Power Plant Subsidies Conjure Up Vision of Troubled Past

Tom Johnson | October 19, 2011 | Energy & Environment
Utility customers still paying off Carter-era subsidies meant to drive down the price of electricity

When New Jersey officials talk about subsidizing the development of power plants, some industry veterans grimace and worry that it will lead to a repeat of PURPA — the Public Utilities Regulatory Policies Act.

Passed during the Carter administration in the wake of the oil embargo, the program required electric utilities to enter into long-term contracts with independent power producers, which were expected to produce electricity more efficiently and, it was thought at the time, more cheaply.

Sadly for consumers, it did not work out that way. When the final so-called non-utility generating (NUG) contracts expire later this decade, the total cost to consumers in New Jersey is expected to tally about $5 billion. The contracts turned out to lock ratepayers into long-term deals that guaranteed they would pay above market prices for the power.

The NUG experience is often cited by opponents of the state’s efforts to lower some of the nation’s highest electricity costs by giving three developers ratepayer subsidies over 15 years. Based on their reading of public documents, utility executives have argued that subsidies could lead to higher customer rates, possibly costing them as much as $1.3 billion.

“When they signed those [NUG] contracts, I don’t think anyone could have projected energy prices over the next 15 years,” said Tony Robinson, administrator of the four NUG contracts still in force for the state’s largest electric utility, Public Service Electric & Gas (PSE&G). “I don’t think anyone can do it today either.”

Contracts that PSE&G entered into three decades ago are still costing consumers today, adding an extra $200 million to electricity bills for PSE&G customers in 2011, according to the company. The utility, like others, has renegotiated or terminated many of its NUG deals, according to Robinson.

By the time, the last one expires in 2016, the NUG program will have added more than $3 billion to PSE&G’s customers’ bills, the utility said.

It hasn’t been cheap for other utility customers, either. Earlier this year, the state Board of Public Utilities (BPU) gave approval to Atlantic City Electric to raise its half-million customers’ bills by roughly 5 percent to recover the costs of its remaining out-of-market NUG contracts.

At one time, Jersey Central Power & Light (JCP&L) had 13 separate NUG contracts, said Ron Morano, a spokesman for the utility, which serves about 1 million customers. It has six remaining contracts, but its efforts to renegotiate the deals led to a 5 percent drop in ratepayers’ bills last March, according to Morano.

By incenting new power plants to be built and adding 2,000 megawatts of generating capacity, state officials argue that whatever subsidies are paid by ratepayers, if any, will be more than offset by a drop in overall energy prices.

Whether that bet will pay off is questionable, according to some analysts. “With 20/20 hindsight, there’s always some degree of risk in any investment you make,” said Paul Patterson, an energy analyst at Glenrock Associates.

But Paul Fremont, an energy analyst as Jefferies & Co., was even more dismissive of the state’s efforts in a research note to clients.

“No sane project developer would invest in a rigged market which competitors are guaranteed a fix price,” Fremont wrote. “This leaves consumers at the mercy of opportunistic politicians who are in a position of power to reward developers with attractive returns on their investment with virtually no risk in return for generating new jobs in the politicians’ jurisdiction.”