ELECTRICITY

PSEG CEO sees efficiency efforts at heart of 'Utility 2.0'

Now in his seventh year as chairman and chief executive officer of Public Service Enterprise Group, Ralph Izzo continues to challenge the electric utility industry status quo, striving to craft a strategy to prosper in a future when he foresees demand for his product remaining flat at best.

"I think we could make money by selling less. I really do. And I know that sounds crazy," Izzo said in an interview earlier this week.

Newark, N.J.-based PSEG had revenue of just less than $10 billion in 2013, with healthy contributions from its regulated utility, PSE&G, and its unregulated merchant arm, PSEG Power.

Today, Izzo goes before Wall Street analysts to answer questions as they try to refine their models for the holding company's future earnings.

Making money by selling less is integral to the success of any permutation of the legacy business model for electric utilities, something Izzo calls "Utility 2.0."

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"You're going to hear us talking a lot more about trying to alert people that they're at great risk of defining Utility 2.0 incorrectly," Izzo said.

"A lot of talk around Utility 2.0 has been putting more smarts on the system, building microgrids, building distributed generation, and it's -- I hate to use the expression, but it's the only one that comes to mind -- kind of the sexier stuff about reinventing the utility."

Asked about the recent agreement between the Edison Electric Institute and the Natural Resources Defense Council on support for the expansion of distributed solar generation, Izzo was quick to express frustration. "Once again, our emphasis is misplaced," he said, calling net metering -- which lets those with solar power systems sell excess energy back to the utility -- "a regulatory fabrication to avoid the realization that [electricity] storage is not economic."

"In most cases, distributed solar generation is nowhere near economic. ... It's a gross distortion. It's purely regressive," Izzo said, noting that it is not inner-city residents spurring the sales of photovoltaic systems. "It's not people who can't afford to do it; it's people who can afford to do it."

Behind the meter

Izzo said he wants "Utility 2.0 to be a reinvention of the utility, but in a very different way" from just trying to accommodate distributed generation.

"Let's talk about pushing the utility deeply into energy efficiency. Let's not stop the utility at the meter. Let's not obsess about making the meter smarter and able to communicate in two dimensions and having all sorts of applications on our phone. Let's talk about the utility being the infrastructure owner of those energy-consuming assets that customers are willing to let us take over," he said.

For Izzo, investment in energy efficiency behind the meter for commercial, industrial or residential customers should be treated no differently from the utility's investment in a new transformer. "We decided the meter should be the property of the utility," he said. "Why did we have to stop there? Why can't we talk about the water-heating system, the air-conditioning systems, the space-heating systems, the building-envelope structure, the insulation, all things that are really not consumer-oriented products?"

Regulators -- New Jersey's Board of Public Utilities, in PSEG's case -- will have to be open to innovative ways to finance efficiency measures and tweak rate structures, Izzo said.

He pointed to PSE&G's most successful energy efficiency programs that "were done with hospitals where we went in and said, 'OK. We will pay 50 percent of the replacement cost of this space-heating system,' and in those cases, the hospitals still maintained ownership.

"What we had, basically, was an IOU from the regulator that they would compensate us for the 50 percent that we paid." Under this "arcane concept," the 50 percent represents a "regulatory asset. ... It's a financial commitment from the regulator," Izzo said.

"You could do it either way. We could own the asset, or we could own the regulatory asset. To me, that's less important. What's more important is that that heating and cooling system got replaced, and that hospital now is more energy efficient, so they can free up their capital for more sophisticated medical equipment, for lowering their bills to their patients, and that's a real benefit. That's not a subsidy," he said.

Izzo also pointed to the example of a homeowner who replaces a water heater that he guarantees is using less electricity than the previous model. "So the load in your house just went down, but that iPad that you added and that smartphone that you added didn't make up for that, so what's happened in your house is you're using less [electricity], yet you've become more dependent on it.

"That violates the notion that the way in which a utility should get compensated is on a throughput basis, because now you're using less, but my product is more important to you. And if I go to you and say that, and therefore you should be willing to pay more, your initial reaction is, 'Are you out of your mind? I don't want to pay more,' so I have to enter into a relationship with you that says, 'I will figure out a way to allow you to spend less, even though your rate is going up,'" Izzo said.

Everybody can win

For the efficiency construct to succeed, the "three participants in this discussion," as Izzo sees it -- the customer, the investor and the environmental community -- have to work together. "All three can win if not one of them gets greedy," Izzo said.

Because roughly half of an electric bill is for fuel, by simply helping customers cut their electricity consumption by 10 percent, "then I save a bunch of money on fuel," Izzo said. "If I lower their bill by less than that 10 percent, such that I save on the fuel more than what I lower their bill, then my cost goes down more than what my revenue went down. I'll take a simple example: A customer, I charge them $1; 50 cents of it is fuel. They reduce their consumption by 10 percent. I should charge them 90 cents because their consumption went down 10 percent. Instead, I charge them 97 cents for having reduced their consumption by 10 percent. I charge them 3 percent less.

"You may say that's unfair, but here's what I just did for my shareholders: The 50 cents that I would've spent on fuel became 45 cents, because that went down by 10 percent. So I took in 3 cents less, but I'm paying out 5 cents less, so I've gained 2 cents in that process, so my shareholder benefits.

"The environment's delighted because 10 percent less fuel got burned, the customer's bill went down and the shareholder made money. Now if you don't do that, if you change any of those numbers to completely benefit the shareholder, and the customer doesn't see the bill go down, that's not fair. If you give the customer the full 10 percent, then the utility is shrinking, and my shareholders would say, 'What are you doing, Ralph?' So if you're willing to say that all three should benefit, there is a way to have utilities be enthusiastic" about undertaking serious efforts at efficiency, he said.

Twitter: @RodKuckro | Email: rkuckro@eenews.net

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