PSE&G Wins Special Incentives for Transmission Upgrades

Tom Johnson | January 4, 2012 | Energy & Environment
Utility gets close to what it wanted for high-risk project running through Hudson and Essex counties

Public Service Electric & Gas once again has won special incentive rates to expand its high voltage transmission system, although a federal agency shaved the return it sought to earn on the nearly $1 billion project.

In a decision released on Friday, the Federal Energy Regulatory Commission awarded the state’s largest utility much of what it sought to build the $895 million Northeast Grid Reliability project, which PSE&G and the operator of the regional power grid argued is necessary to maintain the electricity system.

The issue of utilities being awarded special incentive rates has emerged as a contentious dispute between state regulatory officials — and not only in New Jersey — and the federal agency, which uses the mechanism to encourage the building of high-risk transmission projects. Since FERC initiated the policy, it has received more than 70 applications from transmission owners seeking special incentive rates for $50 billion worth of projects.

The incentives typically include higher rates of return on their equity investment as well as provisions that allow the owner of the transmission system to begin collecting payments from ratepayers while construction is in progress as well as a full recovery of costs if the project is cancelled.

In this instance, PSE&G had sought a 12.68 percent return on equity, far higher than the 10.30 percent return it earns on investments in its local distribution system, which delivers electricity to homes and businesses. In its decision, the federal agency reduced the return on equity for the project to 11.93 percent, according to Stefanie Brand, director of the New Jersey Division of Rate Counsel. Both the division and the Board of Public Utilities opposed the incentive rates sought by the utility.

“It’s hard to truly celebrate,” Brand said, referring to the FERC decision. “It’s still too generous, but they are starting to step back a bit and recognize they can’t provide them with whatever goodies they want.”

The BPU also had a mixed reaction to the decision, “In today’s economic climate, many investors would jump at the chance of such a rate of return,” said Greg Reinert, a spokesman for the agency. “We will continue to closely follow all matters before FERC and advocate in the interests of ensuring the lowest reasonable energy costs for all of New Jersey’s ratepayers.”

The NGR project calls for upgrades to an existing transmission line running from Hudson County to Roseland in Essex County. It involves the construction of 25 miles of new overhead transmission lines and another 15 to 18 miles of underground lines, as well as upgrades to 12 substations and the replacement of more than 100 towers.

In a filing to FERC, the utility argued the scope, risks and challenges associated with the project demonstrate it is not a routine upgrade as opponents had contended. Besides addressing reliability problems in north Jersey, PSE&G said the NGR project would reduce congestion on the grid, a problem that drives up electricity costs for consumers. It projected the annual savings to consumers at $2.4 billion a year.

But the state argued those savings would be exceeded by the estimated $3.8 million costs to customers if the utility had been granted the return it originally had sought.

Neither the BPU nor PSE&G could calculate the impact of the approval of incentive rates on the typical customer.

For the most part, the commission agreed with PSE&G, saying the scope, risks, and challenges involved in the project demonstrate that the NGR project is not routine and entitled the utility to the special incentive rates.

In reducing the utility’s return on equity by three-quarters of 1 percent of its proposed return, the commission said the decision was reasonable given the fact that it had awarded PSE&G other provisions of special incentives, including the construction-work-in-progress and 100 percent of abandonment costs.

Asked for reaction to the federal agency’s decision, the Newark-based utility said the project is required for reliability purposes, at the same time as improving transmission capabilities, particularly in areas where there is constraints on moving electricity. A spokeswoman said allowing the utility to recover 100 percent of construction-work-in-progress will result in rate stability for customers. Otherwise, they could experience “rate shock” if they had to cover the entire cost of the project once it is finished.

PSE&G has already received special incentive rates for two major transmission projects, including the controversial Susquehanna-Roseland project, which cuts through a number of national parks or recreation areas.