Who’s Checking the Numbers? Examining Oversight in Electricity Procurement

Connecticut’s energy problems aren’t new, in fact the prices we pay for energy began to seriously diverge from the prices quoted on the ISO-NE in 2006, and twice a year for the last twenty years, Connecticut’s utilities have signed electricity contracts committing to rates which not only significantly exceed the cost of electricity on our wholesale market, but also dramatically exceed estimates of average returns on energy futures and forwards in other markets as well. We should expect supplied energy to cost more than it does on the spot market, covering price volatility risk isn’t free, but should it cost forty percent more? What about two hundred and forty percent more like it did in the Spring of 2023? Each of these expensive contracts has been approved by the Public Utility Regulatory Authority (PURA) or its predecessor, the DPUC.

Given the history of high prices in Connecticut, it seems fair to ask: what sort of checks are in place to make sure that the energy that is purchased is priced fairly? How rigorously are those checks implemented? After receiving a response to a Freedom of Information Act request that I filed, the short answer appears to be that the legally mandated due diligence which is meant to protect us from over-priced electricity is not being done. Read on for the long answer.

The Connecticut general statute, the codified collection of our legislature’s laws, indicates that electricity must be purchased by regulated utilities in a way that reduces its average cost while also minimizing the volatility of that cost. To ensure that these goals are met, the statute also requires PURA to generate a procurement plan on an annual basis.

“On or before January 1, 2012, and annually thereafter, the procurement manager of the Public Utilities Regulatory Authority… shall develop a plan for the procurement of electric generation services and related wholesale electricity market products that will enable each electric distribution company to manage a portfolio of contracts to reduce the average cost of standard service while maintaining standard service cost volatility within reasonable levels.”

This plan needs to cover not only the purchase of electricity but other wholesale costs, like capacity, ancillary services, and renewable portfolio standards related expenses. Conventionally, each of these different costs would be handled through a different contract as they are purchased from different entities, but Connecticut has historically relied on ‘full requirements’ contracts, which require a go-between entity, typically a wholesale supplier, to handle the purchasing of the different contracts and to then sell them to the utility as a bundled product.

This is convenient for the utilities, United Illuminating does not maintain the staff to handle its own purchasing, but it is bad for transparency. The public only sees the total cost of the bundling in the public record and is given no sense of how much the different components of the electricity cost. It also dramatically reduces the flexibility that the utilities have in shopping for the lowest energy prices. Constricting the utility’s electricity purchasing in this way has the potential to inflate prices as the go-between entities, wholesale suppliers, could incorporate substantial premiums into the prices they charge.

Recognizing this danger, the Connecticut general statute includes the following language: “If [the procurement] plan includes the purchase of full requirements contracts, it shall include an explanation of why such purchases are in the best interest of standard service customers.” The statute also requires PURA to produce a quarterly report assessing the performance of the current procurement plan.

So, to recap, the general statute calls for an annually generated procurement plan, which only includes bundled ‘full requirements’ contracts if they can be shown to be in the best interest of the ratepayer. The statute also calls for quarterly checks on the performance of the plan. These protections are robust in theory, but how do they look in practice?

Although the general statute calls for the procurement plan to be reproduced annually, in reality it was only produced once in 2012. It received minor modifications in 2014 and 2017, which did not lead to the entire plan being redrawn.

The 2012 plan calls for all electricity to be purchased as six-month long, full-requirements contracts purchased on a semi-annual basis. The justification provided for using the full-requirements contracts included in the 2012 plan makes no attempt to estimate their actual cost impact. It notes that full requirements contracts were used to manage spend from 2006 until 2011, and it acknowledges that the contracts include significant risk premiums. It also suggests that the contracts provide price stability, without acknowledging that stability could also be obtained by having the utilities directly purchase electricity-futures or by signing long-term energy contracts like the Millstone PPA.

Since this qualitative assessment of the value of full-requirements contracts, no attempt has been made to assess whether these contracts are good for ratepayers, despite the fact that the general statute calls for an assessment every year. The procurement manager, the person at PURA responsible for producing (and defending the plan) indicated in 2012 that he was not interested in relitigating the plan every year and that the 2012 plan should be treated as an “ongoing” arrangement. PURA determined that the plan should be updated annually, and despite the unambiguous language in the statute, the procurement process and its reliance upon full-requirements contracts have not been formally reassessed since. This shift effectively shut down the oversight called for in the law.

