Grid Operator, Incumbent Power Suppliers, Attempt End-Run Around Consumers

Tom Johnson | October 12, 2012 | Energy & Environment
PJM Interconnection and partners try to make it tougher for state to subsidize new power plants

Power Plant
In a step angering officials in New Jersey and Maryland, the regional operator of the nation’s largest power grid is moving to adopt rules that the states say will make it tougher for them to subsidize the new power plants needed to increase reliability and lower costs for consumers.

The action by PJM Interconnection and a consortium of incumbent power plants is especially galling because, as it unfolded over the past few weeks, it excluded states and consumer advocates, according to officials in both states.

“It was done under a cloak of secrecy,’’ said Stefanie Brand, director of the New Jersey Division of Rate Counsel. “It’s very, very disturbing.’’

The brouhaha is the latest development in an ongoing dispute between the states, PJM, and incumbent power suppliers over efforts by New Jersey and others to bring down high electric bills for businesses and homeowners by offering subsidies to incent new power plant construction.

In New Jersey, those efforts have resulted in two new power plants being awarded controversial ratepayer subsidies to ensure they will be built. The subsidies, widely criticized and currently under challenge in court, could cost consumers up to $3 billion over the 15 years of the contracts, according to opponents.

Opponents also note that a new power plant is being built in West Deptford without ratepayer subsidies, questioning why incentives are needed for the two other new units, one in Old Bridge, the other in Newark.

But proponents of the pilot program in New Jersey argue that the subsidies are needed to overcome obstacles preventing new power plants from being built. With few new generating units being constructed, it has made aging and incumbent power plants more lucrative, earning big profits from not only the electricity they produce, but also their reserve capacity to meet demand, if necessary, critics contend.

The rule proposal under development by PJM in concert with power suppliers and others deals with highly technical regulations governing when new power plants may receive payments for providing capacity, revenue considered crucial to projects moving forward.

Although both states have substantive issues with the proposal being developed by PJM, they are more concerned, at this point, with being excluded from the process.

“We were shocked to learn after the fact that PJM facilitated, a secret and exclusionary negotiation to devise a new set” of rule revisions, a letter from Douglas Nazarian, chairman of the Maryland Public Service Commission dated Wednesday to the PJM said.

In a phone interview, Nazarian said the current market structure will never send a long-term price signal necessary to promote investment in new power plans. “The purpose of this revision is to artificially inflate the bid price of state-sponsored power projects,’’ he said, a step that will ensure no new plants will be built.

Ray Dotter, a spokesman for PJM, said the revision to the rule was developed during informal discussions with various stakeholders, including power suppliers, public power associations, and large energy users. “Those kind of discussions are entirely permissible,’’ Dotter said.

With more formal discussions ongoing, the states and consumer advocates are part of the negotiations, Dotter said. The intention of the rule revision is to prevent “undue market power’’ and uncompetitive behavior, he added. The new rule would not affect the two New Jersey plants.

The Compete Coalition, a group representing suppliers, customers, transmission owners and others, endorses that view.

“Government-subsidized resources distort the market price signal that generators . . . and consumers rely on to evaluate future investments,’’ said Bill Massey, counsel to Compete. “This will ultimately chill investment in competitive unsubsidized capacity resources.’’

Brand disagreed. “The people who are controlling the market are changing the rules so no one can enter the market,’’ she said, criticizing PJM for taking the side of power suppliers.

“They claim not to take sides, but this deal takes care of some people in the process and ignores those who represent consumer interests,’’ Brand said.