Controversial Energy Bill Clears Senate

Legislation could drive up consumer electric bills by subsidizing the cost of building power plants

New Jersey took a step toward encouraging new power plant construction yesterday, with the Senate passing a controversial bill that guarantees developers receive ratepayer subsidies to help get a project built.

The bill (S-2381) was approved in a 25 – 10 vote with no debate. It is viewed as a pilot program aimed at driving down high energy costs by increasing generating capacity in a state where few new plants have come online since New Jersey deregulated the energy industry.

Adding new capacity, advocates say, could save consumers hundreds of millions of dollars per year by reducing capacity payments, a portion of the cost of electric bills. But critics questioned whether a new plant would be enough to drive down customers’ bills. Instead, they argued, it could leave ratepayers on the hook for up to $1 billion in payments over the next 15 years.

‘The Biggest Ripoff’

“To me, it’s the biggest ripoff of utility customers that the state could possibly come up with,” said Paul Fremont, an energy analyst at Jeffries & Co. Fremont argued the legislation will undermine efforts by the regional grid operator, PJM Interconnection, to incent new power plant development and will not bring prices down for customers.

Others have called the measure a sweetheart deal for LS Power LLC, which would benefit by meeting the very narrowly drawn conditions in the bill. The company wants to build a 650-megawatt natural gas power plant in West Deptford, a community represented by Senate President Stephen Sweeney (D-Gloucester), who is strongly backing the bill.

With Sweeney’s support the bill easily cleared the Senate, although Sen. Bob Smith (D-Middlesex), its sponsor, noted there was debate in the Democrats’ closed door caucus. “What ultimately won the day was Division of Rate Counsel Stefanie Brand saying it would save consumers up to $300 million,” he said.

Brand cited an analyst’s report issued last week after the bill cleared a Senate committee, which downgraded RRI Inc., a power supplier, saying the legislation might drive down capacity prices down by $50 a megawatt day. If so, her office calculates, customers could end up saving $275 million in the plant’s third year of operation. (The savings do not emerge until the third year because of the nature and timing of auctions involving suppliers providing capacity).

Congestion Pricing

The motivation behind the bill is the costs New Jersey consumers are incurring due to a new pricing system adopted by PJM to deal with congestion on the power grid and to spur new power plant construction. By most accounts, the system, bitterly opposed by state regulators and Brand, is costing New Jersey ratepayers at least $1 billion a year.

Brand and other advocates of the bill contend whatever costs are borne will be more than offset by the savings derived from driving down capacity payments overall.

“We can’t afford to wait to build additional capacity,” said Hal Bozarth, executive director of the Chemistry Industry Council of New Jersey. “In the short run, if there is a subsidy to get new generation built, my members feel it will be offset by a drop in prices.”

Tom Hoatson, director of regulatory affairs for LS Power, contended the bill will force his company to bid in capacity prices so low, it will have the effect of driving down the rest of capacity prices in the market. That is because the company does not receive any capacity payments from ratepayers unless it clears, or wins, a portion of the capacity contracts awarded in the auction, he said.

“There’s no subsidies. It’s total savings to the ratepayer no matter what happens with the capacity prices,” Hoatson said. That is because customers would pay less if the capacity price in the auction is less than the $232.75 floor set by the bill, and would pay nothing if it rises about the floor price, he said.

Foes, however, questioned what savings, if any, will result from subsidizing new power plant construction.

“For consumers, it’s a boondoggle,” said Dena Mottola Jabroska, executive director of Environment New Jersey.” The same investment in energy efficiency will save three times as much and give us the same rate relief this bill might deliver.”

Jeff Tittel, executive director of the New Jersey chapter of the Sierra Club, agreed. “We deregulated the energy to let the markets work. Now, we have consumers subsidizing fossil fuels,” he said.