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Federal Agency Pulls Plug on New Power Plants for NJ

Federal Energy Regulatory Commission scuttles plan to lower consumer electric bills by building three new plants.

New Jersey’s bid to develop new power plants as a way of lowering consumer’s electric bills suffered a severe setback yesterday, when a federal agency sided with wholesale power suppliers and the operator of the regional power grid on a complex regulation.

In deciding to approve changes in the arcane rules dealing with how power plants are put into service, the Federal Energy Regulatory Commission (FERC) appears to have established very high hurdles that may well block the state’s efforts to spur the building of three new power plants.

The decision, although not unexpected, marks the latest twist in a contentious dispute between New Jersey and other states over how well wholesale energy markets are working. Since the state deregulated the sector in 1999, electricity prices have steadily climbed upward after a cap on rates expired, leaving consumers saddled with some of the highest bills in the country.

Price Spikes

With the breaking up of the old electric monopolies, deregulation advocates argued it would lead to lower prices for consumers because new and more efficient power plants would be built, creating a more competitive market that would depress electricity costs. That has not happened, leading to more congestion on the power grid, a situation that spikes prices. In the last year alone, congestion prices on the PJM Interconnection, the nation’s largest power grid, doubled to $1.43 billion.

New Jersey officials expressed disappointment with yesterday’s decision by FERC.

"It shows what we’ve been saying all along. The system is really broken," said Division of Rate Counsel Director Stefanie Brand. She argued PJM, the federal regulatory agency and wholesale power suppliers have no interest in changing the status quo, a system that greatly benefits power suppliers.

Asked whether the FERC decision will wind up killing efforts to build new generating capacity in New Jersey, Brand answered "I don’t know. That remains to be seen."

Others were emphatic.

"It’s a complete rout for the state of New Jersey," said Paul Fremont, an energy analyst for Jefferies & Co., who had closely followed the tortuous efforts by the legislature and Christie administration to develop lucrative financial incentives to spur new generating capacity.

"Clearly, it is a victory for the merchant generators," agreed Paul Patterson, an energy analyst with Glenrock Associates.

Changing the Rules

In adopting the rule changes proposed by PJM, the federal agency probably made it "totally unattractive" to proceed with the efforts to build new capacity in New Jersey by offering a subsidy to power plant developers, Fremont said.

New Jersey officials had sought to achieve that goal by approving a controversial bill that would have guaranteed a stream of payments from electric customers to power plant developers for up to 15 years to help them secure financing to build the plants. By adding 2,000 new megawatts of generating capacity in New Jersey, it would drive down energy prices in the state, advocates argued.

Even opponents of the bill agreed. If 2,000 mw of capacity was added, it would depress capacity prices by $2 billion, according to Joseph Bowring, president of the independent Market Monitoring Unit (MMU). Those capacity payments go to power suppliers to cover the cost of ensuring enough plants are operating to maintain reliability of the regional grid.

Under the New Jersey pilot program, ratepayers would have covered capacity payments to the three developers with plants in Newark, Woodbridge and Old Bridge, a move that would make it easier for the plants to attract Wall Street financing, according to proponents.

That strategy also would have allowed the developers to bid zero in annual capacity auctions held each year by PJM to determine which plants would receive payments to be ready to come on line if needed. That option, however, appears to have been ruled out by FERC, which said it would not allow state-assisted projects to artificially depress energy prices.

"The commission has previously found, and we reiterate here, that uneconomic entry can provide unjust and unreasonable wholesale rates by artificially depressing capacity prices, and therefore the deterrence of uneconomic entry falls within our jurisdiction," the decision noted.

Opponents of the New Jersey effort said the agency’s ruling may make the economics of the project unworkable.

"FERC is sending a pretty clear message they’re going to defend the wholesale competitive markets," said Glen Thomas, president of the PJM Providers Group, a coalition of power suppliers within the PJM region. "FERC is not saying to New Jersey: 'No, you can’t go down this road, but if you do, you have to play by our rules,'" he said.

NRG Energy, one of the companies that signed contracts to develop one of the three power plants, was cautious in its reaction. Dave Gaier, a spokesman for the Princeton company, said they are continuing to review the impact of the order; they were pleased the agency acted quickly on the matter. "We’re continuing to move forward with the development of our Old Bridge project that received an award under New Jersey’s program and the project is on schedule to reach commercial operations by June 2015," he said.

PJM also was pleased with the order. "It helps ensure the capacity market has integrity and provides better rules from a power market perspective," said Paula DuPont Kidd, a spokeswoman for the organization. What happens next? By most accounts, it largely rests on the response of the New Jersey Board of Public Utilities (BPU), which oversaw the pilot program. BPU President Lee Solomon indicated strongly he planned to pursue further proceedings to try and develop new power generation in the state, no matter what happened with the pilot program.

In addition, the BPU could file a petition with the Market Monitoring Unit agency seeking an exemption from the rules, according to Kidd.

In a statement, BPU President Lee Solomon expressed disappointment, saying the decision fails to address the need to deliver new capacity, which is desperately needed to reduce the state’s energy prices and to replace aging, dirty and inefficient generation facilities.

Solomon argued that PJM’s pricing model causes New Jersey consumers to pay substantially higher prices for electricity than most other states in the PJM, adding $1 billion a year to their costs. He said the state will pursue other options to reduce those costs.

No matter what course the state takes, it is likely to heat up the fight over a controversial tariff, dubbed the Reliability Pricing Model, which adds to consumers’ bills as a way of incenting new power plants to be built in the PJM. Both New Jersey and Maryland have lodged bitter complaints about the tariff, and it is likely only to increase with the decision by the federal agency, according to some industry observers.

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