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New Jersey was reeling from the Great Recession, and Gov. Jon S. Corzine had a plan. Infrastructure projects, he decided, would help the state shake off the country’s worst economic downturn in generations.
In April 2009, the state utility regulator approved nearly $1 billion in projects to install energy-efficient streetlights and replace aging gas lines, and in the process create thousands of jobs across the state.
Utilities wouldn’t have to worry about the cost. Instead of tapping their annual budgets, they were given the green light to impose a surcharge on the gas and electric bills of every customer in the state.
Up till then, such surcharges had been rare, used, for example, in the 1970s when Arab oil-producing countries placed restrictions on exports to countries such as the United States that supported Israel, driving the price of oil to quadruple. Surcharges were used to provide utilities some relief from the volatile oil price swings. But instead of being a one-off, the surcharge championed by the Corzine administration a decade ago helped usher in a new era in the economics of energy.
Across the nation, local and state governments have turned to utilities to address acute and pervasive infrastructure needs, while utility companies have looked to surcharges as a way to finance those projects — and ensure steady profits. Sometimes, utilities have used revenue from surcharges to pay for things other than infrastructure, many of which customers might expect are already included in their rates: tree trimming (Kansas), smart meters (Colorado) and pension costs (Massachusetts).
In New Jersey, gas and electric bills are packed with add-ons that pay for everything from installing solar panels to putting substations on platforms above flood levels. For residential customers, a single charge, added to bills in increments as tiny as a thousandth of a cent per kilowatt hour, can add $35 to $45 a year to costs; for industrial and commercial customers, the charges can add up to tens of thousands of dollars annually. And it’s all on top of the price that regulators have agreed customers should pay for their electricity service.
The use of surcharges has proliferated over the last decade as the energy landscape has changed substantially. The price of oil and gas has dropped as domestic supplies have increased, and residential energy use has plummeted as appliances and lighting have become more efficient. Still, the national average price of electricity has increased slightly over the last decade, with additional surcharges counteracting any potential savings. That means at the end of the day, many customers have likely noticed little, if any change in their final bills.
That remains true in New Jersey, where residential bills last year averaged about $106.28 per month, according to the federal Energy Information Administration. Garden State residents consume less energy than residents of almost all other states, but they have the 12th highest price per kilowatt hour in the nation, at about 15 cents in 2018. Some critics say surcharges have made energy costs more opaque and made it harder for customers to know enough about what they’re paying for to push back.
“Some of these costs might be for important projects and initiatives,” said Evelyn Liebman, advocacy director for AARP New Jersey. “But the question is: How do you evaluate whether or not the price that you’re asking people to pay is fair and that the benefits outweigh the costs?”
To see how surcharges have affected electricity bills, ProPublica examined the charges assessed over the last decade by PSE&G, the utility arm of New Jersey’s largest energy company, PSEG. For PSE&G, adding surcharges has proved to be easier for financing projects than raising rates on its 2.2 million electric customers. The state Board of Public Utilities, which approves rate increases, has to approve surcharges, too, but the waiting period between when the utility spends the money and when it recovers it from customer bills is shorter.
PSE&G went eight years before seeking its most recent rate increase — a lengthy, rigorous process intended to ensure that utilities are reasonable in their charges and prudent in their spending. By October 2018, when its most recent “rate case” was completed, the number of surcharges on PSE&G customer bills had grown to 14, from five in 2009. (Of those, three charges are included in the “societal benefits” charge paid by every utility customer in the state and were created by legislation.)
This year, PSE&G has added two more surcharges to customer bills, bringing the current total to 16. Most notably, one surcharge, the Zero Emissions Certificate Recovery Charge, raises $300 million to prop up PSE&G’s three nuclear power plants. That charge applies to all New Jersey customers, regardless of who supplies their power.
