No Rate Relief in Sight for NJ Power Customers

Federal court dismisses challenge to pricing system that costs electric consumers as much as $1.9 billion a year

It appears New Jersey and other states will get no relief from the courts over a much criticized pricing system that adds more than $1 billion a year to customers’ electric bills.

A decision handed down yesterday by the U.S. Court of Appeals in Washington, D.C., tossed out a challenge to the pricing system brought by the New Jersey Board of Public Utilities (BPU) and the Maryland Public Service Commission.

The case involved a challenge the Federal Energy Regulatory Commission’s approval of the so-called Reliability Pricing Model (RPM), a mechanism proposed by the PJM Interconnection, the operator of the regional power grid in 2005. RPM is intended to spur development of new power plants by increasing the cost of electricity in areas where transmission lines are highly congested. This is done by inflating capacity payments, which are designed to ensure power suppliers can meet peak power demand.

The High Price of Power

The system has proved particularly burdensome to New Jersey consumers and businesses, costing them between $1 billion and as much as $1.9 billion this year because the transmission lines in the northern part of the state are very congested, making it difficult to deliver power there. In their court challenge, the two regulatory agencies argued that power suppliers used the RPM to artificially inflate prices.

The court, finding in favor of the Federal Energy Regulatory Commission (FERC), concluded that the pricing system worked as intended, spurring investments that led to 33,000 megawatts of new generation capacity.

“Given the evidence we conclude that the Commission had a substantial basis on which to conclude that RPM was an appropriate tool for increasing reliability in electricity markets,” the court ruled.

PJM had not had an opportunity to review the court decision, but a spokesman for the organization, Ray Dotter, issued a statement that said “we note the court decided that FERC appropriately approved implementing the RPM capacity market which has ensured continued reliability at the lowest cost and has attracted 33,000 megawatts of new resources.”

Benefiting from Higher Prices

Critics of the pricing system, however, indicate that few new plants have been built in areas that are highly congested, such as New Jersey, with the exception of peaking plants. These tend to run infrequently and only at times of highest demand. Under the current system, the people who are in position to build new capacity are the ones who benefit most from the higher prices if no new capacity is built, state officials have argued.

The system is so frustrating to policymakers in New Jersey that the legislature recently passed and the governor signed a bill that guarantees customers will make payments to incent developers to build 2,000 new megawatts of capacity. While critics derided the bill as a sweetheart deal for a developer in the home district of Senate President Stephen Sweeney (D-Gloucester), proponents said it will push electricity prices down far more than what ratepayers will pay to the developers.

BPU officials said they had not yet read the court decision and declined comment.

Glen Thomas, president of the PJM Providers Group, an industry group that intervened in the case, said the decision was not a surprise. “FERC has very carefully debated the issues around RPM. As the court noted, there is ample evidence the capacity markets are working,” Thomas said.

Nevertheless, even with the court setback, state officials likely will continue to press PJM for changes in RPM, analysts predicted. “This is just another PJM battle,” said Paul Patterson, an energy analyst with Glenrock Associates in New York. “I don’t think it has that much bearing on what else is going on with RPM.”

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