New Haven — Contractors and environmental advocates sparred with the state in federal court Thursday over whether the state improperly swept $145 million from ratepayer-funded energy efficiency programs to address steep budget shortfalls last year.

The groups sued the state government over the sweeps in May, arguing the state's October budget deal essentially stole ratepayer funds meant to pay for programs that reduce electricity demand, stabilize the energy grid and help residents finance home efficiency improvements and solar installations. Many business owners say the sweeps undercut their businesses, leading to layoffs of home energy auditors and solar and insulation installers.

The state argues a budget crisis prompted the move. Attorneys for the state also argue the statute establishing the clean energy programs does not prevent the state from transferring the funds elsewhere, as it has done a few times in smaller increments.

"That's the equivalent of my 5-year-old saying, 'I've been taking cookies out of the jar and you didn't notice, so I took the whole jar of cookies,'" Leticia Colon De Mejias, a plaintiff who founded Windsor-based Energy Efficiencies Solutions, said in an interview.

The programs, including Conservation and Load Management, the Regional Greenhouse Gas Initiative and the Clean Energy Fund, are funded in part through small surcharges on Eversource and United Illuminating customers' electricity bills. Customers of municipal utilities, including Groton Utilities and Norwich Public Utilities, do not pay into those funds.

In a courtroom packed with energy contractors who say they've downsized due to the sweeps, U.S. District Judge Janet Hall on Thursday peppered attorneys on both sides with tough questions centered on whether the state's budget deal amounted to a legal shift of funds or an unconstitutional break of contracts between ratepayers and utilities.

Hall said she's been reviewing related case law for at least a month and will consider arguments further before rendering a decision.

"This is a problem coming up in other states, as well," attorney Stephen Humes of Holland & Knight, one of the firms representing the plaintiffs, said in an interview. Humes characterized the sweep as brazen and said the case could set precedent, so states would be less susceptible to similar actions when policies shift due to administration changes.

Humes told the judge "there was no debate, no public policy discussion ... nothing normal about" the budget deal to sweep the funds.

Hall jokingly advised Humes to avoid arguments "about what's normal in the state legislature."

During her questioning of Humes, Hall highlighted that the nearly 20-year-old statute forming the clean energy funds includes no language barring their transfer into the treasury. Utility customers pay for a service and receive electricity, but the statute gives customers no control over where the surcharges wind up. Utilities, which serve as a custodian for the collected surcharges, also have no power over the funds.

But Humes argued according to the "regulatory compact" established through the clean energy funds, utility customers expect the surcharges to go toward efficiency programs as directed by the Public Utilities Regulatory Authority.

Humes added that the state — a utility customer in its own right — took part in "self-dealing" through the sweep, effectively paying itself back all the money it had contributed to the clean energy funds.

Philip Miller, assistant state attorney general, said the clean energy funds did not "create the expectation" the funds could never be pulled for other purposes. He pointed to instances in 2003 and 2005 in which the state reassigned some of the clean energy funds.

"There's not a contractual obligation on the state" to ensure the surcharges go to clean energy funds, Miller told the judge, who was pressuring him on whether the transfers to state coffers impaired customers' contracts with utilities.

When Hall noted plaintiffs' point that the "state has recouped all the money it paid that was supposed to benefit clean energy funds," Miller responded that the state still faces a budget crisis.

"When the state was trying to do whatever it can, it's taken money from the Department of Children and Families, from the Department of Correction," he said, adding that it may have reduced the state's bottom line but "that wasn't the motivating factor in doing this. There's a difference between just wanting to send money another way and a true fiscal emergency."

Peter Callan and Craig Frenkel of Norwich-based Lantern Energy, a residential and commercial energy auditing and installation business, said their company is down about a dozen people due to fewer funds being available in the clean energy programs.

"The market is not mature enough to sustain itself yet without funds like this," said Callan, who noted that he and Frenkel come from banking and commercial construction fields, respectively. "Everything we touch is affected by this. Solar installs. LED retrofits."

Kenny Foscue, chairman of the North Haven Clean Energy Task Force, said the reduced clean energy funds means fewer small grants for municipal task forces and fewer townwide efficiency projects and, in turn, they mean higher taxes for residents across Connecticut.

"It's not just hippies and saving the environment," Foscue said. "It's about saving money, too."

Utilities are not party to the lawsuit and have declined to comment on the pending litigation. Gov. Dannel Malloy, Comptroller Kevin Lembo and Treasurer Denise Nappier are named as defendants. Lembo's and Nappier's offices previously declined to comment on the pending case.

Malloy signed the budget deal in October but opposed the sweeps, calling them shortsighted.

In addition to Colon de Mejias and Connecticut Fund for the Environment, plaintiffs in the suit are New Haven-based Fight the Hike; Energy Efficiencies Solutions LLC; Best Home Performance of CT LLC; Connecticut Citizen Action Group; New England Smart Energy Group LLC; CT Weatherproof Insulation LLC; Steven C. Osuch of East Windsor; Jonathan Casiano of Windsor; and Bright Solutions LLC.

b.kail@theday.com