As electricity demand soars, NJ regulators explore new utility profit models • New Jersey Monitor

New Jersey’s energy regulators are taking steps to explore a system that would see the state’s utilities draw profit based on their performance rather than tying their returns to capital investments that improve grid reliability but drive up customer bills.

The move follows an executive order Gov. Mikie Sherrill (D) signed when she took office that directed the Board of Public Utilities to examine whether the profit model of New Jersey’s four regulated utilities has outlived its usefulness amid electricity rates soaring as a result of infrastructure investments and data centers’ mammoth power demands.

“This model has served the state for decades, but it also creates a structural incentive to favor capital-intensive solutions even when lower cost non-wires or demand-side alternatives may be available,” the board’s president, Christine Guhl-Sadovy, said during a May 7 stakeholder meeting.

In New Jersey, electric distribution companies like PSE&G and Jersey Central Power and Light profit from investments in distribution infrastructure at levels negotiated with regulators and repaid by customers on monthly bills. Their return on equity typically hovers around 9.6%.

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Though the price of electricity accounts for the largest piece of customer bills, utilities do not profit from its sale, instead passing it through at cost.

Officials discussed transitioning New Jersey’s utilities to a business model that pays them based on their performance across an array of metrics including affordability, reliability, customer service quality, and the speed at which they connect projects to the grid.

Current and former utility regulation chairs from states that have already moved to performance-based models, or are in the process of implementing them, broadly praised the shifts, but cautioned they were mostly made in different energy environments than the one New Jersey faces now.

The price of and demand for electricity was largely level through the 2010s before spiking in recent years, and the scale of growth driven by data centers that can consume as much power as, for example, the City of San Francisco is unprecedented.

Performance-based ratemaking frameworks were designed during a decade of flat load growth, said Carrie Zalewski, chair of the Illinois Commerce Commission, the state’s energy regulator

“I think that’s very different than the challenge before you. That world, obviously, is gone,” Zalewski said.

New Jersey has commissioned Energy and Environmental Economics Inc. to draft a study on utility business model modernization. That study is due July 19.

Sherrill’s executive order also directed the Board of Public Utilities to expand bill credits to offset hikes in wholesale electricity costs.

At least one New Jersey utility wouldn’t oppose a move to performance-based rates.

“Generally speaking, we’re supportive of the concept of performance-based rate making and being held accountable for measurable, objective criteria,” said Andrew Hendry, vice president of government affairs for Atlantic City Electric.

But, Hendry said, that system should have a symmetrical earnings sharing mechanism. In such mechanisms, ratepayers and the utility take an equal share of excess earnings and make up earnings shortfalls. In asymmetrical mechanisms, customers may be responsible for a smaller share of earnings shortfalls while still benefiting from high earnings.

Whatever New Jersey does, it should do it quickly, said Jay Griffin, a former Hawaii Public Utilities Commission chair.

“Perfect is the enemy of much better here, so don’t delay,” Griffin said, adding the state would have chances to iterate on the regulatory scheme.

In her executive order, Sherrill directed the board to consider reductions to the state’s societal benefits charge, a 3% surcharge on all New Jersey electric bills whose collections fund clean energy investments and incentives.

Board of Public Utilities Executive Director Bob Brabston said the charge and others that fund clean energy, energy efficiency, and conservation programs should be examined.

Ratepayer advocates said a change in business models should include measures to actually reduce electricity rates rather than just control their growth.

“I think it’s important when we’re talking about affordability that there’s actually bills going down. What I’m hearing a lot about affordability today is, ‘How are we going to help low-income people pay their bills, how are we going to help people afford their bills?’” said Brian Lipman, director of the Division of Rate Counsel. “The bottom line is, to quote the guy from New York City, our bills are too damn high.”