NJ electric Utilities Take Their Eyes Off What Should Be Their Core Job
- Sep 28, 2020 4:29 pm GMTSep 28, 2020 1:39 pm GMT
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The Summer of 2020
Yet Another Reason to Consider “Utility” Restructuring
A “wandering eye” is a tendency to look at, and have, desirous thoughts about other people, while already in a romantic relationship. Our electric utilities may want to ponder that.
If you are like me, you have experienced power outages this summer, perhaps many. With increasingly severe weather events, ongoing increases in electric demand with “strategic electrification” and, the very real threat of terrorist or cyber-attacks on our Transmission and Distribution infrastructure, by not paying greater attention to grid reliability our electric utility dalliance with diversification, is gambling with potentially tragic consequences.
While utility executives and regulators blame prolonged outages on the wooded nature of our communities, too much rock salt on icy roads in the winter, and other imaginative explanations, diversification is a more significant, though overlooked cause. The current emphasis by our electric utilities on evolving businesses such as efficiency, renewables, electric vehicles and subsidized wholesale generation such as nuclear, are diverting corporate focus and rate-payer subsidized funding from what should be their primary objective, the provision of reliable, safe and economical electric power to the residents and businesses of New Jersey.
Current electric utility strategies popularly labeled “The Utility of the Future” following a landmark study of the same name by MIT back in 2014, are being followed by many. The strategy advocates diversification as a means to grow revenues and profits but, its pursuit exasperates our troubles with grid reliability.
A regulated rate of return on capital investment, subsidized by energy users, provides the best method for sustaining critical infrastructure in a natural monopoly like electric transmission and distribution (T&D). But including power generation, initiatives aimed at increasing electric utilization like those for Electric Vehicles, and programs promoting efficient energy end-use conversion under the same corporate ownership as that of critical power delivery infrastructure, introduces damaging competition for both management attention and capital.
Compounding this, trying to grow revenues and cash flow, in New Jersey, the most densely populated and economically developed state in the nation, is difficult when you are limited to operating only in a “franchise” territory. Our electrical utilities are clearly handicapped when trying to generate incremental revenues from traditional utility sources such as T&D. Constrained to operating in specific areas, demand for utility service depends on growth in both population and the local economy. The greater the population and economic activity, the greater the demand for energy. Unfortunately, when an area is densely populated and fully developed, avenues for increased energy consumption reach a limit.
Recognizing this limitation, New Jersey’s electric utility holding companies PSEG, First Energy (JCP&L), Exelon (Atlantic City Electric), and Con Edison (Rockland Electric), encouraged by well-intentioned but naïve legislators, have embraced diversification to facilitate growth. Power generation, renewables (solar and wind), electric vehicles and efficiency are utility diversification options, but their pursuit causes us to divert our eyes from the true mission of electric utilities.
You may ask, what does grid reliability have to do with diversification? Increasing shareholder value is the goal of every publicly traded company. That means increasing cash flow to shareholders either through share appreciation or dividends. Today compensation for executives are skewed toward how well they grow cash flow to shareholders. Fine in competitive business but is this the best arrangement for the management of entities who provide essential services and whose performance determines our quality of life, and safety?
Utilities are different. They have protected franchises providing essential common carrier services where customers have no latitude to switch vendors. They have guaranteed customers with service demand that occurs in predictable patterns. Their primary challenge should be how reliably they operate their T&D systems. In the past electric utilities were recognized as capable operators of infrastructure employing outstanding engineers and operating management. Today however, their greatest strength is an ability to shape legislation and regulation in a manner resulting in favorable laws, rulemaking and programs that provide attractive earnings for shareholders. When investor expectations are forced on electric utilities who have limited growth prospects, management becomes lured into challenging competitive ventures rather than concentrating on reliably operating their critical infrastructure. Compounding this problem, management often demands “regulated” treatment on their diversified investments which produces a psychological limit on the amount regulators are willing to burden ratepayers with. These tradeoffs in “reliable service” versus “growth through efficiency or renewable energy” are real though not easily recognized.
Problems are compounded when utility executives in fully developed territories promise the investment community that they will increase dividends by x%, or revenues by y%. Then they become increasingly dependent upon earnings from subsidized diversified assets (e.g.: nuclear or electric vehicles) or, attaining higher returns on their T&D assets through higher tariff pricing on those assets.
I recall an Aesop’s fable from my grammar school days about a dog and his reflection. In it a dog is carrying a piece of meat in his mouth and when crossing a bridge over a stream, he looks down and sees his reflection. Assuming it is another dog carrying something better, he opens his mouth to extract the more enticing meat from his rival, but in so doing, he irretrievably drops the meat he was carrying in his own mouth into the water below. The fable demonstrates a foolish tendency to always desire more rather than being content with what one has and in so doing, recklessly diminishing what was originally in one’s possession.
Embracing the “Utility of the Future” model instead of focusing on improving grid reliability is not the best use of electric ratepayer funding. This approach is not appropriate for serving a public that is increasingly vulnerable to the catastrophic consequences of grid instability, increasingly volatile weather, and cyber and physical attacks, an area that should demand full corporate focus.
Imagine if we redirected the billions of dollars that are scheduled to be collected from ratepayers for efficiency, solar, wind, electric vehicles, and nuclear generation programs, and instead directed it to strengthening our transmission and distribution systems. How improved would our electrical reliability and resiliency be? While the net effect on the ratepayer pocketbook would be unchanged the improvement in power grid reliability and quality of life would be exponential. Isn’t reliable electrical service a higher and better public policy objective for the majority of people rather than subsidizing say, electric vehicle chargers?
If electric utilities had their “reliability act” together, diversification might be a timely and palatable alternative. But in the obvious absence of that, investment of ratepayer dollars that should be going to improving reliability, which is instead going to diversification initiatives, represents an irresponsible use of public funding to develop businesses that would evolve more quickly under competitive conditions. If you doubt this, consider whether the innovations we have seen in cellular telephone service would have emerged had it been controlled and developed by an AT&T monopoly instead of the myriad of companies who compete in the various segments of that industry.
Spinning off elements of diversified electric utilities and restructuring a corporate entity that only includes transmission and distribution assets will facilitate a more secure and reliable grid. Elected representatives need to consider the benefits of legislating the spinoff of non-monopoly assets for New Jersey electric utilities. If this happens, remaining electric utility assets comprising T&D operations will have none of the burdensome handicaps’ diversification introduces.
Diversification remains a significant, though unrecognized cause of the unacceptable performance many New Jersey residents experienced during this past summer with electric reliability. In the absence of a renewed focus on resilience and reliability, diversification will continue to be a hindrance to electric service when challenges to our grid occur in the near future.
Fred Fastiggi-Managing Director
Shoreline Energy Advisors, LLC
Brielle, NJ 08730