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Consider Cost
When Making Utility
Infrastructure Decisions

Stefanie Brand

Many citizens and their state and municipal representatives are asking where we go from here to address utility infrastructure and vulnerabilities following the devastation caused by Hurricane Sandy. As the Director of the Division of Rate Counsel, which represents and protects the interest of utility consumers such as residents, small business customers, small and large industrial customers, schools, libraries and other institutions, I am often asked what we can do to avoid the extensive and long-lasting outages that seem to be happening more and more frequently.

broken telephone pole
We can't create an expectation that we can avoid power outages or incur only brief interruptions in the wake of a storm like Sandy by simply implementing certain measures.

My response is to strongly urge that we not rush to institute measures before we know if they will have a positive effect and how much they will cost. It is important to remember that every measure we consider comes at a cost and that cost will be borne by the same people who suffered from the outages that resulted from Sandy.

It is also important to remember that Sandy truly was a historic storm. When storms like Sandy occur, there will be outages. We can’t create an expectation that we can avoid power outages or incur only brief interruptions in the wake of a storm like Sandy by simply implement certain measures. By far, the worst possible outcome would be to go on a spending spree, adding significantly to rates, and then have another storm of that magnitude and find ourselves again with lengthy and wide-spread outages.

We must strike a proper balance as we look for solutions. I encourage everyone to focus on what measures we can take that will be cost-effective and will help with restoration and outage minimization. We have to look at what ratepayers can truly afford. And we have to make sure that the utilities are spending the funds collected for reliability on reliability; that they are complying with the Board of Public Utilities’ (BPU) tree-trimming and reliability regulations, and that they are sharing in the responsibility of trying to address what appear to be more frequent major storms.

  Some may not realize it, but utility rates already include funds to allow the utilities to respond to storms. For most of the utilities, three to five year averages are used to determine the appropriate amount of potential storm related costs that are built into rates. Outliers like Sandy would not be included in those calculations, but reasonable and prudent storm restoration costs are recoverable by the utilities when they come in for a rate case. Also included in rates is a certain amount of spending for maintaining reliability. That number would be based on the amount spent during the “test year” used in the utility’s last rate case. It is the utility’s obligation to spend that money in order to maintain “safe, adequate and proper service,” and to comply with the minimum reliability requirements that are set forth in BPU’s regulations.

In addition to the amounts that ratepayers pay in base rates, over the last several years, ratepayers have been paying additional funds to allow most utilities to accelerate their infrastructure spending. As part of the economic stimulus programs instituted in 2009, the electric companies have been granted over $600 million to accelerate infrastructure spending. During that same time period, the gas companies were approved to spend $800 million to accelerate infrastructure improvements to prevent leaks.

Thus, it may be that ratepayers are currently paying enough for reliability and infrastructure upgrades. We should first take a closer look at what we are already spending and whether it could be spent differently to address frequent and long-lasting outages. Before allowing utilities to go on a spending spree, which they will happily do since they earn on those investments, we should first figure out where the money we are already giving them is going. It may be that more needs to be poured back into the business rather than being paid out in dividends to shareholders.

We also need to reject suggestions that the utilities should obtain recovery of their costs outside of a rate case. It is only in a rate case that our office and the BPU get a comprehensive look at the utility’s finances. We look at what they are spending on infrastructure and reliability, and what they are earning and paying in dividends. We look at how they have been performing when it comes to reliability and customer service. If they are seeking an increase, as two of our electric utilities currently are, we look at whether they deserve one and whether there are cost savings in other areas to offset any cost increases. Now is not the time to cut back on this process—indeed, more scrutiny may be in order.

We also need to look at the standards that are already in place to make sure they are strict enough and that they are enforced. The BPU has regulations setting minimum reliability standards based on industry metrics that measure the number of outages and their duration. Those standards were modified in 2008 to use the utility’s own five year average to determine whether they have met the reliability standards. If a utility performed poorly over those five years, this modification had the effect of making the standards for some companies less rigorous. Those standards should be revisited to see if they should be made more rigorous.

There are also vegetation management regulations. Those regulations should be enhanced and strictly enforced. Penalties for non-compliance with both the reliability and vegetation management regulations are woefully low. Rate Counsel supports recent efforts to enhance those penalties. We would also support enhancing the ability of BPU to perform inspections or otherwise verify the utilities’ compliance with these regulations.

The emphasis has to be on cost-effectiveness. There are many possible measures that could be cost-effective, such as taking measures to prevent flooding at substations or reroute power if a substation goes out. Others, however, such as advanced meters, may provide more information to utilities but do not pay for themselves when the cost is compared to the benefit. These meters are very expensive, do not contribute to restoration or reliability, and provide savings only in the form of lost jobs for meter readers. They are quite lucrative for the utilities, however, as they will fully recover the costs from ratepayers, earn on this physical plant for the life of the meter, and continue to recover for the fully functional meters they are replacing. Moreover, if we spend the money on advanced meters, there will be less to go around for other cost-effective measures to make the grid “smarter” on the utility side of the meter.

Undergrounding of power systems is also not a viable solution. The expense is astronomical. I have heard figures of $1 million—$2 million per linear mile. The impact on ratepayers’ bills of trying any significant level of under-grounding would be suffocating to our state’s economy. At the same time, undergrounding does not ensure that outages will not occur or be long-lasting. When an underground system floods, it may take even longer to restore than an above-ground system.

So let’s tread carefully and avoid the temptation to try to spend our way out of these problems. It’s not likely to work, and would increase the burden on ratepayers who are already struggling to pay for the damage caused by this devastating storm. Let’s not victimize the ratepayers of this state a second time by sharply increasing their utility bills without necessarily addressing the underlying problem.

 

First Published in New Jersey Municipalities, Volume 90, Number 2, February 2013

 

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