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January 8, 2024

Rate case ignites political, legal battle as electric utility UI scrambles to recover investment costs axed by regulator

HBJ PHOTO | BRIAN AMBROSE United Illuminating President and CEO Frank Reynolds stands outside a Connecticut Natural Gas operations center in East Hartford after an interview with the Hartford Business Journal in November, 2023.

United Illuminating, an electric company based in Orange that serves more than 341,000 customers in Connecticut, is in a public policy battle with the Public Utilities Regulatory Authority (PURA) over cuts to its recent rate increase request.

And the company’s President and CEO Frank Reynolds, isn’t pulling punches on his critiques of the state agency, arguing the cuts have delayed infrastructure projects, including upgrades to substations in Bridgeport and Hamden, and vehicle fleet replacements.

The cuts could also hinder future investment in electric vehicle charging stations, a key priority for the Lamont administration’s clean energy goals.

Reynolds, in an interview with the Hartford Business Journal, said PURA has created a hostile regulatory environment that has roiled investors and compromised UI’s ability to attract investment capital.

“Our capital is significantly constrained to really investing in what we are mandated to do, to provide safe and reliable service,” Reynolds said. “So, we are purely focused on those highest-reliability projects at this point.”

It’s a rare public flare up between a state agency and a publicly traded company that it oversees. But UI isn’t the only company that’s been at odds with PURA.

Connecticut’s other electric company, Eversource, has its own ongoing legal battle with the agency, through its subsidiary, Aquarion Water Co. In March, PURA cut Aquarion’s entire request for a $37 million increase in distribution revenues, and lowered its existing revenue requirement by $2 million.

Aquarion appealed the decision in New Britain Superior Court, and a judge has issued a temporary stay preventing the agency, which regulates investor-owned utilities in the state, from enforcing the cut.

Lack of funds

UI, which provides electric service in 17 towns and cities in the southwestern part of Connecticut, argues that PURA has disallowed millions of dollars for system upgrades as well as operating costs, leaving the company without sufficient funds to maintain and improve its infrastructure.

In a final decision issued Aug. 25, PURA approved a $23 million increase of United Illuminating’s revenue requirement for a three-year period that began Sept. 1, 2023, and ends Aug. 31, 2026.

UI will have revenue of $384.9 million each year, which is 6.4% more than in 2022, but 22% less than the $131 million the company requested for the three-year period.

In September, UI, a subsidiary of utility giant Avangrid, filed an appeal in New Britain Superior Court seeking to recoup more than $30 million that it said was unfairly and illegally cut.

PURA denied much of UI’s original requested increase because it found the company had failed to meet its burden of proof — that the proposed rates are “just and reasonable by a preponderance of evidence.”

State law requires utilities to provide “safe, adequate and reliable” service to all customers regardless of the outcome of a rate case.

United Illuminating President and CEO Frank Reynolds during a recent interview with the Hartford Business Journal.

Also in the rate filing, UI requested a 10.2% return on equity, which PURA lowered to 9.1%. Until certain performance issues identified by PURA are addressed, the return on equity was further reduced to 8.6%.

But UI said its actual return on equity has been much lower in recent quarters.

“We’ve seen it deteriorate, we’ve seen it fall every quarter,” Reynolds said of the company’s return on equity, a key financial metric used by investors to measure a company’s profitability. “In June, it was around 5% or so. Now, it’s below 5%. And that’s not even including some of the disallowances that PURA implemented.”

UI’s return on equity over the last year peaked at 6.33% in the fourth quarter of 2022, and hit a low of 4.61% in the third quarter of 2023.

Those lower returns have made it difficult to attract investors, Reynolds said, who may decide to invest money in less volatile securities that yield similar returns.

PURA said its goal is to ensure a return on equity that is “sufficient, but no more than sufficient,” for the company to “cover (its) capital costs, to attract needed capital and to maintain (its) financial integrity.”

In UI’s recent rate case proceeding, PURA said it calculated what it determined to be a “fair and reasonable” rate of return on the company’s capital investments. But the company has to work within the framework PURA provided to achieve them.

“It is the company’s management team and parent company who exercise exclusive control over the company’s operations and financial results, and who may take actions that adversely affect the company’s returns; therefore, PURA can only assess in a rate case whether the company is positioned to, or has the opportunity to, achieve its earnings,” said Joe Cooper, a PURA spokesman.

UI, on Nov. 30, also applied for a rare interim rate increase of $14 million, but PURA rejected that request as well.

Cost recovery

UI has filed a lawsuit against PURA appealing the Aug. 25 decision, claiming it prevents the company from recovering costs for both “used and useful” projects, as well as future capital projects, in addition to operating expenses.

UI said the decision contradicts state law, U.S. Supreme Court precedent and the authority’s own precedent.

