Energy auction proposal sparks consumer backlash
It was a little item, stashed in the revenue side of the slide show that accompanied Gov. Dannel P. Malloy’s budget address earlier this month.
“Energy auction. Convert about 800,000 electric ratepayers to an electric rate below their current standard offer. Savings to these ratepayers of approximately $65 per year. The state would auction the right to provide the lower standard offer pricing. $80 million in General Fund revenue in FY 2014.”
Translation: The state wants to take all the folks who have not picked an electric supplier other than the fallback option — that’s about half the residential ratepayers — divide them into groups of 100,000 and let the various electricity suppliers bid for the right to allow the state to take the accounts to the competitive electric supplier marketplace. High bid wins and that money goes into the General Fund.
Confused? You have lots of company.
“There are two camps — confused and opposed,” said John Erlingheuser, the state advocacy director for the Connecticut chapter of AARP. He’s leading the charge in the opposed camp. We’ll get back to that in a bit.
Actually there are three camps — the folks who are proposing the auction think it’s an idea worth exploring and at least concede it has more than a few details that need to be worked out.
It’s said to be a group idea from the Department of Energy and Environmental Protection, similar to one floated in 2007 by then Energy and Technology Committee co-chair Sen. John Fonfara, D-Hartford and committee member Rep. Sean Williams, R-Watertown. That plan did not generate revenue. The current proposal is also in the Comprehensive Energy Strategy, the final version of which was released last week, and went largely unnoticed among the strategy’s hundreds of pages.
Because the auction is designed to make money, the legislation it’s housed in is in the Finance Committee, where at least one of the co-chairs admits she’s in the confused camp. “I have a lot of questions of how it would work,” said Rep. Pat Widlitz, D-Guilford. “Thank God that we have public hearings.”
The best way to understand what the proposal would do is to start with a little refresher on how you get your electricity in Connecticut.
The two main utilities, Connecticut Light and Power and United Illuminating actually don’t generate your electricity. They deliver it. If you look at your bill there’s a set of charges for generation or supply, and another set for delivery/transmission. That second set is what the utilities do; that’s how they make their money. In fact nowadays they’re often referred to as EDC’s — electricity distribution companies.
You can pick any of the many generation companies that do business here to supply your power. The utility buys the power from them and then charges you for it.
If you don’t pick one, there’s a default electricity source known as the standard service offer. The purchase of that power is regulated by the Public Utilities Regulatory Authority. Its price has served as a benchmark for other power companies to beat, and indeed for a long time it was the highest cost for power.
Not anymore. Nowadays the standard offer falls in the middle of the pack in terms of cost. More important to many is that it does not have the small print that most other companies have — early termination fees, short-term variable rates, introductory deals that quickly go away.
Nobody knows how many people on the standard offer chose to be on it for the convenience or any other reason. And that’s why folks like AARP’s Erlingheuser have been fast and ferocious in their opposition to the electricity auction.
“The whole argument for the market in the first place is people should have the right to choose,” he said. “They’re taking away that right.”
While he admitted there is no data, he said the assumption is that seniors are most inclined to be on the standard offer. “They don’t want to be in the energy market checking their rate every month.”
Among the rest of his litany of concerns is that the plan would effectively eliminate the standard offer and along with it the benchmark against which companies are trying to compete. Questions have also been raised about whether the auction earnings should go to the general fund as opposed to ratepayers, renewable energy or energy efficiency.
Recalling his 2007 plan, Williams, who is ranking member on the Finance Committee and still a member on the Energy Committee, called the revenue component a budget-balancing gimmick. “I think it’s a terrible way to go about it but it’s a good idea at its core.”
He said he may propose the money go to fund smart meters, which are used to charge for electricity based on time of day. “Ratepayer dollars and taxpayers dollar are different dollars,” said Williams. “The revenue thing is enough for me to oppose it.”
The way the legislation exists now, the contract for those accounts auctioned would run at least three years, with the first year’s rate guaranteed to be five percent below the standard offer. It raises questions among many about what happens after one year and the penalties ratepayers could face if they opted out. And if there’s no standard offer anymore, what they would opt out to?
“When the commissioner (Dan Esty of DEEP) first explained it, it seemed a good thing on face of it,” said Rep. Jonathan Steinberg, D-Westport, a member of the Finance Committee and co-vice chair of the Energy Committee.
But after talking to others, he said “I’m having problems understanding how it’s suppose to work and if in fact it’s going to work as smoothly as they say it’s supposed to work.”
DEEP spokesman Dennis Schain called the proposed legislation a placeholder. “We look at that language as an initial concept — details to be worked out between us, the legislature and the administration.
“The intent here is to structure this with maximum consumer protections, consumer choice and flexibility.” He said a standard offer may need to continue to exist in some form.
“There are definitely some tough issues to get solved here. We know that,” he said.
The state also likes to point out, and even says in the Energy Strategy, that there are similar programs elsewhere, specifically citing Pennsylvania, Ohio and Chicago. In fact each program is substantially different from what’s proposed in Connecticut, with the key difference being that none is structured as a revenue generator.
Pennsylvania essentially has a discount incentive program. Ohio’s equivalent of a standard offer for gas and electricity uses a market-based auction, but there’s no guarantee of a lower price. And Chicago uses an aggregation model allowed by law throughout Illinois. Communities make the choice whether to do it. In Chicago’s case, they’ve entered into an agreement with an energy services company to provide power for all customers. But customers can opt out without penalty.
In fact, there is legislation pending in the Energy Committee for an aggregation pilot project similar to Chicago’s. While not specifically saying so, it’s said to be targeted at Bridgeport.
One of the core unanswered questions about the auction is whether the state has the right to essentially take over certain electricity accounts and then put them into a status not unlike the old regulated market.
“That’s how it was when we were fully regulated,” said Rep. Lonnie Reed, D-Branford, a finance committee member and co-chair of the Energy Committee. “When it’s deregulated, there’s more choice. In some ways we’re going to a process that’s sort of a hybrid.”
She too is eager to hear what surfaces at the public hearing. “I’ve talked to some who think it’s a genius idea for the state to be able to make money out of this,” she said. She declined to say whom.
For their parts, the utilities both say they are studying the proposal, though UI spokesman Michel West said on some levels it might not matter. “The generation component is revenue neutral,” he said. “It doesn’t cost us money; it’s a direct pass-through to customers.”
In the meantime AARP’s Erlingheuser has been rounding up support. “Ours is a market principle,” he said of retaining the standard offer. “We believe this is the last tool in the chest to bring downward pressure on electric rates. If we lose this we will have no say ever again on that.”
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