Energizing NJ: Public Service Electric & Gas

New Jersey Business, Mar 01, 1998 by T, James

Public Service Electric Gas, the mammoth $17-billion gas and electric powerhouse that has lit the Statue of Liberty for 90 years, warmed the hearths of generations and fueled the dynamic commercial and industrial expansion of New Jersey, is at the forefront of the emerging energy deregulation and customer choice. PSE&G, the fourth largest gas-electric utility in the nation and the largest electric company east of Michigan and the Mississippi River, series some 2.2 million customers, about 70 percent of the state's population. It provides gas and electricity to 5.5 million New Jersey residents in more than 300 communities along a 2,600 square-mile diagonal corridor across the state from the New York to Philadelphia borders.

This $6-billion-asset, Newark-based company is, undeniably, the key player in the metamorphosis of the electric industry from monopoly to competitive marketplace, which promises customers greater choice, lower bills, cleaner energy, new products and continued reliability of service.

E. James "Jim" Ferland, chairman of PSE&G and its parent company, the $17-billion-asset Public Service Energy Group (PSEG), has repositioned the energy company over the past 10 years and, at age 55, likely will be at the helm for another decade, leading it well into the next millennium. Since taking the reins, Ferland has trimmed the staff from 14,000 to 10,000 workers, created a group of nonregulated entities (such as Enterprise Diversified Holdings Inc. and Energis), forged alliances and put in place a blueprint for all customers to register their choice of electric suppliers by October 1, 1998 and begin deregulated service by January 1, 1999, 18 months ahead of the Board of Public Utilities' suggested phase-in of total choice between October 1, 1998 and July 1, 2000.

"In the past 10 years, we've reduced our total number of employees, improved productivity and adapted new technologies," explains Ferland. "Today, we have better customer satisfaction than we did in the mid-'80s, and we're doing it with 10,000 employees. As a result, customers today are paying about 25 percent less, on an inflation-corrected basis, for power than in the mid-'80s. Clearly, it has been induced by the added pressure of the coming competitive market."

He estimates customers will save between 5 and 10 percent on their already reduced bills, but not the 20 percent for which some had hoped, because the workforce has been cut to the bone and cost-containing measures have been put in place.

"Once we achieve the 5-10 percent discount across the board for all customers, we propose to freeze rates for seven years," he enthuses. "Think about it. Our electricity cost to customers is down 25 percent on a real basis over the past 10-15 years, and we are freezing it for seven years. So, from the mid-'80s until the year 2000, the real cost of electricity will have gone down something like 50 percent!"

PSE&G has 1.9 million electric customers and 1.5 million gas clients, with some receiving both. Its electricity energy sources for 1998 include: nuclear energy, 50 percent; power pool purchases, 25 percent; and a mixture of coal, oil and natural gas, 25 percent. The gas industry was "unbundled" for large commercial industrial customers in the mid-'80s. Bundled service means the utility company bills the customer for all the elements production, transmission, distribution, metering and billing. To "unbundle" is to separate production (deregulated) from the transmission and distribution (regulated). Ferland says that of the 180,000 largest industrial/commercial gas customers, only 16,000 have actually changed to a new supplier.

"There has been very little success in the U.S. and here in New Jersey in creating a competitive marketplace for individual gas customers. It is too expensive to attract each home and there is not very much in the way of profit margin, to bring marketers into this area."

But, electricity deregulation is another story. Everyone is on board. Government regulators and lawmakers are pushing it, as are the utilities. Customers like the idea of saving money. Board of Public Utilities President Herbert Tate issued the "Restructuring the Electric Power Industry in New Jersey" plan last April requiring the state's four utilities to file their deregulation plans by July 1997. The BPU has been working to set up the ground rules for customer choice and ate was to deliver the agency's plan to the state legislature a few weeks ago. Now, the BPU and the state's lawmakers have to come up with a workable plan by this coming July, in order to implement it by October 1. A number of sticky situations are still to be worked out. For example: How much and precisely how to pay for the stranded costs of the utilities -- the major plants and long-term, above-market rate non-utility generator (NUG) contracts that the utilities were forced by regulators to build and buy over the years? PSEG places its stranded costs at $3.9

billion. The stranded costs would be recouped through transition charges or securitization. A BPU-funded audit claims PSE&G's estimate is overestimated by $1 billion.