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Amended Bill Boosts Number of New Power Plants Eligible for Customer Subsidies

Tom Johnson | January 7, 2011

Attempt to encourage new generating capacity and ease congestion on grid is bitterly opposed by some power suppliers, who could see revenues take a sharp drop.

New Jersey is expanding its efforts to develop new power plants in the state by broadening the scope of ratepayers’ subsidies to help realize that goal.

In an amendment approved by the Assembly yesterday, the state would increase from 1,000 to 2,000 megawatts the new generating capacity that could be eligible for a guaranteed stream of revenue over 10 years from ratepayers.

The bill (A-3442), bitterly opposed by power suppliers who sell electricity to customers in New Jersey, is expected to win final legislative approval, possibly as early as Monday. Power suppliers stand to see a drop in lucrative capacity payments, the portion of a customer's electric bill that ensures there will enough power to keep the lights on, if the bill becomes law.

The issue has become huge and closely watched among major players in the energy industry, Wall Street analysts and independent operators of the regional power grids. That includes the nation’s biggest, PJM Interconnection, which runs the power grid from the Eastern seaboard to Illinois.

PJM Tariff

The current situation stems, in part, from a new tariff imposed by PJM, dubbed the Reliability Pricing Model (RPM). It is intended to incent suppliers to build new generating capacity and not retire older plants, which must be maintained for reliability.

The tariff, however, is much criticized by state regulatory officials, who say it has failed miserably to achieve its goals. In response, they have moved to try and attract new generation on their own.

"If this passes, it does indicate that a reappraisal of restructuring is occurring," said Paul Patterson, an energy analyst with Glenrock Associates in New York City. "Clearly, the state does not want to rely on the marketplace as a means of meeting its electricity needs."

Adding Capacity

The legislation aims to lower electric bills by adding generating capacity, which would cut the high prices customers in New Jersey pay for power. Because of congestion on the transmission grid, particularly in northern parts of the state, customers pay between $1 billion and $1.9 billion in RPM payments, or about 1.3 cents of the cost of a kilowatt of electricity on their bill.

By expanding the bill to 2,000 megawatts, advocates argued it would ensure more power plants are built, including where they are most needed. The original bill had been drafted so narrowly it applied to only one proposed power plant in West Deptford, which led critics to deride it as a sweetheart deal for the developer, LS Power LLC.

Under the bill, ratepayers would pay all or a portion of the capacity payments for the developer who builds new plants, costs that critics say could lock customers into more than $1 billion in payments over the course of 10 years.

An Energy Tax

"This is essentially an energy tax that will cost New Jersey residential and business customers more than a billion dollars," said Anne Hoskins, senior vice president of public affairs and sustainability at Public Service Enterprise Group (PSEG). The company had stayed neutral on the bill when it was limited to 1,000 megawatts of capacity, but came out strongly against the bill yesterday after it was amended.

Other power suppliers echo those concerns. They say the bill may artificially deflate power prices in the short term, but will deter new investments in plants and lead to many older plant retirements, which will jack up prices in the long run.

"If the Governor signs this bill, he is going to lock people into a rate increase, not a rate decrease," said John Flumerfelt, director of government and regulatory affairs for Calpine Corp., another power supplier.

Assemblyman Upendra Chivukula (D-Middlesex) said the bill was expanded because the governor wanted to broaden possible job growth beyond just West Deptford to other areas of the state. "The question is whether changing it to 2,000 megawatts will accomplish that objective," Chivukula said.

Opponents said the argument about job creation is a red herring, saying that it will create hundreds of temporary construction jobs, but typically only 20 to 30 people will be needed to run the plants once they are operational.

In any event, both sides expect PJM to ask the Federal Energy Regulatory Commission (FERC) to rule that the bill represents a violation of rules it has adopted to ensure capacity price payments are not artificially depressed by subsidized power supplies.

If FERC agrees, Chivukula said the bill will wind up being just an academic exercise.

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