State Moves to Block PSE&G from Profiting from Federal Rate Incentives

Federal program could boost utility's return on investment on four transmission projects worth $1.6 billion

The state is trying to prevent Public Service Electric & Gas (PSE&G) from securing special incentives from the federal government, which critics say would boost the utility’s earnings on more than $1.6 billion worth of transmission projects.

In filings with the Federal Energy Regulatory Commission (FERC), the New Jersey Board of Public Utilities (BPU) wants to prevent PSE&G from receiving incentive rates on upgrades to its transmission system. The utility has been directed to improve the reliability of its system and to reduce congestion on the power grid.

The dispute revolves around two separate cases before the federal agency. In one, PSE&G is seeking to transfer incentive rates it was granted on a transmission upgrade involving the Branchburg to Roseland to Hudson transmission line, a project that has been downsized from $1.1 billion to $700 million. The other case involves four transmission expansion projects in the utility’s territory, which together could cost $979 million.

The federal agency decides rates for a utility’s transmission lines. In states like New Jersey, where the industry has been deregulated, it controls only the rates for delivering electricity over the utility’s distribution system. The transmission system carries electricity from power plants to substations; the distribution system from substations to homes and businesses.

Routine Upgrades

Both the state BPU and Division of Rate Counsel argue the transmission expansion projects are routine upgrades that the utility needs to do to maintain the reliability of its system. Thus, they do not qualify for the incentive rates, which increase the company’s rate of equity on its investment and allow it to recoup the cost as the work proceeds, instead of when it is completed.

“The ratepayers are paying for incentives for projects that would be built anyway,” said BPU Commissioner Jeanne Fox.

The incentives sought by the utility include recovering costs while construction of the 124 miles of lines are built and being allowed to recover any costs incurred should the projects be cancelled. The incentives are justified, the utility argued, because the projects’ costs, when combined with the company’s other transmission investments, will dramatically increase PSE&G’s debt levels.

Division of Rate Counsel Stefanie Brand disputed that assertion in a brief to the federal agency.

“Recent statements by the company indicate that far from creating a credit risk, PSE&G view the pursuit of transmission investment as the most attractive of its investment options in terms of its potential to create substantial earnings growth,” Brand wrote.

“They get a nice return for building these transmission lines,” Brand said in a phone interview. “It’s become almost routine for FERC to hand out these incentive rates. We’re saying they need to take a hard look at this before adding to the company’s earnings.”

BPU President Lee Solomon agreed. In these kind of proceedings, Solomon said, unless a party is protesting, the rate incentive tends to get granted.

Return on Investment

The federal agency does tend to provide higher returns on investments for transmission upgrades than are generally awarded by state public utility commissions, added Paul Patterson, an energy analyst with Glenrock Associates in New York.

PSEG, however, contended customers will end up paying less if it is granted the incentive rates. Customers could expect to see increases averaging approximately $34 million per year over four years if its request was granted, the company said in its filing. Without the incentive rates, the cost would run about $74 million per year over two years, the utility said.

The utility also argued the transmission upgrades would reduce congestion in its territory, which leads to higher power prices. In New Jersey, customers are paying $1 billion more per year than neighboring states for power because of congestion in the northern part of the state. Two of the four projects planned by PSE&G are expected to reduce congestion. Finally, the utility said it is not seeking an adder to boost its return on equity.

Generally speaking, transmission costs make up about 8 percent of a customer’s electric bill, according to officials.