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Power Company Challenges Pilot Program Even While
Participating in It

PSEG signs up for lucrative subsidies but mounts legal challenge to program that awards them.

Public Service Enterprise Group (PSEG) is challenging in federal court a new state law that would hand out lucrative subsidies to power suppliers to build new generation plants in New Jersey. But that legal action isn’t preventing one of its subsidiaries from seeking to take advantage of the program.

PSEG Power is expected to seek to build 1,100 megawatts of new gas-fired capacity under the program at three of its existing power stations in Sewaren, Kearney and Hudson, according to Bill Levis, president and chief executive officer of the company.

"We will participate in the process," Levis said, referring to a fast-track program underway at the New Jersey Board of Public Utilities (BPU) that seeks to develop up to 2,000 megawatts of new gas-fired capacity in the state.

No Surprise

The entry of PSEG Power is not much of a surprise, given the profitable payments guaranteed to developers to spur construction of new capacity—even given its parent company’s opposition to the bill establishing the program and its federal court filing soon after Gov. Chris Christie signed the legislation (S-2381).

Paul Patterson, an energy analyst who covers the company, said its decision was to be expected. "It makes sense to keep their options open given the challenging and changing regulatory and political environment."

Others were less impressed. "It just shows no matter what anyone does when it comes to energy, PSEG always finds a way to benefit from it," said Jeff Tittel, executive director of the New Jersey Sierra Club.

The law was bitterly opposed by major power suppliers, who unsuccessfully argued that it would undermine wholesale markets by subsidizing new power plants, a step they contend would actually discourage new plants from being developed and hasten the retirement of old plants needed to maintain the reliability of the regional power grid.

Despite seeking approval to build three new plants, Levis agreed with the basic criticism of the bill. "Once you go down that path, you are going to have a hard time backing out of it and subsidizing every new plant that is proposed," he said.

Under the program, the state would guarantee payments to power plant developers to cover the cost of capacity payments, a subsidy that would allow plants to be built that otherwise would not be because the economics failed to make sense. Originally, the bill was designed to spur the building of the LS Power Plant in West Deptford, but lawmakers expanded the measure to include additional facilities.

At least a half-dozen other power suppliers were expected to submit applications to the state by yesterday afternoon, seeking to participate in the program, including some of the same companies that have joined PSEG in opposing the law. The names of those seeking to build power plants will not be made public until early March.

In Favor of Subsidies

Proponents of the law defend the subsidies, saying they would be more than offset by a reduction in capacity payments made by ratepayers. Capacity payments are designed to ensure there are enough power plants on standby to crank out electricity if power demands rise. In New Jersey, because of congestion on the power grid, capacity payments are expected to cost consumers between $1 billion and $1.9 billion this year.

Because those payments go to the same power suppliers that benefit from capacity payments, it gives them little incentive to build new power plants. Lowering those payments would would hurt their bottom line, according to advocates of the New Jersey pilot program. The subsidies from ratepayers are expected to run as high as $2 billion over the length of the contract, which could extend up to 15 years.

How lucrative are the capacity payments? Well, PSEG Power owns four units at its Sewaren facility, each of which ran in single digit days last year. Still, they earned a total of $27 million in capacity payments alone in 2010. That figure does not include the payment for the energy the plants produced, which is less than the capacity payments.

In any event, the New Jersey program must clear numerous obstacles before it ever comes to fruition. Besides the federal court suit, the program is being challenged by power suppliers before the Federal Energy Regulatory Commission (FERC). In addition, PJM Interconnection, the operator of the regional power grid, has made a filing with the commission changing its rules dealing with the capacity market. If approved, the state would have to go to the commission

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