From the 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.
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“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%.
Though the price of electricity accounts for the largest share of customer bills, utilities do not profit from its sale; instead, they pass 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.
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