Ben Hertz-Shargel has been President of the state Board of Public Utilities for a little more than four months. On Thursday, he stood in front of a room full of utility executives and told them the way they make money is going to change.
The cost-of-service model that has governed utilities for generations, he said, has run its course.
“I think the cost-of-service regulation has made sense for a very long time,” he said. “It is no longer fit for purpose, or at least optimal for purpose.”
Hertz-Shargel spoke during a fireside chat at BINJE’s Best: Top Utility and Infrastructure Leaders, held in partnership with the New Jersey Utilities Association at Jumping Brook Country Club in Neptune.
More from Hertz-Shargel’s fireside chat:
Under cost-of-service, utilities earn a return on the capital they invest. Hertz-Shargel wants them earning on results instead.
“What we really want is a way of having utilities adapt such that they earn money by delivering outcomes for customers, the right outcomes,” he said. “And that could be around affordability. It could be around reliability. All the things that we want to see, rather than just being paid to deploy capital.”
He was careful to say the problem is the rules, not the players.
“We genuinely want to work with all of the utilities to find a set of incentives … such that you are truly incentivized to do what is best for the customer,” he said. “And right now, through no fault of your own as utilities, the incentives you are given are not directly in line with that. And that is something that we do want to fix.”
All of this begs the question: How does the state do that?
Gov. Mikie Sherrill has made affordability a centerpiece of her agenda. That raises an obvious question: Can a regulator push rates down and keep utilities healthy at the same time?
Hertz-Shargel said that’s exactly what the reform is designed to do.
“I think that what we are trying to do is squarely aimed at aligning those two things,” he said.
He dismissed the idea that utilities and ratepayers can’t both win, calling it a straw-man argument he doesn’t buy.
“What we are trying to do is design a framework in which, when customer outcomes are improved, utilities earn more.”
Then he got specific.
Say a utility needs a $100 million electric substation. Today, if the same problem could be solved with a cheaper mix of technology, there’s little reason for the utility to go that way.
“If you can solve that through a $40 million portfolio of technologies and assets … that is not right now something that utilities are motivated to go for.”
The fix, he said, is letting utilities share in the savings, ideally enough to match or beat what they’d earn on the bigger build. He admitted that’s “a tall order,” as long as customers come out ahead.
Peak demand is another target. If utilities are rewarded for shaving the peak, the same poles, wires and substations can serve more customers, including data centers, new industry and growth from electrification.
“If you’re satisfying more load with the same fixed infrastructure, so people pay less per unit, that is a benefit,” he said.
Here’s what Hertz-Shargal was clean on: He is not calling for a building freeze.
For an audience of nearly 200 that builds things for a living, he offered some reassurance.
“This is not about avoiding infrastructure,” he said. “We want infrastructure. There’s a lot to build. Let’s just build the smartest stuff, the stuff that is forward-looking, not just rinse and repeat replacement.”
Hertz-Shargal said he understands utilities are expected to “produce a dividend” and to have “a healthy, predictable, stable revenue source.” The goal, he said, is a step change that gets utilities to a lower-cost operating model, he said.
He also acknowledged what he’s up against. Hertz-Shargel came to the BPU from the private sector, where he worked closely with electric utilities, and he said he respects the caution that runs through them.
“I know the very justified conservatism and pragmatism that your engineers, your operations people, your planning people bring to problems,” he said. “And I realize it is a challenge to get people out of their comfort zone and try something different.”
Even if the business math does not always add up, he said.
“If you can earn a return on equity on a 40-year asset, that’s a very compelling thing to do and to focus your business on, rather than something that is potentially shorter-term that involves more risk, more operational complexity,” he said.
Hertz-Shargal said the BPU’s job is to flip that, making the cheaper, more agile option at least as attractive. And he conceded the board is working uphill.
What are the next steps? He said he welcomed feedback and converstion with those in the room. In fact, he said it’s almost required.
Hertz-Shargel said the way to shape what comes next is to show up — in meetings with BPU staff, in stakeholder sessions and, above all, in formal comments.
“Ultimately, we need your feedback and comments in response to RFIs. We need it on the record so we can actually act on it.”
Hertz-Shargel said he’d rather hash things out than fight them out, working together “rather than sort of in parallel or in a worst case across purposes.”
And he told the utilities in the room exactly what he wants to hear from them.
“Listen, here’s the facts of what you need to understand if you’re changing the rules of our business model,” he said.
