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Industry Group Challenges New Law Guaranteeing Power Plant Subsidies

Coalition of energy suppliers mounts federal challenge of newly signed NJ law that ensures customer subsidies for power plant development.

The ink is hardly dry on a bill designed to promote the building of power plants in New Jersey, but an industry group is already challenging it before a federal agency.

Less than a week after Gov. Chris Christie signed the bill without any fanfare, the PJM Power Providers Group, a coalition of energy suppliers, asked the Federal Energy Regulatory Commission (FERC) to adopt new rules "that will protect consumers from the negative consequences of funding unneeded power plants."

A Bitter Battle

The action, while not unexpected, is the latest step in an ongoing and increasingly bitter battle between big power suppliers and New Jersey officials over how to promote the development of new power plants in the state, which has some of the highest electric rates in the country.

In an effort to reduce those costs, the Christie administration and Democratic legislature joined together to pass and sign a bill (S-2381) that would guarantee ratepayer subsidies to build up to 2,000 megawatts of new generating capacity.

If that capacity were built, proponents argued, ratepayers’ subsidies, which could amount to more than $2 billion over 15 years, would be more than offset by a reduction in other parts of consumer and business energy bills. Those costs, called capacity payments, ensure there will be enough power to keep lights on at all times, but the pricetag for that service runs between $1 billion and $1.9 billion a year for New Jersey customers.

Those capacity payments are very lucrative to the same group of energy suppliers that have challenged the New Jersey law. According to proponents of the bill, those suppliers are afraid that lower capacity payments will cripple their bottom line.

Critics of the bill, however, argue that it will undermine wholesale markets by subsidizing power plants, a step they contend would discourage new plants from being developed and hasten the retirement of old plants needed to maintain the reliability of the regional power grid.

"The bill signed by Gov. Christie on Friday seeks to subsidize a few uneconomic power plants through a new energy charge on all New Jersey families and businesses," said Glen Thomas, president of the PJM Power Providers Group.

"Testimony before the legislature showed that New Jersey has sufficient electricity to meet customer demand," said Thomas, who argued that new forecasts by the PJM Interconnection, the independent operator of the regional power grid, suggest that demand for electricity has declined because of the economy. That forecast, he noted, implies that New Jersey would not meet previously projected forecast loads for 2014 until 2020.

An Expected Development

Paul Fremont, an energy analyst at Jefferies & Company, was not surprised by the challenge. "It’s exactly what we said we will happen," he said, referring to a research note issued last week. Once the complaint is filed, Fremont said he expects both the PJM Interconnection and the PJM Market Monitor will agree with the conclusions before FERC.

In its complaint, the industry group asked FERC to order that all bids into the PJM capacity auctions be reviewed to determine whether they are consistent with the cost of new generating capacity in the market. Despite the high capacity payments, power suppliers have argued they cannot build new generating capacity in the region because the costs of building new power plants will not attract financing from Wall Street.

Calls to LLS Power Development, LLC, a power plant developer that hoped to build a facility in West Deptford and Michael Drewniak, the governor’s press secretary, were not returned. The LLS Power project has been criticized by opponents as a sweetheart deal for the developer because it is located in Senate President Stephen Sweeney’s (D-Gloucsester) home district.

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