Is Jersey Central Power & Light earning too much and investing too little in its distribution system?

The state Board of Public Utilities (BPU) has decided to initiate a proceeding to look into allegations that the state’s second-largest utility is earning significantly more than what the agency has established as a reasonable return on its investments.

The proceeding was initiated based on a petition filed by the Division of Rate Counsel, which argued that Jersey Central Power & Light (JCP&L) is earning a 12.37 percent rate of return, far in excess of the 8.5 percent approved by the state.

As a result, JCP&L overearned $86 million to $90 million in 2010, according to Robert Henkes, an energy consultant retained by the agency, who examined the company’s financial data.

The new proceeding comes at a time when JCP&L, which serves 1 million electric customers in north and central New Jersey, has come under repeated criticism from the Christie administration, local officials, and customers for its slow response in restoring power after Hurricane Irene and a rare late October snowstorm. Those outages left hundreds of thousands of their customers without power, some for as long as eight days.

Essentially, the action taken by the board will require the utility to file a base rate case petition with the agency, a move that will examine in detail through administrative hearings the company’s expenditures, revenue, and earnings.

Ron Morano, a spokesman for JCP&L, said the company would fully cooperate with the board. “We believe that Jersey Central Power & Light’s electric rates are just and reasonable, and that the Rate Counsel’s request does not provide sufficient reason for the NJ Board of Public Utilities to order JCP&L to file a base rate case at this time,” he said.

In a filing by Division of Rate Counsel Director Stefanie Brand, her office argued otherwise. “A base rate case would also provide the opportunity to examine the company’s earnings in the context of its investment in its rate base, the plant, and equipment needed to provide service to its customers,” Brand argued, while also making note of the problems experienced by JCP&L with reliability.

“One way for a utility to increase its rate of return for its investors is to reduce its investment in the plant and equipment needed to provide its customers with safe, adequate and proper service,” Brand said in the filing.

Unlike the state’s three other electric utilities, JCP&L has not had a full-fledged base rate case for six years. A base rate case is important, according to the rate counsel, because it allows an opportunity to examine the utility’s revenues and expenditures, including capital spending, and other aspects of its operations.

JCP&L’s actual rate of return of 12.7 percent far exceed the rate of return for the state’s other utilities, according to Henkes. For instance, Public Service Electric & Gas (PSE&G) and Rockland Electric have a rate of return of 8.21 percent, while Atlantic City Electric’s rate of return is 8.6 percent, Henkes said in an affidavit.

In deciding to go ahead with the proceeding, which will be presided over by the BPU president, other commissioners said they welcomed the move. “I find this interesting,” said BPU Commissioner Jeanne Fox. “I think it can be very educational.”

This is not the first time JCP&L faces questions about its rate of return. In 2003, a slow response to a string of outages at the Jersey Shore during the Fourth of July led the BPU to temporarily reduce the utility’s rate of return after an investigation found flaws in its performance.

In addition, earlier this year, the state hired a special consultant to help investigate how the four electric utilities planned, prepared, and responded to the events of Hurricane Irene this summer, which left 1.8 million people without power.

Assemblyman Upendra Chivukula (D-Middlesex), the chairman of the Assembly Telecommunications and Utilities Committee, said JCP&L’s problems may stem from being owned by an Akron-based energy company, FirstEnergy.

“It’s an Ohio–based company so they have not invested enough in New Jersey in keeping up their infrastructure,” Chivukula said. “It’s been reflected in the natural disasters we’ve seen this year, like Hurricane Irene.”