CONNECTICUT IS CHANGING the way it regulates utilities, and the new approach has the companies and investors scared.

The new approach, called performance-based regulation, is intended to compensate utilities based on how well they perform tasks rather than on how much money they spend. Many states, including Massachusetts, incorporate some element of performance into their rate-making, but only Hawaii has overhauled the entire rate-making process. Connecticut’s Public Utilities Regulatory Authority, typically identified as PURA, last week voted to move in the same direction after a year-long investigation.

The decision is making the state’s utilities nervous. The new regulatory system isn’t even in place yet, but already financial analysts are scaling back their earnings forecasts for the state’s two major electric utilities — Eversource and United Illuminating Co., a subsidiary of Avangrid. The companies are clearly worried by the chair of PURA, Melissa Gillett, who Connecticut Gov. Ned Lamont brought in from Maryland to disrupt the status quo.

On a first-quarter earnings call with Avangrid last week, Angie Storozynski, an analyst with Seaport Research Partners in New York City, captured the mood in the financial community. “We hear some public comments from the PURA president that sounded really scary and highly punitive for utilities in the state of Connecticut,” she said.

What caught everyone’s attention was a March decision by PURA in a rate case filed by Aquarion, a water company owned by Eversource. Most rate cases in Connecticut have been resolved with settlements, negotiated agreements between regulators and the company. With Aquarion, which serves 207,000 customers in Connecticut, PURA held hearings and then delivered its decision.

The company came into the rate-setting process seeking annual revenues of $236 million and a return on equity of 10.35 percent. Aquarion’s proposal would have boosted customer bills by 9 percent on average, or $61 per year.

PURA, by a 2-1 vote, instead approved a return on equity of 8.7 percent and annual revenues of $196 million. The decision cut customer bills on average by 11 percent, or $67 a year.

The utility commission disallowed many expenses, including Aquarion’s request for $4.9 million in costs associated with the company’s 2017 merger with Eversource, $390,000 in outside legal costs related to the rate case, $300,712 in industry and nonindustry membership dues, and $37,812 in entertainment expenses.

“The decision finds that such expenses that do not contribute to the safe, reliable, and efficient provision of water service or otherwise provide discernible value to a utility’s customers should not be the burden of ratepayers, particularly when Aquarion is receiving public goodwill for such endeavors made in its name,” according to the decision. “Denying these expenses from recovery through rates does not prohibit the company from engaging in such activities; Aquarion may instead fund such activities with shareholder funds.”

Michael Caron, a commissioner who supported the ruling, nevertheless called the return on equity “appalling.”  He added: “I suspect investment will fall significantly in Connecticut for the foreseeable future and increase in other state jurisdictions, and not just from Aquarion,” he said.

John Betkoski, like Caron a former state lawmaker, was the lone dissent. “While I’m happy for the relief ratepayers receive in reduced rates, I worry that the chill on future investment may occur,” he said.

Gillett, the architect of the decision, disagreed. “If there is a message coming out of today, I think it’s simply that PURA’s prepared to hold our regulated utilities accountable, and I think [that’s] what this decision does,” she said.

Connecticut Gov. Ned Lamont

Gillett came to Connecticut from Maryland, recruited by Gov. Ned Lamont to help flesh out legislation he signed into law in 2020 called the Take Back the Grid Act. In an interview, she said, the opposition to what Connecticut is attempting is mostly because the approach is so new.

“The agita in the investment community about performance-based regulation comes from a place because there’s not many people doing it,” she said.

She said the investment community is now accustomed to Hawaii’s approach, and opposition has softened.

Not so in Connecticut. A Superior Court judge has issued a 30-day stay of the Aquaion rate cut while the company appeals, arguing that Gillett was determined to make an example of the company in order to help set the stage for the rollout of performance-based regulation.

At a PURA meeting last week where the three commissioners unanimously approved the eventual rollout of performance-based regulation, Lamont indicated he continues to support the concept.

“This is something that’s long overdue,” he said, according to story by Connecticut Insider. “You just don’t get paid an automatic 9 percent when you do good work or bad work,” Lamont said. “You get paid for doing good work. In my world, you get paid a little extra for doing really good work and you get paid a lot less for not doing really good work.”

Lamont also showed no sign that he had lost faith in Gillett. He said her departure would be counterproductive.

“I don’t think it’s a good idea to disrupt right in the middle of historic disruption,” he said, according to Connecticut Mirror. “I think the idea of having some continuity there makes an awful lot of sense.”