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New Jersey: A State of Transition

John Hanger's picture
Acting Secretary Pennsylvania Department of Environmental Protection

John Hanger is the Acting Secretary of the Pennsylvania Department of Environmental Protection. As Acting Secretary, Mr. Hanger manages an agency of more than 3,000 employees with a mission to...

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  • Oct 1, 2003
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What would you say if your water rates, cable TV bill, postage charges, health insurance premiums, prescription drug costs, gasoline prices, and natural gas rates all still cost today what they did in 1999? Maybe "hallelujah!" or "happy days are here again!"

Well, in New Jersey, as rate cuts which were implemented in 1999 as a part of its restructuring plan end, electricity prices are essentially returning to 1999 levels - significantly lower in real terms. Of course, most news accounts of New Jersey's transition bury these facts in the 10th paragraph of a 12-paragraph story, while most stories paint a dire portrait.

Instead of emphasizing that electric prices in New Jersey increased yet returned to 1999 levels, even after the four-year-long temporary rate cuts expired, media outlets publish headlines and leads telling consumers that electric prices are "jumping" or "skyrocketing." In the media business, the "hallelujah" or especially government-is-doing-a-good-job stories are lemons. Instead, what sells are scandal, conflict or bad news.

So why are rates returning to 1999 levels? Only a portion of the New Jersey rate increase is going to pay current competitive market generation rates.

Paying off the "deferred balances" for generation costs that couldn't be recovered under artificially discounted regulated rate cuts in effect for the last four years is the largest cause. Increased rates for distribution service - not related at all to competitive generation supply - are also pushing rates back to 1999 levels.

The New Jersey approach
New Jersey's 1999 Electric Discount and Energy Competition Act (EDECA) emphasized 10 percent regulated rate reductions and capped rates for consumers as well as the development of a competitive wholesale market during a four-year transition period which officially ended August 1, 2003.

In reality, the New Jersey transition isn't ending, but is moving to its next stage where competitive suppliers may have more opportunity, even though transition charges will still be added to competitive retail prices. As a result, New Jersey retail prices will remain above market or competitive levels for 10 more years as deferred balances are collected.

The actual rate discounts for Atlantic and JCPL were 10.2 percent, 14 percent for PSEG, and 11.2 percent for Rockland. Thanks to these rate discounts that ended on August 1, 2003, consumers saved a good deal of money over the last four years.

But what about that pesky difference between the artificially low discounted rates for consumers and the actual cost of generation supply?

These deferred balances were essentially treated as stranded costs, for future collection from - you guessed it - consumers. So the discounted rates for the last four years were not pure consumer savings; they were more like a partial loan - with interest - to be repaid by consumers later.

Paying the piper
Except for PSEG, repayment for the deferred balances with interest is the largest component of the current rate increases. JCPL, Atlantic, and Rockland requested $687 million, $180 million, and $96 million in deferred balance recovery respectively, while PSEG sought to credit consumers $404 million.

The other large component of the current rate increase is for increased distribution charges in the continuing monopoly part of the electric industry. PSEG, JCPL, Atlantic, and Rockland respectively sought distribution rate increases of $250 million, $41 million, $68 million, and $3 million.

In late July, the New Jersey Board of Public Utilities (BPU) completed rate cases through negotiated settlements for each utility. Besides the Basic Generation Service and distribution rates, consumers see these results as the Market Transition Charge, Net Non-Utility Generation Charge, and Societal Benefits Charge for August 1 through May 31, 2004. The deferred balances will be collected over the next 10 years.

So stranded cost recovery isn't over in New Jersey; a new phase of it is just getting started. The good news for New Jersey consumers is that for the first time the deferral accounts will no longer grow, and as of August 1, 2003 will be going down.

The consumer bottom line
Even with the new rate increases effective on August 1, average rates in southern New Jersey are lower than in 1999 when restructuring went into effect. In northern New Jersey, they have increased just a few percent over 1999 rates.

Atlantic Electric (Conectiv): The totals for the deferred balances and the Market Transition, Net Non-Utility Generation and Societal Benefits charges are about $39.5 million annually, for an average rate increase of 4.7 percent. Additionally, the Basic Generation Service rate increase for all fixed-price customers will be about 3.4 percent, for a total current average increase of 8.1 percent. This increase still keeps customers at rates 2 percent lower than in 1999 when the 10.2 percent discount went into effect.

Jersey Central Power and Light: The net result of the current adjustments is an overall increase in the fixed-price customer revenues in the amount of approximately $82.8 million or 4.2 percent. The net increase is only about 3.5 percent for the typical residential customer. The BPU rejected $220 million in additional distribution rates on the grounds that these costs were "imprudently incurred." The increase still keeps customers at rates that average about 6 percent lower than at the start of restructuring in 1999.

PSEG: PSEG customers fared the worst of the major utilities with average 15 percent increases designed to collect $481 million per year, but they also had the highest discount of 14 percent since 1999, so total rates are going up only a tad. Unlike the other utilities, PSEG didn't have high deferred balances to collect because it was able to supply generation from its controlled resources at relatively low cost during the pre-auction period.

Unlike southern New Jersey utilities, a large portion of the current increase is due to increases in costs for Basic Generation Service. Northern New Jersey tends to have among the most congested transmission lines and prices are often considerably higher than elsewhere. In addition, the now uncapped distribution rates increased 13.6 percent for much needed upgrades.