Nationally, the average price of electricity has slightly increased over the last decade, according to data from the Energy Information Administration. But PSE&G said that over the last decade, its customer bills have decreased even with the surcharges, which have financed investments in solar power, energy efficiency and infrastructure upgrades.
The company said the spending has helped keep electricity service reliable, created jobs and reduced emissions. “Programs have costs,” Scott S. Jennings, a PSEG senior vice president, said in an interview. “We totally recognize that. But customers are paying far less than was paid in the past.”
PSE&G said the median monthly bill for customers who only receive electricity was $102 in 2019, down slightly from 2008 when it was $105. The median bill for customers who receive electricity and gas dropped to $176 per month in 2019 from $249 in 2008. Some of those savings can be attributed to lower fuel costs.
“We see that as a win for customers, the economy and the environment,” PSE&G said in a statement.
No federal entity tracks utility surcharges nationwide, but they have been followed for years by consumer advocates and regulatory groups. The National Regulatory Research Institute, the research arm of the association for utility regulators, has cautioned states to consider the potential impacts of surcharges before approving them, with a 2009 paper recommending that the fees be approved “only in special situations.” A review of the fees conducted for the AARP in 2012 found that at least 30 states add surcharges to customer bills for an array of purposes.
In New Jersey, the BPU energy director, Stacy Peterson, said the infrastructure work financed through surcharges needs to be done. Surcharges allow work to be completed more quickly, she said, and the BPU ensures the surcharge revenue is spent properly.
“We always have the ability to step in,” she said. “We’re not just approving these blindly.”
But some critics say utility regulators have lost sight of their mission when it comes to approving surcharges, particularly for what amount to routine business costs.
Regulators “need to remember that the public interest does not mean serving the utilities,” said David Nickel, state consumer counsel in Kansas. “It means serving the public. And sometimes that means looking at the utility and telling them ‘no.’”
Chances are, you give little thought to how your electricity bill is calculated. Surcharges capitalize on that.
“I don’t half look,” said Michael Denning, a 66-year-old retiree from Kearny, New Jersey, who had come to a PSE&G customer service center in Newark on a recent Friday to pay his bill. “They’re on there, but you can’t do anything.”
Other customers said they had not seen the charges and, when approached by a reporter, spent a few minutes shuffling through their bills to decipher what was what.
Each cycle, electricity bills are broken up into two buckets: supply and delivery. Supply charges cover the cost of producing power at a plant or buying it from another producer. Delivery charges cover the cost of bringing that power over transmission lines and ultimately to your light switch. Surcharges — also known in the industry as “trackers” or “clauses” — are included in the delivery bucket and are usually assessed as a fee per kilowatt hour of electricity used.
For a utility, how it seeks to recover expenses comes down to risk.
If a utility chooses to apply for a rate increase, regulators will weigh not only the costs the utility projects for the coming years but also any expenses the utility has made that were not part of its previous rate case. If regulators don’t think the expenses were necessary, they could reject the proposal, leaving the utility on the hook for those outlays.
Surcharges sidestep that risk. Where rate cases entail a fuller review of a utility’s operations, the analysis of a surcharge focuses on a single program. Before any money is spent, that single program is given the blessing of regulators, along with a means to collect the cost from customers up front.
In New Jersey, PSE&G has made surcharges a critical part of its business strategy. In investor materials from as early as 2009, the company notes that its regulatory strategy is to earn all authorized returns on investments and minimize regulatory lag — the time between when a change in costs for the utility is reflected in the customer’s rates.
PSE&G is allowed to earn a profit on some of its investments, and with each program announced came the promise of immediate payback. In a 2011 investor meeting presentation about future investments, the company touted its growth in the solar and energy efficiency arenas alongside receiving approval for immediate repayment through surcharges.
Fitch Ratings, one of the major credit rating agencies, raised the utility’s credit rating in 2012, increasing it one notch from BBB+ to A-, its current rating, citing New Jersey’s “constructive” regulatory environment. At the time, PSE&G had recently added a weather normalization surcharge to gas bills that helped guarantee cash flow even when customers saw a mild winter and used less energy. The BPU’s willingness to allow utilities to recover costs in a “timely manner” meant there was a predictable cash flow even in uncertain outside conditions, the credit agency said at the time.
