At Power Conference, Utilities and Suppliers Ponder Industry Model

Tom Johnson | September 9, 2014 | Energy & Environment
Given incursion of renewables and emphasis on energy efficiency, will old ways of doing business suffice?

Ralph Izzo, chairman, president and CEO of PSEG
For the past few years the nation’s electric utilities have coped with a wave of challenges shaped by new technologies, deregulation, and perhaps, just bad luck.

Extreme storms left millions of customers in the dark. A rapid expansion in the use of renewable energy and other new forms of power generation took many customers off the traditional distribution system, draining revenues from the utilities.

All of which leads to a question: Does the business model that has provided reliable, safe, and mostly affordable power to customers for more than a century need to be changed?

Even an industry trade group, the Washington D.C.-based Edison Electric Institute, raised similar concerns in a study released April 2013 that suggested the advent of cleaner technologies, as well as aggressive efforts by states to curtail energy use, pose financial threats to the sector.

For the most part, both utility executives and other energy experts agree, but how to meet these challenges was the subject of debate at a conference yesterday at New Jersey Institute of Technology in Newark.

Do utilities and how they are regulated need to change? Ralph Izzo, chairman and chief executive officer of the Public Service Enterprise Group, the owner of the state’s largest utility, Public Service Electric & Gas, answered in the affirmative.

He argued that utilities should take a greater lead in helping customers reduce their energy use, a step that would cut bills even if the utility were allowed to increase its rates as a reward for achieving that goal. “The greater focus should be on bills — not rates,’’ Izzo said.

PSE&G recently filed a petition with the New Jersey Board of Public Utilities to spend nearly $110 million helping hospitals, multifamily units, and government agencies reduce their energy consumption. The program would lead to a small increase in rates for all customers.

Izzo argued utilities would be very effective in delivering savings to its customers through energy-efficiency projects because their acceptable rate of return on investment is far lower than the customer’s.

While utilities need to adapt to the innovations occurring in the energy sector, others at the conference argued that there needs to be a recognition that the costs of maintaining a reliable electric grid still must be recovered.

“The public doesn’t understand the fixed costs in the distribution system,’’ said Ashley Brown, executive director of the Harvard Electricity Power Group.

Those costs are likely to rise in response to the massive power outages caused by storms like Hurricane Sandy. In the wake of that storm and others, regulators in New Jersey are requiring utilities to spend more to increase the resiliency of their power systems. PSE&G, for example, won approval to spend $1.2 billion to upgrade it gas and electric distribution systems.

Citing the increased use of renewables and other distributed energy technologies, Steve Corneli, senior vice president of policy and strategy for Princeton-based NRG Energy, argued “this is a recipe for a business model change.’’ NRG is not a utility, but one of the largest independent energy producers in the country, including renewables.

How extensive are the inroads that renewable energy has made on utilities? According to a six-month assessment by the U.S. Energy Information Administration, renewable energy sources accounted for more than 14 percent of the electricity generated in the country.

“The good news is consumers can actually save money and enhance their own reliability,’’ Corneli said. The bad news is there is not a good regulatory system that determines what utilities and its competitors can do,’’ he said.

Some of the speakers questioned the subsidies given to consumers to install solar systems on their homes and businesses, a practice Izzo argued is favorable to more affluent customers at the expense of less economically advantaged ones.

Brown agreed. “A lot of these subsidies that are pouring into these programs are socially regressive,’’ he said.