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    Edwards Wildman Client Advisory - Connecticut Releases First-Ever Comprehensive Energy Strategy

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    On February 19, 2013, the Connecticut Department of Energy and Environmental Protection (“DEEP”) released an ambitious new Comprehensive Energy Strategy, the first-ever for the state, designed to move the State’s utility customers toward a cheaper, cleaner, and more reliable energy future. The 195 page Strategy can be found at http://www.ct.gov/energystrategy.

    In a letter accompanying the release, Governor Dannel P. Malloy stated that the “Strategy lays out a coordinated approach to address our collective energy, economic, and environmental challenges [to]…. ensure that all parties involved in energy in the state are pulling together in the same direction toward a cheaper, cleaner, and more reliable energy future.”

    The core of the Strategy, which will be implemented by DEEP, in conjunction with the state’s Public Utilities Regulatory Authority (“PURA”) centers on five major priority areas:

    • Energy Efficiency
    • Industrial energy needs
    • Electricity supply, including renewable power
    • Natural Gas
    • Transportation

    The Industry Sector Strategy proposes six approaches to help Connecticut’ industrial companies:

    • Continue Efforts to Reduce Electric Rates
    • Reconfigure Energy Efficiency Programs to Meet the Needs of Industry
    • Enable Fuel Switching to Cheaper and Cleaner Energy Sources
    • Remove Known Barriers and refine Combined Heat and Power Strategy to Capture Remaining potential
    • Encourage Water Conservation
    • Launch and Advanced Energy Innovation Hub at the University of Connecticut’s new Technology Park to support basic research on topics such as: fuel cells, batteries and storage, “microgrid” engineering, and small-scale hydropower

    Among the most aggressive aspects of the Strategy is its overarching emphasis on natural gas. Noting the State’s historic dependence on environmentally damaging alternative fuel sources, and the drop in the average price of natural gas from $7 per million BTU in 2007 to well below $3.00 per million BTU in 2012, the Strategy characterizes the current environment as presenting “Connecticut residents and business owners with a once-in-a-generation opportunity to switch to a cheaper, cleaner fuel source.” This will have the dual benefit of allowing consumers to lower their energy bills and break free of the price of the price spikes associated with dependence on oil, while decreasing the level of harmful air pollution.

    While mindful of the controversy surrounding efforts to tap into the nation’s shale gas resources, the Strategy seeks to align Connecticut’s energy future with emerging shale gas market to derive a lower-cost, less polluting, and domestically available energy resource. With this in mind, the Strategy announces the State’s goal to make natural gas available to as many as 300,000 additional homes and business, beginning with the 217,000 customers currently located on gas mains, but not heating with gas. At the same time, the Strategy cites a Department of Economic and Community Development study which estimates that the necessary natural gas distribution buildout will result in the addition of 54,000 job-years of net total employment.

    To achieve these objectives, the Strategy proposes:

    • New financing options to address the upfront cost associated with conversion
    • Alternative financing for low-income homeowners
    • Regulatory changes in the form of extended payback periods for customers located on, but not near enough to gas mains to qualify for financing by a gas distribution company private capital funding
    • Amendment of the “hurdle rate” for all three of the State’s gas companies to allow for a payback period of 25-years (Under the current regulatory regime, a gas company may invest (and recover) the costs of expanding its distribution system to add a new customer, so long as the increased revenues are sufficient to recover the costs and allowed rate of return over a 15 or 20 year period)
    • Construction of 900 miles of gas mains, with particular focus on “anchor loads”
    • Creative financing mechanisms, with particular emphasis on private capital funding sources

    A critical component of the Strategy’s Energy Efficiency proposal is “an enhanced focus on private capital leveraged by limited government funding.” By providing structure and scale to the effort to bring private capital into the clean energy arena, the Strategy seeks to expand access to financing and lower the cost of borrowing, while scaling back the use of taxpayer and ratepayer funding over time. The Strategy calls for expanded use of Connecticut’s first-in-the-nation “Green Bank,” the Clean Energy Finance and Investment Authority, as well as greater efforts to lower the bar for financing by commercial, industrial, and multi-family property owners through programs such as the Community Property Assessed Clean Energy program (“C-Pace”). C-Pace is a tax- lien financing program that allows property owners to finance qualified energy efficiency and clean energy improvements through an additional assessment on their property tax bills. Because the payment is tied to the property tax, a secure payment stream, it is hoped that low interest capital can be raised from the private sector, thereby eliminating the need for government or ratepayer funding.

    The Strategy identifies several other financing options including a “low or no” interest rate loan program modeled after a zero interest loan Massachusetts utility-administered efficiency program. It also advocates use of “on-bill” financing which uses loan terms structured so that savings from the efficiency or clean energy improvements are greater than the loan repayment cost, resulting in no increase to customer bills.

    The Strategy states that while the State’s residents are likely to enjoy steady or decreasing electricity prices over the next few years, rates are likely you go up after 2017, due to increasing regional demand and an increase in the price for natural gas. In addition, demand for renewable generation is expected to outpace available supply. Accordingly, the Strategy cites the need to better manage demand, which can be accomplished and reduced through greater participation in demand response programs, an increase in renewable energy (especially solar), targeting demand as part of the State’s energy efficiency programs, and behavioral change available due to technological advances and dynamic rates.

