BPU Opposes Proposal from Grid Operator, Fearing Spike in Power Prices

Tom Johnson | November 26, 2014 | Energy & Environment
State agency calls for changes to draft proposal to contain energy prices in New Jersey

Credit: Governor's Office/Tim Larsen
Richard Mroz, president of the state's Board of Public Utilities
Worried that there might not be enough power to keep the lights on for customers, the state is pressing for changes in a draft proposal by the operator of the nation’s largest power grid, which they fear could lead to price spikes for ratepayers.

The draft proposal by the PJM Interconnection needs to be approved by the Federal Energy Regulatory Commission, but it has spurred much criticism from state regulators and consumer advocates not only in New Jersey but also in other states.

They argue it could cost consumers billions of dollars by creating new incentives for power suppliers to deliver the needed capacity — and penalties if they fail to do so –which might end up with companies bidding up higher prices to reduce their potential risks.

The issue highlights how actions taken by agencies beyond the state — often in arcane proceedings that few pay much attention to — can lead to higher bills for consumers. In New Jersey, the state only regulates the cost of electricity delivered to homeowners and businesses, a much smaller portion of their bill than the power to keep the lights on.

In New Jersey, approximately 85 percent of residential and 70 percent of smaller business customers continue to have their electricity supplied by the four incumbent utilities. The utilities buy the power they need to supply those customers in annual auctions held each February overseen by the state Board of Public Utilities.

BPU staff and commissioners fear that if the draft PJM rule is approved by FERC, it might discourage suppliers from bidding in the auction, which in the past has mostly helped to reduce electricity costs for customers.

“Faced with the uncertainty of federal action on a draft PJM proposal, there was good reason to believe that electricity suppliers would either not participate in the upcoming auction or would bid much higher prices to mitigate unknown risks,’’ said Richard Mroz, BPU president.

If the PJM proposal is approved, however, customers could still face higher prices because BPU rules include a new mechanism allowing for the pass-through by PJM of unanticipated costs when it originally bid into the auction.

The proposal, unveiled last month by the grid operator, is aimed at ensuring energy suppliers provide enough electricity during periods of frigid temperatures, such as occurred last January. PJM had difficulties this past winter maintaining the reliability of the grid.

In recommending the changes, PJM said it is seeking to incorporate stronger performance incentives and more operational capability and diversity during peak power periods. It is unlikely to be approved by the federal agency before the next scheduled auction takes place in February.

Critics of the proposal questioned whether it would provide additional reliability. According to one analysis, power prices to provide the needed capacity during peak periods could rise from $8.7 billion to as much as $15.1 billion over a four-year span.

In filings on the proposal, a coalition of power generators, with some qualifications, backed the proposal, saying it will improve system reliability and drive the energy sector to invest in gas and electric infrastructure.

For New Jersey, the issue is crucial because the state has been seeking to reduce energy costs, which are among the highest in the nation. In part, those costs are driven up by high capacity costs to ensure there is enough power to maintain reliability of the power grid. The draft proposal by PJM might increase those costs, according to the state and others.

“Imposing billions of dollars of unforeseen costs on the region deserves a far more thorough analysis,’’ said the Transition Coalition in a filing submitted to PJM. The New Jersey BPU is a member of the group.