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Gas Utilities Look for Rapid Recovery of Costs for Upgrading Infrastructure

Tom Johnson | August 9, 2011

With some pipelines reaching the century mark, gas utilities seek less regulatory oversight for routine upgrades.

With infrastructure up to a hundred years old, the state's gas utilities are apparently going to ask the Christie administration to approve a system that would allow them to recover costs of upgrading their pipelines more quickly and with less regulatory oversight. It also would enable a faster return on investment.

A similar concept has been discussed in stakeholder meetings between the state Board of Public Utilities (BPU) and New Jersey’s regulated water utilities during the past year as a means of upgrading their antiquated infrastructure. It also was briefly mentioned in a draft energy plan released by the administration in June as a way to help gas and electric utilities maintain the reliability and safety of their systems.

The proposal, called a Distribution System Improvement Charge (DSIC), is similar to mechanisms in place in neighboring states and has been kicked around in New Jersey since the mid-1990s. It allows utilities to pass along the cost of routine infrastructure improvements, such as water main replacements, so long as the projects do not cause customers' bills to exceed a cap ranging between 5 percent and 7.5 percent.

If adopted, the DSIC probably could boost gas bills for consumers in the short term, but avert even bigger increases over the long run. Any immediate increases, however, might be avoided if gas prices continue to drop, by no means a certainty.

No Formal Proposal

While no formal proposal has been made by the utilities, Ralph Izzo, the chief executive officer of Public Service Enterprise Group, (PSEG), the owner of the state's largest utility, told analysts last week during an earning call that the four gas utilities plan to collectively seek a similar proposal to what the water companies are requesting "in the not-to-distant future."

PSE&G and other gas utilities declined to comment in more detail. The BPU also did not respond to questions about the proposal, which has been discussed with agency staff.

The rationale behind the proposal is one that has been frequently advanced by BPU President Lee Solomon, who argues it is better to deal with the problems caused by an aging infrastructure sooner rather than later, because if the state waits, the cost to ratepayer will only be more onerous.

In the Energy Master Plan, it says "the BPU has evaluated the appropriateness and reasonableness of providing additional incentives to EDCs (electric distribution companies) for their capital improvements to the electric and gas distribution systems, including a surcharge mechanism that allows the companies to receive full recovery of and on their investments without a base rate case." It also would provide an after-the fact evaluation to make sure the utility’s projected expenses matched their actual costs, according to the plan.

"This reduces the cost of capital, lowers project costs and ultimately reduces the burden on ratepayers," the plan argued.

The Time Is Right

Izzo, PSEG’s CEO, told analysts the timing might be opportune to adopt such a proposal.

"So the rational thinking point of both the BPU staff and us in the direction of, 'OK, if we have an aging infrastructure and we have an opportunity here with the availability of construction labor and greatly reduced gas prices to reinvest in that system to preserve its reliability going forward, now is a good time to be thinking of that,'" Izzo said.

In his conference call, Izzo noted PSE&G gas rates have dropped by more than 30 percent recently.

New Jersey Division of Rate Counsel Stefanie Brand noted the drop in gas prices is welcomed by consumers, but just because the cost of the commodity has dropped, it does not necessarily mean the utilities should receive new incentives. "We have to continue to recognize ratepayers are having trouble paying their bills," she said.

Brand also noted that even if the utilities win approval for a quicker cost recovery mechanism, it still would not eliminate the need for periodic rate cases to ensure the costs were justified.

While the timing of the recovery proposal may coincide with falling gas rates, it also comes shortly after the BPU approved accelerated spending for the gas utilities to upgrade their distribution systems. PSE&G was approved to to invest $78 million in its gas system earlier this month, and another $195 million in its electric network. The company also won special incentive rates this summer to allow it to earn 11.68 percent on equity on nearly $1 billion worth of transmission projects.

Although the gas utilities were not talking in detail about how such a cost recovery mechanism might work, it may be modeled after similar proposals which are pending in Maryland and Pennsylvania, or how water utilities have implemented similar systems.

Kevin Lynott, director of government relations for Elizabethtown Gas, said the utility has been monitoring what has been going on with the water utilities. "At some point of time, it may be useful," he said.

Paul Patterson, an analyst at Glenrock Associates, agreed. “For simplicity’s sake, it allows them to recover the costs more quickly,’’ he said.

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