In recent years, the Connecticut economy has spent around six billion dollars on electricity each year. It’s a staggering amount of money, equivalent to the total revenue collected annually by the State’s sales tax or the annual budget of the state’s department of education.

While electricity sold by the utilities does not account for all of that $6 billion spend, Eversource and UI’s dominant market share means that they act as price setters. The regulated utilities’ procurement process is effectively the price determining mechanism for this massive industry. As such, it warrants careful examination and regular reconsideration. Yet regulators at PURA have failed to provide even one quantitative assessment of the validity of the structure of the current plan to the public. This is hugely problematic; we spend too much money on electricity to blindly accept that the opaque system of full-requirements contracts we currently rely on is fair and reasonable.

I analyzed risk premiums for the full-requirements contracts signed in the period between 2006 and 2024, using data from PURA, the Energy Information Administration and the ISO-NE, New England’s grid operator, and found that the average return on full requirements contracts over that period exceeded forty percent when estimated conservatively. Experts examining similar length energy future contracts in the neighboring PJM market found average returns of around ten percent. Looking further afield, in Europe returns on six-month energy futures vary from five to fifteen percent (Germany/Austria/Scandinavia, Italy). I could find no precedent elsewhere for the rates consistently being charged in Connecticut and New England more broadly. The state of the electricity futures market in New England, which is not monitored by the ISO-NE (they only handle real time and day ahead transactions) and is not accessible without surmounting substantial paywalls, should be seriously assessed by regulators.

Wholesale suppliers, the go-between entities supplying full-requirements contracts in CT, are purchasing energy futures when they provide energy to utility companies. Hypothetically, the suppliers are supposed to compete with one another, absorbing more of the risk themselves to lower their prices, which allows them to then gain more of the state’s business. However, becoming a qualified whole-sale supplier is difficult and there are few competitors. Additionally, the current regulatory system ensures that the utilities are given no other purchasing options. So, the lack of competition in the current situation offers very little incentive for these companies to accept any risk at all. Thus, it seems likely that the energy portfolios they assemble will be more expensive, reflecting this risk aversion. We cannot know for sure because that information is not made public. However, the difference between rates charged in Connecticut and rates charged elsewhere supports this idea.

Full requirements contracts have been presented by PURA and by the consultants that PURA pays to help them make decisions as moving the risk of electricity price volatility from the consumer to the whole-sale supplier, but because of the lack of competition in the wholesale supplier market, suppliers could potentially pass the tab for a highly risk averse portfolio on to the consumer, effectively reversing the dynamic. Under these conditions, it is the consumers who pay to cover the risk of the wholesale suppliers, not the other way around.

You don’t have to look very far back in time to see how limiting the utilities’ purchasing options affects our costs. In 2023, when the prices offered through the full-requirements focused procurement process were unconscionably high, PURA instructed Eversource to go out and purchase its own energy. The ability to instruct the utilities to do this is a remnant of another attempt to unseat the current auction process from back in 2009. The utilities don’t like doing it because it exposes them to risk and they are offered no return on their efforts. UI does not maintain the staff required to make it possible, so only Eversource participated.

Despite having only two months’ notice, Eversource was able to acquire a third of its total energy requirements for 20% less than the prices wholesale suppliers offered. In other years, like 2013, this was considered too short of a time period to put a good deal together. This is clear evidence that the premiums added to our electricity through the current process are inflated.

Whatever the reason for the elevated premiums, an investigation is surely warranted. PURA is supposed to confirm that full-requirements contracts are in the best interest of the consumer every year. Connecticut residents have consistently paid dramatically elevated prices for electricity through those same contracts over the last twenty years, yet no assessment has been made of whether the full-requirement contracts are playing a role. When I filed a Freedom of Information Act (FAIO) request with PURA, asking to see the annual justifications of the full-requirements contracts, I was told that the language in the 2012 plan, which I commented on earlier, is the standing justification. This explicitly contradicts the general statute, which states that the procurement plan must be generated annually and must include a justification of its use of full requirements contracts. What is the point of having laws if our regulators are going to ignore them? How could you possibly assess whether certain contracts are in the best interest of consumers without drawing comparisons to alternative pricing models and generating estimates? Even if full-requirements contracts were in the best interest of consumers in 2012, why is it reasonable to simply assume that they still are today?

