Rate Counsel Comes Out Against PSE&G’s $3.9B Energy Strong Program

Division unhappy with utility's plan to recover costs from customers up front, before grid upgrade gets under way

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Count the New Jersey Division of Rate Counsel among those urging the state Board of Utilities to reject a $3.9 billion plan by Public Service Electric & Gas to fortify its gas and electric systems over the next decade.

In filings with the BPU, the division, which represents the interests of all ratepayers in the state, recommended the regulatory agency reject the utility’s so-called Energy Strong proposal and its method of recovering those costs from ratepayers.

Like other groups that have come out against the proposal, including consumer advocates, environmentalists and manufacturers, the consultants for the Division of Rate Counsel suggested PSE&G has failed to demonstrate why it needs to recover costs from ratepayers up front in order to ensure it takes steps to harden its infrastructure against extreme weather.

The crux of the case revolves around very arcane issues dealing with utility regulation. In this instance, PSE&G is seeking to recover the costs of the program immediately, instead of waiting until the BPU decides what costs can be recovered in a traditional utility base rate case, a matter that typically drags on for many months, if not years.

The utility argues the investments would be used to upgrade its electric and gas infrastructure to avert many of the widespread power outages that occurred just a year ago during Hurricane Sandy. It is a goal embraced by many towns and business groups, as well as by the Christie administration.

“You have to have a short memory not to remember the impact of Sandy,’’ said Michael Jennings, a spokesman for the company. “And you have to be shortsighted to think we shouldn’t prepare for the next storm. That’s why we proactively proposed a comprehensive program to make our systems not only reliable but resilient to storms like that.’’

In its own filing, however, PSE&G said it would not proceed with its proposed $3.9 billion investment in Energy Strong as part of its regular capital investment program, as critics of the proposal have argued it should. The utility said it would not undertake the program unless the surcharge mechanism is approved, arguing that rating agencies would look a discretionary capital spending without pre-approved collection as a “credit negative.’’

In its third-quarter earning announcement last week, the parent company of PSE&G. said it was upgrading its earnings outlook for the full year to $2.40 – $2.55 per share, a slight boost from previous projections.

Andrea Crane, president of the Columbus Group, based in Ridgefield, CT, said the utility’s proposal would increase shareholder return while significantly reducing risk. The Division of Rate Counsel retained Crane as a consultant in the case, not expected to be decided until next spring.

“The BPU should consider whether it wants to establish a new regulatory mechanism for the recovery of costs incurred for projects that the company claims are not required to meet reliability and service standards,’’ Crane said in a filing in the case.

Crane noted the utility’s own consultant said the proposal would force ratepayers to pay for projected expenditures for plants not yet in service.

How much the proposed $3.9 billion upgrade — an investment targeted to be spent over the next decade beginning in 2014 — would cost customers remains in dispute.

According to Crane, rates would increase by up to 21 percent by 2014 for electric customers and by 16 percent for gas customers by 2014. The BPU’s projections are far more modest, saying rates would rise by only 5.4 percent. The utility says customers rates will remain mostly flat because of declining natural gas prices and the elimination of surcharges on utility bills stemming from the deregulation of the energy sector back in 1999.

Jennings said the utility recovers its costs for projects like these by financing half from shareholders and half through the debt market — with ratepayers paying that back over a 40- to 60-year life span.

“In today’s market, with demand for electricity being flat to declining, we can’t embark on an investment program like this without knowing that it had been pre-approved,’’ he said.