FERC Slams Door a Second Time on Power Plant Subsidies

Tom Johnson | November 18, 2011 | Energy & Environment
Agency ruling holds out little hope that state can sponsor new capacity to be built in New Jersey

For the second time this year, a federal agency yesterday largely rejected New Jersey’s efforts to build new power plants in the state by funneling subsidies from ratepayers to help three developers finance the projects.

In a 78-page decision, the Federal Energy Regulatory Commission (FERC) denied a request by the state to grant a blanket exemption from tough new rules imposed by the agency that make it very difficult for the three projects to move forward. FERC did leave a small opening that the plants could be justified on a case-by-case analysis by the regional grid operator, PJM Interconnection.

The ruling disappointed state officials who have aggressively backed the subsidies as a way to get new capacity built in New Jersey, a step they believe would lower electric prices that rank among the highest in the nation.

The New Jersey effort has attracted widespread scrutiny and controversy, primarily because its backers see it as loosening the stranglehold incumbent power generators have on the market, which has led to steep power prices here and in other states where electricity has been deregulated. Power suppliers claim that giving subsidies to new suppliers will wreak havoc on the wholesale competitive energy markets, eventually leading to higher prices.

The decision by the commission yesterday followed up an earlier ruling in April, when it adopted arcane regulations dealing with how power plants are put in service by PJM, rules that most analysts believe would make it difficult for the three new power plants to ever be built. With heavy lobbying from the state Board of Public Utilities and Division of Rate Counsel, the federal agency agreed to reconsider portions of that ruling.

For the most part, FERC rejected most of the state’s arguments in its latest decision, dismissing the contention that a mechanism employed by PJM to ensure there are enough power plants available to meet spikes in demand is not working as planned. The state argued that the system, dubbed the Reliability Pricing Model, is not functioning, which has left consumers in New Jersey facing potential liability issues and paying $1 billion more a year for electricity than counterparts in neighboring states because of congestion on the power grid.

New Jersey argued that state-sponsored projects, along the lines of the one it proposed, should be exempted from the rules adopted in April. The commission flatly rejected that view, saying such an exemption would undermine PJM’s efforts to have a competitive wholesale market.

The ruling was not welcomed by state officials.

“We are still analyzing the decision, but initially, disappointed that FERC did not rule in our favor,’’ said BPU President Lee Solomon, who has ratcheted up criticism of the federal agency in recent months. The ruling, which convenes another technical conference on how exceptions will work, does nothing to alleviate the problem that the state is facing in having new generation built to meet reliability needs, Solomon said in a statement released by his press office.

“The state is reviewing its legal options and will take the most expeditious, prudent, and appropriate course to protect the interests of the citizens of our state,’’ he said.

Division of Rate Counsel Director Stefanie Brand was reluctant to give a full accounting of the decision, but said it did appear that the commission left open a procedural route that could allow the three plants to be built. “It’s a little bit of a softening in their decision,’’ she said, referring to a section deep in the ruling.

“We find that PJM’s proposal for consideration of unit-specific factor on a case-by-case basis is just and reasonable and we will accept that approach,’’ the commission ruled.

But Paul Patterson, an energy analyst at Glenrock Associates who has followed the controversy closely, said it would depend on how that provision is interpreted. “It allows for discretion, but basically it’s a question of how the discretion will be applied as to how much new type of capacity will be built in New Jersey,’’ he said.

Under the New Jersey pilot program, ratepayers would have covered capacity payments, which are given to power suppliers to ensure there is enough power to keep the lights on, to the three developers with plants in Newark, Woodbridge and Old Bridge, a move that would make it easier for the plants to attract Wall Street financing, according to proponents.

New Jersey officials had sought to achieve that goal by approving a controversial bill that would have guaranteed a stream of payments from electric customers to power plant developers for up to 15 years to help them secure financing to build the plants. By adding 2,000 new megawatts of generating capacity in New Jersey, it would drive down energy prices in the state, advocates argued.

But the bill spurred challenges before FERC and the courts from power suppliers, including Newark-based PSEG Power. They feared the new power plants would drive down capacity payments, a prospect that even the independent market monitor for PJM agreed with. If 2,000 megawatts of new capacity were added, it would depress capacity prices by more than $2 billion, according to a study by the market monitor.

Opponents also argued that in the long run prices would rise for consumers because no new power plants would be built in New Jersey unless the developers received similar subsidies from ratepayers.