N.J. Staff Recommend Options to Address Capacity Costs Which May Negatively Impact Retail Market

New Jersey should consider the possibility of creating a state power authority if ratepayer-backed long-term capacity contracts fail to clear the May 2012 and May 2013 Reliability Pricing Model auctions, New Jersey BPU Staff has recommended to the Board.

Staff's recommendation was heard by the BPU last week, but no formal action was taken on Staff's report of various capacity issues.

Staff said that the state power authority, "may be carried out independently or as part of an FRR [Fixed Resource Requirement] initiative."

Staff did note that since the Electric Discount and Energy Competition Act places ultimate responsibility for procurement on the EDCs, legislation would be required if the BPU wishes to pursue a state power authority.

Although Staff's discussion was limited to capacity, creation of a state power authority would immediately implicate procurement of other resources -- notably basic generation service -- similar to the use of power authorities in other states (most notably Illinois).

This is precisely the danger Matters warned would occur when most retail suppliers failed to support the competitively neutral treatment of capacity represented in the New Jersey long-term contracts, which would have had absolutely no impact on headroom, default service procurement, or the retail market as a whole. With FERC, at the behest of capacity owners, blocking the implementation of the long-term capacity contracts, the BPU has no alternative but to pursue less desirable options to address its capacity cost concerns, most of which will likely negatively impact the retail market unlike the competitively neutral long-term capacity contracts.

Staff's chief recommendation is that the Board study establishing an FRR service area and FRR entity in a currently recognized RPM Locational Deliverability Area (LDA), preferably the PS-NORTH LDA. "Staff recommends that the Board adopt the FRR Alternative as the principal mechanism to realize new generation capacity development in New Jersey."

The creation of an FRR would have enormous implications for retail suppliers, as their capacity cost obligation would no longer be determined through an auction where all LSEs pay the same clearing price (which, ironically, would have continued under the long-term capacity contracts, thus maintaining a competitive retail market).

Under the FRR, an entity -- likely to be the EDC under Staff's recommendation or perhaps a state power authority -- would assume all of the capacity obligations for an LDA, and then could choose to allocate those costs to load serving entities (the utilities and retail suppliers) as the entity sees fit. This is what has been in place at AEP Ohio, and as retail suppliers are aware, AEP Ohio, as the FRR entity, sought to increase the price charged to retail suppliers under the FRR plan to reduce the migration of load to competitive supply.

Staff said that, "[d]evelopment of additional generation capacity resources within the PS-NORTH area would address the current problem of importing sufficient capacity due to transmission constraints while providing greater competition and likely lower capacity prices over time."

"While PJM's FRR requirements specify that a substantial portion of capacity resources be located within PS-NORTH under a FRR scenario, anticipated DR [demand response] and energy efficiency capacity resources, state facilitation of merchant generation within the LDA, and the potential for existing PSEG Power capacity to secure longer-term supply contracts would likely be sufficient to meet the minimum internal capacity obligation. The balance of the load obligation could be met through imported capacity up to the identified CETL threshold," Staff said.