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UTILITIES - ELECTRIC;

February 4, 2009 2009-R-0086

LAWS ON MUNICIPAL ELECTRIC UTILITIES

By: Kevin E. McCarthy, Principal Analyst

You asked for a summary of the laws governing municipal electric utilities. The first part of this memo focuses on the provisions contained
in chapter 101 of the statutes (CGS § 7-213 et seq.), which has been largely unchanged since it was adopted in 1893. Several municipal
utilities were formed by special act, which have separate provisions. OLR memo 2009-R-0090 provides additional information on
municipal electric utilities, including descriptions of the existing utilities.

SUMMARY

Municipalities can build, buy, lease, or establish a municipal electric utility. A municipality cannot exercise this authority unless the
initiative (1) receives a two-thirds vote of the members of its legislative body, (2) is approved by the municipality's chief executive officer,
and (3) is ratified by a majority of the electors voting at the regular municipal election where at least 15% of the voters have voted.

The selectmen of the town, common council of the city, and warden and burgesses of the borough, as the case may be, must appoint a
board of commissioners to administer the utility. A municipality that establishes a utility or that reconstructs, extends, or enlarges its
facilities may finance them by issuing revenue bonds with a term of up to 30 years. It can also issue temporary notes that can be backed by
the municipality's taxing authority as well as other revenue sources.

If an electric company serves the municipality when the municipal utility is established, the municipality must buy the company's facilities
if the company wishes to sell them. The municipality must pay the fair market value of the company's electric system. The Superior Court
can adjudicate disputes as to how much of the company's property the municipality must buy and the terms and conditions of the sale.

The utility's board must set its rates to allow the utility to earn a net profit per year of 5% to 8% on the cost of the investment in plant made
by the municipality. In setting rates, the utility's cost of gas and electricity must be passed through without a profit. Rates can change no
more than once every three months.

The Department of Public Utility Control (DPUC) has limited oversight over municipal utilities, including municipal electric utilities. In
particular, municipal electric utilities are not subject to DPUC rate regulation. However, municipal electric utilities are subject to the same
provisions regarding terminations as are electric companies. For example, they cannot terminate service to residential customers on
Fridays, weekends, or holidays. Nor can they terminate service to hardship customers during the heating season. Municipal utilities must
file annual reports and emergency response plans with DPUC. They also must annually file detailed information with the Siting Council
for the preparation of its loads and resources report under CGS § 16-50r.

Municipal utilities are allowed but not required to participate in the competitive market; to date none of the existing utilities has chosen to
do so. Municipal utilities that choose to participate in the market are generally subject to the same provisions that apply to other market
participants. Among other things, they must allow their customers to choose competitive suppliers and must be licensed by DPUC to serve
customers outside of their existing service territory. Any municipal utility that is created or expands its service territory on or after July 1,
1998 must collect several charges from its new customers. These charges are currently imposed on electric company customers.

MUNICIPAL UTILITIES FORMED UNDER CHAPTER 101

Formation and Governance

Under CGS § 7-213 et seq, any town, city or borough may build, buy, lease, or establish an electric system. The system can include power
plants and distribution facilities for the municipality's own use and the use of its inhabitants. Municipal electric utilities can also own and
operate cable TV systems. A municipality cannot create a utility unless the initiative (1) receives a two-thirds vote of the members of its
legislative body present at a legal meeting, (2) receives the approval of the municipality's chief executive officer, and (3) then is ratified by
a majority of the electors voting at the regular municipal election where at least 15% of the voters have voted. If the referendum is not
approved, it cannot be re-submitted to the voters for at least one year.

If the referendum is approved, the selectmen of the town, common council of the city, and warden and burgesses of the borough, as the
case may be, must appoint a board of commissioners to operate, control, manage and repair the utility. The board must consist of three
voters of the municipality who do not hold other official positions in the municipality. The initial appointments must be staggered, one for
one year, one for two years, and one for three years. Subsequent appointments are for three years. Any vacancy may be filled for the
unexpired portion of the term by the appointing authority. The board members must give a bond to the municipality for the faithful
performance of their duties, in an amount and form and with sureties as the selectmen, mayor, or warden and burgesses approve.

The board is responsible for administering the utility. It must, each September 1st, give the municipal officials a detailed statement of its
operations and of its business and financial matters. The board also must provide financial statements at any time required by these
officials. The board must pay to the municipal treasurer all moneys collected by the utility.

A municipality that operates a utility may adopt relevant ordinances, covering such things as the use of its plant and salary schedules.

A municipal utility established under the statutes or by special act may withhold any commercially valuable, confidential or proprietary
information from disclosure under the Freedom of Information Act

Acquisition of Existing Facilities

If an electric company serves the municipality when the municipal utility is established, the municipality must buy the company's facilities
if the company wishes to sell them. The municipality may purchase the facilities, whether located in or outside the municipality's limits, so
long they are being used for generating or distributing electricity for sale “for lighting purposes” in the municipality.

