BPU Seeks Better Way to Buy Electricity at Auction

Three-part process protects customers from price spikes, but can keep rates artificially high

Is there a better way for the state to purchase electricity for the bulk of residents and many businesses that do not want to bother to shop around for an alternative to their incumbent utility?

For the first time in the 11 years since New Jersey broke up its electric monopolies, that question is being seriously debated by the state Board of Public Utilities, which is being urged to make dramatic changes in an annual auction it holds to procure power supplies for more than three million customers.

The issue is important because natural gas prices have fallen to near record lows, but ratepayers are not reaping the full benefit of that slide because of the way New Jersey has structured the method it uses to buy electricity for consumers.

In essence, the state buys one-third of the power it needs each year every three years to supply customers who do not shop for electricity, a system that over the first decade managed to avoid the price spikes experienced by ratepayers in other states when natural gas prices soared after disruption in supplies because of hurricanes in the Gulf of Mexico.

With natural gas prices falling, however, customers are not gaining the full measure of the current decline because the state is locked into higher power prices for the previous two years.

The retail energy supply industry that is competing against the incumbent utilities is making a case to shorten the timeframe for buying electricity, a move they say could lead to lower prices for consumers.

According to the Retail Energy Supply Association, which argued to the state agency in a meeting in Trenton on Friday, that there is much good news about the deregulated market in New Jersey. More people are shopping; more suppliers are competing for customers; and more varied products are being offered customers, including green energy suppliers that offer customers cleaner sources of producing electricity.

The bad news, argued Jay Kooper, New Jersey state chairman of the association, “this is not a retail market structure that is built to last.”

The problem, he said, centers on the three-year blended average of power prices offered by the incumbent utilities to those customers who do not shop around. The result creates “boom” or “bust” cycles where his members can offer prices that beat the three-year blended average when gas prices are falling, but are shut out of the market when prices spike, Kooper said.

The association wants to shorten the three-year blended average, a move it claims could allow customers access to a choice of suppliers, not only in boom cycles, but at all times.

The proposal, however, has few champions. All four electric utilities oppose the step, as does the Division of Rate Counsel. All of these critics say the proposed changes will expose customers, some of whom may not be very sophisticated about shopping for electricity, to price volatility.

BPU President Bob Hanna also expressed concern, noting he had seen some Wall Street projections that natural gas would rise to about $5 per dekatherm by 2020. “That might counsel to sticking to a three-year system,” he told Kooper.

While the Division of Rate Counsel’s Stefanie Brand opposed the proposal by the retail energy suppliers, she argued that it is time to reassess the existing structure of the auction.

Brand said the auction should be made more transparent, a contention others also argued in the past.

“This is completely opaque,” Brand said. “What are ratepayers paying for solar? I can’t answer that.”

The Division of Rate Counsel, as well as the Solar Energy Industries Association, proposed to the board that it remove the renewable energy requirement, a provision that mandates a certain amount of the electricity come from clean energy sources, such as solar, from the auction process. Instead, the four electric utilities would be required to meet the renewable mandate, a proposal opposed by the companies.

Brand argued that by removing the renewable energy requirement from the auction, it would increase transparency, allowing consumers to see how much they are paying for renewable energy. It also could potentially lower the cost to ratepayer, as the board’s own consultant noted, she said.

By and large, the utilities argued against any radical changes in the auction process, saying the system has been very successful over the past 11 years.

The board is expected to make a decision on the system sometime this summer.