Does Energy Efficiency Make It Tough for Utilities to Afford Upgrades?

Tom Johnson | April 25, 2011 | Energy & Environment
The old business model is based on delivering more. What happens when consumers use less?

It’s not your father’s utility company anymore.

With the nation’s water, gas and electric infrastructure aging and a new ethic building around consuming less of these essential services, it remains to be seen how the state’s utilities are going to find the capital to upgrade rapidly aging pipelines, wires and generating stations.

According to many, the old model worked quite well. Utility companies were given a monopoly and guaranteed a rate of return for setting up and maintaining an infrastructure to supply gas, electricity and water. Rates were kept relatively low and the system proved remarkably reliable: the lights stayed on, water came out of the taps, and gas was available to heat homes.

Here’s the conundrum. With politicians and clean energy advocates pushing for more aggressive policies to reduce consumption of energy and water, how are utilities going to make enough money to replace the infrastructure that, in some cases, dates back more than a hundred years. The old business model relied on delivering more water, more gas and more electricity.

Not anymore.

The state wants to reduce energy consumption by 20 percent by 2020, a goal hardly likely to be achieved without the cooperation of gas and electric utilities, some of whom have bought into the program. It will not work under the old business model utility officials warn.

“It’s almost a rethinking of our business model” Said Laurence Downes, chief executive officer of New Jersey Resources, the owner of New Jersey Natural Gas, one of four gas utilities in the state. To that end, the utility was one of the first to adopt a conservation program to help customers reduce energy usage while recovering the costs of those efforts.

“What worked 50 years ago may not work today,” noted David Parker senior research analyst at R.W. Baird, speaking at a forum last week in Trenton on the market implications of regulations in the utility industry. Parker said the declining use of utility services creates significant challenges to utility companies.

A Muddled Situation

At the forum, policymakers noted the deregulation of the energy sector a decade ago has created a muddled situation, which has not always produced the desired results.

“Unfortunately, nothing has been built,” Parker said, referring to the lack of construction of big power plants, a situation that has particularly hurt New Jersey consumers because it has led to congestion on the power grid and sky-high electric bills, according to some critics. “How to get plants to be built is going to be a big challenge,” Parker said.

With the challenges posed by an aging utility infrastructure, policymakers and officials need to educate the public about essential services they deliver and what their value is, according to Karen Alexander, president of the New Jersey Utility Association.

“We’re coming to the point where the rubber meets the road,” she said. “I think it’s infinitely more important to pay more for water than a device which allows me to communicate.”

A Difficult Position

But Alexander said utilities are put in a difficult position by policymakers because they tend to use the utility as a backdoor to pay for programs that they believe are worthy. “Increasingly, the utility bill is becoming vehicle to do things that people would otherwise say no to if they had to pay taxes,” Alexander said.

In the past decade, the state has imposed a surcharge on utility bills to pay for clean energy programs, a low-income energy assistance program, and other programs. The surcharge, known as the societal benefits charge (SBC), has raised nearly $5 billion since its inception — greatly increasing the cost of energy to businesses that use a lot of electricity.

The state is investigating whether to allow water utilities to impose a new surcharge that will enable them to replace aging infrastructure more quickly, without having to go through a rate proceeding. New Jersey needs to spend up to $20 billion to restore water and wastewater infrastructure, according to a report.