Brad Viator is an energy consultant who specializes in state policy with more than a decade of experience leading public policy for the utility industry.
As the Regular Session of the Connecticut General Assembly draws to a close, significant energy legislation is heading for the governor’s desk. This bill, SB 7, is a laundry list of limits on costs that electric, gas and water utilities can recover from their customers.
Even if well-intentioned, this legislative populism is destined to have the exact opposite effect of what its supporters intend. If SB 7 becomes law, Connecticut customers are going to have less reliable utility services and will pay higher electric, gas and water bills.
SB 7’s issue isn’t the concept of performance-based regulation that would reward or punish utilities for the quality – or lack thereof – of their service. Rather, it’s the overly punitive approach Connecticut is taking to overseeing utilities that will cause significant customer harm.
The conflict lies in the fact that the progressive policymakers working to enact SB 7 believe if investors are upset, they are doing something right. The problem is that this rationale discounts the regulatory compact and how utilities function as investor-owned corporations.
It also doesn’t factor in the amount of capital the utility industry deploys. Investor-owned electric companies alone are projected to invest $154 billion in capex this year. Making that industry the single biggest investor in North America.
If SB 7 becomes law, lenders and rating agencies will conclude that Connecticut is becoming a riskier operating environment because of the reforms and penalties it requires. This will cause the interest rates that utilities pay when they borrow funds for critical investments to go up.
When that cost of capital increases, the cost of doing business will go up and, therefore, Connecticut utilities will have significantly less money to invest in the system. This will have direct and immediate impacts on customers who will see higher bills without the benefit of improved service from grid investments.
Shockingly it appears supporters of SB 7 hope this negative feedback loop will cause the utilities significant financial harm forcing them to sell their assets in Connecticut. Why would investors choose to deploy their capital in such a hostile regulatory environment?
My view that SB 7 will be a disaster is informed by another state decision to impose harsh penalties on utilities the state felt were not meeting its standard of service. In 2017, the California Public Utilities Commission decided to disallow recovery of costs associated with a wildfire in San Diego called the Witch Fire. The CPUC intended for San Diego Gas and Electric to feel punitive damage for not investing in wildfire mitigation, and not catching a fire started by its electric system.
This punitive course of action caused more complications. That is because investors were unable to determine which wildfire costs would be recoverable by the electric utilities and which costs wouldn’t. This uncertainty quickly led capital costs to go up for electric utilities in the state. The increase in costs left the utilities with less capital to invest in fire mitigation, which resulted in even more devastating fires that subsequently caused Pacific Gas and Electric, the state’s largest electric utility, to go bankrupt.
Realizing that the hostile governing environment resulted in less safe and reliable power for Californians, lawmakers in Sacramento eventually passed legislation to create a fund for wildfire victims to get money to rebuild and developed a liquidity fund for utilities. In layman's terms, California had to dish out cash to create a safety net for utilities, so Wall Street would have the confidence to deploy capital in the Golden State.
Seemingly unfazed by this recent California utility debacle, it appears Connecticut is on a similar path that prioritizes punishing utilities at the expense of common-sense utility regulation that may not be perfect but creates a safety net to protect ratepayers from skyrocketing bills and unreliable service.