New Jersey is studying whether to use funds from the Regional Greenhouse Gas Initiative to keep down electricity rates and restructure the way utilities are compensated in the state’s effort to reduce the upward pressure on electricity prices.

The New Jersey Department of Environmental Protection in a Feb. 19 release said it had discussed using uncommitted RGGI funds with the Board of Public Utilities and Economic Development Authority. The three agencies together oversee the expenditure of income from the initiative.

The DEP said that in line with an executive order issued by Gov. Mikie Sherrill on Jan. 20, her first day in office, the state would “use available uncommitted and future RGGI proceeds to offset bill increases stemming from the rise in the price of electricity, especially for vulnerable families struggling to make ends meet.” (See New N.J. Governor Rapidly Confronts Electricity Crisis.)

“Similarly, DEP and EDA are actively assessing potential approaches related to energy affordability and generation that align with existing statutory parameters for the use of RGGI funds,” the department said. It noted that allocation of funds “outside of these parameters would require legislative authorization.”

New Jersey has committed $950 million in RGGI funding to clean energy projects, including $88 million in 2025, according to the DEP. It does not say how much was left in uncommitted funds after that expenditure.

The state has in the past prioritized RGGI funds for promoting healthy homes, investing in clean and equitable transportation, promoting carbon capture and reducing the use of refrigerants. Supported projects have included investing in fleets of electric municipal school buses and garbage trucks, and helping put electric vehicle chargers in multiunit dwellings. (See NJ To Accelerate RGGI Fund Expenditures.)

Alternative Utility Business Models

The planned redirection of RGGI funds comes as the state searches for ways to expand its generating capacity and prevent rates from rising under the pressure of a future capacity shortfall.

Analysts say the state and others in PJM are facing an energy shortfall in part because old generators have shut down more rapidly than new sources have come online.

The resulting shortfall has contributed to a spike in electricity costs, which resulted in a 20% increase in the average New Jersey bill in June. But analysts say the biggest part of the hike stems from the rapid arrival of heavy energy-using data centers.

Looking to tackle the issue from a different direction, the BPU voted 5-0 to procure a consultant to “examine alternative utility business models as a mechanism to drive down electricity costs for New Jersey customers,” according to an agency release.

“This study will result in a concrete plan to address how the utility business model can better serve customers throughout the state,” BPU President Christine Guhl-Sadovy said.

The consultant will “evaluate a range of potential regulatory reforms, including performance-based ratemaking, which ties utility profits to outcomes like reliability and customer savings rather than simply how much they spend,” according to the BPU. The consultant will also look at “multiyear rate plans, reductions to utility returns on equity, least-cost resource testing and securitization tools.”

“The goal is to identify which combination of changes offers the greatest long-term savings for ratepayers while providing certainty for the industry and encouraging important investments to ensure reliability of the system,” it said.

The resulting study “will focus on the longer-term question of whether the underlying business model itself needs to be changed,” the board said. “The BPU wants to better understand how much of that increase is driven by the way utilities are currently regulated — and what a different approach might mean for customers’ bills in the future.”

‘Broken’ System

In the traditional cost-of-service model, regulators determine utility revenues based on operational expenses and capital investments and grant an agreed return on investments.

However, there has been a growing recognition that changes to the basic cost-of-service model may be needed to accommodate the changes in the energy industry, including state clean energy policies and rapid load growth.

Performance-based regulation includes regulatory approaches such as financial incentives and penalties; performance metrics and scorecards; multiyear rate plans; and revenue decoupling. The aim is to direct utilities toward achieving goals and outcomes not explicitly considered in traditional ratemaking.

Abraham Silverman, a former counsel for the BPU and now assistant research scholar at Johns Hopkins University’s Ralph O’Connor Sustainable Energy Institute, said the BPU’s move shows that Gov. Sherrill is “obviously very serious about tackling the utility business issue.”

“Everyone talks about how broken the existing system of utility regulation is — allowing utilities to earn more the more they spend,” he said. That system “doesn’t work very well and leads to the utility doing the same old things.”

“It’s commonly recognized that we’d all like to see utility spending align with New Jersey’s energy policies,” he said. “That means financially rewarding utilities that implement policy effectively rather than just spend more money.”

New Jersey is one of 17 states that are exploring the use of performance-based regulation, with another 11 that have moved toward implementation or have done so, according to the National Association of Regulatory Utility Commissioners.

Paul Patterson, a utilities sector analyst for Glenrock Associates, said that it can be “politically difficult to implement new regulatory regimes that significantly could hurt the utility industry,” although such efforts are not necessarily negative for the utilities.

One example of a “long regulatory review” that centered on “utility performance and affordability” played out in Connecticut and has yet to be implemented, he said. In that case, the effort by the Public Utilities Regulatory Authority to shift to performance-based regulation stoked controversy.

Eversource Energy and Avangrid decried the effort for hampering their ability to receive a fair return on investments, but PURA said it was simply holding the utilities accountable to existing standards. (See The Rocky Road to Performance-based Regulation in Connecticut.)

The effort eventually stalled because of unrelated issues, Patterson said. In general, the effectiveness of the approach has yet to be determined, he said.

Regulators can potentially, but not necessarily, come up with regimes that “could be a lot more disruptive than what has been implemented in many states to date,” he said, referring to the impact on the business model of utilities. “I think it’s important to see what actually gets implemented, and it’s a little early right now to say what that would be.”