Time to Consider Electric Utility Restructuring?
- May 13, 2019
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Yet Another Reason for Electric “Utility” Restructuring
Last month, appointed New Jersey Board of Public Utilities commissioners were backed into a corner, with four of their five, reluctantly deciding to award PSEG a $300 million annual subsidy to keep its nuclear generating fleet operating. Under a dubious threat of decommissioning by PSEG, allegedly due to growing operating losses, our commissioners made a difficult decision. While at least four independent sources including PJM, the Rate Payer Advocate, an independent consultant and the BPU’s own staff, concluded that PSEG’s nuclear plants were profitable and show no signs of sinking into unprofitability, the commissioners were pressured into making a decision based on dangerous emerging dynamics which are gradually undermining the foundation upon which the New Jersey energy economy is based.
With utilities constrained to operating in defined “franchise areas”, their demand for service is dependent upon growth in population and the local economy. The greater the population growth and economic activity, the greater the demand for energy. Unfortunately, when a region is densely populated and economically fully developed, the avenues for increased energy consumption reach their limit. Recognizing this limitation, diversification for utility holding companies like PSEG become a strategy. Power generation, renewables and efficiency have become options for utility diversification, though when these businesses are operated in a regulated framework their maturation becomes stunted with higher costs and slower development of expected functional capability. This is just the opposite of what one might expect as a natural outgrowth of competition and the innovation it facilitates.
Most business enterprises are suited to unregulated competition and a few are not. But, mixing one with the other will inevitably raise thorny conflicts of interest. Recent promotion on electric utility future strategies popularly labeled “The Utility of the Future” is an example. A regulated rate of return on investment, fairly subsidized by energy users, provides the best method for sustaining critical infrastructure in a natural monopoly like electric transmission and distribution. However, including wholesale power generation, renewables and efficient energy end-use conversion under a regulated framework isn’t the best way to coax innovation and lower consumer costs from evolving industries. Most importantly, it is certainly not the best way to assure the future safety and adequacy of our critical power delivery infrastructure as both regulators and utility management lose focus on their primary objective of providing safe and reliable electrical power.
The emergence of the “hybrid utility” (part monopoly, part competitive business) presents dilemmas which only get worse as electric utilities are pressured by investors to grow revenues and cash flow despite being handicapped by demographically saturated markets. Demands for non-traditional methods of financial relief like last month’s nuclear subsidy in New Jersey, are the tip of a coming iceberg. If left unaddressed by legislators and regulators, New Jersey’s continuous descent into the realm of costly and least attractive places in which to live, or to do business will only get worse.
Last month, we were reminded that the greatest competitive strength of an electric utility has grotesquely mutated over time in the interest of self-preservation. Their strength has become their ability to shape legislation and regulation in a manner resulting in favorable laws, rulemaking and programs that provide attractive earnings for shareholders. PSEG’s nuclear subsidy is the most recent example of cunning proficiency grown largely through snowballing political influence, itself the end-result of extensive lobbying and generous financial support to influential elected officials who may exert pressure on appointed public servants, themselves chosen via an outdated patronage system.
Ironically, electric deregulation and most notably the bifurcation of generation from “wires” originally came about only after lengthy negotiation resulting in electric utilities gaining generous concessions with the enthusiastic support and leadership of the same executives, lobbyists and lawyers who today argue for regulated treatment on the non-utility business they sought to free from regulation just a few short years ago.
The emerging hybrid electric utility model isn’t suited to serving a public that is increasingly vulnerable to the potentially catastrophic consequences of grid instability. Spinning off elements of diversified electric utilities that shouldn’t be in a regulated structure, and concurrently restructuring balance sheets for the remaining true monopoly assets with bond-like financing (similar to capital structures for water, sewer or bridge authorities) will facilitate a more secure grid, accelerated innovation in areas like environmentally beneficial generation and ultimately, lower pricing for both deregulated energy services and power delivery.
Those who would view restructuring as a heavy lift need only consider the precedents of industrial giants like GE, DuPont, Honeywell, Kraft, Conoco and others to see that restructuring occurs frequently and especially when there is a glaring mismatch in the objectives of conflicting business units. We need look no further than the telecommunications industry to see the benefits competition brings to formerly regulated utilities, customers and shareholders. In the absence of competition, would anyone believe that wireless technology would have developed to the level of where it is today?
Focusing on the development and maintenance of resilient power delivery infrastructure while letting generation, renewables and efficiency businesses evolve in a competitive marketplace will eliminate the troubling dynamics that pressured four otherwise rational commissioners to approve a ratepayer-funded giveaway.
Rather than originating legislation, or promoting legislation drafted by utility lobbyists, which hamstring regulators on issues like nuclear subsidies, elected representatives might consider championing the spinoff of non-monopoly electric utility holding company assets. These assets should fend for themselves in a competitive world, without the burdensome and uneconomic demands that conflicts of interest present to captive rate payers and hapless regulators who are left to deal with emerging chaos.