    The Strategy notes that DEEP is undertaking a study – separate from the Strategy – to evaluate options for cost-effectively meeting the State’s renewable power goals. Study objectives include an evaluation of the impact of the state’s current 20%-by-2020 renewable portfolio standard (“RPS”) target, determination of the appropriate RPS target, and reassessment of the State’s current definition of renewable power to include geothermal and large-scale hydropower. The Strategy proposes to “explore opportunities for large-scale hydropower to provide low-cost, clean base-load generation as well as the potential for load-following (and thus “peak shaving”) electricity.”

    The Strategy acknowledges the special relationship between energy and water. According to the Strategy, the relationship “crosses so many sectors that it is difficult to fit the discussion of the relationships, the challenges, and the opportunities in these areas” into the space allotted in the Strategy. Water is essential to producing electricity generation. Natural gas-fired boilers and combined cycle power systems require water for cooling, and water is heated to make steam to run turbines that generate electricity. The Strategy observes that water is “heavy”, which means that pumping, extracting, treating, conveying, and discharging requires tremendous energy. At the same time, energy represents as much as 65% of a water utility’s cost. Consequently, according to the Strategy, “the rewards for reducing those costs through efficiency process and motor upgrades are large…” Using less water means using less energy.

    In view of the significant relationship between energy and water, the Strategy makes three recommendations related to water and wastewater utilities, focused on promoting efficiency and conservation:

    • The PURA, which is tasked with utility ratemaking, should establish water rates that encourage, rather than penalize water utilities for promoting and achieving conservation (due to the adverse effect of conservation on revenues)
    • Expansion of the State’s Water Infrastructure and Conservation Adjustment (“WICA”) surcharge mechanism, which provides for recovery of certain capital investments for certain capital investments between rate cases, from 5% to 10% to offer more support for the efforts of water utilities in repairing and replacing aging infrastructure.
    • The Conservation & Load Management Program plans submitted by the electric and gas distribution companies should be revised to include specific efficiency programs for water and wastewater utilities, and water conservation measures, in general, rather than just those that reduce energy use related to heating water.

    The Electric Sector Strategy notes that energy efficiency represents the best way to lower the electric bills for all ratepayers. Accordingly, increased investment in energy efficiency is one of the primary recommendations of the Strategy At the same time, it finds that that the State should seek to reduce peak demand by increasing awareness of opportunities for larger customers to take advantage of demand response programs, and invest in technologies that will benefit smaller customers, including residential customers.

    The Strategy also recommends significant changes by the State’s electric utilities. It concludes that achievement of its goals will require development of dynamic rates that allows customers to align their electric use with incentives associated with time-of-use pricing. Advanced meter technologies have the ability to support time-of-use rates and dynamic pricing strategies such as hourly pricing. However, the Strategy finds that, while United Illuminating currently possesses the required advanced meters, Connecticut Light and Power (“CL&P”) does not. Accordingly, while it recommends that UI promote time-of-use rates to all of its customers, CL&P should submit a detailed plan for a multi-stage roll out of advanced meters over a five to ten year time frame, and defer promotion of time-of-use rates to residential customers until advanced meters are available.

    The Strategy also seeks to change the way the utilities’ rates are structured so as to align with the desired market transformation. For example, the reductions in water use described above, while resulting in the desired reduction in energy use, will also result in a reduction of revenues achieved by electric suppliers. Conceding that the current ratemaking process can result in “harm” to the utility if conservation efforts are successful, thereby reducing the associated revenues earned by the company, the Strategy endorses full, permanent “decoupling” for both UI and CL&P in their next rate cases. Decoupling enables the utility to recover allowed returns even as sales decline due to efficiency gains by breaking the link between sales and revenues, and aligning the interest of the companies and their customers, and the State’s interest in conservation. The Strategy also advocates additional performance-based incentives such as higher allowed rates of returns for a utility’s success in meeting the State’s public policy goals.

    The Strategy finds that structural network changes can assist in the attainment of objectives. Specifically:

    • DEEP and PURA should work to divide current Standard Service customers into tranches of 100,000, and make them available to the retail electricity market via auction, with the tranches awarded to the highest bidder and the resulting proceeds allocated to Connecticut citizens. Such a program is not without precedent, as Pennsylvania and Ohio have executed similar programs, and a recent referendum approved such for Chicago.
    • The State can allow “submetering” of electricity produced on site by a landlord in a multi-tenant building. Noting that statutes currently allow submetering at campgrounds and marinas, it finds that expansion can provide an incentive for landlords to install newer equipment, including renewable energy or a system with a combined heat and power component to generate power on site and fully recover costs via submetering to tenants.
    • “Microgrids” can offer a 24/7 system of distributed generation that can be “islanded” to allow certain facilities (e.g., grocery stores, gas stations) to remain operational when the power system fails.
    • “Virtual net metering” can be utilized to allow customers who operate “behind-the-meter” generation (i.e., host) to assign the surplus production from the generator to other metered accounts that are not connected to the generator. The surplus production could be used to reduce the electric bill of the beneficial account through an accounting mechanism.

    Finally, in a nod to global efforts to detect, deter, and manage the effects of cyber disruption, the Strategy makes improved cyber security a priority. Noting that public utilities are particularly vulnerable, it states that the State must ensure that its utilities establish, update, maintain, and practice cyber defense and management capabilities commensurate with high industry standards.


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