In a 2014 presentation to industry executives and investors, the company said that it expected to use surcharges to recover 12% of the $11.3 billion invested in solar and energy efficiency programs and an infrastructure hardening program, dubbed “Energy Strong,” which targeted substations that flooded during Superstorm Sandy in 2012.
During another presentation, PSE&G said consumers ultimately wouldn’t feel the surcharge for solar and energy efficiency programs because it would replace a surcharge that was expiring of an equal amount. The move, the company noted, would “fully offset the impact to customer bills,” which wouldn’t go up. Of course, bills wouldn’t go down, either, despite lower fuel costs.
“We can debate the merits of what we should and shouldn’t do,” said Jennings of PSEG. “And different people will have different perspectives. It comes down to affordability and where you draw the line.”
Critics of the charges, however, say projects billed as protecting infrastructure from climate change or increasing reliability are less about improving service and more about ensuring profits.
“If you’re a utility and demand is flat, and you get a return on capital, how can you make a capital investment if no one is buying more electricity,” said David Dismukes, executive director of the Center for Energy Studies at Louisiana State University, who testified against PSE&G’s Energy Strong program. “You say that we need to build in ‘resiliency,’ that’s how you do it.”
PSEG projected roughly $1.6 billion in earnings for 2019. The company has also paid shareholders increasing dividends every year over the past decade.
In New Jersey, surcharges appear to have found a welcoming regulatory environment, especially as the state seeks to ensure its progressive climate policies don’t alienate businesses. It’s a balancing act the state has struggled to pull off. New Jersey has been on the cutting edge of environmental protection legislation, but such efforts were spurred in part by lax enforcement that allowed industrial pollution to do lasting harm to the state’s waterways.
For the most part, utility surcharges and the projects they finance attract only fleeting attention — an article in which residents called PSE&G’s utility pole mounted solar panels an “eyesore,” or others describing work done to help the utility recover after Superstorm Sandy.
“I don’t even pay attention,” Anthony Boone, a 48-year-old artist, said as he ran errands in Newark. “I just pay it. I guess I should be more in tune, but that’s pretty low on the totem pole.”
Some customers did start to pay attention this year after the utility’s parent company, PSEG, sought to impose the surcharge to subsidize its three aging nuclear plants. Without the subsidy, the company said it would have to close the plants, costing the state hundreds of jobs and a key source of clean energy.
Suddenly, surcharges were big news, as officials, executives and legislators sparred over PSEG’s demands and the $300 million price tag.
State experts said the plants were still relatively efficient and not in danger of closing. But a law enacted in May 2018 to compensate nuclear plants for being a cleaner energy source seemed to tie the hands of the BPU. In April, the board voted to impose the surcharge, even as some of the commissioners expressed misgivings, with one likening PSEG’s threats to extortion. The New Jersey rate counsel, Stefanie Brand, whose office advocates on behalf of customers, recently challenged the subsidy in court. In a brief filed this month, Brand said that if PSEG’s threat was all it took to secure the subsidy, then “the ratepayers of this state truly are being held captive.”
As a part of any surcharge agreement, the utility must come back to regulators at a specified point in the project and provide an accounting showing that the money is being spent as stipulated, the BPU said.
Regulators say they also review surcharges as part of a utility’s next application for a rate increase. But until a change made last year, utilities could go as long as they wanted without seeking a rate increase and undergoing the requisite review. A new rule, established by the BPU in January 2018, requires any utility with an infrastructure-related surcharge to submit to a full rate review within five years of the surcharge’s approval. (PSE&G is scheduled to file its next rate case by the end of 2023.)
