Connecticut Delegation Signs Letter To Protect Against Unfair Energy Price Increases

CONNECTICUT DELEGATION SIGNS LETTER TO PROTECT AGAINST UNFAIR ENERGY PRICE INCREASES

Letter asks FERC Chairman to reject plan that would increase energy prices

The Connecticut delegation today signed a letter urging the Chairman of the Federal Energy Regulatory Commission (FERC) to reject a plan that could increase energy costs in Connecticut by $3.5 billion over five years. The delegation signed the letter with 21 of their New England Congressional colleagues in strong opposition to the Locational Installed Capacity (LICAP) proposal which would increase energy costs for residential, commercial, and industrial electric customers to provide additional compensation to power plant owners/generators as an incentive for them to build additional plants. However, New England currently has a surplus of energy that will last until the end of the decade, and the proposal is only an "incentive" to generators without any requirement or commitment from them to build any additional power plants.

"We note that unless FERC rejects the ISO plan, this plan and its huge rate increases will become effective on January 1, 2006. We therefore urge the Commission to reject the ISO-NE LICAP plan, and to instead direct ISO-NE to go back and consult with all affected stakeholders to come up with alternative mechanisms for ensuring that our region's wholesale electricity markets function properly and that rates charged in such markets are just and reasonable and not unduly discriminatory or preferential - as is required under the Federal Power Act."

The full text of the letter is below.

June 5, 2005

The Honorable Pat Wood , III
Chairman
Federal Energy Regulatory Commission
888 First Street, NE
Washington, D.C. 20426

Dear Mr. Chairman:

As you know, ISO New England has asked FERC to approve a plan (called "LICAP" or "Locational Installed Capacity Proposal") to provide additional compensation to power plant owners/generators as an incentive for them to build power plants needed to insure adequate electricity supplies for New England in the future. We are writing you to express our opposition to this proposal, and to urge the Commission to reject it.

At the time that FERC adopted its landmark Order 888 to promote wholesale competition in electricity markets, the Commission ordered a functional unbundling of electricity generation and transmission services, while also noting that its order would accommodate a full corporate unbundling of generation and transmission - including divestiture of generation assets. The Commission's order appears to have been predicated upon an assumption and belief that opening up competition in generation by ensuring open and nondiscriminatory transmission access and approving market based rates for transmission would result in new competitors entering the generation market and resulting competition creating lower prices for consumers. In fact, FERC Order 888 indicated that:

The Commission estimates the potential quantitative benefits from the Final Rule will be approximately $3.8 to $5.4 billion per year of cost savings, in addition to the non-quantifiable benefits that include better use of existing assets and institutions, new market mechanisms, technical innovation, and less rate distortion.

Today, New England has adequate supplies of electricity -- in fact, there is a surplus of generation that will last until the end of the decade. In the face of this surplus, the proposed LICAP rule, if approved by FERC, would result in the largest rate increase in the history of New England, effective January 1, 2006. In contrast to the type of competitive generation market that appeared to be envisioned by the Commission a decade ago, under the proposed LICAP rule, huge financial subsidies would be provided to generators based on complex regulatory formulas. It is hard for us to see how such an approach is consistent with the underlying philosophy behind wholesale competition in the generation market - competition which was supposedly going to move such generation from a regime in which vertically-integrated utilities received a regulated rate of return and consumers paid for investment in new generation, to one in which the costs and risks associated with new generation were to be shifted to generation company investors. Now, it appears that this cost is being shifted back to consumers in the form of LICAP charges.

Essentially, ISO-NE is asking FERC to order New England residential, commercial and industrial electric customers to pay out what some estimates have suggested could be $13.5 billion over the next 5 years to companies that own power plants in our region, in the hope that these power plant owners will be "incented" to build new power plants.

The consequences of this for New England electricity consumers could be serious. It has been estimated that the typical Boston area residential customer's electric bill would increase by a projected 21% - 24% over the next 5 years because of the LICAP payments that would go to power plant owners under the ISO's proposal. A similar 21%-24% increase is projected in Connecticut as well. Commercial and Industrial customers likely will also see very significant price increases. These rate increases to businesses in our region will have a devastating impact on our state's and our region's economy.

Because the LICAP payments are only "incentives," this money will go to generators without any requirement or commitment from them to build any power plants. It is therefore entirely possible that ratepayers could spend $13.5 billion for nothing.

We would note that the plan put forth by ISO is radical and experimental. There is no evidence that it will result in new generation in New England in the time frames needed. We also note that the ISO LICAP plan has broad opposition across New England. The ISO attempted but failed to achieve a 2/3rds vote of the NEPOOL Participants Committee for the first version of the LICAP plan, which ISO filed at FERC on March 1, 2004. ISO did not submit the current version of LICAP to the Participants Committee, and while ISO offered to continue a regional dialogue on LICAP, the FERC hearing schedule did not leave much of an opportunity to do so - particularly once the case was in litigation. All six new England governors are opposed to the LICAP proposal and have formally registered their concerns to the Commission. In addition, every state public utility commission in New England and the New England Conference of Public Utility Commissioners (NECPUC) has filed strong opposition to this plan at the FERC. The ISO LICAP Plan has also been broadly opposed by other New England market participants and stakeholders, including governors, state attorneys general, state consumer advocates, public utilities, municipal utilities, and investor-owned utilities.

A broad coalition of public officials and private parties tried to propose to FERC an alternative plan that would be both much less costly and more certain to result in actual power plant construction since it would target payments to the type of generators needed for reliability and which had demonstrated that they were failing to earn sufficient revenues in the markets. Separate reliability option alternatives were put forth by the Connecticut Municipal Electrical Energy Cooperative and by a group led by the Connecticut DPUC. But the Commission refused to consider any alternatives other than the LICAP plan filed by ISO. The testimony and supporting evidence offered by the coalition, as well as similar testimony offered by other parties, were even stricken from the record of hearings at FERC.

On June 15, FERC Administrative Law Judge McCartney issued a recommended decision for FERC's approval. This recommended decision essentially endorses the ISO-NE LICAP plan, recommending no significant modifications to address the many objections and concerns raised by all the above listed parties.

In our view, there has been no showing that the LICAP mechanism approved by the Judge will result in just or reasonable rates. In evaluating the implications of ISO-NE's LICAP proposal, we respectfully request your assistance and cooperation in providing responses to the attached questions. We respectfully request that responses to these questions be provided to us as soon as possible.

We note that unless FERC rejects the ISO plan, this plan and its huge rate increases will become effective on January 1, 2006. We therefore urge the Commission to reject the ISO-NE LICAP plan, and to instead direct ISO-NE to go back and consult with all affected stakeholders to come up with alternative mechanisms for ensuring that our region's wholesale electricity markets function properly and that rates charged in such markets are just and reasonable and not unduly discriminatory or preferential - as is required under the Federal Power Act.

We look forward to receiving your response.

Sincerely,

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