PSEG Claims Insurers Shortchanging It On Sandy Recovery Costs

If court finds for insurance firms, ratepayers could wind up paying the $400M difference

Credit: PSEGpics
The question of who will pay the cost of rebuilding the power grid after Hurricane Sandy is spilling into the courts.

In a lawsuit filed in Superior Court in Essex County last month, Public Service Enterprise Group and three of its subsidiaries accused 10 insurance companies of shortchanging them on coverage that should have reimbursed them $456 million for damages to their power grid.

Instead, the insurers say they will only cover $50 million in payouts, arguing that provisions in the policies restrict reimbursements above that amount in specific flood zones, a matter disputed by PSEG and its subsidiaries in the 19-page lawsuit filed on June 18.

The dispute has big implications for utility customers, who could end up paying the bill to repair the infrastructure if the insurance companies’ view is upheld by the courts.

Public Service Electric & Gas, the state’s largest gas and electric utility, is not alone in suffering huge harm to its power grid after Hurricane Sandy, a storm described as the most destructive to ever hit New Jersey.

Jersey Central Power & Light, the state’s second-biggest utility, incurred more than $600 million in costs getting service restored after the storm, according to Ron Morano, a spokesman for the utility. It initially sought to recover those costs in a rate case pending before the New Jersey Board of Public Utilities, but so far has been blocked in that effort.

“It is not going to be an issue with our carriers, according to our lawyers,’’ Morano said.

How the utilities will recoup those costs will be determined in part by litigation, as well as a new proceeding initiated by the BPU in February to decide how utilities can recover the enormous costs of restoring service after the superstorm. It has yet to start.

The proceeding is not the only issue before the regulatory agency. Earlier this year, PSE&G filed a $3.9 billion petition with the BPU, laying out an expansive program to to make the grid more resilient if extreme weather hits New Jersey again.

Among other things, the petition proposes to make utility substations and switching sites less likely to lose power during big storms by elevating them, installing floodwalls, and building berms around the facilities.

As for the court case, neither PSEG nor the insurers would comment. “We have no comment at this point,’’ said Terese Rosenthal, a spokesman for the American Alternative Insurance Corp.

“The complaint speaks for itself,’’ said Karen Johnson, a spokeswoman for Public Service Electric & Gas. “We don’t comment on litigation.’’

Paul Patterson, an energy analyst at Glenrock Associates in New York City, said it is not unusual for disputes to emerge over big insurance claims. He said PSEG is trying to get just compensation for the premiums they have paid on their policies.

Jeff Tittel, director of the New Jersey chapter of the Sierra Club, said the case involves important consequences for consumers. “What they won’t get from insurers, they will end up getting from ratepayers,’’ he said.

Even before Hurricane Sandy struck, utility customers faced expensive upgrades to the power grid.

According to a report released earlier this year, the state needs to spend $8.7 billion to make the grid reliable in extreme weather, an assessment produced before Hurricane Sandy struck and left as many as 7 million people without power.

The investments come at a time when state officials are wrestling with how to reduce energy costs in New Jersey, which traditionally rank among the highest in the nation.