But PURA is adamant that future investment costs shouldn’t count in rate cases until after the investments have been made. Starting Sept. 1, PURA stopped allowing utilities to recover future capital projects in rate cases.

For example, in its recent rate case, UI sought to recover the cost of implementing a proposal to install 900 electric vehicle charging stations, which UI said would help the state meet its clean-energy goals.

PURA rejected the project, noting in its decision that “the capital expenses sought for recovery have not yet occurred.”

PURA’s more than 300-page decision also puts an end to UI’s practice of charging for unfilled positions. Between 2018 and 2022, UI collected more than $55 million from customers to fund more than 200 employee positions that the company left vacant, PURA said.

“The number of employees for which the company received money, but did not employ, ranged from 153 to 211 over this period, or between 19% and 27% of the total number of authorized employees,” according to PURA.

In its decision, PURA reduced UI’s requested employee headcount from 519 to 485, noting the company did not actually have 519 employees. UI’s actual number of employees as of Feb. 28 was 485, according to PURA.

Asked for comment about the discrepancy, a UI spokesman said that while the company strives to propose rates that match actual costs, final outcomes do not always match the rates set by PURA — and vice versa.

“While the rates PURA sets for specific line items may fall above or below the revenue established, any over-collection may be offset by under-collections in other areas, such as capital costs,” said Craig Gilvarg, a UI spokesman. “In the case of employee positions that were established in rates but unfulfilled, that revenue was directed to other costs necessary to provide customers with safe and reliable service, while UI returned additional value to customers through the earnings sharing mechanism.”

A PURA spokesperson said the scenario shows how important it is for a regulator to thoroughly review and vet proposed rate increases.

“A rate case essentially sets rates at a moment in time — a snapshot based on the substantiated portion of a company’s application,” Cooper said. “Once rates are set, they remain in effect through the next rate case, and with very few exceptions, the regulator is not legally permitted to claw back expenditures authorized in rates.”

Analysts weigh in

UI isn’t alone in raising concerns about the state’s tougher stance on utility rate approvals.

A recent report from Moody’s Investors Service called Connecticut’s regulatory environment “less consistent and predicable” over the last two years, and “punitive,” referring to a new law that went into effect on Oct. 1, which gives PURA the authority to adopt a more aggressive regulatory approach.

According to Moody’s, the law “reduces the ability of timeliness and certainty of cost recovery related to system improvements.” Also, the credit rating service said the changes will result in lower cash flow-to-debt ratios for utilities.

“The credit consequences could be exacerbated if the ability to reach rate case settlements is impaired by the new requirements, since it could translate into more prolonged, fully litigated (and probably more contentious) rate cases,” Moody’s predicted.

Marissa Gillett

PURA’s hard-nosed rate analysis is part of a new approach, called performance-based ratemaking, which sets rates based on how well a utility meets certain goals, taking into consideration outcomes and value to customers. It has been a hallmark of PURA Chairman Marissa Gillett’s tenure.

Earlier this year, Lamont reappointed Gillett as PURA’s chair for another two-year term that began July 1.

Under the new regulations, utilities have the burden to prove that their proposed rates are “just and reasonable by a preponderance of evidence.” PURA is required to deny any portion of a request that does not meet this threshold.

Reynolds said UI is planning a number of future investments, including transitioning its infrastructure from one-way to bidirectional flow, which would improve the efficiency of the power supply and allow customers who generate their own electricity using solar panels to feed their surplus back into the grid.

“That’s just one part of how we’re attempting to modernize our grid so that we can harness more renewable energy,” Reynolds said.

But projects like that are in jeopardy without the ability to attract sufficient investment, he explained.

In the past, when UI applied for rate increases to help fund future investments, PURA would generally approve them, Reynolds said.

“And typically, we would have some certainty, if you will, around those forward-looking investments, such as investments in substations,” he said. “What they’ve told us this time is, ‘Go make the investment, then come back to us.’”

Reynolds said the new era at PURA threatens the reliability of UI’s electric distribution system. Over time, if upgrades are delayed, the system will deteriorate and workers will be forced to focus more on “reactive work vs. proactive work,” he said.

There could be more frequent outages and longer response times, he said. Currently, customers average less than one outage every two years — a statistic Reynolds said he is proud to repeat.

“The reason that we have such great reliability is because UI has made some very systematic investments over the past two decades, very detailed, systematic investments, to have some of the best reliability in the region, if not the nation, and PURA has allowed those investments to be made,” Reynolds said. “And that’s the case that we put forward, saying, ‘We want to continue to make those types of investments.’”

UI’s revenue comprises about 15% of Avangrid’s total. Avangrid, also headquartered in Orange, serves about 3.1 million customers throughout New England, Pennsylvania and New York. It’s owned by the Spanish company Iberdrola.

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