Op-Ed: Ratepayers held up their side of nuclear deal. PSEG must do the same

There is no justification for PSEG’s effort ‘to require ratepayers to assume responsibility for the costs and risks associated with the continued operation’ of its nuclear plants
Steven S. Goldenberg

With the issue regarding the propriety of nuclear subsidies — known as Zero Emission Certificates or ZECs — again before the Board of Public Utilities, the predictable PSEG-inspired public drumbeat supporting its nuclear plants has begun. News outlets, including NJ Spotlight News, have recently featured articles and editorials that tout the benefits the nuclear plants confer on the state, and are intended to gin up support for extending the current $300 million annual ratepayer subsidies.

There is no question that the plants provide jobs and environmental, fuel diversity and economic benefits to the state. However, as discussed below, these benefits alone do not establish the plants’ eligibility to receive the more than $800 million in additional subsidies that have been requested, and certainly do not justify PSEG’s effort to require ratepayers to assume responsibility for the costs and risks associated with the plants’ continued operation, a requirement that violates long-standing law. PSEG’s latest exercise in corporate greed and regulatory overreach is particularly ill-suited to the challenging COVID-19 environment, in which struggling ratepayers have accrued $600 million in unpaid utility bills, with increasing numbers forced to seek refuge in the BPU’s temporary moratorium on shut-offs.

To receive ZECs, PSEG (and Exelon Generation, the minority co-owner of the Salem I and II plants) must prove that each plant cannot remain financially viable without subsidization. In the BPU’s ZEC I proceeding, all independent experts, including the PJM Independent Market Monitor and the experts retained by the Division of Rate Counsel and the BPU’s staff, unanimously concluded that each plant would fully recover its costs of operation and that the companies failed to prove financial need. In response, PSEG threatened to immediately close all three plants unless each was awarded ZECs. In the face of this regulatory extortion, the BPU commissioners felt compelled to disregard the findings of the experts and their own professional staff and award the subsidies. The commissioners publicly decried the “Hobson’s choice” presented to them, characterizing PSEG’s threat as a “hostage taking” and “highway robbery.” The BPU’s decision is currently on appeal.

Obligating ratepayers to act as guarantors

In the ZEC II proceeding, PSEG and Exelon continue to make clear that they want more from the subsidy than mere compensation for the nuclear plants’ clean-energy attributes. Rather, they seek to leverage the subsidies as a means to obligate ratepayers to act as guarantors of the plants’ profitability, holding the plants harmless against business and market costs and risks that could reduce corporate profits. These costs and risks include the risk of plant outages, increased overhead costs, downward price fluctuations in the power markets, nonperformance of contractual obligations, and fuel and non-fuel capital costs. In the ZEC I proceeding, the experts rejected these costs and risks as speculative “cost cushions” used to pad the companies’ financial presentations, and refused to characterize them as “true costs” because of the companies’ failure to include them as actual, incurred costs in certified financial reports to other federal and state agencies. The experts also determined that the companies inappropriately inflated the plants’ actual costs and understated their projected revenues.

Thus, a pivotal issue in ZEC II will again be whether the BPU should consider these purported costs and risks in deciding whether the plants are financially viable and, by extension, whether these financial obligations may appropriately be imposed on ratepayers. The companies argue that the ZEC Act authorizes this expansive ratepayer bailout. Nothing could be further from the truth. In reality, the ZEC Act (which is widely believed to have been authored by PSEG) did not supersede or alter the omnibus “deal” struck years ago by the BPU, Legislature, PSEG and ratepayers that restructured the state’s electric industry, deregulated power generation and absolved ratepayers of any further obligation to financially support PSEG’s power plants.

Ending ratepayer support of deregulated power plants

The BPU’s Final Restructuring Order clearly described the deal: “Customers will no longer be exposed to operational risks associated with these (generating) facilities…With respect to the transfer of the nuclear generation assets, we noted above the benefits associated with the transfer of not only operational risk but also decommissioning risk and responsibility to GENCO (PSEG’s generation affiliate, now PSEG Power), attendant with (PSEG Power’s) opportunity to earn non-regulated returns associated with the sale of power and related services from the nuclear units.” (I/M/O PSE&G Restructuring FIling, 8/24/99 Order at 104-105). To ensure that ratepayers were relieved of all financial obligations associated with the generating plants, the BPU “unbundled” PSE&G’s rates to segregate all generation-related costs, including all capital and operation and maintenance costs, overheads, fuel costs and costs associated with long-term power purchase arrangements. The unbundling of these costs was intended to prevent the subsidization of PSEG’s competitive generation affiliate by PSE&G’s distribution customers.

