be disappearing. Once they run out, those guys will have to find an independent supplier or sign up under the transitional standard offer [TSO]. When that [TSO] ends, we will offer a default offer, which will be a straight pass-through of short contract price.
"So they have three years to figure out how to deal with this."
Small businesses, Downes adds, "are going to be treated more or less as residential [customers]."
Large companies often have in-house employees for energy issues, and may be contacted directly by electric aggregators and suppliers.
Smaller businesses may not be able to take advantage of these opportunities, but they, too, should be looking for ways to cut energy costs (see accompanying story).
Gridlock
Demand on the existing electricity-transmission system for in southwestern Connecticut is rapidly outgrowing the system's ability to deliver cost-effective - and reliable - power.
The antiquated infrastructure already is costing Connecticut ratepayers more. DPUC Chairman Downes estimates that $180 million in federally mandated congestion costs were collected from customers in the nine months since the new pricing structure was implemented last March.
Northeast Utilities' plans to update the system with larger, more efficient 345-kilovolt lines have met with opposition from environmental groups and municipalities.
Last July the state Siting Council approved the first phase of a CL&P project to construct 20 miles of overhead and underground 345-kv lines between Bethel and Norwalk. Since then, engineers working on design and maintenance plans have been surveying locations for overhead structures and researching town records, and talking to town engineers regarding underground line locations.
"We don't want to bump into what's already there," says CL&P spokesperson Frank Poirot. Construction could begin this spring if the plans are approved by the end of March.
Meetings on a joint UI and CL&P proposal to construct a 69-mile 345-kv line from Norwalk to Middletown, with 24 miles underground, began on December 17 and are expected to run through February 24. "Those will be followed by evidentiary hearings," Poirot says, adding that the Siting Council has until October 9 to make its decision.
Twenty-four towns are involved in this proposal, compared to five for the Bethel-to-Norwalk line. And battle lines are being drawn.
Although there's greater awareness of the need for more reliable power, a point underscored by August blackout, there are the inevitable disputes over where the lines will go.
"Environmental and aesthetic concerns must be balanced against technical constraints," explains Joel Rinebold, who runs the Institute for Sustainable Energy at Eastern Connecticut State University in Willimantic, and served as chairman of two task forces last year on state energy issues. Underground and overhead wires must be integrated with the power grid, Rinebold says. "It's not just a simple matter of paying more money and having lines underground," he explains.
Meanwhile, time is running out regarding who will pay for the upgrades.
As of now, costs are to be shared equally, or "socialized," among members of ISO New England Inc., which runs the regional power grid. But the transmission improvements need to be completed and operational by December 20, 2007.
"If we do not make it by the deadline, if we're not even close, Connecticut will end up bearing the costs, which are just under $1 billion," warns DPUC Chairman Downes.
Updating the system, he points out, will "knock out" congestion costs and may result in rate reductions.
"At the end of the day [the two projects] are going to have the effect of cutting the congestion and line loss figures by 70, 80 or 90 percent," Downes says. "For some businesses this could literally be the difference between turning a profit and not."
Power Politics
As the transmission proposal wends it way through the regulatory process, other energy issues are encompassing even larger political battlegrounds.
"We are seeing the transition of the ISO into an RTO (Regional Transmission Organization), and the beginnings of regional organizations that will ultimately take over responsibility for planning, funding and constructing regional projects, and making sure there is enough transmission and generation to serve the load," says DPUC Chairman Downes. "That used to be done state by state."
The Federal Energy Regulatory Commission (FERC) must approve ISO New England's recent request to become an RTO.
"It would bring many benefits to New England, and would have the authority to require transmission companies to either upgrade lines or build new ones," says ISO spokesperson Erin O'Brien.
State Attorney General Blumenthal and several state legislators oppose the conversion.
Others offer a different view.
"ISO New England really is a captive of various utility companies, and is beholden to the New England pool," says Downes. "For me it's a no-brainer that boils down to who do you want running the electric system. I want our grid being run by people not attached to the utility company, who do not feel the need to service their needs and desires."
DelGobbo expresses similar sentiments.
"RTOs are probably an idea whose time has come," he says, because they "can ensure more reliable and effective transmission."
Other hotly contested regional issues concern energy projects involving Connecticut, Long Island Sound and New York.
Many Connecticut officials vociferously oppose the continued activation of the Cross Sound Cable, which the federal government ordered turned on during the August blackout. Its operation had been delayed by controversy over inadequate depth of parts of the line. Debates over which state benefits most also have generated plenty of news.
"We have looked at that fairly carefully and found that even though Long Island would benefit more, Connecticut would not be worse off, and in fact would be slightly better off with it," notes Hoff Stauffer, senior consultant for Cambridge (Mass.) Energy Research Associates. Connecticut could benefit in winter, when gas prices typically are high, Stauffer says, by procuring cheaper electricity from oil-powered sources on Long Island.
These matters are important, Downes says, but "The key issue is who's going to ultimately make those decisions."
Similarly, the Islander East proposal to run a natural gas pipeline under Long Island Sound has been delayed by regulatory authorities in Connecticut and New York and may finally be decided by a federal judge.
"We can keep fooling around and making moratoriums on building, or try to find some method to do a credible job of siting and building these facilities, with much more rigorous and serious types of analyses that let all the different segments of the society participate and produce actual results," Downes says. "Unless we do this, the federal government will pre-empt us."
Other state legislators, energy experts and business leaders also are hoping a new state agency, the Connecticut Energy Coordinating Authority, will spur faster action on forthcoming proposals.
"We have come up with a broad regional perspective to help better manage energy issues," says Joel Rinebold, who headed the task force recommending creation of the new agency. "Some may say it's more bureaucracy and delay, but our intent is to have a process in place to streamline solutions that are determined to be proper, consistent with environmental policies and cost effective, and to have them expedited."
Speaking Up
Businesses may have more clout that they realize in shaping energy policy. CBIA, MAC and some regional chambers of commerce have been "quite active" in the energy arena, according to DPUC's Downes.
"Outside of those [groups] most of the business community has not engaged themselves in this process," he says. "They may be figuring, 'Once this settles out, I'll try to make it work.' The problem is that may eliminate certain options some business might consider important.
"This is not a spectator sport," he adds. "There are a raft of people making decisions that are going to have profound impacts on rates and services, and perhaps how the world is going to look for the next several decades."
Downes worries that business owners may be skeptical that their viewpoint "is not really going to be heard and paid attention to. "They think we really care about more about residential consumers," he says.
"The reality it those of us in the utility sector recognize different sectors of customers are different and have different needs, and the business community is going to be far more influential than they might think."
Hoff Stauffer, senior consultant for Cambridge Energy Research Associates, agrees.
"Even small businesses have the opportunity to join in the regulatory process," Stauffer says. "Regulators always listen, and if people have good points, they listen a bit more."
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