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Transmission Projects Will Earn PSE&G Second Spot on Regional Power Grid

The $3.5 billion buildout should boost reliability, utility's top line.

Public Service Electric & Gas is poised to own the second-largest transmission system in the PJM Interconnection, the nation’s largest power grid, which serves more than 50 million people.

The utility’s ambitious $3.5 billion expansion of its transmission system beyond 2014 is aimed at promoting greater reliability of the grid, according to company executives who discussed the plans on an earnings call with analysts earlier this month.

It also may provide a boost to the Newark utility’s top line, generating an additional $174 million in revenue, potentially realized beginning January in 2013, said Caroline Dorsa, the chief financial officer of Public Service Enterprise Group, the utility’s parent company.

The request was filed last month with the Federal Energy Regulatory Commission, the agency that oversees how much energy companies can earn from building new transmission lines. The increase would affect ratepayers throughout the region, not just in New Jersey.

“This request reflects the costs associated with an expansion of PSE&G’s transmission-related cost over the next year,’’ Dorsa said.

With a steep drop in prices power suppliers get for electricity, PSEG has largely shifted its spending on capital projects from building or expanding generation stations to investing in transmission, a strategy that subjects the company to less risk while still providing an acceptable rate of return on investment.

PJM, the operator of the grid -- stretching from the Eastern Seaboard to Illinois -- ordered all of the transmission projects undertaken by PSE&G or still under review as a way of improving the reliability of the system.

In talking about the transmission projects, Ralph Izzo -- chairman of the board, president, and CEO of PSEG -- told analysts that the investment program is important in maintaining reliability and equally critical to "New Jersey’s economy through the addition of new jobs.’’

“When we’re done with this $3.5 billion program -- actually the continuation of it beyond 2014 -- it positions us to be the second largest owner of transmission in all of PJM,’’ Izzo said.

That is somewhat surprising but attests to the utility’s aggressive capital expenditure program involving transmission. Geographically, New Jersey is one of the smallest states in the PJM, although PSE&G serves about two-thirds of the state’s population.

PSE&G has faced a great deal of opposition in trying to expand its transmission system, most notably in the 145-mile Susquehanna-Roseland line, which stretches from eastern Pennsylvania to Roseland in Essex County.

The $790 million project is opposed by a wide array of environmental groups that object to the route cutting through three major parts of the national park system and parts of the New Jersey Highlands. It won final approval from the National Park Service earlier this year.

The approval is being challenged in court by environmental groups, who say the line is not needed to maintain grid reliability. Backers of the line counter that it will save consumers and business millions of dollars each year by reducing congestion on the grid, which tends to spike energy bills.

The utility also has won all regulatory approvals for its $390 million North Central Grid Reliability project, which cuts through 15 municipalities in Morris, Essex, Union, Somerset, and Middlesex counties.

PSE&G is also seeking approval for an $895 million Northeast Grid Reliability project, which calls for upgrades to an existing transmission line running from Hudson County to Roseland in Essex County. It involves the construction of 25 miles of new overhead transmission lines and another 15 to 18 miles of underground lines.

The last project is one of a few that PSE&G has won special incentive rates from FERC to build. The incentives typically include higher rates of return on equity investment, provisions that allow the owner of the transmission to begin collecting payments from ratepayers while construction is in progress, and full recovery of costs if the project is cancelled.

New Jersey regulatory officials have protested the awarding of special incentive rates by FERC, which uses the mechanism to encourage the building of high-risk transmission projects. More than 70 applications from transmission owners seeking the special rates for $50 billion worth of projects have come into the federal agency.

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