Connecticut Public Utilities Regulatory Authority chair Marissa Gillett.
H John Voorhees III/Hearst Connecticut MediaConnecticut’s electric utilities are strange legal creatures: one part investor-owned private businesses, one part public service provider bound by increased regulatory oversight. As chair of the Connecticut Public Utility Regulatory Authority (PURA), Marissa Gillett is charged with establishing a balance that allows the utilities to make money while serving the public good. She has shifted away from the traditional approach of awarding a reasonable rate of return (a certain percentage of the investment) for utility upgrades in favor of pioneering performance-based regulation. In what Gillett calls a “customer-centric” model, the utility’s return will be based on how well they meet outcomes related to efficient operation, customer service, emissions reduction, and affordability.
But is the approach really so novel? What does case law have to teach us about regulating public utilities?
It has been well-established in the courts that a reasonable rate of return for utilities provides stability and makes them attractive targets for high-quality employees and investors. This in turn benefits the ratepayers (us). If, however, that guarantee is granted with impunity, utilities can take huge financial risks, skirt laws and regulations, and provide unsatisfactory customer service without threatening the fat salaries of top execs. For this reason, among others, case law throughout United States history has established exceptions and guardrails to this doctrine. A review of three instructive Supreme Court decisions adds valuable context and lessons that affirm Gillett’s chosen path.
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Munn v. Illinois 94 US 113 (1877) is a seminal case in public utility law. In the late 1800s, the State of Illinois attempted to set a maximum price for grain along with a licensing process for public grain warehouses. Munn & Scott, operators of a grain elevator in Chicago, claimed this deprived them of due process and violated their 14th Amendment rights. The Supreme Court rejected their argument, explaining that when “one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good.”
Lesson learned: States can and should regulate private property when the product or service in question is “clothed with a public interest.” Grain and electricity are necessary for a society to function, and the public interest is even further implicated by the fact both 19th century grain warehouses and contemporary electric utilities hold virtual monopolies.
FPC v. Hope Nat. Gas Co., 320 U.S. 591 (1944) looks at the other side of the Munn question — what are utilities entitled to get in return for this oversight? Justice William Douglas writes in the opinion of the court that “rates which enable the company to operate successfully, to maintain its financial integrity, to attract capital, and to compensate its investors for the risks assumed certainly cannot be condemned as invalid, even though they might produce only a meager return on the so-called ‘fair value’ rate base.” The opinion also stresses that the formula used to arrive at a utility rate cannot itself be considered unfair or unjust — only the resulting rate can be. Finally, Douglas demonstrates significant deference to the FPC as a group of experts: “the Commission’s order (…) is the product of expert judgment which carries a presumption of validity.”
Lesson learned: Regulatory agencies such as the FPC and PURA may use whichever tools or formula they see fit during ratemaking, so long as the resultant rate is truly reasonable and just. Performance-based regulation is admissible under this principle. Furthermore, that a utility might make less of a profit than they originally proposed doesn’t automatically render the compensation unreasonable.
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FERC v. Electric Power Supply Association et. al. 577 US (2016). This more recent case dealt with a FERC (again, PURA’s federal equivalent) rule that ordered operators to compensate customers at a given rate for reducing electricity when it benefited the grid, a practice known as demand-response. The association felt FERC had not considered the imbalance created if an operator had “to pay the same price to demand response providers for conserving energy as to generators for making more of it.” So, was this rule “arbitrary and capricious” — legalese for unjustifiable? No, says Justice Elena Kagan in the opinion of the court: “The commission addressed that issue seriously and carefully, providing reasons in support of its position and responding to the principal alternative advanced.”
Lesson learned: A regulatory body such as FERC/PURA can and should use “policy judgment” when setting rates and compensation schemes. As long as they engage in “reasoned decision-making” to arrive at their path forward, it is legally defensible.
It is worth noting that in Connecticut, electric utilities have a significant amount of good will to rebuild with their customers. Inadequate responses from Eversource and United Illuminating (UI) to weather-related power outages have long plagued our state. This came to a head with Tropical Storm Isaias in 2020, when hundreds of thousands of residents were left without power for days — some, over a week. They were fined handsomely. Eversource was in the media’s crosshairs a year later when it surfaced that they were distributing fossil fuel propaganda to schools in Massachusetts and Connecticut, despite their commitment to lead the energy transition and achieve carbon neutrality by the end of the decade. Just this year, the state filed a lawsuit against UI over an abandoned, contaminated power plant that has been festering in New Haven for more than 30 years. Most recently, in retaliation for PURA’s crackdown, both utilities suspended electric vehicle charging rebates. These incidents do not speak to responsible utilities that always keep the best interests of consumers at heart. As ratepayers within this monopoly system, we cannot simply take our business elsewhere — which is why PURA is charged with protecting our interests and holding utilities accountable. Recently, that is precisely what they have been doing.
Yet, criticisms of Chairwoman’s Gillett’s leadership abound. When reading sponsored content or op-eds that attest her decisions have led to a “hostile regulatory environment” in Connecticut, we need only to follow the money to figure out why. Most of the opposition stems either from the utilities themselves or groups with connections to fossil fuel lobbies — yes, even those with innocuous sounding names such as “Consumer Energy Alliance.”
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To Chairwoman Gillett, I say thank you for championing performance-based regulation as holistic solution to move our public utilities into the 21st century. I am proud to live in a state where utilities cannot run roughshod over their customers and expect to continue lining their pockets. Do not be cowed by agents of the status quo claiming that performance-based rate setting is too risky a gambit.
Greater accountability is rarely a bad bet.
Christine O’Neill is an environmental planner and holds a master’s degree in Energy and Environmental Management from University of Connecticut. .
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