Sunday, March 04, 2007

Across the Board Rip Offs in Connecticut


Why It Shocks

Generating Plants, Delivery System, Deregulation Affect Electric Bills In Connecticut
March 4, 2007
By MARK PETERS, Courant Staff Writer
A kilowatt-hour of electricity costs a little less than 6 cents for many households in West Virginia. Across the country in the state of Washington, it's between 4 cents and 8 cents.

In Connecticut that same kilowatt-hour costs more than 19 cents.

Although it may only seem like a few cents, those kilowatt-hours add up. An average household in Connecticut that uses 700 kilowatt-hours each month pays a rate of $80 or more above what similar households in West Virginia or Washington pay.

The average retail price for electricity in Connecticut is the second highest in the U.S., behind only Hawaii, according to the most recent data collected by the U.S. Energy Information Administration.

Why? Is electricity in New Haven, Conn., so different from electricity in New Haven, W.Va.?

Energy experts, consumer advocates, regulators and industry officials offer a variety of reasons, some simple, some complex.

Start with generating plants. Many of the state's power plants use natural gas, which is one of the most expensive fuels. Older, less efficient plants cost more to run, and Connecticut has several. And no new power plants are being built, even as demand for electricity is rising.

After power plants, the next problem is the delivery system. The state's grid of high-voltage transmission lines isn't sufficient to get power to those who demand it. More than $2billion worth of improvements have already begun, but for now the cheapest power can't always get to consumers.

Finally, there are the wholesale and retail electric markets started in 2000, two years after the state deregulated electricity generation.

Is deregulation to blame for Connecticut's high electric rates? That depends on whom you ask. Those who say it is believe the wholesale electric market favors generation companies, so consumers end up paying more for each kilowatt. At the same time, a retail market hasn't really developed yet, so people can't shop for better electric prices.

Legislators and regulators also question whether Wall Street investment banks, which have entered the business of managing massive portfolios of electric contracts, add to the expense.

"There is no one fighting hard for lower prices for consumers," said state Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn.

On the other side are industry officials who say studies have shown that deregulation has saved customers money when compared with the old, regulated system in which utilities like Connecticut Light & Power Co. both generated and distributed electricity. They say high fuel costs, constant rule changes by policymakers, local opposition to new power plants and stricter environmental rules in the Northeast all help make electric prices rise.

And geography and history play a role, too.

Connecticut doesn't have any nearby source of fuel - no coal mines or natural gas fields - so consumers must pay to haul it here.

Southern New England, in general, isn't a cheap place to live or do business. Electric rates aren't much different in New York City, Westchester County or Massachusetts.

High electric prices are not new to Connecticut. The state had higher prices than most of the country 10 years ago.

"Rates in New England already led the nation," said Johannes Pfeifenberger of The Brattle Group, a Cambridge, Mass.-based consulting firm.

High prices, in fact, were a principal reason elected officials pushed for deregulation. Today, several legislators say that deregulating the electric market was a mistake and that the state should again become involved in the industry.

As the energy debate continues in the General Assembly, a deeper look at factors contributing to high electric prices reveals complex interactions that frustrate easy solutions.

Generating Power

You need fuel to make electricity, and fuel costs money.

Burn a cheap fuel like coal obtained from a nearby mine, and retail prices are likely to be low.

Use an expensive fuel like natural gas that's transported hundreds of miles through pipelines, and prices will be high.

That's a major factor separating states with high electric prices from states with low prices. Those with the lowest prices have an abundance of coal or federally financed hydroelectric plants, said Richard Cowart, a director of The Regulatory Assistance Project, a Vermont-based energy think tank.

That explains the low rates in Washington and West Virginia. Hydroelectric plants are common in Washington, and West Virginia has plenty of locally mined coal to burn. Appalachian Power, for example, has a conveyer belt that runs straight from a coal mine to its Mountaineer Plant in New Haven, W.Va.

Connecticut, however, relies heavily on natural gas and oil. Federal statistics show that almost 37 percent of the electricity produced in the state in November derived from those two fuels, and that makes electricity more expensive.

For example, industry figures show the cost of producing 1 megawatt-hour of electricity - enough to power about 750 to 1,000 average homes for an hour - ranges from $26 to $45 for a traditional coal-fired power plant in New England. The cost for the same megawatt-hour at a natural gas-fired plant ranges from $60 to $105, depending on the plant's design. Oil-fired plants start in roughly the same range, but can climb to more than $200.

Nuclear plants have among the lowest production costs, at $7 to $9 per megawatt-hour.

Industry officials say the cost of producing power doesn't take into account the expense of building or improving a plant, which can be particularly high for nuclear energy.

NRG Energy, a New Jersey company that operates four oil- and natural-gas fired plants in Connecticut, said the cost of fuel makes up more than 80 percent of the consumer cost of electricity from its plants.

ISO-New England, which operates the region's power grid, concluded in a recent report that prices in New England would drop by $600 million annually if generation companies built new plants that could produce 1,000 megawatts, but only if they used fuel other than natural gas or oil.

"If we want to discuss strategies to control energy prices, we need to break the linkage between volatile fuel prices and volatile electricity prices. That means we need to diversify the sources of fuel we use to produce electricity in New England," Gordon van Welie, president and CEO of ISO-New England, said in a speech to business leaders in Connecticut last fall.

In the nine years since deregulation was approved, the only major plants built in Connecticut run on natural gas and oil. But even that kind of plant isn't getting built anymore, in part because of the rapid rise in fuel prices. Natural gas, for example, is three times more expensive today than it was in 1998, NRG said.

Power plants that use the two principal alternative fuels - coal and nuclear power - aren't being built, either, mainly because people don't want the pollution or radioactivity associated with them.

