When a steel mill threatened to pull out of New Jersey and move to the Southeast where electricity rates are cheaper, Public Service Electric & Gas Co. (PSE&G) did some creative thinking.

How could it keep the mill, Co-Steel Raritan, and its 500 jobs and $36-million annual payroll in Perth Amboy, NJ?

After considerable negotiation, PSE&G proposed an experimental hourly pricing plan that lets Co-Steel Raritan take advantage of the lowest fuel costs within the Pennsylvania-New Jersey-Maryland (PJM) pool. In return, the steel mill promises to forego the move and actually expand its present operations.

PSE&G, the nation's fourth-largest combined utility, has been very active in attempting to retain its large industrial customers in the face of relatively high electric rates. Two years ago, to keep its largest industrial customer, Tosco Corp.'s Bayway oil refinery, PSE&G negotiated a special contract that involved the State of New Jersey as well as the New Jersey Board of Public Utilities (BPU). PSE&G officials are optimistic that the BPU will approve tariff changes to implement the proposed flexible rates that will tempt Co-Steel Raritan to stay.

Under the plan, Co-Steel Raritan would see a $7.3-million reduction in its annual $26-million electric bill, largely as a result of improved operating efficiencies. That includes a $1.8-million reduction in the $3.6-million gross receipts and franchise tax component of the steel mill's utility bill. In return, Co-Steel Raritan has promised to invest $37 million to upgrade its Perth Amboy facility. The company uses electric furnaces to melt scrap metal into reusable steel products.

Co-Steel Raritan is PSE&G's second-largest customer at a single location, with a peak electric load of 80 megawatts and annual consumption of 440,000 megawatt-hours. In addition to utility gross receipts and state taxes, Co-Steel Raritan pays $2.5 million in state and local taxes. "If we didn't do something, 500 New Jersey jobs would have disappeared," said Robert J. Dougherty, PSE&G senior vice president. "We're willing to accept this deal because it's good business (em for PSE&G and for our customers."

The flexible pricing plan is just one example of the many steps PSE&G has taken to prepare for a more competitive environment in both the electric and gas distribution businesses. Another example is PSE&G's decision to invest heavily with telecommunications giant AT&T in developing a comprehensive "interactive communications system" that will enable the utility's distribution segment to deliver some high-tech services to customers. Technology development is "a vital part" of PSE&G's strategy to remain competitive, said Lawrence R. Codey, PSE&G president, announcing the partnership earlier this year. The AT&T agreement shows how PSE&G is "transforming itself from a New Jersey electric and gas utility into a national energy services company."

The companies plan a pilot project in the first quarter of the year, expanding to more than 10,000 sites by 1996. PSE&G expects to place 500,000 customers on line by 2001. The system will piggyback on the fiber-optic and coaxial cable connections of telephone and cable companies to provide a range of services: automated meter reading, remote control and monitoring of energy use, automated power-outage detection, and real-time control of energy conservation devices. Total cost will run "in the tens of millions of dollars," says Ralph Izzo, PSE&G's general manager for electric business development. AT&T and PSE&G plan to market the finished system architecture to electric and gas utilities worldwide.

PSE&G has also formed a partnership with Cincinnati Gas & Electric Co. to market natural gas nationwide under the name of U.S. Energy Partners, based in Houston. PSE&G is the utility subsidiary of Public Service Enterprise Group Inc., an exempt public utility holding company. Nonutility businesses belong to a second subsidiary, Enterprise Diversified Holdings Inc. (EDHI), which accounts for about 4 percent of Enterprise's total net income. Nonutility operations include oil and gas exploration and production, development of cogeneration and power production facilities, and passive investments. EDHI has interests in 19 domestic cogeneration and independent power projects; 17 are currently in operation, including an electric generating plant in Argentina. Analysts says that returns from nonutility operations have not performed as well as hoped but are improving.

PSE&G is generally viewed as having strong financial resources, a management willing to adapt to increasing competition, and a relatively small industrial customer base (24 percent of total sales). PSE&G has interests in five nuclear units and relies heavily on nuclear power. But analysts say operating performance at the five units has been uneven in recent years. Nevertheless, ratings agencies predict a stable outlook for PSE&G. Barry M. Abramson, utilities analyst with Prudential Securities Inc., rates the stock as a "hold." There's no question PSE&G will be a survivor in the brave new world of competition, Abramson said. "The question is whether they will survive and thrive. That's a question only time will tell." t

W. Lynn Garner is senior writer of PUBLIC UTILITIES FORTNIGHTLY.

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