Connecticut's Sweep of Energy Efficiency Funds

For 123 days last year, the State of Connecticut operated without a budget. For years, the state has struggled to right an ailing fiscal ship. The combination of a shrinking tax base, growing income inequality, and dire spending needs (Connecticut has one of the worst-funded public pension systems in the nation) made it difficult to forge any kind of grand budgetary bargain.

In an effort to close a $3.5 billion deficit, legislators appropriated a pot of money last year which may have never been theirs to begin with: an investment fund for energy efficiency and clean energy projects, paid for by customers of Connecticut's two major electric utilities. Ratepayers, energy efficiency companies, and environmental groups are now suing in federal court to get the money back, with oral arguments set for Thursday, 9/13.

The main question in the lawsuit is: if the state is short on cash, can it draw on money collected by utilities to pay for general budget needs? And behind this legal question lies a core policy concern: do we want the state to balance the budget by means of electricity rates, which are a regressive and often out-of-sight means of raising money?

The money in question came from two funds: the Connecticut Energy Efficiency Fund and the Clean Energy Fund. Together, the funds support projects that reduce peak demand for electricity, lower electricity costs, alleviate local air pollution, and lessen the state's dependence on fossil fuel power plants. In the process, the funds also spur local employment — to the tune of 34,000 energy efficiency jobs — and help the Connecticut Green Bank bring in $6 of private financing for every $1 of public money spent on clean energy projects.

The General Assembly created the two funds in 1998, when it passed a law instructing Eversource and United Illuminated to invest in energy efficiency projects. To pay for the projects, the legislature ordered the utilities to levy a surcharge on their customer's monthly electric bills. The state now argues that because the utilities are required by law to collect the surcharges, they are essentially a form of tax revenue which the state can spend as it sees fit.

The plaintiffs counter that ratepayers and taxpayers are not synonymous groups, and that even if they were, the state is barred from seizing ratepayer funds by both Connecticut statutes and the U.S. Constitution. Local electric utilities, like Eversource and United Illuminated, operate under a state-approved tariff. The tariff spells out what services the utility needs to provide and how much it can charge. The plaintiffs argue that the tariff is a form of a contract between utilities and their customers, and that the state cannot interfere with the ability of utilities to make good on their promises, including its promises to invest in energy efficiency and clean energy projects, without violating the Contracts Clause.

I'm not well-versed in state utility law, but if this were a case at the federal level, the plaintiffs's arguments would have some force (though not on constitutional grounds). The Federal Energy Regulatory Commission operates under a constraint known as the the Rule Against Retroactive Ratemaking, which forbids FERC from raising electricity rates after a tariff has been approved by the Commission. If a utility or the Commission wishes to make changes, they have to open a new rate case.

The Supreme Court and the Courts of Appeals have described the rationale behind the doctrine as providing "necessary predictability"¹ for regulated parties, as well as "prevent[ing] discriminatory rate payments."²

Both rationales are on display in the current case. On the predictability front, both Eversource and United Illuminated have already made commitments on the assumption that the $145 million in the funds would be available for them to spend. For example, Eversource and UI submitted energy efficiency bids into New England's regional electricity market, which allows them to receive payments if they reduce the overall amount of electricity that the New England region needs. However, if the utilities fail to deliver on their promises of reduced energy demand, they can face stiff financial penalties.

Discrimination is also an issue. While the majority of people and businesses in Connecticut are customers of either Eversource of United Illuminated, the state also has a number municipal utilities which were not subject to the surcharges. The plaintiffs have argued that the state has no rational reason to treat customers of Eversource and United Illuminated differently from customers of the municipal utilities if the point of the surcharges was to raise general tax revenue. This Equal Protection argument faces an uphill battle, because there are a host of plausible reasons for treating small municipal utilities differently than large investor-owned utilities.

My favorite argument in the case never made it past the complaint stage. In their initial complaint, the plaintiffs argued that sweeping the surcharges into the general fund constituted an illegal form of taxation on tax-exempt organizations.  501(c)(3) non-profits and other organizations are not supposed to pay state taxes. The plaintiffs argued that by using electricity rate money to fund the general budget, the state was indirectly taxing these tax-exempt organizations through their electricity providers, and so the surcharges would be illegal (at least as applied to 501(c)(3)'s). Unfortunately, that argument seems to have been jettisoned before the summary judgment phase.

Oral arguments are set for this upcoming Thursday at the New Haven Federal Courthouse. If you're in New Haven, I'd recommend checking it out. For more information on the case, see the complaint and the plaintiff's motion for summary judgment.