"When was the last time an electric project came out that got the support of the public and elected officials?" asked Daniel Weekley, director of Northeast government affairs for Dominion Resources, owner of the Millstone Nuclear Power Station in Waterford.

Last June, NRG proposed a $1.6 billion coal-fired plant in Montville that would use a sophisticated gasification process to reduce emissions. The company faced protests and a letter-writing campaign before it even submitted plans to state regulators. By November, NRG shelved the so-called clean coal plant and decided instead to build a natural gas-fired plant that could later be converted to coal-gasification.

While no new power plants are being built, demand continues to rise - especially peak demand during hot weather - creating a classic case of prices influenced by supply and demand. The ISO has projected that peak demand in New England will grow about 1.9 percent annually through 2015.

"The closer demand and supply are matched, the higher the price is going to be," said Jerrold Oppenheim, a lawyer and energy consultant who has handled utility litigation for attorneys general in New York and Massachusetts. "That is good for investors, but kind of scary for consumers."

Transmission Costs

Connecticut doesn't have an adequate system of high-voltage transmission lines to move power to where it's needed.

New lines are only now being built. Among the reasons they weren't built sooner are lengthy debates over the need for more lines and past forecasts that underestimated the rise in demand, a CL&P spokesman said.

So, for now, Connecticut residents have the highest costs in New England for what energy insiders call congestion charges.

"We are not only king of New England, we are probably the king of the country," said Donald Downes, chairman of the state Department of Public Utility Control, which oversees the state's electricity industry. He estimated that the lack of sufficient transmission lines increases a customer's bill by 10 percent to 15 percent.

Consumers pay for congestion - and the lack of new plants - in different ways, ISO said.

For instance, Connecticut consumers are forced to pay higher rates to keep expensive power plants running. Those high-cost plants, some dating from the 1950s, would go out of business if they had to sell power by competing with other plants, according to the ISO.

So why isn't the free market forcing those plants out of business? Because the state depends on the power they produce. If the plants shut down, so may the lights in southwestern Connecticut during times of peak demand. That area of the state suffers most from a lack of competitive plants and inadequate transmission lines.

To keep the plants profitable and operating, the ISO pays them every month just to be ready to run. In Connecticut, the ISO says eight plants received such payments at an annual cost of more than $300 million to consumers, including the cost of electricity produced.

Connecticut and Massachusetts are the only states in New England that have the so-called reliability-must-run arrangements.

The cost of those arrangements makes up most of what's called the federally mandated congestion charge found on consumer bills in Connecticut. The charge adds 1.7 cents per kilowatt-hour to a utility bill, or $11.90 for an average consumer.

Consumers get hit again when power line congestion forces communities to get electricity from more expensive sources because the cheapest plants can't deliver energy to them. Connecticut ratepayers spent $237 million in 2005 for electricity coming from more expensive plants. No other state in New England came close to that amount.

CL&P is now spending $2.4 billion to improve transmission lines to reduce congestion. The work comes more than 30 years after it was first proposed. The utility won approval to install underground lines or tall metal poles and high-voltage lines after a long and contentious fight with the communities they will run through.

"No one wants a big transmission line in their backyard," Pfeifenberger said. "It makes it very hard to build the power infrastructure needed. That has its costs."

The Wholesale Market

Electric deregulation went into effect in 2000 and created a wholesale market for electricity.

More than seven years later, a growing chorus of elected officials, consumer advocates and utility officials say the wholesale market is actually driving retail prices higher in Connecticut than in other states.

The reason, critics say, is that the complex process of bidding and setting contracts for electric supply artificially boosts costs. Attorney General Richard Blumenthal and other critics say one result of the process is that the state's one nuclear plant and one coal plant get paid based on prices established for oil- and gas-fired plants.

That means that even though the electricity generated at the Millstone Nuclear Power Station - enough for 1.5 million to 2 million average homes - is less expensive to produce, those lower costs never reach consumers.

"We no longer have the economic advantage of having a fairly diverse set of [plants]," said Joseph Rosenthal, a principal attorney with the state's Office of Consumer Counsel, which represents ratepayers in utility cases.

Under the old, state-regulated system, consumers got the average price of all the plants, from coal to renewable energy sources.

But industry officials say the system is working. Plants are running more frequently and more efficiently than when they were operated by the utilities. The risk of spending hundreds of millions of dollars to build a plant falls on shareholders - not ratepayers.

In addition, the free market system has produced better prices for some ratepayers. Customers of United Illuminating, under a three-year contract that expired last December, were getting below-market prices for electricity, said Frank Cassidy, president of PSEG Power.

What the region needs now, industry officials say, is consistency in market rules and state regulations that promote the construction of new power plants.

The General Assembly has said it wants to take some action on electric rates this spring. Legislators tried to address energy issues last year but couldn't reach a consensus.

Current proposals range from new taxes on nuclear and coal plants to allowing CL&P back into the power plant business, to new rules that might allow consumers more choices and spur competition in the retail market.

Last week, a handful of residents from the New Haven area who call themselves Fight the Hike gathered in the Legislative Office Building in Hartford. As lobbyists and legislators walked by, they reminded them what the high price of electricity means.

In January, rates for CL&P customers climbed an average of 7.7 percent after a 22 percent increase last year. United Illuminating, which covers the New Haven and Bridgeport areas, is phasing in a 50 percent increase for residential customers.

Frank Panzarella, a carpenter from New Haven, ticked off some consequences: Jobs move out of state. Stores raise prices as they pass on electric rate increases to consumers. People start making choices between electricity and other basic needs. Something must be done, Panzarella said.

"We don't expect miracles, but we expect quick action," he said.

Contact Mark Peters at



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