Under CGS § 7-226, he municipality must pay the fair market value of the electric system. The determination of fair market value must
consider (1) the plant's earning capacity based upon its actual earnings when the municipality creates the utility and (2) the market value of
any other locations or similar rights acquired by the plants' owners, less the amount of any mortgage or other encumbrance or lien to which
these plants may be subject at the time the title is transferred. The municipality may require that property be transferred free and clear of
any mortgage or lien.

If the municipality proposes to buy only part of the company's system, the company can require that the municipality buy all of the
facilities within the municipality. If the municipality believes that this would be unreasonable, it may petition the superior court for the
judicial district where it is located for relief within 30 days after the company makes its choice. The court may, after holding a hearing,
modify the company's choice and make such orders, including orders relative to the amount of property to be purchased, as it deems
reasonable.

A company that desires to force the municipality to purchase any property must file a detailed schedule with the municipality's clerk that
describes the property and states its proposed terms of sale. The company must file the schedule within 30 days after the municipality
creates the utility. If the parties fail to agree as to what will be sold or the terms of sale, either party may, 30 days after the schedule is filed,
petition the superior court for the judicial district where the plant is located to adjudicate the matter. The court must, after notice and
hearing, appoint a special commission of one or three persons. The commission must give the parties an opportunity to be heard and then
adjudicate whether the real and personal property contained in the schedule, including rights and easements, properly belongs to the plant
and should be part of the transaction and under what terms and conditions. The commission must report its findings to the court for its
confirmation.

Any party aggrieved by the commission may file a remonstrance within 14 days after the report has been filed with the court. The court
must hear the questions contained in the remonstrance. It may set aside the report and appoint another commission to rehear the case, in
whole or in part. The court's final decision can be appealed to the Appellate Court.

Financing the System

Bonds. A municipality that establishes a municipal utility or that reconstructs, extends, or enlarges its facilities may finance them by
issuing revenue bonds with a term of up to 30 years. The bonds cannot be issued until the municipality votes to authorize it. All receipts
from the sale of electricity must be paid to the municipality's treasurer. The gross expenses of running the utility, including interest on the
bonds and the requirements of the sinking fund, if one has been provided for the payment of such bonds, must be included in the
municipality's appropriations and paid from its treasury. The proceeds of any notes issued to purchase capacity or energy are be considered
income of the utility by the municipality issuing the notes and are applicable against the expenses related to the utility.

Notes. The municipality may also issue temporary notes to finance any capital project related to the system or to purchase capacity or
energy. Any notes for purchasing capacity or energy must be authorized by a resolution adopted by the municipality's legislative body and
approved by the utility's board, notwithstanding the provisions of the municipality's charter or any special act.

The municipality may renew such notes for up to 15 years for notes of financing capital projects, provided in the first year immediately
following completion of the project or in the sixth year following the date of issue of such notes, whichever is sooner, and in each year
thereafter, at least 1/15 of the total of the notes must be retired. The municipality may renew notes for purchasing capacity or energy for up
to six years from the original issuance date, provided no later than two years after this date and in each year thereafter at least 1/5 of the
total of the notes are retired. Payment of principal and interest on the notes may be secured by a pledge of (1) the municipality's taxing
authority, (2) revenues from use charges, (3) revenues from system connection charges, (4) revenues to be derived from benefit
assessments related to the plant, (5) any other revenues which are collected by the municipal department or authority which is authorized
to set rates and other charges or (6) any combination of these sources.

Any notes that are secured by a pledge of the municipality's taxing authority are municipal obligations even if they are also backed by
other revenues. In each year when these notes are outstanding, the municipality must appropriate a sum of money that, together with all
other revenues, is enough to pay the principal, interest, or mandatory annual retirement payment on the notes. The municipality's tax levy
must be sufficient to provide for this appropriation.

The municipality's legislative body must determine the maximum authorized amount of notes to be issued and may determine other
aspects of the notes, such as the rights and remedies of the note holders. The legislative body may determine the rate or rates of interest for
each issue of such notes or may provide that such rate or rates of interest shall be determined subsequently by a municipal officer. The
notes are tax exempt.

Rate Setting

The utility must charge fixed rates that cannot be changed more than once in three months. Any change must take effect on the first day of
the month, and the new rate must be first advertised at least one month in a local newspaper. The rate must be set to allow the utility to
earn a net profit per year of 5% to 8% on the cost of the investment in plant made by the municipality. The plant's cost must be depreciated
at a rate of at least 5% per year. In setting rates, the utility's cost of gas and electricity must be passed through without a profit.

The utility can charge a deposit to cover the payment for electricity for three months, and the supply may be shut off to any premises until
all arrearages are paid. After three months default in payment of the arrearages, all appliances for distribution on such premises belonging
to the municipality may be removed and not be restored until the customer pays his or her arrearages and enough money to cover all
expenses incurred by the removal and restoration and any penalty that the municipality may impose.

