Fine Print: New Jersey’s Electricity Auction Has Become Annual Winter Event

Buying electricity over a three-year period helps hold down price spikes for customers

It is an event that has occurred each February since the state broke up its electric monopolies in 1999. The New Jersey Board of Public Utilities conducts an online auction in which the state’s four electric utilities purchase the power they need to supply homes and businesses in their respective franchise territories. It is not much noticed by customers, but the auction amounts to big bucks — usually costing ratepayers more than $7 billion a year.

Why it is needed: Most residential and many business customers served by electric utilities do not bother to shop for electricity, although the rationale behind deregulating the sector was that it could lead to cheaper prices for ratepayers, an option not always available in the past. So the utilities buy the power for customers, with the prices taking effect in June.

How it works: The utilities buy one-third of the power they need for customers each February. Those prices are folded into electricity purchased in the two prior years, a system of avoiding huge price spikes for customers if the cost of power skyrockets because of an unexpected rise in the price of fuels used to power the plants. The downside of the system is if those fuels, such as natural gas, drop in price customers do not see those drops rapidly reflected in their bills.

What’s happened recently: Mostly, good news. For the past four years, most residents and many businesses have seen their electric bills decrease. They can chalk that up to a steep drop in the price of natural gas for that, a fact that has led to even bigger drops in the cost of heating homes with the fuel. By buying power in bulk, the electric utilities are able to garner significant savings for their customers than would otherwise be available.

What the auction does not cover: The auction only deals with the price of generating the electricity to supply customers. Other costs, such as delivering it from power plants over high-voltage transmission lines or more local distribution wires to consumers is decided by the federal government and state regulatory authorities, respectively. The costs also include a series of surcharges added on to utility bills to pay for clean energy programs and for low-income energy assistance programs.

What lies ahead: More uncertainty. The U.S. Energy Information Administration projects natural gas prices will rise in 2014 slightly, as well as electricity prices across the nation. The unusually harsh winter also may spur electricity suppliers to build more cushion into their bids this month at the auction, according to energy analysts. The extreme weather forced many plants to shut down either because of the frigid temperatures or not having access to the fuels needed to run their generating units.

What else could drive up costs: The power-generating business is in turmoil –facing increasingly tough environmental mandates to clean up emissions from their plants. Many units are expected to be retired in the next few years, an event that could drive up capacity payments to keep older and less efficient plants in operation. Those payments — intended to ensure there is enough electricity to meet power demand — could drive up costs for consumers, as they did last year for some businesses.