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Power struggle over a utility's $4B infrastructure upgrade

PSE&G, business groups agree on merits of Energy Strong proposal — just not who should pay for it

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- (AARON HOUSTON)

Implicit in Public Service Electric & Gas's Energy Strong infrastructure plan is the notion that spending money now will save money later by preventing future outages.
But while PSE&G has calculated the costs of its program — $3.9 billion — the monetary benefits are much more difficult to predict.

Ralph LaRossa, PSE&G's president, said everyone agrees a stronger infrastructure would help. Cost is where the debate lies.

"From a need standpoint, we seem to be on the same side of the table," he said. "From a recovery standpoint, we're not asking for more than the national average."

In justifying the unprecedented cost of Energy Strong, LaRossa pointed to a Rutgers University study that put the total economic cost of Hurricane Sandy at $25 billion. The storm knocked out power to 90 percent of PSE&G's 2.2 million customers. The Rutgers study totaled utility damage at $1.7 billion, and the cost to businesses at $6.2 billion, though the latter came from a variety of factors, not just outages.

In response to PSE&G's filing, the Board of Public Utilities sent a series of written questions, including one asking the utility to rank its infrastructure projects by importance using a cost-benefit analysis.

Frank Felder, director of the Center for Energy, Economic and Environmental Policy at Rutgers, said that's a critical consideration.

"At some point, you're going to spend more money to prevent an outage than it's worth," he said.

Felder's center has been retained by the BPU to help it calculate the costs and benefits of post-Sandy infrastructure programs like Energy Strong.

One component of PSE&G's ranking was a metric known as "value of lost load," which attempts to quantify the lost revenue incurred by businesses and residential customers during power outages, and using those figures to determine the economic benefits of preventing or shortening outages.

Felder said that metric has been around for decades, but it — like other such calculations — is fraught with potential for error, because it necessarily requires a long list of assumptions, such as what types of businesses are affected, how often outages will occur and how long those outages will last.

For instance, he said, a data center might have massive financial losses from even a short outage. A butcher, however, might only suffer severe loss if the outage lasts long enough to destroy his refrigerated inventory.

"You'll see wide ranges of numbers, depending on the method used," Felder said.

All of this matters because ratepayers stand to spend a lot of money on the upgrades PSE&G is proposing.

The Chemistry Council of New Jersey has estimated its largest energy users would pay an extra $700,000 annually if Energy Strong passes, though PSE&G says those charges would be offset by expiring utility surcharges, which currently make up about 8 percent of a customers' bill.

Hal Bozarth, the chemistry council's executive director, said businesses already are paying too much for electricity, and said the difficulty of calculating costs and benefits suggests the BPU should take the deepest look possible.

"That really begs the larger question, and that is, why shouldn't this process for $4 billion be put through a rate case at the BPU?" he said. "That way we'll get at all these things."

A full rate case would let the BPU search PSE&G's books and potentially find other money the utility could put toward Energy Strong. As is, PSE&G is asking the board to consider Energy Strong as a standalone program, saying it goes beyond the utility's normal "safe and reliable" service mandate, and thus deserves its own hearing.

Bozarth also questions PSE&G's call for a 10.3 percent rate of return on the equity portion of its Energy Strong investment, which constitutes 51 percent of the total cost.

"Nobody out there in the real world of business is getting that," he said.

PSE&G says that's the industry average, and notes they recently won a 10.0 percent rate of return on a solar investment program.

Felder said a cost-benefit analysis shouldn't be the only factor the BPU considers, because it's not a black-and-white decision.

"The analysis should help guide your thinking," he said. "But other policy considerations come into play."

For instance, he said, a government might choose to promote renewable energy for environmental reasons or to promote energy independence, even if it doesn't provide as favorable a cost-benefit ratio as other forms of energy.

Still, LaRossa said the one thing that is clear is that the state's infrastructure is going to be tested.

"We don't know when it's going to come or the ferocity of when it's going to land," he said. "But what we do know is there's going to be more storms."

E-mail to: jaredk@njbiz.com
On Twitter: @jaredkaltwasser

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