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NJ, Other States, in Pitched Battle With Grid Operator Over Capacity Payments

Lucrative capacity payments key to financing new power plants, states argue before federal agency.

New Jersey and other states are caught up in a multiyear dispute with the agencies overseeing the electric power grid, battling to roll back new rules they say will prevent them from providing cheaper, more reliable power to residents and businesses.

This is just the latest twist in an argument about spurring the development of new power plants in various jurisdictions, a step the states say could lower energy costs for customers saddled with some of the highest electric bills in the nation.

The fight is being played out before the Federal Energy Regulatory Commission (FERC), the agency that reviews actions by the regional transmission companies that manage the high-voltage power lines crisscrossing the nation. These organizations largely decide where and which new power plants are built.

The issue is important because the decisions made by relatively obscure agencies and organizations -- without much public scrutiny -- can have a big impact on how much customers pay for electricity and why their bills are rising.

In this case, the struggle revolves around a decision by the PJM Interconnection -- the operator of the nation’s largest power grid, -- to adopt complicated new rules governing what plants are eligible for so-called capacity payments, which essentially ensure that the lights stay on. In recent years, it has become an increasingly lucrative source of revenue for power suppliers to guarantee that there is enough capacity to keep things humming along, even in the hottest days of summer.

Without being eligible for those payments, it is much less likely that a new power plant can obtain the financing to be built. The new rules, argue New Jersey and others, discriminate against states that have deregulated their energy sectors, making it virtually impossible to build new power plants. In 1999, New Jersey approved a bill breaking up its electric and gas monopolies.

The dispute is particularly contentious because New Jersey, in an effort to promote new power plant development, adopted a controversial law to reward subsidies to developers to build new generation. Last May, PJM deemed two of those plants eligible for capacity payments, a decision that riled incumbent power generators.

Those generators support the new rule and are contesting the New Jersey law in federal court, worrying that the new plants will erode their capacity payments, which in the state alone amount to more than $1 billion annually.

How this will all play out remains to be seen, and whether ratepayers will benefit is still unanswered. The power generators claim that the subsidies could cost consumers up to $3 billion over 15 years, although proponents say lower overall energy prices will benefit consumers in the long run.

In an interesting twist, the PJM’s independent market monitor, an organization that oversees the competitiveness of the power grid -- which stretches from the Eastern Seaboard to Illinois -- filed a statement with the federal agency that seems to side with New Jersey, West Virginia, Delaware and the District of Columbia in objecting to the new rule.

“This constitutes a barrier and is not just and reasonable,’’ said Joseph Bowring, president of the independent market monitoring unit for PJM, after a long discourse on technical jargon relating to the regulation.

Paul Patterson, an energy analyst with Glenrock Associates in New York, found the comments significant. “I think it’s noteworthy the market monitor appears to have such a fundamental issue’’ with the rule, Patterson said, considering the role it plays in the capacity markets. “The monitor is essentially the policeman of the PJM markets.’’

The consumer advocates argued that the rule is counterproductive. “Preventing entry by resources that may cost a bit more but offer superior value is economically inefficient and diminishes consumer welfare,’’ the states argued in their brief.

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