In a case with the potential to save New Jersey’s utility customers billions of dollars on their electric bills, a federal district court this week declared Maryland’s effort to spur building of new power plants unconstitutional.
The ruling does not directly affect New Jersey’s own highly contested attempt to encourage the construction of new power plants, a case also tied up in the federal court system, but Maryland’s program is similar in that both rely on subsidies to encourage energy suppliers to build new generating units.
“Could this be a harbinger for what happens in New Jersey?’’ asked Glen Thomas, president of the PJM Providers Group, which challenged the law before the Federal Energy Commission less than a week after it was signed by the governor. “Absolutely.’’
The rationale behind both states’ efforts is an attempt to lower electric bills for utility customers by creating more supplies of electricity, a step proponents say could bring down prices by reducing congestion on the power grid. Doing so could deflate prices existing power supplies are paid to ensure there is enough electricity to meet customer demand, a cost that has spiked in recent years.
In New Jersey, lawmakers passed and Gov. Chris Christie signed in 2011 a controversial law that would provide ratepayer subsidies to help build 2,000 megawatts of new natural-gas-fired power plants. As in Maryland, the law was bitterly opposed by incumbent power suppliers, who filed challenges in a federal district court in Trenton disputing its constitutionality. The case is still pending.
The outcome means a great deal to consumers because they face up to an additional $2 billion in charges on their electric bills over the next 15 years to subsidize the construction of new power plants, if they all move forward. At this point, that is not certain, although the court ruling injects new questions into the process, an ambiguity power suppliers and investors dislike.
The $2 billion cost estimate is disputed by state officials, who argue the new generating capacity produced by the three units will drive down overall energy costs far more than what it will cost consumers over the 15-year life of the program.
But the energy market has changed dramatically since legislators first began debating the New Jersey law early in 2011. Low natural-gas prices and new, tougher environmental regulations on coal-powered plants, forcing the retirement of many older and inefficient units, have created conditions in which a multitude of new gas-fired plants have been proposed on the regional power grid operated by PJM Interconnection.
Case in point: LS Power Group, which is building a new natural gas power plant in West Deptford, is going ahead with its project without any state subsidies even though it was among the primary forces lobbying for the state law to develop new generating units with ratepayers’ subsidies. The company, however, was not among the three suppliers awarded subsidies by the New Jersey Board of Public Utilities. In some sense, it underscores how much low natural-gas prices have turned the energy sector upside down.
So many new natural gas powered plants have been proposed in PJM, according to Thomas, that by 2016, there will be more gas units in service in the regional power grid than coal units — a first. “We are seeing a lot of development in PJM without any subsidies,’’ said Thomas, echoing an argument made by suppliers during the debate over the New Jersey law.
Paul Patterson, an energy analyst with Glenrock Associates in New York City, agreed, saying the competitive threat from the New Jersey state-sponsored projects seems to have been surpassed by new projects. Instead of a problem with state-supported power plants, the threat to incumbent suppliers seems to lie more with power plants without state-mandated contracts, such as those in Maryland.
What this new energy landscape means is still subject to dispute. But some critics of state-supported subsidies argue it raises new questions as to why the administration and lawmakers handed out ratepayer-funded subsidies to power plants that may have been built anyway.
“It’s going to expose the hot air of New Jersey’s subsidies,’’ said Jeff Tittel, director of the New Jersey Sierra Club. He said the result could help ratepayers lower their costs on utility bills and the environment, as well as directing more state money to encourage renewable energy and energy-efficiency projects.
PSEG Power, the biggest power supplier in New Jersey, also welcomed the court decision.
“We are pleased that the court ruled in favor of competitive markets,’’ said Michael Jennings, a spokesman for the company. “We believe that PJM’s capacity auction is the best approach to ensure there is sufficient supply of electric capacity to meet demand at the lowest cost.’’ The PJM auction each May is aimed at locking in enough capacity every year to meet demand.
In the court ruling on Monday, the U.S. District Court of Maryland said that the state’s law requiring three state utilities to sign long-term contracts to support the construction of a new natural-gas fired plant is unconstitutional. In New Jersey, many of the same issues raised in Maryland are being debated in the court case pending here.
“The net effect is about the same,’’ Thomas said. “Both states arbitrarily set prices for capacity.’’
New Jersey regulatory officials at both the BPU and state Division of Rate Counsel declined to comment on the Maryland decision, saying they wanted more time to review the ruling. A spokesman for Competitive Power Ventures, which was granted subsidies to build a new power plant in Woodbridge, deferred comment as well, saying that it also wanted time to review the court’s ruling.
Besides CPV, Hess won state subsidies to build a plant in Newark and NRG Energy won subsidies to build a power plant in Old Bridge, although the latter has not met requirements to qualify for the subsidies.