Connecticut legislature passes new restrictive regulatory rules for utilities

Connecticut’s two electric utility companies, Eversource and United Illuminating, could be facing a tougher time seeking meaningful rates from state regulators following changes to the rulebook passed by the state legislature this week that create a challenging regulatory environment for utilities.

With the legislative session winding down, the measure, Senate Bill 7, passed both houses of the legislature and was sent on to the desk of Gov. Ned Lamont, a Democrat who is likely to sign it.

SB 7 held the attention of utility analysts who saw red flags in the chances of an increasing pace of rate cases at the same time utility companies also will be barred from using ratepayer funds to cover the costs of preparing their cases. The result could be administrative efficiency overwhelmed by a more frantic and uncertain ratemaking regime.

“We will have to see what it does in terms of how the utility reacts,” said Ronald Brisé, Government Affairs Practice Leader at the Gunster law firm and a former Florida Public Service Commission commissioner who is an expert in electricity regulations.

At 79 pages, SB 7 had what state Sen. Norm Needleman, co-chair of the Energy and Technology Committee, called “a lot of moving parts.” The debate was boiled down to granting a higher level of clout to the Public Utilities Regulatory Authority (PURA), particularly for Commissioner Marissa P. Gillett, who will now answer largely to Lamont and will have greater authority to call for more-frequent rate cases. In addition, utility companies may find themselves at a disadvantage in being unable to request their administrative costs for rate cases be paid for by their customers; those costs will be borne solely by stockholder funds.

The measure is part of a longer-running move toward basing rates on customer satisfaction and other performance metrics rather than simply covering the company’s costs.

“The bill is really just a laundry list of prohibitions for rate recovery,” said Brad Viator, CEO of the advisory firm B Strategic.

“It is built on the foundation of performance-based rates (PBR) legislation, which was passed in 2020,” Viator told Daily Energy Insider. “Investors have been watching the implementation of PBR in the state, and are uncomfortable with the hostile environment at the PURA.”

The move toward PBR in Connecticut stemmed from the response to major outages in 2020 caused by Tropical Storm Isaias, so SB 7 was not a bolt from the blue, and the utilities’ rate teams have been adapting to new metrics.  At the same time, however, PURA is seen as growing more aggressive and adversarial under Gillett’s leadership and more likely to upend the current biennial calendar for rate cases.

“It (PURA) is almost an agency of the governor,” Brisé said. “Legislators will hear the clamor from the consumers and they can respond.”

A preview of the future came earlier this year when Gillett led PURA to order a reduction in water rates charged by Aquarion Water Company. Aquarion, a subsidiary of Eversource, went to court to appeal the order and also secure a stay from the judge.

Brisé predicted that a significant result of a hurried rate case could be another court case filed by a utility or potentially another Connecticut stakeholder that would be addressed in a decidedly unhurried manner.

Those types of twists tend to add a level of uncertainty to long-term financial planning, and are just the type of development that could raise the cost of capital for Eversource for new infrastructure and other expenses. And with rates based on performance, company revenues will be reduced whenever it falls short of target.

At the end of the day, the ratepayers may wind up paying for the higher overhead incurred by Eversource and other utilities.

“The issue in Connecticut from Wall Street’s perspective is that PURA is proposing a really high reliability standard, and imposing penalties every time that high standard is not met,” Viator explained. “So, if there are no violations, you will get a reasonable return, but every violation reduces the return.”

“Wall Street doesn’t see this as a prudent investment, so they are choosing to deploy their capital in other states,” Viator said. “When a Connecticut utility needs to raise capital, many funders will say no, which means those utilities have to pay a higher interest rate for money to invest – and those costs are then passed directly to Connecticut ratepayers.”

Wolfe Research stated in a recent analyst’s note on Evergreen that Connecticut utility regulations were getting more restrictive. “SB 7 would among other things give PURA’s chair more power, making the chairmanship a two-year vs one-year term and allowing her to assign a sole commissioner to decide a case. The current chair has been adversarial toward the utilities,” the report said, noting her term expires in March 2024.

Consumers may be mollified somewhat this summer with Eversource rates for the second half of the year dropping from 24.17 cents per kilowatt hour (kWh) in the first half of the year down to 13.82/kWh effective July 1. “The volatility in the energy markets has hit our customers hard in the last year, so we’re pleased to let our customers know about the new rate that will provide some relief in energy prices this summer,” Eversource President of Electric Operations in Connecticut Steve Sullivan said last month in a written statement.

Connecticut remains a high-end energy neighborhood due to natural-gas constraints and the transition to renewables will face headwinds if capital costs continue to rise. “The impact will be on everything the utility buys,” said Viator. “When capital costs increase, buying solar panels in Connecticut will cost more than buying them in Massachusetts or Florida. It’s a self-inflicted wound that will lead to customers having to pay more for everything, and for very little reason.”

Brisé told Daily Energy Insider that the potential speed-up in rate cases could lead to a higher level of volatility in customer electric bills and an overall lowering of efficiency when setting rates. “There can be a regulatory lag that doesn’t benefit anyone,” he said.

Analysts agreed there is nothing to prevent Connecticut from tweaking SB 7 and smoothing out any rough patches in the ratemaking process, as long as any changes don’t push further afield.

As Brisé said: “The commission reflects the market and therefore, the commission should reflect how the market operates. If everything becomes overly burdensome, then it isn’t a reflection of the market.”