The state of New Jersey just lost a huge bet with your money.
Policymakers gambled that they could outfox sophisticated regional electricity markets. Had they been correct, they argued, developers of power plants would actually be paying consumers money. However, we learned in late May, that just the opposite will happen. Unfortunately, the homes and businesses of New Jersey will pay two power plant developers hundreds of millions of dollars above the market price for their product because of this gamble gone wrong.
How did this happen? How could the homes and business of New Jersey be on the hook to pay off such a bet? How could one company benefit from a scheme that guarantees them $1.3 billion dollars from New Jersey consumers over the next 15 years to build a power plant that is not needed and does not need to run in order to get paid?
The answer is a simple five letter bet called LCAPP.
LCAPP (which stands for Long-term Capacity Agreement Pilot Program) requires New Jersey ratepayers to subsidize the construction of new power plants that are not needed and are more expensive than current market prices. LCAPP was sold on the promise that it would build power plants at prices lower than current market rates. Now that we know that the promise went wrong, LCAPP is smacks of corporate welfare that makes two companies rich with money coming straight from your pocket.
The “house,” in this case a Maryland-based generation company named Competitive Power Ventures (CPV), is laughing all the way to the bank as they receive $1.3 billion dollars to build a power plant that is not needed and that is priced 75 above the market price of capacity in the first year of the contract. CPV will enjoy outright ownership of the Woodbridge-based plant and will have no obligation to sell the electricity from the plant to New Jersey ratepayers (assuming that the plant even runs, which it is not required to do). Power from the plant could be sold to buyers in New York, Pennsylvania, and several other states ranging from Illinois to North Carolina.
The money to pay for this unnecessary and overpriced power plant will be coming from your wallet. Everyone in New Jersey will pay, regardless of whether you use electricity from this plant or not, In the first year, the “extra payment” will be $30 million. In subsequent years, the payment could escalate as guaranteed payments to CPV escalate. Over the next 15 years, a whopping $1.3 billion will flow into CPV’s pockets -- all guaranteed by New Jersey electricity consumers.
But CPV is not the only recipient of LCAPP largesse. Hess also received a state-subsidized contract that will guarantee it more than $700 million over the next 15 years. Combined, the total payout to these two companies from New Jersey’s homes and businesses will be well over $2.1 billion. If such a burden was placed on consumers in the form of tax increase, there would be protests on every corner in Trenton.
Making matters worse, New Jersey's efforts to subsidize chosen power plant developers sends a chilling message to other developers who want to build their own power plants in the state without a subsidy. No rational developer will want to compete in a market where the competition has their revenue guaranteed.
If New Jersey fails to change course, the state will be left with a market that is devoid of competition and filled with consumers who cannot escape from these bad deals. Out-of-market subsidies to chosen generators will become standard operating procedure. Consumers will pay more and the market will be destroyed.
Losing a bet hurts -- especially one this colossal. Hundreds of millions of dollars will be unnecessarily flowing from consumers straight to the pockets of two generators. Let’s hope that New Jersey learns a lesson from this losing wager. Let’s hope it understands that it is time to walk away from the table and never look back.