Transmission Playing Larger Part in PSE&G Plans — and Customer Bills

In earnings call, PSEG chief says transmission projects now account for more than one-third of its utility's business

Ralph Izzo, chairman, president and CEO of PSEG
PSE&G’s investments in upgrading its transmission lines are playing a bigger part in its business plan and its profits. Most likely they also mean higher bills for Public Service Electric & Gas customers.

In a quarterly earnings call, the Newark company yesterday disclosed its expenditures on transmission projects now account for 36 percent of the utility’s rate base, up from 28 percent the previous year. The rate base largely determines what the utility earns from its customers and how much they have to pay.

The number is significant because state regulators only Wednesday complained about the rising costs of transmission while approving yet another modest increase in utility customers’ rates, one that would boost the bills of PSE&G customers by about $1.26 a month from a transmission project.

Part of the frustration of the New Jersey Board of Public Utilities reflects the fact that transmission rates are set by a federal agency, which often grants higher rates of return on those investments than do state regulators when approving projects to improve distribution.

The latter initiatives, which typically involve moving electricity from utility substations to homes and businesses, are overseen by the BPU. They remain one of the few areas the agency still controls in a deregulated energy sector, which means they are one of the few ways it has to control costs to consumers. The cost of generating electricity, an even larger component of customer bills, also is largely no longer under the purview of the BPU.

“It’s an outrage,’’ said BPU Commissioner Jeanne Fox, noting the transmission projects are not typically a risky business venture. Indeed, the rate increase passed along to customers this week included a project that was eventually cancelled by the regional operator of the power grid, but expenses incurred in engineering and design are still being passed on to ratepayers.

With transmission costs increasing, BPU President Dianne Solomon said it underscores the need to develop more in-state power generation, a goal that has been pursued by the Christie administration, but with only limited success.

Paul Patterson, an energy analyst with Glenrock Associates in New York City, said the irritation between federal and state regulators is not unusual. “Part of it is a lack of control,’’ he noted.

In the meantime, new transmission projects move forward for PSE&G, which won a $171 million revenue increase from the Federal Energy Regulatory Commission, effective this past January.

In addition, PJM Interconnection, the operator of the nation’s largest power grid, gave approval to PSE&G to begin a new $1.2 billion transmission project in northern New Jersey, which is expected to be in service in 2018. It is not a surprise, since the utility has been investing big money in its transmission system in recent years.

In the past year, PSE&G invested $1.7 billion in upgrading its transmission lines, which contributed 4 cents per share in earnings per quarter to the bottom line of its parent, Public Service Enterprise Group. The utility registered double-digit growth in earnings from its regulated business.

Asked about the criticism from state regulators over increasing transmission costs, Ralph Izzo, chairman, chief executive, and president of Public Services Enterprise Group, defended the investments.

“That runs the risk of being penny wise and pound foolish,’’ said Izzo, noting the cost of these projects is generally spread among customers in other states, not just New Jersey. Utility executives have long argued new transmission projects can reduce congestion costs on the power grid, a problem that has contributed to higher electricity rates in New Jersey.

In both the call with Wall Street analysts and talking to reporters afterward, Izzo largely deflected questions about the utility’s Energy Strong program, which proposes to spend $2.6 billion to harden its power grid to avert the kind of widespread outages that occurred during Hurricane Sandy.

In a story last week, NJ Spotlight disclosed that the staff of the BPU is recommending the filing by PSE&G be whittled down to $1 billion, instead of the $1.9 billion now suggested by the utility. The board has retained the case and Commissioner Joseph Fiordalisio is presiding. Izzo said he is still hopeful of reaching a settlement, although he previously predicted the case would be settled by January.

Overall, however, the earnings for PSEG were decidedly upbeat. Its operating earnings for 2013 topped those of the previous year. “We had a terrific 20113,’’ Izzo told analysts.