This past month, the commissioners of New Jersey’s Board of Public Utilities were backed into a corner, with four of their five reluctantly deciding to award PSEG a $300 million annual subsidy to keep its nuclear generating fleet operating. Under a highly improbable threat of decommissioning by PSEG, allegedly due to growing operating losses, our commissioners made a difficult decision. With at least four independent sources including PJM, the director of the Division of Rate Counsel, an independent consultant, and the BPU’s own staff concluding that PSEG’s nuclear plants were profitable and showed no signs of sinking profitability, the commissioners were pressured into making a decision based on dangerous emerging dynamics that are gradually undermining the foundation upon which our New Jersey energy economy is based.
With utilities constrained to operating in defined “franchise areas,” their demand for service is dependent upon growth in population and the local economy. The greater the population growth and economic activity, the greater the demand for energy. Unfortunately, when a region is densely populated and fully developed economically, the avenues for increased energy consumption reach a limit. Recognizing this limitation, diversification for utility holding companies like PSEG becomes a strategy. Power generation, renewables, and efficiency have become options for utility diversification, though when operated in a regulated framework their maturation becomes stunted with both higher costs and slower development of expected functional capability. Just the opposite of what we can experience as a natural outgrowth of competition and the innovation it facilitates.
Most business enterprises are suited to unregulated competition, but a few are not, and mixing one with the other will inevitably raise thorny conflicts of interest. Recent promotion on electric utility future strategies popularly labeled the “utility of the future” is an example. A regulated rate of return on investment, fairly subsidized by energy users, provides the best method for sustaining critical infrastructure in a natural monopoly like electric transmission and distribution. However, including wholesale power generation, renewables, and efficient energy end-use conversion under a regulated framework isn’t the best way to coax innovation and lower consumer costs from evolving industries. Most importantly, it is certainly not the best way to ensure the future safety and adequacy of our critical power delivery infrastructure, as both regulators and utility management inevitably lose focus on their primary objective of providing safe and reliable electrical power.
The ‘hybrid utility’ emerges
The emergence of the “hybrid utility” (part monopoly, part competitive business) presents ongoing predicaments that only get worse as electric utilities are pressured by shareholders to grow revenues and cash flow despite being handicapped by demographically saturated markets. Resulting demands for nontraditional methods of financial relief like last month’s nuclear subsidy are only the tip of a coming iceberg. If left unaddressed by our Legislature and regulators, New Jersey’s continuous descent into the realm of costly and least attractive places in which to live, or to do business, will only get worse.
With the recent nuclear subsidy decision, we are reminded that the greatest competitive strength of an electric utility has grotesquely mutated over time in the interest of self-preservation. Their strength has become their ability to shape legislation and regulation in a manner resulting in favorable laws, rulemaking, and programs that provide attractive earnings for shareholders. PSEG’s nuclear subsidy is the most recent example of cunning proficiency grown largely through snowballing political influence, the end-result of extensive lobbying, and generous financial support to influential elected officials who can exert pressure on appointed public servants via an outdated patronage system.
Ironically, electric deregulation and most notably the bifurcation of generation from “wires” originally came about only after lengthy negotiation resulting in electric utilities gaining generous concessions with the enthusiastic support and leadership of the same executives, lobbyists, and lawyers who today argue for regulated treatment on the nonutility business they sought to free from regulation just a few short years ago.
The emerging hybrid electric utility model isn’t suited to serving a public that is increasingly vulnerable to the potentially catastrophic consequences of grid instability. Spinning off elements of diversified electric utilities that shouldn’t be in a regulated structure, and concurrently restructuring balance sheets for the remaining true monopoly assets with bond-like financing (similar to capital structures for water, sewer, or bridge authorities) will facilitate a more secure grid, accelerated innovation in areas like environmentally beneficial generation, and ultimately, lower pricing for both deregulated energy services and power delivery.
Those who would view restructuring as a heavy lift need only consider the precedents of industrial giants like GE, DuPont, Honeywell, Kraft, Conoco, and others to see that restructuring occurs frequently and especially when there is a glaring mismatch in the objectives of conflicting business units. We need look no further than the telecommunications industry to see the benefits competition brings to formerly regulated utilities, customers, and shareholders. In the absence of competition, would anyone believe that wireless technology would have developed to the level of where it is today?
Focusing on the development and maintenance of resilient power-delivery infrastructure while letting generation, renewables, and efficiency businesses evolve in a competitive marketplace will eliminate the troubling dynamics that pressured four otherwise rational commissioners to approve a ratepayer-funded giveaway.
Rather than originating legislation, or promoting legislation drafted by utility lobbyists, which hamstring regulators on issues like nuclear subsidies, elected representatives might consider championing the spinoff of nonmonopoly holding company assets. These assets should fend for themselves in a competitive world, without the burdensome and uneconomic demands that conflicts of interest present to captive rate payers and hapless regulators who are left to deal with certain energy-policy chaos.