PSE&G Increases Investment in Transmission and Distribution Lines 15 Percent

Tom Johnson | August 8, 2011 | Energy & Environment
State's largest utility slated to invest $5.2 billion in new infrastructure, cites special incentives as one reason for moving ahead

Public Service Electric & Gas (PSE&G) is once again ramping up its capital spending on new transmission and distribution lines, boosting its investment by 15 percent to $5.2 billion over the next three years.

In its quarterly earnings call Wednesday, the state’s largest utility indicated that more than half of its increased spending will involve transmission line projects, saying recent state and federal regulatory approvals laid the foundation for the investments.

Earlier this summer, PSE&G won approval from the New Jersey Board of Public Utilities (BPU) for accelerated spending on $368 million of gas and electric projects. It also got the nod from the Federal Energy Regulatory Commission (FERC) for special incentive rates for three of five major transmission projects it is developing.

The special incentives were opposed by the BPU and the Division of Rate Counsel, which argued that the transmission projects were routine in nature, part of a utility’s typical improvements necessary to meet reliability issues.

The special incentives sought by the utility included permission to begin collecting rates from customers before construction work on the lines and upgrades has begun, and assurances that it will be able to recover 100 percent of the project’s costs if it is canceled or abandoned due to circumstances beyond its control. In addition, the return on equity is much higher than for routine projects. In this case, PSE&G will earn a 11.68 percent return on equity on nearly $1 billion.

Frustrated with FERC

The decision by the federal agency to approve the special incentive rates rankled state officials, who have been at odds with FERC over a range of issues this year, including New Jersey’s efforts to attract new power plants to the state to reduce high congestion costs.

“We believe the whole incentive rate concept has gone off track,” said Stefanie Brand, director of the New Jersey Division of Rate Counsel. “It’s become the norm to get something that was only intended to be used in special cases as an incentive.”

Brand said she did not know how much the special incentive rates will cost ratepayers, but predicted it will have a significant impact on bills.

In revamping its capital spending program, Public Service Enterprise Group, the owner of the utility, boosted capital investment for PSE&G by $670 million. In turn, it decreased capital spending for its subsidiary, PSEG Energy Holdings, which has been building utility-scale solar projects in other states. Its capital spending for the three-year period fell to $40 million from $570 million.

“Our assessment is that it’s difficult in the current market to find projects that meet our threshold for adequate returns,” Caroline Dorsa, the company’s chief financial officer told analysts on a conference call. “Some of the returns that we see some of these solar projects clearing are not the kind of returns that we think make senses for shareholders on a risk-adjusted basis.”

PSE&G’s increased capital also is line with a trend where big energy companies are ramping up spending on transmission projects because they typically get a better return on their investment than overhauling other parts of their infrastructure.

“It would not surprise me that transmission would be a better bet, especially given the potential upheaval in the tax code,” said Paul Patterson, an analyst with Glen Rock Associates, referring to the expiration at the end of the year of a 30 percent federal tax credit for solar projects.

The utility’s increase in capital spending likely will be closely scrutinized by many in the state — given the huge opposition sparked off by its proposed Susquehanna-Roseland transmission project, which cuts a 45-mile swath through the New Jersey Highlands. Environmentalists say expansion of transmission lines promotes the transport of dirty coal power into the state at the expense of renewable energy and energy efficiency projects.