Wall Street Firm Expects to See Power Plant Construction Bill Overturned

Investment company dismisses the impact of bitterly contested bill on PSEG and other energy suppliers

Apparently some on Wall Street do not believe New Jersey has hit on the right solution to rein in spiraling energy costs.

A report from Jefferies & Co., an investment firm, yesterday predicted a bill aimed at encouraging new power plant construction in the state is likely to be overturned by a federal regulatory agency, if not by the courts.

The bill (S-2381) is expected to be signed into law as early as this week by Gov. Chris Christie, after having won approval three weeks ago from the legislature in a bitter battle that pitted some of the biggest energy suppliers in the nation against an unlikely coalition of business interests and consumer advocates.

Overturned by Challenge

Paul Fremont, an energy analyst for Jefferies, said he expected the law to be overturned by the Federal Energy Regulatory Commission (FERC) in a procedural challenge brought by the same power suppliers that had lobbied so hard against the legislation.

Fremont is so confident the law will be blocked he reiterated a Buy recommendation for one of the power suppliers thought to be affected by the bill, Newark’s Public Service Enterprise Group (PSEG). In a phone interview, Fremont noted Public Service and other suppliers had been under pressure in the market in recent weeks because of the perception the law would hurt its bottom line.

“It’s irrelevant,” Fremont said, noting if FERC does not overturn the New Jersey law, it is likely to be challenged in state or federal courts.

Adding Capacity

The law is the state’s proposal for trying to lower energy bills for businesses and consumers. It seeks to encourage the building of 2,000 new megawatts of generating capacity by guaranteeing the developers a stream of revenue over 15 years to take care of capacity payments. Capacity payments cover the cost of having enough generating capacity to meet electricity needs in peak periods.

Proponents argue the subsidies given to power plant developers will be more than offset by the drop in capacity prices throughout the PJM Interconnection, the regional power grid. The opponents, who will see their profits fall by the drop in capacity prices, argue that over the long term prices will increase because no new plants will be built, unless owners win similar and more lucrative subsidies from the state.

The backdrop to the dispute involves a new mechanism put in place by PJM to encourage suppliers to build new plants. Called the Reliability Pricing Model (RPM), it has increased electricity prices sharply in some states where the power grid is congested, especially in New Jersey, Connecticut and Maryland. In New Jersey, state officials say consumers pay between $1 billion and $1.9 billion more because of the new pricing model.

In his note, Fremont predicted that even if the law gets overturned, pressure will build on PJM to address the concerns of New Jersey to fix the pricing system. “That part is real,” he said. “It’s not just harming one state; it’s affecting three.”

Even if the proposal is overturned, Christie administration officials have vowed to find ways to build new power plants no matter what happens to the bill. That focus is expected to be a big part of changes to the state’s Energy Master Plan (EMP), which is expected to be released by the end of the month, according to people familiar with the proposal.

Paul Patterson, an energy analyst for Glenrock Associates, said pressure for PJM to deal with the issue is mounting.

“There’s clearly an increased level of apprehension in different states on relying on market prices to incentivize new capacity,” Patterson. “Frankly, RPM has been controversial from Day 1.”

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