DPUC OVERSIGHT

DPUC has limited oversight over municipal electric utilities, whether formed under the statutes or special act. In particular, municipal
electric utilities are not subject to DPUC rate regulation since they are not considered public service companies as defined by CGS § 16-1.
But, under CGS § 16-19rr, they must, upon request, provide electric distribution services to military veterans' posts and organizations that
are exempt from federal taxation at the lesser of the residential or commercial rate for the service territory in which the facility is located,
so long as these rates are not inconsistent with the laws governing municipal electric utilities, municipal charter, ordinance, or special act.

Municipal electric utilities are subject to the same provisions regarding terminations as electric companies under CGS § 16-262c et seq.
For example, they cannot terminate service to residential customers on Fridays, weekends, or holidays. Nor can they terminate service to
hardship customers during the heating season. Hardship customers include, among others, those whose household income is up to 125% of
the federal poverty level; those who rely solely on Social Security or unemployment compensation; and those who have a household
member who is seriously ill. The heating season runs from November 1 to May 1. Municipal utilities as well as electric companies are
subject to several related laws, e.g., requiring notice to tenants when their landlord's service is about to be terminated. Municipal utilities
and others subject to these laws are subject to a fine of up to $500 and imprisonment for up to 30 days for their violations.

CGS § 16-243a et seq. imposes several requirements on electric companies and municipal electric utilities with regard to “private power
producers” (generating facilities that use renewable resources or cogeneration). The utility must buy any electrical energy and capacity
made available by a private power producer. It must do so at the utility's avoided cost (primarily its cost of fuel). The utility must also (1)
sell backup electricity to any private power producer in its service territory; (2) make interconnections needed to accomplish these
purchases and sales; and (3) offer to operate in parallel with a private power producer. These requirements are subject to reasonable
standards for operating safety and reliability and the nondiscriminatory assessment of costs against private power producers, as set by
municipal electric utilities.

In addition, if the private power producer applies to DPUC and DPUC approves the application, the utility must transmit energy or
capacity from the private power producer to any other utility or to another facility operated by the private power producer. In making its
decision on the application, DPUC must consider whether the transmission would (1) harm the transmitting utility's customers, (2) result
in an uncompensated loss for the utility or unduly burden it, (3) harm the reliability of the utility's service, or (4) harm the utility's ability
to serve its customers.

CGS § 16-29 requires each municipal utility to file an annual report with DPUC, which prescribes the method for keeping the utility's
accounts. If DPUC believes the report is defective or erroneous, it may notify the municipality making the report and require that the
report be

amended within 15 days, DPUC may examine the utility's personnel, records, and facilities and correct the items it finds should be
corrected. Failure to file the report on time is subject to a civil penalty of up to $5,000 (CGS § 16-41).
Under CGS § 16-32e, each municipal utility must file an emergency response plan every five years with DPUC, the Department of
Emergency Management and Homeland Security, and each municipality within its service area. DPUC can hold hearings on the plans and,
in consultation with the Department of Emergency Management and Homeland Security, the Department of Public Health, and the Energy
and Technology Committee, revise the plans to the extent needed to provide for the public convenience, necessity, and welfare. The next
submission deadline is June 1, 2011.

PARTICIPATION IN THE COMPETITIVE MARKET

The law allows, but does not require, municipal electric utilities to participate in the competitive market. To date none have, which means
that they retain a monopoly in serving their customers. Municipal utilities that choose not to participate in the competitive market are not
required to meet requirements that apply to electric companies, such as obtaining a specified proportion of their power from renewable
resources.

CGS § 16-245c imposes several requirements and prohibitions on municipal utilities that participate in the competitive market. It prohibits
municipal utilities from using the transmission or distribution system or facilities of an electric company for the purpose of providing
generation services to customers outside its service area, unless authorized to do so by DPUC.

Once a municipal utility is authorized to participate in the market, it may provide generation services to customers outside of its service
area. Such utilities must provide open and nondiscriminatory access of all distribution facilities they own or operate to all competitive
electric suppliers and allow customers within their service areas to choose among suppliers.

Each participating utility that provides generation services must be licensed by DPUC as an electric supplier in accordance with CGS § 16-
245. To be licensed, the utility must separate its power plants and other generation assets from its distribution operations. It can do so by
several means, including selling the generation assets or putting them in a separate division of the utility that is structurally separate from
the utility's distribution assets and related operations and functions.

Any municipal utility that is created or expands its service territory on or after July 1, 1998 must collect several charges from its new
customers. The charges are the competitive transition assessment (which covers the stranded costs of the electric company that previously
served these customers), the systems benefits charge (which covers several public polity costs), and energy conservation and renewable
energy charges as set by DPUC at a level that would have applied had the municipal utility not been created or expanded. These charges
currently apply to customers of electric companies and competitive suppliers.

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