Is the Federal Government Driving Up Power Prices for Consumers?

Tom Johnson | October 3, 2011 | Energy & Environment
In filing to federal agency, NJ and other states contend that special incentives for transmission operators are costing customers hundred of millions or even billions of dollars

The federal government’s policy of handing out special incentives to owners of transmission lines to build new projects to enhance the reliability of the regional power grid is increasing rates to consumers by “hundreds of millions, if not billions of dollars,” according to a filing made by New Jersey regulatory officials, other states, and consumer advocates.

In comments forwarded to the Federal Energy Regulatory Commission (FERC), New Jersey questioned the rationale behind giving incentives to transmission lines but not to power plants, which it argues could be a “cheaper, more environmentally-friendly and efficient solution to existing supply needs.”

The filing continues an ongoing dispute between New Jersey and federal regulators over the former’s bid to lower electric bills by luring new generation here, a strategy state officials believe will drive down energy costs by reducing congestion and easing capacity problems on the grid.

With businesses and residents paying some of the highest electric bills in the country, the Christie administration has tried to attract new power plants by giving three power projects hefty ratepayer subsidies, but the effort has been blocked by the federal agency and incumbent power suppliers.

As a result, New Jersey and other state utility commissions have grown more active in seeking to shape policies at the federal agency, which has jurisdiction over transmission and energy-related issues. Among the policies generating a great deal of criticism is FERC’s decision to grant special incentive rates to scores of transmission projects.

Since the policy was adopted in 2006, the commission has received over 75 applications for transmission incentives with a total cost of $50 billion, according to New Jersey officials. The average return on equity granted for those projects amounted to approximately $650 million each year.

The special incentives are designed to reduce the risk of projects that face special difficulties in getting built, a growing problem along the densely populated eastern seaboard. The incentives include allowing developers to begin collecting rates, if approved by the regional grid operator, while construction is in progress. They also enable a developer to recover its costs if a project is canceled through no fault of its own. Typically, the projects are awarded a higher return on equity than what a state utility commission might grant for smaller distribution projects.

Joint Filing

New Jersey, and an array of other utility commissions, consumer advocates, and public power groups, contended in a joint filing that the granting of the rate incentives, “rather than being reserved for those cases in which transmission projects are truly needed to move forward, are being granted routinely.”

The issue is affecting New Jersey consumers. This past summer, FERC approved special incentive rates for three of five major transmission projects by Public Service Electric & Gas (PSE&G), the state’s largest electric utility with nearly 2 million customers. In this =case, the return on equity is 11.68 percent on nearly $1 billion in proposed investments.

In its filing before the federal agency, the utility argued its transmission upgrades would reduce congestion — which drives up prices — in its territory. In New Jersey, customers are paying $1 billion more per year than neighboring states for power because of congestion in the northern part of the state.

But the state insists too much focus is placed on relying on new transmission projects to relieve congestion. In its own filing, the state contends there other ways besides simply building new transmission lines to address these potential reliability issues and the related congestion costs.
“FERC, however, continues to rely heavily on transmission solutions, often laden with significant and costly rate incentives,” the state maintains. “Transmission incentives, especially when so freely provided, give economic advantage to transmission solutions over possible non-transmission solutions to reliability needs.”

The state utility board argued stressing incentives to transmission infrastructure, while rejecting incentives to generation infrastructure, “”is arbitrary, capricious and unduly discriminatory, unjust and unreasonable, and requires the immediate remedial attention of the commission.”