BPU Decides Not to Tinker With Traditional Power-Auction Model

Tom Johnson | November 27, 2013 | Energy & Environment
Agency defends three-year rolling supply contracts as delivering best deals for consumers, small businesses in deregulated market

Credit: Amanda Brown
BPU President Bob Hanna
If it’s not broke, why fix it?

New Jersey Board of Public Utilities commissioners and staff echoed that sentiment last week in deciding to essentially retain its 12-year-old system of deciding how the state’s four electric utilities go about purchasing the power they need to supply customers who don’t shop around for a better deal elsewhere.

The system is viewed by some as a model for how states with deregulated energy markets should go about procuring electricity to supply customers. Others, however, say the process dampens competition and deprives utility customers of potential savings when fuel prices are declining.

The criticism of the process stems from the way it has been set up. In each year, one-third of the electricity consumers need to keep their lights on is purchased by the utilities in an online auction held every February. The next auction by the agency would involve electricity purchases for customers, effective June 1, 2014.

By blending electricity prices over three years, the state avoids potential spikes in energy prices for consumers, but it also has the reverse effect. If prices drop, as have natural gas costs in the past few years, customers sometimes fail to reap the benefits in the current year.

Nevertheless, both staff and commissioners defended the system, known as the basic generation service (BGS) auction.

“The BGS auction has served the state of New Jersey and its citizens well,’’ said BPU President Bob Hanna. “It is not broke and therefore does not need to be fixed.’’

In an order issued by the board last Friday, the agency said the auction — one for a fixed price for residential and small businesses and the other for larger companies that pay for electricity based on hourly power prices — has worked “well and has resulted in the best prices at the time.’’

As in the past, electricity suppliers who are trying to compete with the incumbent utilities sought changes in the auction to make it easier for them to capture mid-sized business and residential customers, by forcing them into buying power on an hourly basis and having shorter procurement periods to buy their electricity. The Division of Rate Counsel and board rejected those proposals.

According to the board order, it noted Rate Counsel “maintains that the use of the current three-year rolling supply contracts enables smaller commercial and residential customers to benefit from more stable prices while paying market-based rates.’’

In the past year, beginning in June 2013, the system has worked for those customers. Prices for electricity fell from 3 percent to as much as 5.4 percent, the fourth year in a row prices dropped for residents and small businesses. That was welcome news in a state repeatedly finishing among the top 10 states in terms of energy costs.

On the other hand, prices for larger commercial and industrial customers last June nearly doubled, a fact state officials blamed on a rise in capacity payments to power suppliers, which ensure there is enough electricity in reserve to maintain the reliability of the power grid.

The decision by the BPU comes at a time when it is faced with choosing whether to grant the state’s gas and electric utilities big rate increases to recover costs from storm outages in the past few years, as well as to harden their power grids to prevent prolonged and extensive service outages. The cost of doing so is not cheap, with the former expected to run up to $1 billion and the latter more than $4 billion, according to filings with the BPU.