What about the quarterly assessments of the procurement plan’s performance which the statute mandates? These also appear to have not been done. The publicly available dockets which chronicle the procurement process’s procedures do not include any such reports. In the same FAIO request, I asked to see the quarterly reports and was pointed to the procurement manager’s evaluations of bids received. As these evaluations are carried out before semi-annual purchases are approved on bids that have not yet been implemented, they neither occur on a quarterly basis nor do they retroactively assess the performance of the procurement plan which is currently in place. So, it is hard to accept that these are the reports fulfilling the obligations outlined in the general statute.

PURA regularly selects the cheapest candidate from the pool of options generated by the current procurement system, but it does not confirm that the current system will provide the cheapest option for customers, and an examination of risk-premiums over the last twenty years suggests that the costs associated with full requirements contracts are in fact exceptionally high. Thus, it appears this system of opaque, expensive contracts has effectively operated unchecked, and the lack of oversight has made the wholesale suppliers increasingly brazen.

The rates approved in 2023 marked a new high for wholesale premiums. Energy and the typical related expenses cost $53 per MWh on the New England grid, while Eversource customers in Connecticut paid $197 per MWh for the same goods. This price was approved even as the utilities had access to thousands of megawatts of much cheaper electricity through the Millstone PPA. This procurement failure is unacceptable, it should never have happened, and changes should be made to ensure it never happens again.

At the very least, oversight needs to be taken more seriously, and PURA should regularly publish a public-facing report which quantitatively justifies the use of these incredibly expensive, full-requirements contracts. To be done seriously, a more complete assessment of alternative purchasing methods would need to be undertaken, including the expansion of PPAs to lock in lower prices and help bolster the expansion of renewable and carbon-free energy sources.

PURA should also seek advice from a broader set of consultants. They have relied on Levitan & Associates Inc. (LAI) since 2006, when prices first diverged from the costs on the ISO-NE. According to an older version of the resume of the firm’s president, the firm has also worked for both the whole-sale suppliers who currently profit from the system and one of Eversource’s subsidiaries.

LAI has consistently encouraged the regulatory agency to stay the course with full-requirements contracts whenever the shortcomings of the approach have been brought up. See for example, their defense of the approach in 2007. At the time, the firm pointed to the administrative costs incurred by having the utilities handle contract bundling themselves as prohibitive. These costs have since been estimated in a 2024 report on procurement alternatives, weighing in at far below five million dollars annually. Why were such relatively small expenses used as a justification for not exploring alternative procurement strategies in a six-billion dollar industry where even a one-percent change in the average price of electricity could have saved sixty-million dollars?

The mismanagement of the Millstone PPA, which has inflated system benefits charges, is a direct reflection of advice that LAI gave earlier, encouraging regulators to handle longer term contracts in a way that would not disturb the full-requirements system, essentially treating the PPA as a contract for differences, which is another energy hedging instrument. Implementing a contract for difference on a large generation asset without language specifying when that asset is allowed to generate is considered to be quite risky by industry experts, yet that is exactly what regulators have done.

Drawing a more diverse set of expert voices into the discussion of how procurement should be run in Connecticut might incur additional expense, but if it leads to better decisions being made the savings would more than justify the cost.

The negative economic effects of our current situation are hard to understate. On the one hand, every consumer in Connecticut has less money. On the other hand, everything is more expensive. Higher energy costs have a broad, suppressive effect on our economy. It is particularly bad for energy-intensive industries. If you wanted to open a small manufacturing company in the state to take advantage of the proximity to big name firms like Sikorsky, Pratt & Whitney, or Electric Boat, you are at an immediate disadvantage because the electric bills are so high. Connecticut is giving away the competitive advantage that its concentration of defense-industry manufacturing firms should be affording it. The current state of electricity in Connecticut is actively killing competition and innovation.

Given the dire economic consequences of inflated electricity costs, we should not accept PURA’s decision to forgo the oversight that it is legally obliged to complete. The use of full-requirements contracts should be seriously reconsidered every twelve months and quarterly reports should be produced to regularly monitor their performance. This isn’t my idea, it is what is called for in the law that was already passed. Contact your legislators and demand that they pressure PURA to complete these reports or write to PURA directly and ask them to complete the assessments.

You should also contact your representative objecting to the transfer of PURA out of the executive branch. Claire Coleman, the Consumer Counsel, recently pointed out that separating PURA from the executive branch would only further obscure the regulatory agency’s processes. The oversight failures I have identified here highlight why that would be such a problem. It is critical that PURA become more transparent, not less.