Monday, January 01, 2007

NIMBY and Electricity Costs

Recently, Connecticut utility United Illuminating (UI) was awarded a 50% price increase. Connecticut will supposedly, after this price increase takes effect, have the highest electrical rates in the country.

I became interested in this phenomenon: why does Connecticut have such high rates? First, I am not a UI customer: UI handles the relatively small area between Bridgeport and New Haven. Connecticut Light & Power (CL&P) is my utility, and covers almost all areas of the state that UI doesn't cover, although there are a few very small municipal utilities. In Connectict, UI and CL&P don't actually generate power: they instead buy the power and then distribute it.

In the course of trying to read up on why electric rates were so expensive, I stumbled on a newspaper article (link since deleted) about UI's proposal to build a substation in Trumbull, with local NIMBY types strongly opposed to the proposed location. While this was seemingly an unrelated article that I found because I typed "United Illuminating" into Google, this story provides a good example of one reason why electrical rates are so expensive: high real estate costs.

As far as I can tell here is what's happened. There is no substation in Trumbull, and in peak periods in the summer, the substations in Bridgeport and Shelton were loaded to 107% of capacity. So a new substation needs to get built. A substation is where the voltage is stepped down so it can be distributed to the local users.

UI owns about five acres of land in a residential area, and proposed to build a substation on this property, which would cost $17.3 million. There would be some woods buffer between some houses, but not on all sides. The local residents were understandably upset that a substation was going to get built there, and a neighborhood committee formed to protest the new substation.

Another property in a more industrial area was proposed instead. UI doesn't own this property, but the owner said he'd sell it for $7.5 million. The town offered open space it owned, but after residents near that space complained, that parcel became a nature preserve.

The additional cost to locate in the industrial area is about $11.6 million: $7.5 million to buy the property, with the remainder for additional costs in construction, materials, overheads, and transmission. I guess the difference comes from the fact that the industrial property is further from the power source than the property in the residential area.

It appears to me that UI owned the land where it wants to build the substation long before most of the surrounding houses were built. (This of course makes sense: why would UI buy land in a residential area before it was clear that it could get permits to build a substation there).

UI made an operating profit of $31.6 million last quarter, and $19.7 million in net income (i.e., after interest payments on its debt). So while it certainly can afford an extra $11.6 million expense, it isn't trivial. UI is going to, somehow, pass these costs on to its users. Maybe UI could also sell off the property in the residential area it owns and get something for that, if it could be zoned for new houses. Of the extra $11.6 million that UI would have to spend, the $7.5 million price for the property would not be tax deductible, as land is usually not something you can depreciate. The other $4 million should be tax deductible, but I'm not an accountant.

I don't necessarily think that anyone is in the wrong here, although I imagine that the industrial area property owner sees an opportunity to make a killer profit. But I think this episode is useful to show one reason why electricity costs a lot in Connecticut. Real estate is very expensive, and as a result, costs for goods and services that require real estate will be higher in Connecticut than in states with lower real estate prices.

There are of course a bunch of other reasons why electricity is expensive in this state: generation capacity, demand for the electricity, reliance on natural gas over coal, taxes, a regulatory structure (often called "deregulation") that prevents distributors from owning their own generation plants, etc. But real estate, and the general high cost of doing business here, is going to help make electricity more expensive.

I've heard many Republicans, Democrats, Liberals and Conservatives all demand that the Connecticut legislature DO SOMETHING about high electric rates. While there are certain things they can do, the fact is that with Connecticut's high land prices, and the ability of local residents to stall and block infrastructure projects, there are many things that the legislature simply cannot do. In Trumbull, UI had land for future use, but then the people moved in and all of the sudden these new people didn't want UI to build the infrastructure. Now UI may have to spend an additional $11.6 million.

One thing I am curious about is if UI and CL&P were owned by the state of Connecticut, do you think that local neighborhood groups could stop infrastructure projects like they can now? Or would the siting council and zoning boards have less sympathy for local groups fighting not a for-profit corporation but the state government? Could a utility owned by the state use eminent domain more frequently to put substations and high voltage lines where it saw fit?

Anyway, I think it's an interesting episode that gives some clues about why electric rates are so expensive in Connecticut.

Updated minor grammatical and spelling errors on 1/29/07


turfgrrl said...

The situation you describe in Trumbull is somewhat similar to the one in Wilton and the residents of that town being against the build out of Super 7. I think the legislature does have an obligation to do something when it concerns the greater public good for infrastructure development. Particularly in the case of Wilton, and now it seems Trumbull, where the land was pre-designated for infrastructure long before the residential use increased.

Anonymous said...

The substation situaation has very little to do with the high cost of purchasing generated electricity for distribution through it. CT has bad deregualtion laws - unlike NY - and that's why we pay more and more.

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