A Decade into Deregulation, Where are NJ’s New Power Plants?

Tom Johnson | July 11, 2011 | Energy & Environment
Debated at the NJ Spotlight forum: Do subsidies motivate new construction or saddle ratepayers with bigger bills?

Are New Jersey’s high energy prices the result of its history of subsidies given to power plants?

That question was hotly debated this past Friday at a forum hosted by NJ Spotlight, which examined why few new power plants are being built here in the wake of the deregulation of the energy industry than a decade ago.

Board of Public Utilities President (BPU) Lee Solomon and Division of Rate Counsel Director Stefanie Brand defended a pilot program to subsidize three new power plants in New Jersey, arguing that industry-dominated institutions like the Federal Energy Regulatory Commission (FERC) have blocked efforts to lower energy bills for consumers, which are among the highest in the nation.

But Glen Thomas, president of the PJM Providers Group, a nonprofit trade group representing power suppliers, and Paul Fremont, managing director of Jefferies & Co., an investment firm, repudiated those efforts, saying the current market is working to provide enough generating capacity and reliability for the regional power grid.

That argument was rejected by Solomon, who said the administration and lawmakers could not sit and wait for the current system to right itself. “When you are a governor or a legislator and people are out of work, you can’t say to them ‘hopefully the market will work itself out,'” said Solomon at the Friday forum at the Masonic Temple in Trenton.

Blocking the Plan

Much of the discussion revolved around the state’s efforts to build nearly 2,000 megawatts of new gas-fired power plant capacity, a strategy that most analysts say has been thwarted by actions taken by the PJM Interconnection, the independent operator of the regional power grid, and the FERC. Solomon said new rules adopted by the federal agency will stymie New Jersey’s efforts to build the capacity.

The most contentious debate occurred after Fremont compared the ratepayer subsidies obligated by the BPU plan to those handed out in the 1980’s to independent power producers. Those contracts required utilities to pay higher than market prices for power, a cost that ran into billions of dollars, which they passed on to their customers. Though the contracts were signed more than two decades ago, they are still burdening customers with more than a billion dollars in payments above prices on the open market. Critics of the BPU pilot argue that awarding subsidies to power plant developers could result in the same problem.

“Why the state of New Jersey would seek to replicate its worst policy blunder of the past 50 years is a real mystery,” said Fremont, referring to what have been dubbed non-utility generation (NUG) projects. “But we have seen this movie before and it ends badly for customers.”

Brand argued there is no connection between the so-called NUG contracts and the pilot program proposed in New Jersey. “It is not someone picking a number out of the air. Here there was a competitive process,” she said.

With the state’s new subsidy to the pilot projects, Fremont questioned how New Jersey would get any new power plants built over the next 30 years, without developers receiving the same subsidies.

But Brand responded by asking “what power plants in New Jersey were not built without subsidies,” primarily referring to the rate-based return on equity electric utilities earned before the state broke up its electric monopolies. Under that system, utilities earned 10 percent or more on every dollar they invested in new generation.

The Congested Grid

Both Solomon and Brand repeatedly criticized the reliability pricing model (RPM) enacted by PJM
as a way of encouraging construction of new power plants to help drive down prices. Solomon noted it has cost consumers here more than $1 billion a year, and yet has failed to incent developers to build power plants where they are most needed, particularly in northern New Jersey, where the grid is most congested, a situation that drives up energy prices.

Brand said part of the problem with the RPM system is that it was never designed to be the “be all and end all” for solving the grid’s capacity need. “What FERC has done is make RPM the only game in town,’’ Brand said, eliminating other considerations, such as a state’s preference for developing a diversified fuel mix that does not rely on dirty power. Part of the problem with the RPM is it only sends an one-year price signal to power plant developers, which is not enough for them to line up financing for their projects, Brand said.

Thomas, however, rejected assertions that the RPM has become a big cash cow for power suppliers.
“The notion that RPM is a huge ATM machine for generators is false,” he said.

Fremont argued the reason no new generation is being built in the state is probably related to an oversupply in capacity margin in the region, as evidenced by reserve margins (the amount of capacity available above what is needed) ranging from 14 percent to 18 percent.

Brand questioned that argument. “If we are in an oversupply situation, why are we told we may have rolling blackouts and Reliability Must Run contracts [RMR],” she asked, referring to warnings by PJM that some parts of northern New Jersey face increased risk of reliability problems in 2012 and may need to pay older, inefficient plants to stay in service to maintain service.