Dip in Power Prices Leaves Customers and State Looking for More

Tom Johnson | February 10, 2012 | Energy & Environment
A shorter timeframe for power auctions and more in-state capacity could have made a bigger difference

Most consumers may see a dip in their electric bills this June, but the drop is likely to ignite a recurring debate over whether the decline could have been much greater.

For the fourth consecutive year, residential customers will see bills decrease by as much as $6.96 each month for customers of Jersey Central Power & Light to as little as $1.37 a month for those served by Rockland Electric.

They can thank a steep drop in natural gas prices for the savings. But larger commercial and industrial customers, who use the bulk of electricity in New Jersey, saw the price they pay for power purchased in an annual auction run by the state increase by 7 percent. Since the auction price makes up only a small part of their payments, they, too, might see a dip in utility bills because of falling gas prices, officials said.

Nevertheless, the results of the two online auctions conducted over the past week are likely to have a big impact on the state’s energy policies.

For one, it may increase efforts by power suppliers to change the structure of the auction for residential customers to take more advantage of the fall in natural gas prices. For another, it probably will spur the Christie administration to step up lobbying to ease rules that have hampered efforts by New Jersey to encourage new power plant construction in the state.

In the first case, while residential bills will drop by as much as 6.4 percent to 1.1 percent each month, the dip could have been much more significant if the state were not locked into a system in which it purchases one-third of the electricity it needs for residential and small customers every three years.

The one-third of the power purchased this past week replaces power purchased in 2009, which was priced 20 percent higher than the in the recent auction. The other two-thirds of the electricity is purchased under contracts in the prior two years, a system that averts big rate spikes when gas prices soar.

The Board of Public Utilities, which oversees the auction, is committed to exploring possible changes, including switching to a shorter timeframe. BPU President Robert Hanna acknowledged that there could be a “groundswell’’ to change the current system, given the recent decline in natural gas prices, but added the state needs to be cautious.

“In a time of falling energy prices, it’s very tempting to shorten the timeframe,’’ he said, in response to a reporter’s question. “On the other hand, had the Straits of Hormuz been closed by some act of war you wouldn’t be making that argument if energy prices were increasing.’’

In buying power this past week, the state’s four utilities do not make a profit on the cost of generation. Instead, they simply pass those costs on to customers. Generation accounts for between 60 percent and 70 percent of a customer’s bill.

A typical residential customer’s monthly bill from Public Service Electric & Gas, the state’s biggest electric utility with 1.8 million customers, will drop from $121.40 per month to $116.99 per month, a 3.6 percent decline. For Jersey Central Power & Light, with 1 million customers, the monthly bill will drop to $101.49 per month from $108.45 monthly, a 6.4 percent decrease.

BPU officials blamed the increased prices secured in the second auction for larger commercial and industrial customers on a controversial tariff imposed by the regional grid operator, PJM Interconnection. The tariff, dubbed the Reliability Pricing Model (RPM), is aimed at spurring construction of new generation in areas where there is congestion on the power grid and where new capacity is needed.

In New Jersey, however, the RPM has increased power prices to customers by more than $1 billion a year, without spurring any new power plant construction, according to state officials. The big driver in the increase for commercial and industrial customers in the most recent auction was PJM’s capacity prices, state officials said, which increased by nearly 40 percent.

Hanna vowed to press the state’s efforts to encourage new generation by pushing for changes in federal and PJM regulations that could prevent a pilot program for encouraging the construction of three new power plants in the state.