Rockland Electric Company: Like PSEG, Rockland is in a very congested part of the transmission system and has above average costs for generation.
Despite cuts in the distribution rate of 5.3 percent, the cost of electricity in Rockland is increasing. Rockland's Basic Generation Service charges are going up 11.3 percent, for a total net increase of about 15.4 percent. But undoing the 1999 rate decrease of 11.2 percent under EDECA, rates for the relatively few Rockland customers are really only going up about 4 percent since 1999.

Utility supply
In part, mandated retail rate cuts took center stage in New Jersey because it focused on its competitive wholesale market before its retail market. The rate cuts offered immediate benefit to consumers, while wholesale market issues were resolved. The four former monopoly utilities, Public Service Electric & Gas (PSEG), Atlantic Electric (Conectiv), Jersey Central Power & Light (JCPL; first GPU, now FirstEnergy) and Rockland Electric (Consolidated Edison) were encouraged but not required to divest generation. PSEG sold its generation to an unregulated affiliate, while the others divested most of their generation.

From August 1999 through August 2002, utilities supplied customers from a mix of their own generation, bi-lateral contracts, and spot market purchases. As of August 1, 2002, utility generation supply was obtained through a state-run competitive wholesale supply auction.

Wholesale as well as retail suppliers bid on "tranches" of load that they would serve at a wholesale level. The winners of this auction didn't take over any customer support functions and didn't have any direct relationship with the customers.

A second auction was held for all utility customers on fixed prices from August 1, 2003 through May 31, 2004. The terms required higher summer and lower winter prices (the period was for less than one year to line up with the PJM market seasons; subsequent auctions will be for an annual duration).

Despite generally increasing wholesale electricity prices during these periods, both auctions produced relatively low rates that surprised many. For the first auction, the winners were able to provide service mostly around the level of the artificially low shopping credit of the regulated rates, without adding to the deferred balances. While still lower priced than expected, the second auction did put some upward pressure on rates.

Customer switching
Until this August there was little competitive market activity in New Jersey under the artificial rate discounts and rules barriers. As of April, 2003, only 1,800 residential customers were served by competitive suppliers statewide, mostly buying renewable energy through Green Mountain, and only about 375 large customers had switched.

In August, retail switching showed signs of life when the state signed a 33-month contract with PEPCO Energy Services for 24 megawatts of electricity to serve 180 accounts including the New Jersey Turnpike Authority, Rutgers University, and New Jersey Highway Administration. The contract includes more than 10 megawatts of electricity from Community Energy's new Bear Creek wind farm (less than 60 miles from northern New Jersey).

And in less than two weeks, as of August 12, about 57 percent of the largest industrial customers, comprising 68 percent of the class load or 1,637 megawatts, has switched. According to Roger Schwarz - a Trenton lawyer, lobbyist and leading expert on restructuring in New Jersey - Strategic Energy, Constellation New Energy, Reliant, PEPCO Energy Services, New Jersey Resources, and Green Mountain are aggressively seeking customers with prices and plans that may better meet customers' needs. Over 90 percent of New Jersey's largest customers that looked at switching have made the move.

But competition has not been nearly as robust for fixed-price customers. This is in part because the shopping credit is artificially low, reflecting only the wholesale cost of service - even with the end of discounted rates - making it difficult for competitive suppliers to compete because they have additional costs for customer acquisition and service. Comparable utility costs are included in the utility bundled distribution rates, so shopping customers receive no credit for these costs. This conceptual error was made by many states during restructuring. Competitive suppliers are rightfully pressing New Jersey to include some of these customer costs in the shopping credit for the next auction scheduled for June 1, 2004.

Municipal aggregation
Also as of August 1, the New Jersey legislature changed rules which should enable more municipal aggregation to succeed. Previously, programs were only on an opt-in basis, and municipal aggregation was non-existent. Now a municipality that wants to aggregate customers can offer an opt-out program for residential customers as well as an opt-in program for commercial and industrial customers. The new rules require an aggregated contract to be at or below the Basic Generation Service, unless the product has more renewable energy.

What's next
Utilities in New Jersey recently filed proposals for June 2004 through May 2005, generally suggesting that they continue the wholesale supply auction, but stagger the purchases over a three-year period to provide for more price moderation for fixed-price customers.

Competitive suppliers, including Green Mountain, Coral Power, Reliant Resources, and Constellation NewEnergy have been arguing for a more competitive market because some New Jersey rules imposed procedural obstacles that made switching difficult. For example, New Jersey changed its "wet signature" rule, which required a physical signature rather than a telephone or internet switch order. Some of the changes currently proposed include:

  • Increasing the number of customers that are included in the real-time pricing program.
  • Adding a retail rate adder to mirror the administrative cost of the utilities and provide for a more even playing field. The BPU has indicated an openness to a 5 mil adder for customers over 750 kW peak load (about the size of a supermarket).
  • Alleviating the credit requirements to become more in line with utility risk.
  • Improving data availability

The rest of the story
While plenty of problems remain, in contrast to dire reports of skyrocketing electric prices, New Jersey continues an orderly transition to a competitive market. Energy prices are already based on wholesale prices and at least some customers are paying real-time prices. The relatively small total amount of stranded and other deferred costs is decreasing. Large industrial and commercial customers have switched in significant numbers. Residential customers have a choice of renewable energy and the prospect of municipal aggregation. Prices have gone down for the last four years and now are in the same range as they were in 1999, at the start of competition.

As with many issues, screaming headlines don't tell the whole story.

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