It’s very rare to see corporate representatives take off the mask in a public forum and openly and aggressively engage in a bare knuckle fight with regulators over limits on profits.
Public discussion of Corporate profits is taboo and almost always buried in all sorts of rhetoric and euphemism.
But that happened yesterday, at a NJ BPU meeting on implementing Gov. Sherrill’s Executive Order No. 1 on “utility business model” reforms.
In proposing the most important – but least reported by media – “reform” to truly freeze electric rates, EO 1 directed BPU to make recommendations about “reduction in utilities’ return on equity” (ROE).
ROE is a financial metric that measures a company’s profitability and how it generates profit from its shareholders’ equity.
Did you get that? Gov. Sherrill directed BPU to lower corporate PROFITS!
BPU met yesterday to discuss ways to do that.
Related: Candidate Sherrill said she’s freeze electric rates (New Jersey Monitor)
The most important issue discussed was in the morning metrics discussion when consultants discussed EO1, reduction in ROE, and the theory on CAPX.
As I understand things, CAPX is a reference to the Averch-Johnson Effect (often called the “CapEx bias”). It states that when a regulated utility’s authorized Return on Equity (ROE) exceeds its actual cost of capital, the utility is incentivized to maximize its capital expenditures (CapEx) because that is the only way it can grow its “Rate Base” and generate absolute profit for shareholders.
I was listening in on the phone so it is hard to be certain, but I’m pretty sure it was the PSEG lawyer who went ballistic and had a meltdown.
She harshly criticized the premise that utilities were over earning. She claimed that the premise of excess profits and the economic theory it was based on had been discredited. She objected to a lack of due process evidentiary hearings and issued a “warning” that “ radical” change in regulatory policy would risk grid reliability and she also managed to drag the unions into the opposition.
The reliability threat is basically a threat to turn off the lights if their profits are reduced.
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