Senate Bill Could Leave Power Customers on the Hook for More Than $1 Billion

Pending legislation hopes to spur new power plant construction, financed by revenue stream from consumers and businesses

It wasn’t supposed to work like this.

When the state broke up the electric monopolies a decade ago, advocates said more power suppliers would enter the marketplace, driving down high energy bills for residents and businesses alike. It didn’t happen, and few new generators have built significant power plants.

So, in a legislative bid to spur new power plant construction, a bill is moving rapidly through the legislature that would guarantee certain developers a revenue stream, making it more likely new generation facilities would be built. That prospect could finally drive down electric prices, according to proponents.

Critics argue the bill represents a sweetheart deal for one or two developers, who will get a subsidy from ratepayers to build plants. That could skew the unregulated wholesale power market, saddling customers with the costs of uneconomic generation for 15 years and costing more than $1 billion.

Byzantine Restructuring

Who to believe? It is difficult to sort through the byzantine world of energy restructuring, a system, in the view of Division of Rate Counsel Stefanie Brand, in which the people most likely to build the power plants benefit the most from the high prices customers pay. The reason: The regional power grid in northern New Jersey, in particular, is so congested it spikes prices for the electricity that suppliers sell. So they don’t build new power plants.

“The system is really off the rails,’’ said Brand, who supports the bill but would like to see changes in it. “We act like it’s a real market, but it’s not. It is not a system that works. It desperately needs fixing.”

By many accounts, the fix ought to focus on a relatively new pricing system adopted by the operators of the regional power grid that is designed to incent new power construction. It has increased electric prices where the grid is congested, a tactic that is costing New Jersey consumers an additional $1 billion or more each year on their energy bills. Critics say it has encouraged few new power plants to be built, except for so-called peaking units. These come on line only a few times a year during summer heat waves, and tend to drive up prices even higher.

The quick fix is a bill (S-2381) approved by the Senate Environment and Energy Committee a week ago and up for a vote in the full Senate today. It has been derided by foes because it is so narrowly written it will likely primarily benefit LS Power LLC, which wants to build a 650-megawatt natural gas plant in West Deptford, a location in the district represented by Senate President Stephen Sweeney (D-Gloucester).

Guaranteed Revenue Stream

The bill guarantees a stream of revenue from all ratepayers in New Jersey to cover capacity payments, a portion of the cost of producing electricity. Capacity payments ensure there will be enough power to keep the electricity flowing if demand quickly rises. Power suppliers also are paid for the electricity their plants generate. Under the bill, ratepayers would be on the hook for capacity payments amounting to $232.75 per megawatt day for 15 years.

To critics, that would amount to a massive subsidy from ratepayers. Over the course of 15 years, it might, depending on what happens with capacity prices in the marketplace, cost customers $1.3 billion, according to opponents.

Brand argued otherwise. “We might pay nothing, and, if it succeeds, we will save far more than what we spend,’’ she argued.

Here’s how it would work, according to that reasoning. If capacity prices fall below $232.75 per megawatt day, ratepayers would have to pay the difference. But Brand argues it would be far less than what they are paying now for congestion on the system.

Under the bill, if prices rise above $232.75, the developer gets to keep the difference, unless it soars above $290 per megawatt day, which, at that point, it would have to be shared with ratepayers.

The compromise seemed to have deflected concerns of some business interests.

Building New Plants

“The monopolies will not upgrade their plants or build new ones,” said Hal Bozarth, executive director of the New Jersey Chemical Industry Council. “We need new generation. If this is what it takes to convince banks to finance a plant, then great, I’ll buy it.’’

Those views don’t hold much sway with critics, many of them the power suppliers currently benefiting from the high capacity prices now being paid by New Jersey consumers, as Brand noted.

They noted the guaranteed floor price of $232.75 is substantially higher than projections of capacity prices made by the PJM Interconnection, the operator of the regional power grid stretching from the eastern seaboard to Illinois.

For example, PJM posted on its website on November 1 its project capacity price scenario analysis, according to John Shelk, president and chief executive officer of the Electric Power Supply Association. Under this analysis, future market capacity prices could be as low as $100 per megawatt day, less than half of what the bill obligates consumers to pay, Shelk said in a letter to the Senate committee.

Others said the bill might end up disrupting the unregulated markets, which are supposed to drive prices down.

“Anytime you have new supply coming about by way of non-market-based contract it has the potential of disrupting the demand-supply balance and creating uncertainty regarding future market prices,” said Paul Patterson, an energy analyst with Glenrock Associates. “What we have been seeing for sometime is a considerable level of apprehension in different parts of the country of relying on market-inspired pricing regimes as a means to ensure adequate electricity supplies.”

The market already has taken note of the bill. Citigroup lowered the rating of RRI Energy, a retail energy supplier selling power in the PJM region, “to reflect the negative impact pending legislation in New Jersey could have on forward capacity revenues,” wrote Brian Chin in a research note, according to Zacks Investment Research.

Brand, who noted in a letter to the Senate panel the state Board of Public Utilities (BPU) is also exploring ways to spur new generation, argued the bill is just a start to those efforts. “It’s not the last thing we’re going to hear of trying to build new generation,” she said.