Readers of NJ Spotlight and other news outlets have recently been exposed to a steady stream of PSEG-sponsored content and thought pieces extolling the virtues of nuclear power and warning of a “looming financial crisis” that purportedly threatens PSEG’s nuclear fleet. PSEG argues that its nuclear units are operating on thin and diminishing margins because the environmental value of their carbon-free output is not reflected in PJM wholesale power market prices. The company therefore proposes the implementation of zero-emission credits, or ZECs, a state subsidy that would increase the price paid for PSEG’s nuclear output by valuing its environmental attributes.
ZECs are not a new idea. ZEC subsidies have been promoted in several states as part of a utility-orchestrated campaign to compel consumers to subsidize profitable companies like PSEG whose nuclear units face reduced profits due to declining energy prices. ZECs are also expensive. Ratepayers in Illinois will be paying $235 million annually for 10 years, while New Yorkers will initially pay $500 million annually, increasing over 12 years to a staggering $800 million per year, to support uneconomic nuclear facilities in those states. While PSEG has been coy about the amount of its bailout request, it is believed that the company seeks about $350 million annually over a 10-year period, or $3.5 billion. Adding insult to injury, these subsidies would be shouldered solely by New Jersey ratepayers even though the PSEG units sell most of their output to other states.
Unlike the units elsewhere, the PSEG nuclear units are profitable, will remain so for at least several more years, and are required to remain in operation through 2019 or longer if, as expected, they clear in the next PJM auction. To date, PSEG has not supported its vague warnings of eroding profits with a credible projection of future losses. Nor has PSEG indicated whether these units could return to profitability without subsidies, or demonstrated that the massive subsidies sought would be proportional to the units’ alleged future losses. Nor does PSEG suggest that PSEG itself is in financial distress. Quite to the contrary, PSEG’s CEO recently advised investors that PSEG maintains a double-digit year-over-year growth rate and has again increased its already generous dividend to shareholders.
Ratepayers have heard self-serving subsidy pleas before from PSEG. As part of the restructuring of the electric industry, PSEG transferred all generation assets, including the nuclear units, to PSEG Power, its unregulated generation affiliate. As part of the transfer, PSEG Power assumed all benefits and risks associated with the generation units while ratepayers were saddled with almost $3 billion in “stranded costs,” a subsidy intended to offset the losses that PSEG assured the public it would suffer in the newly competitive generation markets. In reality, PSEG Power became highly profitable and drove the profits of PSEG to new levels. Powering these profits were the low-cost nuclear units, which earned windfall profits due to high market-clearing prices set by then-costly natural gas units. At no time did PSEG propose to share any portion of these windfall profits with ratepayers to mitigate their stranded-cost burden. But now, facing a market that has turned against it, PSEG seeks to rewrite the rules and shift the market risks that PSEG Power assumed back to ratepayers, just as the stranded-cost surcharges have ended.
PSEG claims that a nuclear bailout would save jobs and promote the economy. If past is prologue, however, the opposite will be true. From 2000 to 2015, many of the state’s largest businesses paid PSEG between $30,000 and $100,000 per month (equivalent to 30 percent to 40 percent of their distribution charges) for nonexistent stranded costs. This wealth transfer moved many millions of dollars from each of these companies to PSEG, without providing them any benefit in return. Legislators concerned about job losses and the viability of the state’s business community should carefully consider the effect expensive bailouts have on decisions by corporations whether to expand, contract or eliminate their local presence. Properly viewed, ZECs would provide an unwarranted windfall to a single, undeserving company to the detriment of literally every other struggling business and residential ratepayer in New Jersey.
The legality of ZECs also remains very much in question. Every ZEC regime has been challenged, on constitutional grounds, by broad coalitions of ratepayers, environmentalists, and competitive generators. The lawsuits argue, with considerable legal support, that state-sponsored subsidies like ZECs are pre-empted by federal law because they undermine the Federal Energy Regulatory Commission’s exclusive authority over the interstate power markets and wholesale rates. For its part, in a 2016 Report, PJM cautioned that its ability to efficiently administer the wholesale markets “is threatened if actions taken by lawmakers and regulators to promote other policy interests are pursued in a way that materially distorts price outcomes in PJM’s capacity and energy markets.”
Ironically, when the Legislature passed the LCAPP law, which would have provided subsidies to PSEG’s generation competitors, PSEG strenuously objected, advanced similar constitutional pre-emption arguments, and successfully challenged the subsidies all the way to the U.S. Supreme Court. Now the shoe is on the other foot and the case PSEG litigated, Hughes v. Talen Energy Marketing, could provide the last nail in the coffin for ZECs.
Because FERC and PJM have exclusive jurisdiction over interstate wholesale markets and wholesale prices, it should be left to them (or Congress) to address carbon valuation or taxation on a national or regional basis. New Jersey should not jeopardize the efficient operation of these markets by creating an unwarranted subsidy for a politically favored resource or company to the clear detriment of all ratepayers and competitors. New Jersey’s legislators and regulators should just say no to nuclear subsidies.