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November 30, 2007		2007-R-0672
ENERGY IMPROVEMENT DISTRICTS
By: Kevin E. McCarthy, Principal Analyst

You asked for a discussion of energy improvement districts, including the rationales for creating such districts (including energy security), the relevant provisions of PA 07-242, and which municipalities have created such districts. You also wanted to know (1) how creating districts might promote the state's goals for clean and local energy and (2) what proportion of the state's electricity is imported.

SUMMARY

Proponents of energy improvement districts favor their creation on a wide variety of grounds. They argue that such districts can reduce energy costs and improve reliability for customers located within the districts. They also argue that the districts can benefit customers located outside the district by decreasing demands on the electric transmission and distribution systems, reducing congestion charges for all customers. They also believe that the districts may create environmental benefits. Districts may also improve energy security by increasing the efficiency of power production, among other things.

PA 07-242 act allows a municipality, by a vote of its legislative body, to establish energy improvement districts and prescribes how they can be formed. It specifies the powers of such districts, which include developing and operating distributed resources (small power plants and certain conservation programs). It requires the district to develop a plan, in consultation with the Connecticut Center for Advanced Technology, for financing and developing these resources. This plan must be consistent with the Siting Council's determinations and the integrated resources plan the act requires electric companies to develop.

The act gives the districts a variety of powers, including hiring staff, operating distributed resources, and charging fees for its projects. The district boards can issue revenue bonds, which are subject to standard provisions regarding bond issuance, revenue guarantees to back the bonds, trust indentures, and other bondholder rights. Districts are tax-exempt but can make payments in lieu of property taxes.

The act gives municipalities a wide range of powers to aid districts, including guaranteeing each district's bonds, issuing general obligation bonds to support the district, and appropriating funds for the district's use.

Ansonia and Stamford have recently adopted ordinances creating districts and Bridgeport, New Haven, and Watertown are considering doing so.

While it is unclear to what extent districts will help meet the state's standards for class I and II renewable energy (e. g. , power from photovoltaics or resource recovery plants, respectively), they should help electric companies and competitive suppliers meet the law's requirements for obtaining power from on-site generators (class III resources).

Approximately 10% of the state's electricity was imported in 2006, according to the Independent System Operator New England, the entity that administers the regional wholesale market.

RATIONALE

At the public hearing on HB 7223 (a bill with energy improvement district provisions virtually identical to those in PA 07-242, which was emergency certified and did not have a hearing) Michael Freimuth, director of the city of Stamford's Office of Economic Development, stated that energy improvement districts can function as economic development tools. He argued that they offer greater business flexibility and reliability, addressing concerns regarding power generation, transmission, and distribution. They can be financed and managed outside the transmission grid. Districts could help businesses forecast their energy costs, hedge their purchases, and commit to long-term energy contracts. Similarly, Guy Warner, who has promoted districts as a consultant for the U. S. Conference of Mayors, stated that they can be used as a tool to not only retain businesses that may be thinking about going to states where power is more reliable or lower and as an economic development tool to attract businesses. Warner stressed the importance of power reliability to high tech businesses, such as financial services and bio-tech companies. He noted that the cost of even a brief outage is enormous for a financial services company that operates a trading floor.

According to Freimuth, districts can benefit other electric customers by taking demand off of the system and increasing capacity where the power system needs it. Districts can promote energy efficiency by using the heat produced in power generation to meet the heating and cooling needs of nearby customers. Districts can also use new technologies that are generally more environmentally friendly than traditional generation technologies. Rep. Williams noted that the creation of districts in southwestern Connecticut could reduce the federally mandated charges imposed on all customers arising from congestion on the transmission system.

Joel Rinebold, executive director of the Connecticut Center for Advanced Technology, made similar arguments. He claimed that districts could put advanced, clean technology in the right places and also take some of the burden off the transmission and distribution systems and help maintain the voltages of the system at proper levels.

Similar arguments were made in the debates on the House and Senate floors. At both the public hearings and the floor debate, no one spoke against the energy improvement district provisions of the acts.

