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The Explainer: Factors Driving Electricity Prices in New Jersey

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If you ask businesses, one of the biggest drags on the state’s economy is higher energy costs. If you question consumer advocates, it is one of the biggest complaints they hear from utility ratepayers. If you listen to the Christie administration, lowering electricity bills is one of its top priorities.

Why then, is it such a seemingly intractable problem?

Not your father’s utility anymore

In the past, so-called vertically integrated utilities delivered power to homes and businesses. They owned the power plants, the transmission wires, and the distribution lines that delivered electricity to customers. The New Jersey Board of Public Utilities determined the prices paid by consumers, including the cost of generating the electricity and the expense of moving it along the power grid.

That all changed in 1999 when the state broke up the gas and electric monopolies. Now, what was traditionally the biggest part of your electric bill -- the cost of generating the power -- is unregulated and set by the marketplace, sometimes to the benefit of consumers, such as when natural gas prices drop, and oftentimes not to their advantage.

Making the grid more reliable -- and maybe more expensive

Both federal and state governments are pushing for huge improvements to the nation’s transmission system, which delivers electricity from power plants to the utilities' smaller distribution lines. It is a move designed to enhance the reliability of the power grid, and possibly cut costs to consumers by reducing congestion, which tends to spike prices at times of peak demand. (More about that in a minute.)

Those investments, however, are gradually boosting costs to consumers. Take Public Service Electric & Gas, for instance. It plans to spend $3.4 billion to upgrade its transmission system through 2015. The investments will increase the utility’s rate base for transmission, meaning how much it will collect from its 2 million customers, from 28 percent to 40 percent.

And you think the Garden State Parkway gets congested

There is traffic congestion on one of the state’s most heavily travelled highways, and there is traffic congestion on the nation’s largest power grid, PJM Interconnection, which serves more than 60 million people, from the Eastern Seaboard to Illinois. Nowhere is the congestion worse than New Jersey, where price spikes during times of peak demand (hot summer days in the middle of heat wave) cost consumers more than $1 billion a year. The aforementioned transmission upgrades may reduce those costs.

Keeping the lights on, but at what cost?

Power suppliers get paid not only for the electricity they deliver to homes and businesses, but also for having reserve capacity to increase their load if energy demand rises. To address that issue, the PJM directs capacity payments to power plants, some of which run only a handful of times a year, when demand for electricity peaks. To critics, that is the wrong way of ensuring the reliability of the grid, since many of those plants are older, more inefficient, and generate more pollution. New power plants could provide cheaper electricity with less pollution, according to environmentalists and consumer advocates.

It is not so easy to join the club

When states like New Jersey deregulated their energy markets, the rationale behind the move was that it would encourage more efficient power plants to compete with older, incumbent generating units. To some extent, that has not happened, in part because of much-criticized interconnection rules put in place by PJM. Those rules impose big interconnection costs on new power plants, making it very expensive for them to join the grid -- a problem that has frustrated development of new generating facilities, according to some.

Cleaner energy, low-income subsidies come at a cost

bills

Both goals are widely supported by policymakers, legislators, and various interest groups. But they come at a cost. In 2012, a surcharge imposed on gas and electric ratepayers raised $790 million. In the past decade, it has cost utility customers $5 billion. The two biggest chunks of the money go to finance clean energy programs ($309 million in 2012) and to a low-income energy assistance program ($292 million in 2012) to ensure those families do not spend more than 6 percent of their household income on energy bills.

The good news, at least for now

Historically low natural gas prices have helped to lower bills for electric customers for the past four years. Aggressive goals to curb energy usage in New Jersey also could lead to reduced costs to consumers -- provided the state achieves those targets. Three new natural gas plants are being developed in the state to increase capacity and lower electricity prices, but two of them may still be awarded ratepayers subsidies.

What lies ahead

Most probably, even higher bills. The state’s electric utilities are under the gun to improve their reliability to prevent widespread outages, such as those that occurred during Hurricane Sandy. They also stand to recoup expenditures they incurred during the superstorm and other extreme weather. Neither will be cheap. PSE&G is seeking $3.9 billion to upgrade its energy grid. Jersey Central Power & Light is hoping to recover $640 million it spent restoring power after the storms.

How to cushion costs for ratepayers

In New Jersey, the state has tried to reduce costs to utility customers by by "blending" power costs over three years, a system that has lowered utility bills when energy bills are rising, but has failed to deliver savings when fuel costs are dropping. Larger commercial and industrial customers pay more when energy prices rise, but less when those costs drop. In the most recent year, those costs have nearly doubled, largely because of higher capacity prices.

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