Gov. Dannel P. Malloy’s $6.7 billion plan to convert 305,850 Connecticut business and homes to heat with natural gas relies on a heavy commitment from the private finance industry.
The plan announced Oct. 5 replaces petroleum with natural gas as Connecticut’s heating fuel of choice. Malloy prefers natural gas as it reduces heating costs by 50 percent, greenhouse gas emissions by 30 percent, and is found domestically, unlike foreign oil.
“You can’t grow Connecticut’s economy at the rate we need to grow it at without making changes and that is hard in the land of steady habits,” Malloy said.
The cost of the expansion is broken into three parts: $3-$4 billion for homes and businesses to change their boilers and appliances to run on natural gas; $1-$1.3 billion to hook up customers on or near existing natural gas mainlines; and $1-$1.4 billion to build 900 miles of new mainlines to hook up off-main customers.
Malloy’s plan to expand natural gas was proposed Oct. 5 as part of the state Department of Energy & Environmental Protection’s comprehensive energy strategy. The strategy is open for public comment until Dec. 14, and then the plan will be submitted for legislative and regulatory approval.
The theory on paying for the expansion is the people with the most benefit — such as new customers — will bear the greatest burden, but the upfront costs must be spread around enough so the burden isn’t so great to prevent those new customers from converting.
“There is a pretty big public value by expanding natural gas as the fuel of choice,” DEEP Commissioner Dan Esty said.
For most expensive part — $4 billion for customers to upgrade appliances — the plan relies on private financers to help customers spread costs over a number of years.
For commercial customers, the financing will be obtained through the commercial property assessed clean energy, or C-PACE, program adopted by the Connecticut General Assembly this year. Under C-PACE, the state’s Clean Energy Finance & Investment Authority works with private financers to help businesses get loans for up to 20 years to pay for energy upgrades. The businesses pay off the loans through a separate line item on their municipal property tax bills.
For residential customers, CEFIA will help them obtain similar long-term loans from private financers. The loans would be paid off through separate line items on customers’ heating bills from the natural gas utilities. This on-bill financing still has to be approved by regulators.
By having CEFIA manage C-PACE and on-bill financing, the state hopes to obtain private loans at low interest rates, Esty said.
“This is a market transforming initiative,” said David Bogan, partner in the Hartford office of law firm Edwards Wildman Palmer, LLP. “If nothing else, it is innovative.”
The remaining portions of Malloy’s natural gas expansion rely on the natural gas utilities for financing, with an assist from new and existing customers — and possibly taxpayers.
The $1.3 billion portion to convert roughly 216,650 customers who already are near natural gas mains can be split through utility financing among just those customers, Esty said. The average cost per customer is about $6,000, spread over a number years, although commercial and industrial customer would bear a greater burden.
The $1.4 billion portion of the plan to convert 89,200 customers by building 900 miles of new natural gas mainlines is a bit trickier, Esty said.
The first option is to have the new customers bear the entire $1.4 billion through fees on their utility bills, although this large burden could outweigh the benefits for those new customers, Esty said.
The second option is to spread the new hookups among all 305,850 new near-main and off-main customers. State regulators would approve two separate rates for natural gas utility customers: one for existing customers and another for all new ones. This still puts a large burden on new customers.
The third option is having all existing and new customers pay through an increase in all rates. This proposal increases the amount existing customers would have to pay, even though they don’t receive a direct benefit.
“All the existing customers did have the benefit of past support,” Esty said.
The fourth option is to spread the burden to all Connecticut taxpayers by using state bonding. While included in the DEEP strategy, this is Malloy’s least favorite option, Esty said, although the public receives the health benefit of having a cleaner fuel heat the majority of Connecticut businesses and homes.
Connecticut’s three large natural gas utilities — Yankee Gas in Berlin, Connecticut Natural Gas in East Hartford, and Southern Connecticut Gas in Orange — support the plan. They proposed a expansion in May.
“We have tried for a number of years to come up with solutions to help customers make the choice to natural gas,” said Michael West, spokesman for New Haven-based UIL Holdings Corp., which owns Connecticut Natural Gas and Southern Connecticut Gas.
Malloy’s plan does put a large burden on natural gas utilities to pay for the expansion, although if regulators are supportive of the plan, then the utilities can make it happen, said James Robb, senior vice president for Northeast Utilities, which owns Yankee Gas.
The DEEP proposal partners with the three utilities, where the one nearest new customers receives new business. In the public comment period, the state will consider an auction, opening up for the possibility of service from a new or out-of-state utility, said Esty.
Since the proposal increases the existing utilities’ customer base by 58 percent, they will lobby hard to make sure they are the only ones to receive the new business.
“Our companies have been around for more than 100 years — CNG and SCG,” West said. “We feel very strongly about our ability to do this.”