The issue of energy security (as distinct from reliability) was not specifically addressed in the discussions on the bill. However, using on-site generation may reduce the risk of supply disruption for customers served by a district, particularly if the power generation equipment uses fuel that can be stored, e. g. , oil or propane. For districts that use cogeneration technology, a district can provide alternatives for steam used in space or process heating. In addition, the districts may be able to increase the state's overall energy efficiency by eliminating transmission losses (typically nearly 10% of the power produced by a generating plant is lost in transmission). Districts may also promote the use of cogeneration (simultaneously creating electricity and steam that can used for space or process heating), and district heating and cooling, both of which are more efficient than traditional technologies. This added efficiency may make the state less vulnerable to fuel supply shortage or other security risks.

PA 07-242

The act allows a municipality's legislative body to establish an energy independence district within the municipality. After a vote, the municipality's chief elected official must notify each property owner of record by mail of the district's creation. An owner may record on the municipal land records its decision to participate in the district and the act's provisions regarding districts. Any existing or new owner may rescind the decision at any time.

The district's affairs must be administered by a board, whose members are appointed by the chief elected official. The board must fund distributed resources in the district. These resources include power plants with a capacity of 65 megawatts or less (a megawatt is about the amount of power consumed by 700 homes), combined heat and power (cogeneration) systems, and conservation programs in commercial and industrial facilities. The board must prepare a comprehensive plan for developing and financing these resources.

The act allows the board to exercise a wide range of powers regarding distributed resources. It allows the board to:

1. determine the location, type, size, and construction of distributed resources in the district, subject to the approval of municipal, state, and federal agencies as required by law;

2. make plans for developing and operating these resources and for coordinating its facilities with public and private agencies;

3. fix and collect fees and charges for the resources it owns; and

4. operate and maintain resources the board owns or leases and use their revenues for the board's corporate purposes.

The act allows the board, with the approval of the municipality's legislative body, to issue revenue bonds to pay the costs of acquiring, purchasing, constructing, or improving any district distributed resources project, acquiring land and equipment for the project, or any other authorized board purpose. The bonds may also be secured by a pledge of any grant or contribution from a participating municipality, state or federal agency, or private party.

The act allows a municipality, by ordinance and without a referendum or public or competitive bidding, to sell, lease, lend, grant, or convey to the board any of its real or personal property that may be needed or useful for the board's purposes and that the board accepts. The municipality may also allow the board to use, maintain, or operate its property.

The bond principal, once issued, counts towards the municipality's debt limit. But, this amount does not count under the debt limit (1) from the time the bonds are issued until the facility is completed and (2) in any subsequent fiscal year if the board's revenues in the prior fiscal year were sufficient to pay its operating and maintenance expenses and the amounts due on all of the district's bonds.

MUNICIPAL RESPONSE

Ansonia. Ansonia became the first municipality to take advantage of PA 07-242's energy improvement district provisions. The city's board of alderman passed the implementing ordinance, available online at www. munic. state. ct. us/ansonia/071007. htm, on July 10, 2007. Under the ordinance, the district includes the entire city. According to Mayor Della Volpe, the city will focus its search for a generating site downtown. Further information about the city's initiative is available at www. conntact. com/article_page. lasso?id=41479.

Stamford. On November 11, 2007, the city's Board of Representatives passed legislation creating an Energy Improvement District for downtown, South End and parts of the Shippan neighborhood. A copy of the ordinance and the minutes of the committee meeting where it was discussed are available at www. boardofreps. org/Committees/legrules/2007/reports/reports/070917. htm. According to Michael Freimuth, the city plans to begin its effort with the Stamford Government Center as part of Mayor Dannel Malloy's Stamford Cool & Green 2020 plan. The city might power adjacent Stamford Housing Authority buildings with the same system. Further information about Stamford's initiatives is available at

www. topix. net/content/trb/2007/11/district-gathers-businesses-for-energy-savings-2.

ENERGY IMPROVEMENT DISTRICTS AND CLEAN ENERGY

The law requires electric companies and competitive suppliers to obtain an increasing proportion of their power from renewable energy. CGS § 16—as amended by PA 07-242, they must get 20% of their power from class I resources, such as wind and solar power and fuel cells, by 2020. They must get an additional 3% per year from either class I or class II resources (the latter includes things like energy from resources recovery plants). Finally, they must get a specified amount of their power from class III resources, including on-site generation and conservation savings from commercial and industrial customers.

It is unclear what effect, if any, districts will have in electric companies meeting the class I and II standards, since it is unclear to what extent the districts will use class I and II resources to generate power. On the other hand, to the extent that the districts encourage the development of on-site generation, this will make it easier for the companies and suppliers to meet the class III standards.

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