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PSE&G Wants to Put Its Money -- and Its Customers' -- Into Building a Better Grid

Company looking to invest $10 billion in utility projects rather than new power plants.

PSE&G Capital Expenditures

Public Service Electric & Gas once again is ramping up spending on its grid, saying it will invest $10 billion over the next five years -- a 40 percent increase from its projections just a year ago.

The plans, outlined at an annual investor’s conference in New York City on Friday, reflect the changing nature of the energy industry, where many big companies find it more profitable to shift investments to their utilities with a guaranteed rate of return, instead of building new power plants, a far riskier proposition.

All told, the company said it would invest $12 billion in capital spending over the next five years across all of its subsidiaries.

And the Newark-based utility, the state’s largest with 2.2 million electric and 1.8 million gas customers, may not be done.

The projections do not include a proposed $2.6 billion PSE&G wants to spend in the next five years to make its gas and electric systems more resilient to extreme weather, like Hurricane Sandy. Hearings on that case concluded Friday before a commissioner of the New Jersey Board of Public Utilities, although no decision has been reached.

PSE&G executives also talked Friday about opportunities to build new transmission projects because of changes in regulations adopted by the Federal Energy Regulatory Commission.

Those changes allow utilities to bid on building new transmission lines in a competitive process in areas outside of its traditional franchise territory. PSE&G currently has five major transmission projects underway in New Jersey -- with yet another planned.

As a result, the utility has a lot of experience in building the typically unpopular lines through the nation’s most densely populated state as well as dealing with regulations for projects traversing sensitive environmental areas, such as wetlands and park systems, PSE&G executives said.

“We think we have a really unique skill set,’’ Ralph LaRossa, president and chief operating officer of PSE&G, told analysts, referring to the opportunities presented by the new competitive process ordered by the Federal Energy Regulatory Commission.

Energy analysts say the new rules could be a game-changer on how new transmission projects get built.

“What remains to be seen is how many projects are available and how fierce the competition is,’’ said Paul Patterson, an energy analyst at Glenrock Associates in New York City. Still, it may prove beneficial to PSE&G, he said.

“They probably have the expertise to give them a competitive edge,’’ he said.

The big plus to transmission projects is they are largely decided by the federal agency, which typically grants the utility a higher rate of equity on their investment than state regulators. For the nearly $3 billion of transmission projects currently underway, the return varies from 12.93 percent to 11.63 percent.

In comparison, the return rate for electric and gas projects on a more local basis is 10.3 percent. For PSE&G, the ramped up spending underscores how important the utility has become to its parent, Public Service Enterprise Group, in providing profits to the company.

Five years ago, approximately 20 percent of PSEG’s earnings came from the utility, with the bulk of the rest (76 percent) coming from PSEG Power, which operates its fleet of power plants, according to Ralph Izzo, PSEG chairman and chief executive officer. This year, the company projects the utility will contribute 54 percent of PSE&G’s profits, he said. PSEG Power’s earnings will reflect roughly 43 percent of the company’s profits.

“The strategy we have put in place over the past several years is transforming the profile of our company,’’ said Izzo in a press released put out by the company Friday. It also will prove profitable. The company projects double-digit rate base growth through 2016.

How it will impact customers is uncertain. Many of the projects to be undertaken by the utility also are paid for by ratepayers in other states if regulators deem they have a beneficial impact in improving reliability and reducing congestion on the grid. That is a particular issue in New Jersey where congestion on the power grid at times of peak demand steeply drives up costs of electricity.

That normally happens during summer months, but this winter’s extreme cold raised unusual reliability issues for the operator of the regional power grid, causing huge spikes in electricity prices .

The utility’s proposed investment in new transmission lines merely follows a policy adopted by FERC to increase spending on such projects to boost reliability of the power grid, according to LaRossa.

“We’re basically rewiring the state,’’ added Kim Hanemann, vice president of delivery projects and construction for PSE&G.

To some, that is the wrong approach.

“I know they can make more money by using my money to put up new poles and wires,’’ said Hal Bozarth, executive director of the Chemistry Industry Council and a vocal critic of the company. “Should they use my money to put up new generation to force my rates down,’’ he said, adding the state has the sixth-highest industrial electric rates in the nation.

Increasing instate power generation has been a top priority of the Christie administration, but not to much avail. Gov. Chris Christie signed a bipartisan bill to award ratepayer subsidies to incent new power plant construction, but that effort has been struck down by federal courts, although the matter is still under appeal.

In the investor’s conference, Bill Levis, president and chief operating officer of PSEG Power, said the company is working to increase the output of its generation fleet by increasing the capacity of its nuclear facilities and a fossil fuel plant. He said the company is also looking at future opportunities to expand capacity at other plants it operates in New Jersey.

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