Hartford Business Journal

HARTFORDBUSINESS.COM | MAY 29, 2023 15 expected and falls below expecta- tions of investors we have spoken to," wrote Paul Zimbardo, a securities analyst with Bank of America, in a note to investors. He continued: "Our investor conver- sations have revealed a growing unease with Eversource's outlook with the challenges in Connecticut." PURA's proposed decision on the Aquarion rate case was issued Feb. 16. Since then, Eversource's stock price, a reflection of investor confidence, declined by about 7.6% to $72.75 as of the end of trading on May 23. Since the beginning of the year, Eversource's stock price was down more than 13.6% as of May 23. Meanwhile, United Illuminating has a rate case currently pending before PURA. It is seeking an 8% increase in rates over the next three years. During its parent company Avan- grid's first-quarter shareholder conference call in April, investment analysts asked whether perfor- mance-based ratemaking would impact the rate case. Angie Storozynski, senior equity research analyst at Seaport Global, said she had heard comments from the PURA chair that "sounded really scary and highly punitive for utilities." Attracting capital Connecticut's performance-based ratemaking system is the result of the Take Back Our Grid Act, which Lamont signed into law in 2020, following Tropical Storm Isaias, which left some residents without power for more than a week. State Sen. Norm Needleman (D-Essex), co-chair of the Energy and Technology Committee and a key sponsor of the legislation, said he believes that PBR will hold utilities accountable for providing better service. "There has generally been, unfor- tunately, a lack of confidence and such high cost in our state that I think the ratepayers deserve to have a utility that functions to the best of our sense of how they should function," Needleman said. The initial PBR rollout will apply to the state's two electric utilities, but Gillett wants to expand it to all utility companies overseen by her agency, which also include natural gas, water and telecommunications businesses. The tools for PBR to go into effect will be ready at the end of next year, but it will not be implemented until Eversource or United Illuminating file a rate case. In October 2021, Eversource agreed to settle a lawsuit brought by the state for $103.4 million, for its handling of power restoration following Tropical Storm Isaias. Based on the agreement, Eversource's rates would remain flat for four years. Eversource is still operating under that agreement, but has told investors it plans to request a rate case in 2025. Eversource's last rate case, in 2018, ended with a settlement that set its return on equity at 9.25%. While Eversource says it's well- equipped to meet the performance metrics under PBR, company offi- cials are anxious about the impact on the investment community in light of the "chilling effect" of the Aquarion decision. Gillett said PURA is required, based on a Supreme Court precedent, to ensure that the health of utility companies and their ability to attract necessary capital remain intact. "I don't care, and I should not care, and I'm legally not required to care what their profit is, or what they actually earn," Gillett said. "What I am required to do, legally, is in a rate case, set a rate of return that … looks at what my actions will do to their credit rating, their ability to attract capital. … So, at the end of the day, yes, do they need to make a profit? Of course, to the extent that it contributes to them being able to attract capital." 'Reasonable returns' Eversource says healthy profit margins are needed to attract inves- tors, because they signal that the company is a quality investment option. That investment helps fund capital projects and system upgrades by spreading out the cost over time. Without enough outside investment from the capital markets, those costs would be passed onto customers. "We need investors to install the projects, the infrastructure that our customers need," said Doug Horton, Eversource's vice president of distribution rates and regulatory requirements. "And if we can't get that money from investors, it has to come from customers. If we can't get it from customers or investors, that infra- structure can't be built." Jeffrey Kotkin, Eversource's vice president of investor relations, said the company invests about $4.4 billion a year in its three territories – Connecticut, Massachusetts and New Hampshire. "I think there are some concerns by investors about being able to achieve reasonable returns on that investment (in Connecticut) going forward," Kotkin said. The unpredictable regulatory environment is especially problematic for risk- averse investors who expect modest but consistent returns from utilities. "The constructive regulatory environment produces consistent outcomes for investors, which utility investors are looking for," Horton said. "They're consistent, they're not looking for inconsistency or taking a gamble. Utilities are a going concern. We are here to provide our customer service over the long haul. And that's how investors also look at us." Horton said Eversource is not opposed to PBR, but is worried about how it could be applied. "We hold ourselves to high stan- dards, we control our costs and our general strategy has been to try to enter into rate agreements that provide a level of stability and predict- ability…," he said. "We're not afraid of PBR. We're not afraid of having to be measured by performance, as long as it's constructed in a fair way, and we know what the goal posts are going to be that we need to hit, and that those goals are things that we're going to be able to control." Doug Horton Jeffrey Kotkin Norm Needleman Eversouce utlity crews restore power lines in the wake of 2020's Tropical Storm Isaias, which left some Connecticut residents without power for more than a week. Eversource's storm response contributed to a new performance-based ratemaking scheme being adopted by state regulators. PHOTO | CONTRIBUTED Hawaii's influence Nationally, PBR is gaining traction, with a handful of states — including Massachusetts — having already implemented pieces of it. The Edison Electric Institute, an association that represents all U.S. investor-owned electric companies, said that performance-based rate- making can be a useful tool that has provided transparency to customers, regulators and stakeholders. "PBR and performance metrics are best for things that are completely within a company's control — if PBR is reasonable and balanced, then there should be no investor concern, particularly for high-performing utilities," said Shelby Linton-Keddie, executive director of state regulatory affairs at the Edison Electric Institute. Investor concerns arise when there are "too many performance incentives and possible penalties attached that make something other- wise predictable and stable, risky and unknown," Linton-Keddie said. Gillett points to the success of performance-based ratemaking in Hawaii, the first state in the country to fully implement it. Connecticut will be the second state to do so. When PURA developed the framework, it met with officials from Hawaii's electric company and its regulatory oversight agency, and modeled its framework after theirs. "My understanding is that the investment community there expressed similar concerns," Gillett said. "But, towards the end of the process, and now that Hawaii is implementing it, my understanding is that the investment community has really done a 180, and they now understand PBR in Hawaii." Eversource officials said they have not seen a similar backlash from investors in Massachusetts, because the regulatory environment there is different. According to investment bank UBS' regulatory rankings, Connecticut is one of eight states that ranks in the lowest tier for utili- ties regulatory environment. The rankings are based on criteria that include tendency to settle vs. litigate rate cases, regulatory lag, regulatory mechanisms and a subjec- tive investor-friendliness factor. "The investor community," Ever- source's Horton said, "is looking at Connecticut and saying, 'Is this really a good place for investors to be spending their capital?' when they have choices, … and can decide to invest their capital in places that have a constructive regulatory environment." On the other hand, Needleman sees performance-based ratemaking as an enhancement to the regulatory climate in Connecticut. "I wouldn't say that the regulatory climate of the state is onerous, but it's more stringent," Needleman said. "And I think that the ratepayers in the state are appreciative of that."

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