The Stipulation of Settlement that PSEG prepared for the restructuring proceeding highlighted the termination of ratepayer financial responsibility for generation: “The amount of consideration being received by Public Service is extremely reasonable given the fact that under the Stipulation the electric utility’s customers are insulated from any liabilities associated with the transferred generation facilities…Auditable accounting protocols will be in place to assure that all expenses and capital expenditures related to generation are borne by the generating company.” No generation-related expenses were excluded from the complete transfer of cost responsibility from ratepayers to the company’s shareholders.

Precedents established by restructuring cannot be ignored

In return for assuming full financial responsibility for its power plants, PSEG was authorized to charge lucrative, uncapped market-based rates for the power they produced. The authorization paved the way for PSEG Power to earn windfall profits on its low-cost nuclear power in power markets whose clearing prices were established by high-priced natural gas. PSEG had earlier projected that its plants would lose money in the competitive power markets and persuaded the BPU to award the company $3 billion in stranded costs to offset the projected “losses.” The stranded costs, which cost New Jersey businesses up to $100,000 per month each for 15 long years, were awarded on an irrevocable basis, enabling PSEG to continue to collect the payments even as its plants were reaping windfall profits. It is noteworthy that PSEG never offered to return any stranded-cost payments to ratepayers and now has the temerity to argue that this $3 billion wealth transfer should not be considered in determining whether the nuclear plants require further subsidization.

The restructuring framework was memorialized in a series of BPU orders, expansive competition rules and the seminal Electric Discount and Energy Competition Act (EDECA). The BPU orders and rules have never been reconsidered or amended, nor has EDECA been repealed, superseded or limited in any manner, by the ZEC Act or any other law, with regard to the termination of ratepayer financial responsibility for the power plants.

However, now that the power markets no longer provide the level of profits the companies apparently desire, they have engaged in a back-door attempt to reinstate ratepayer financial responsibility for the nuclear plants. The companies would accomplish this by including the costs and risks associated with the deregulated nuclear plants as costs that may be taken into account in determining whether the plants are eligible to receive ZECs. The inclusion of such costs and risks as the basis for an award of subsidies, however, clearly violates the parties’ restructuring deal.

Despite the efforts of PSEG and Exelon to ignore precedent and establish their preferred regulatory structure, the fact remains that the BPU and Legislature removed precisely these types of costs and risks from ratepayer responsibility long ago. Thus, an interpretation of the ZEC Act that would have the effect of reinstating ratepayer responsibility for these costs and risks, or to consider them as a basis for an award of subsidies, would contravene the clear language and clearly articulated state policies that provided the basis for EDECA and the BPU’s restructuring orders, which remain the governing law. Indeed, such an interpretation would turn the EDECA bargain on its head by requiring ratepayers to insulate the nuclear plants from all business and market risks and to guarantee the plants’ continued profitability. The state’s struggling competitive businesses, for which no such bailout opportunity exists, have little appetite or ability to fund yet another multibillion-dollar nuclear bailout for these highly profitable companies or to serve as guarantors of their profits. No doubt this view is shared by the many ratepayers who struggle each day to pay their bills.

It is therefore imperative that the BPU’s decision whether to award additional ZEC subsidies be rendered within the parameters of existing law, including the limitations imposed by EDECA. Should the companies be able to demonstrate financial need using appropriate financial benchmarks that comply with existing law, the BPU could fashion a subsidy that fairly compensates the nuclear plants for the environmental and fuel diversity benefits the state derives from their continuing operation. Such a subsidy would more closely resemble the subsidies the BPU has provided to support renewable technologies like solar and wind. Such an approach would properly align the requirements of EDECA and the ZEC Act, whose provisions must be read together and harmonized if the BPU’s decision is to survive judicial scrutiny.

In sum, given the clear limitations imposed by EDECA and the BPU’s restructuring orders, the authorization of a subsidy that, directly or indirectly, would require ratepayers to again be responsible for the costs and risks associated with the deregulated nuclear plants and establish ratepayers as guarantors of their profits is clearly a bridge too far and is legally indefensible. A deal is a deal. Ratepayers have held up their end of this decades-long bargain. The BPU must assure that the companies do so as well.