Locking In Ratepayers, Locking Out Savings?

A trio of decades-old contracts force customers to pay more for power than they would on the open market

The timing was coincidental but not absent of irony.

At about the time a Senate committee on Thursday was approving a bill locking in ratepayers for payments over a 15-year period, the New Jersey Board of Public Utilities (BPU) was reluctantly approving three decades-old contracts locking Atlantic City Electric customers into agreements that will hike their bills by about $10 per month.

The contracts, mostly above what other customers pay for electricity in a deregulated market, underscore the perils of locking in customers for long-term contracts in an market subject to wide swings in prices.

“We’re in a bind,” said BPU President Lee Solomon, shortly after the board approved three contracts between the utility and non-utility generators (NUGs). “We’re paying the price for someone else’s very bad judgment.”

Projecting Costs Into the Future

The contracts, which represent about 20 percent of Atlantic City Electric’s generation that it purchases for its half-million customers, underscore how difficult it is to project energy costs into the future. It is why there is such strong opposition to a bill (S-2381/A-3442) that would guarantee ratepayers’ subsidies to build new power plant capacity in New Jersey.

“Ultimately, long-term contracts lock customers into prices so that they are unable to respond to favorable market conditions,” said Karen Alexander, president and chief executive officer of the New Jersey Utilities Association, speaking against the bill.

When Atlantic City Electric entered into the contracts, it was at a time when federal officials were encouraging electric utilities to enter into long-term agreements with power suppliers to purchase electricity from plants that produced electricity and steam simultaneously. It was believed this would produce savings for customers and reduce reliance on fossil fuels, particularly imports.

Unfortunately, few predicted the volatility of energy markets over the recent past. Natural gas prices, for example, soared after Hurricane Katrina, but have steadily dropped. In the past two years, the price has dropped again by one-half, according to Jeff Tittel, executive director of the New Jersey chapter of the Sierra Club.

The Big Drop

With the big drop in power prices, Atlantic City Electric, can sell power from the three contracts into the PJM Interconnection at about half the price it pays for the electricity, leaving customers to pick up the bill. “Unfortunately, it’s a pretty big hit for customers,” said a BPU staff member.

When the contracts came up before the BPU earlier this month, Solomon directed staff to investigate whether there were environmental or legal issues that could lead to breaching them. “They appear to be in compliance, from both a legal and environmental perspective,” Solomon said.

Responding to the high energy bills paid by consumers, lawmakers are hoping that locking in ratepayers to long-term contracts to pay a portion of their electricity charge will lower rates. The high rates are blamed on congestion on the power grid, and, according to some state officials, not enough capacity to ensure lights remain on.

The result: New Jersey ratepayers pay $1 billion more each year than neighbors in other states for capacity, which makes up about 20 percent of the supply portion of an electric bill. To drive down those prices, the bill would guarantee ratepayers cover all or a portion of those capacity prices.

Tom Hoatson, director of regulatory affairs for LS Power LLC, which hopes to build a 640-megawatt natural gas plant in West Deptford if the bill passes, said long-term contracts are nothing new in the energy Industry, existing even before states deregulated the energy markets.

The debate over the bill revolves, in part, over whether the current regulatory structure will eventually result in more power plants being built, a prospect everyone agrees will bring down prices.

Assemblyman Upendra Chivukula (D-Middlesex), a sponsor of the bill, argued the state needs to do something to drive down prices. “Under the current economic conditions, there is not enough economic justifications to build new generation,” he said.