State, utilities OK new electricity pricing system

(March 10, 2006) Because the demand for electricity in Connecticut and the rest of New England is expected to overtake supply by 2008, the region’s electric rates could be increased by about 4.5% later this year. Revenue from the hike would be used to expand electricity-producing capacity and increase energy conservation, under a settlement agreement now under federal review.

Announced by ISO New England, state regulators and energy utilities, the agreement replaces an earlier federal plan that would have installed a far more costly, two-zone program in Connecticut.

Under the new Forward Capacity Market (FCM) plan, ISO New England will project the needs of the region’s power system three years in advance, after which there will be an annual auction to purchase power resources.

Resources will include new and existing power plants, alternative energy sources, and demand-response assets. The competitive auction process will determine prices, with plants bidding against each other to provide power.

Net cost to Connecticut consumers over four years is estimated at $800 million — one-half of the estimated incremental cost of a program proposed by the Federal Energy Regulatory Commission (FERC).

FERC’s plan, called Locational Installed Capacity (LICAP), splits Connecticut into two prizing zones — with the southwest part of the state bearing higher electricity rates.

Responding to the objections of Connecticut and the other New England states to LICAP, FERC ordered the states and utilities to develop an alternative. The settlement resolves a three-year dispute over how to ensure power plant owners will build enough new plants to meet peak power requirements and replace old, inefficient plants.

If FERC rejects the settlement, however, it will automatically approve LICAP, effectively doubling the cost.

Power officials believe that the new plan will do a better job of improving the reliability and affordability of Connecticut’s electric system.

The FCM plan includes measures to guarantee electric generating plants will be available when they are most needed and penalized if they fail to meet that need. In particular, the settlement agreement proposes to only award payments for delivered electric capacity. Pledges to build new electric power plants or to increase existing generating capabilities are not enough for payment under the settlement. This is a key difference from LICAP. Moreover, the agreement’s auction proposal would reward not only investment in new electric generation but also provide incentives for demand reduction, which could actually result in opportunities for businesses to control their costs.

Two other proposals that could help businesses customers control their energy costs were released from the Department of Public Utility Control this week. Draft decisions were issued in DPUC Dockets 05-07-16 and 05-07-17 that propose payments to help customers make certain kinds of conservation and distributed generation investments. Final decisions in both these dockets are expected next month.

For more information, contact CBIA’s Rob Earley at 860-244-1900 or earleyr@cbia.com.