“Any expense in a rate case has to be prudent,” said Paul Flanagan, executive director of the BPU. “When they’re spending money on building things, one of the issues is: ‘Is it prudent? Is it gold plated? Are they just spending money to earn money?’”
The agency can step in if it believes a charge is being misused, but it almost never does. The BPU doesn’t track such interventions, but of the roughly 1,500 matters that come before the agency annually, Flanagan said interventions have been “fairly rare.”
At core, utilities and regulators see surcharges differently.
Jennings, the PSEG executive, said surcharges help the company invest wisely, ensuring regulators support a project before any money is spent.
“We want to make sure that the other stakeholders, like BPU staff and ultimately the BPU, rate counsel and other key parties agree that it is worthwhile doing,” he said. “They will, through that process, agree that the type of work and basic program is prudent.”
However, the BPU’s Flanagan said surcharges are only a way to make sure that necessary upgrades are made quickly, and he rejected the idea that they are a tacit way for regulators to weigh in on how a company makes investments.
“The utilities run their companies,” he said. “The board doesn’t run the companies. If the utility feels the need to upgrade the system, they’re capable of doing that.”
Garden State residents pay among the highest prices per kilowatt hour in the nation for their electricity. Brand, the state-appointed advocate for customers, said she is concerned about the proliferation of surcharges.
“That kind of surcharge really should be left for extraordinary circumstances and the run-of-the-mill work the utilities should be doing through rates,” Brand said. “If they’re not making enough money to do the work, they always have the ability to come in for a rate case.”
While energy costs may not drive decisions about where to live, for big businesses, energy costs can be a significant factor in locating — or relocating — a facility.
Major commercial customers, such as chemical plants and large retailers, can buy energy from a third party or generate electricity itself, but the power still has to go through a utility’s distribution and transmission lines, which is where the surcharges are applied. That leaves them with no way to avoid the not-so-small impact of the surcharges.
“We have gotten to the point that more money is probably collected at this point through these mechanisms than through base rates,” said Steve Goldenberg, a lawyer for the New Jersey Large Energy Users Coalition, which represents retailers, manufacturers, food chains and pharmaceutical companies. “And that’s the problem.”
For the Kuehne Company, which uses electricity to manufacture industrial grade bleach at plants in New Jersey, Delaware and Connecticut, surcharges have a significant impact on the company’s bottom line.
“We live and die by energy,” said Bill Paulin, the company’s co-president, noting that electricity makes up 40% of the company’s production costs.
“Our energy costs are in the millions,” he said. “We spend more on electricity than we do on medical insurance for our employees.”
The company, which employs 150 people across its three locations, has been in New Jersey since 1919, and it recently built a new manufacturing facility in Kearny, on the industrial peninsula between Newark and Jersey City. Paulin said the company made the decision to stay because of New Jersey’s access to the Northeast markets, and because of the employees who live in the state.
“We decided to take a chance and do what we needed to do to stay,” Paulin said. Still, the new facility, which was built on the site of the company’s older plant, can be dismantled and moved if costs — such as utility bills — continue to rise, he said.
“It wouldn’t be easy or cheap, but we can do it if things get out of whack.”
For now, the bills are holding steady, and not by accident.
A surcharge, imposed five years ago to cover improvements to the utility’s resilience after Hurricane Irene and Superstorm Sandy, was expiring. The program, which collected on average about $4 a month from residential customers and substantially more from commercial customers, would soon be history.
But PSE&G had already asked to impose a new surcharge, which would raise $1.5 billion to elevate or close old substations in flood zones. It would be part of Energy Strong II — an extension of the Sandy recovery program.
During discussions with the BPU and rate counsel this summer, PSE&G scaled back its proposal, and in September, the BPU approved the next phase of the program. The cost to residential customers will be about $3 each month — almost the same amount as the expiring surcharge for the previous round of the recovery program.
For more coverage, read ProPublica’s previous reporting on the environment.
Opening photo by Glenna Gordon for ProPublica.