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Senator Creates Task Force to Keep NJ Utilities Out of a ‘Death Spiral’

Decoupling volume sales from profits may be the only out in a world where energy efficiency and alternative sources of power are becoming order of day

bob smith roundtable
Sen. Bob Smith (D-Middlesex).

Warning that the state’s utilities need to change their business model, a prominent legislator yesterday set up a new task force to come up with a bill to keep those companies financially viable.

With customers using less power and technology offering consumers viable alternatives, utilities face an eroding revenue base that shows no signs of ending --even as they pile up new debt expanding their energy infrastructure.

“The world is dramatically changing,’’ said Sen. Bob Smith (D-Middlesex). “If we don’t do something, we’ll have major problems.’’ To underscore the need, he read an excerpt from one expert predicting that half the nation’s electric utilities could go into a “death spiral’’ within the next 10 years.

The task force, the second appointed by Smith to study the problem in the past two years, will examine the more than century-old business model, in which utilities rely on volume sales of energy or water to grow. That trend has reversed nationwide as appliances use less power and the country has invested in energy efficiency and renewable energy.

New Jersey is no different. In 2006, total retail electric sales in the state were 84.3 gigawatt-hours; that fell to 76.4 gigawatt-hours in 2013 and has since remained flat, according to data collected from the Board of Public Utilities. Gigawatt-hours are usually used to measure output of large power plants.

“They are down 10 percent of their revenue,’’ noted Fred DeSanti, an energy lobbyist who was one of the four-co-chairs of the task force assembled by Smith. “The utilities are not falling off a cliff, but it’s time to move to a new paradigm.

The way about two dozen states have addressed the problem is through a regulatory tool called decoupling. It breaks the traditional link between the volume of sales of energy sold by a utility as a business model to a system that ensures the utility brings in enough revenue to maintain the reliability of its power grid, no matter how much power it sells.

To a small extent, New Jersey has tried decoupling in programs at New Jersey Natural Gas and South Jersey Gas, ventures deemed successful by state regulators. But it has shied away from fully embracing the concept.

“It’s everywhere, but not here ,’’ Smith said, noting New York state just adopted a decoupling program. “We’re behind. We need to get going. We don’t want a death spiral in New Jersey.’’

The task force was urged to come up with recommendations for a decoupling program in New Jersey by the end of the summer, a bill the Senate Environment and Energy Committee will take up. Smith is the chairman of the committee.

“The first thing we’ll look at what is happening around the country and see where we can build on that,’’ said Andrew Hendry, the president of the New Jersey Utilities Association, and one of the four co-chairs of the task force. “Decoupling can take a lot of different forms.’’

In 11 states, there are decoupling programs for both gas and electric utilities; seven states have it only for gas utilities and five for electric, according to DeSanti.

Even with a strong directive from Smith to come up with a bill, reaching an agreement will be no easy task. Two years ago, the task force only agreed to disagree.

“This is not a fool’s errand, but it will be difficult to find agreement that satisfies utilities, environmental advocates, and consumers,’’ acknowledged Doug O’Malley, director of Environment New Jersey, and another co-chair.

For instance, environmental groups will push hard for strong performance standards designed to encourage utilities to invest in energy-efficiency programs. “There needs to be benchmarks for utilities -- both carrots and sticks,’’ O’Malley said.

Business groups will echo concerns from consumer advocates about adding new costs to ratepayers in a state saddled with high energy costs.

“We have to look at the competitiveness factor,’’ said Sara Bluhm, a vice president of the New Jersey Business & Industry Association, another co-chair. “What is it going to do to rates? ‘’ she asked, noting that businesses are the largest consumers of energy.

But some said change is almost inevitable. “The warning signs are there,’’ DeSanti said. “The sooner we do something, the easier the transition.’’

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