In the wake of Superstorm Sandy, utility ratepayers face the prospect of paying many billions of dollars in storm-recovery and infrastructure improvements designed to “harden” utility distribution systems in preparation for the “next Sandy”. While no one questions the need for more weather-resistant utility distribution systems, concerns have been raised that Sandy could provide a convenient pretext for unrestrained, opportunistic utility spending that could result in windfalls to utilities and unwarranted, long-term financial burdens to ratepayers.
The Board of Public Utilities deserves kudos for its response to these concerns. In a March 20 ruling, the BPU struck an appropriate balance between utility proposals to fortify the state’s energy infrastructure and the interests of New Jersey ratepayers who will fund these improvements. The ruling rebuffed PSE&G’s attempt to obtain expedited approval of its proposed Energy Strong program, which calls for an unprecedented $3.9 billion in investments over the next ten years to further fortify PSE&G’s award-winning distribution infrastructure.
It is noteworthy that in addition to Energy Strong, PSE&G has petitioned for an additional $1.5 billion in upgrades to its transmission system and another $1 billion to $2 billion to expand PSE&G’s existing solar programs. Together with pending smart-meter legislation and two utility rate cases that together seek to recover hundreds of millions in storm recovery and upgrade costs, total potential ratepayer exposure has reached a breathtaking $10 billion to $12 billion, equivalent to one-third of the state’s annual budget.
The sheer magnitude of these proposals and their potential financial impact on ratepayers requires a cautious approach involving detailed analysis of the effectiveness, reasonableness, and prudence of the proposed investments and rigorous cost-benefit analysis. The BPU agrees with this cautious approach. This past January, the BPU issued a comprehensive storm-response order as part of its ongoing Hurricane Irene investigation. The order approved more than 100 potential storm-response measures for implementation by the state’s electric and natural gas utilities to mitigate the effects of extreme weather events. The order directed each utility to conduct a detailed six-month investigation regarding five proposed categories of infrastructure improvements -- including critical analysis of ongoing smart-grid pilot programs -- and to report to the BPU regarding the potential benefit and cost-efficiency of each proposed category of improvements.
However, barely three weeks after the January order issued, rather than preparing the required reports and analyses, PSE&G instead filed the Energy Strong petition. The petition largely lacks detail and does not include the required analysis of the effectiveness of the proposed measures or any cost-benefit analysis. PSE&G’s wide-ranging proposals also relied on untested, expensive technologies that are not yet commercially available, although the company professes “a high level of confidence” that the technologies would work if implemented.
PSE&G backed its Energy Strong petition with an aggressive PSE&G public relations campaign that insisted the proposed improvements would create about 5,800 jobs, “all without asking customers to pay more." These dubious, free-lunch-type claims should compel a rational person to ask: when was the last time the State spent $10 billion without taxpayers having to pay more taxes? And what about the many jobs -- as well as the businesses and investment capital -- that are lost each year due to the high cost of energy in New Jersey?
Indeed, Division of Rate Counsel experts have estimated that the pending PSE&G proposals would annually cost the average residential ratepayer about $100 and industrial ratepayers $700,000 or more, depending on their level of energy usage. In fairness, PSE&G does not claim that Energy Strong would be free to ratepayers, only that utility rates would remain “flat” vis-à-vis prior years after program implementation. This would occur because natural gas prices and interest rates are at historic lows -- situations that certainly will not continue indefinitely -- and because certain utility surcharges currently paid by ratepayers will soon be phased out. These surcharges include billions of dollars in stranded costs that have been paid to PSE&G since 1999 based on the false premise that the State’s deregulation of power generation would diminish the value of its fleet of power plants. In fact, these power plants have been enormously profitable over the years and have contributed handsomely to the company’s bottom line. Thus, the now-expiring surcharge -- which creates the rate “gap” that PSE&G now seeks to “fill” with Energy Strong costs -- has proven to be an unwarranted subsidy that has been a significant burden on ratepayers for almost fifteen years.
Thus, when PSE&G states that rates will remain flat, what it means is that it wants to transfer the benefits of lower gas prices, reduced interest rates, and the discontinued stranded-cost surcharge from ratepayers to shareholders. Energy Strong’s significant new costs would deprive ratepayers of an estimated 8 percent decrease in rates that ratepayers would otherwise enjoy but for PSE&G’s opportunistic spending proposals.
In addition, PSE&G would lock in this wealth transfer through a “clause” mechanism that would provide guaranteed, accelerated recovery of Energy Strong program costs, and would reward itself with a proposed 10.3 percent return on equity. In an era of 3 percent mortgages, a return of this magnitude on the utility’s proposed risk-free Energy Strong investment is unquestionably excessive. Moreover, PSE&G requested the BPU to approve the petition in a perfunctory three-month proceeding that would deny ratepayers the due process protections that are the hallmark of BPU rate proceedings.
To its credit, the BPU rejected these overreaching PSE&G proposals. The BPU reiterated the view expressed in its January order that the interests of the state and ratepayers will best be served by addressing storm-response and energy infrastructure resiliency issues in the context of a generic proceeding involving each of the state’s electric and gas utilities. The BPU made clear that it properly regards the issues relating to the strengthening of the state’s energy infrastructure to be of critical importance, requiring the methodical and informed review of all stakeholders to assure that the infrastructure measures that are ultimately approved for implementation will be necessary, effective, and financially prudent. Ratepayers deserve nothing less. Thanks to the BPU, ratepayers will get the regulatory protections they deserve.
Read Philip K. Beachem's.