PSEG President, Chairman and CEO Ralph Izzo has launched a three-pronged campaign in New Jersey aimed at rate reform, nuclear supports and enhanced efficiency — a trio of policy initiatives he says are essential to the industry and grid, and which can help achieve customers' top priority.
"The number one thing we hear from customers is, 'help us control our bills,'" Izzo said in an interview.
As the state pushes for more renewables and a cleaner power mix, Izzo's utility has been a vocal proponent of energy efficiency. PSEG has already spent close to $400 million on energy efficiency programs in hospitals and multi-family buildings. And earlier this year the utility proposed expanding efficiency spending by $74 million, including two new initiatives and three existing ones which are popular with customers.
But the utility chief is adamant that more can be done — if the utility is allowed to recover costs. Ultimately, that means decoupling PSEG's profit from commodity sales.
"We've had a handful of programs directed at discrete segments, but we think there is so much more to be done in that area," said Izzo. "We've been trying to engage regulators and interested parties in a discussion that would expand on our efforts. That's been our top priority."
In addition to efficiency, the utility is pushing ahead with infrastructure programs targeting its gas distribution network and its electric grid. But PSEG believes changes to how those projects are approved would help the utility modernize faster. And the utility has also begun working to educate the state's consumers about the importance of fuel diversity and nuclear generation — an which mirrors similar debates in New York, llinois and other states.
PSEG wants to do efficiency upgrades at the "utility level," meaning lowered costs would apply to all bills. Some of this includes work that would be done on the utility grid, in spots like industrial areas, low-lying areas, along railways. New efficiency program proposals also include a smart thermostat offering and a behavioral demand management program using home energy reports.
"We'd like to do efficiency in a way that current electricity usage would result in a lower bill, and we think that's possible because half the bill is supply," said Izzo. He explained that if the utility can lower its variable costs, shareholders can come out ahead. And if it lowers revenues, customers will benefit.
“The stumbling block there is our insistence on recovering our fixed costs," said Izzo. "Some participants in the dialogue are not willing to allow the utility to recover its fixed costs, and that is a shame, because the fixed costs is less than half the total customer bill. So if you think about this: the customer pays half in fixed costs and half in variable, and we're saying we can do energy efficiency for less than the variable component. In some cases, half the variable."
"So customers could potentially pay a quarter less per kilowatt-hour than they do," he said. "We would recover our fixed cost, and the environment they would be better off."
But the utility has received pushback on some projects, including a proposed replacement for the Mason Substation, constructed by the New Jersey Department of Transportation in the early 1980s. PSEG wants to own the substation, and says the benefits would accrue system-wide.
But according to May testimony from New Jersey's consumer advocate, the Division of Rate Counsel, the $268 million project "primarily serves one customer, and therefore it would be inappropriate to recover such investment from the general body of ratepayers."
DRC also argued that the benefits would accrue to the transmission level, and therefore should not be included in distribution rates.
But according to Izzo, allowing the utility to recover those types of costs is essential to unlocking greater potential savings.
"We've talked to regulators about broadening the definition of electric efficiency to include things which people can use electricity for which are using electricity today that would be a more efficiency use," he said. "And of course the screaming example of that is electric vehicles."
"We're also considering some modest efforts in electric technologies that could include energy storage," he said.
Paying for capital improvements
The way the state currently approves electric and gas infrastructure also needs to be re-thought, said Izzo. The New Jersey’s Board of Public Utilities typically approves infrastructure projects in three-year cycles, but according to Izzo said a longer-term approval would allow for several benefits: utilities could better plan their purchasing and hiring, customers would avoid periodic rate shock, and necessary improvements could be completed faster.
A prime example of this is the utility's natural gas pipe modernization program, where there is little question that aging cast iron pipes need to be replaced.
The BPU has initiated a proceeding that would allow utilities to file for capital program trackers. "If we do a type of work the board approves of, we can get approval for up to five years and earn a quasi-contemporaneous return," said Izzo.
There are concerns that a system like this gives utilities too much flexibility to earn a return on projects without proper oversight, but Izzo noted that PSEG would still be back in front of regulators every five years.
"We would just like to see some kind of a new hybrid system that gives regulators the comfort they want but recognizes the steps other states have taken in terms of regulatory efficiency," said Izzo. He noted that S&P Global Market Intelligence's Regulatory Research Associates last month downgraded the state's regulatory climate to "below average."
The change was due to "attrition rather than an identifiable shift in policy," the group said. "The jurisdiction has not moved to implement certain innovative policies that have been adopted in other jurisdictions."
"The New Jersey regulatory body has gone from being viewed as middle-of-the-road to being ... far to the side of keeping rates low at the expense of shareholders," said Izzo. And that's just not fair. A regulatory body should balance the needs of employees, shareholders and customers."
And a familiar debate may soon be coming to New Jersey. PSEG Nuclear LLC operates New Jersey's Salem and Hope Creek nuclear plants, and they are beginning to feel pressure from cheap natural gas.
Other states have had variations on this conversation: New York's zero emission credit (ZEC) program, aiming to keep three plants viable, is being a challenged in federal court and reviewed by federal regulators. Illinois and Ohio also approved nuclear supports, and all have been challenged.
"It doesn't make a lot of sense to try and improve upon customer bills and the environment, and to improve upon efficiency and reliability of the grid, and then allow nuclear plants to prematurely close because of of market failures," said Izzo.
Current market structures "don't compensate nuclear plants for their very strong environmental and fuel diversity attributes," he said, but added "we're just starting to educate people."
“Because of where we are located in the market and the scale of our operation, we're a little later to this discussion," he said. "Discussions are far more mature and have been going on a bit longer in other states, to the point where they're actually in litigation."
So far, PSEG has taken a wait-and-see approach while trying to let customers know what is happening. But New Jersey appears poised to enter a familiar debate over the nation's nuclear fleet in wholesale markets.
“Our emphasis has not been around designing a solution," said Izzo. "We've really tried to simply educate people how the market is working today."