New Jersey Business and Industry Association Energy Council Meeting March 2

New Jersey Business and Industry Association
Energy Council Meeting
March 2, 2001

Statement of Gregory Eisenstark, Esq., Managing Attorney -- Electric

Good Morning. My name is Greg Eisenstark. I am the Managing Attorney -- Electric for the Division of the Ratepayer Advocate. The Division of the Ratepayer Advocate is the statutory representative of all New Jersey utility customers, and actively represents ratepayer interests in state, regional, and federal proceedings. I would like to thank Art Maurice and NJBIA for inviting the Ratepayer Advocate to participate in today's roundtable discussion of the current "energy crisis." The sub-title of today's agenda is strategies to reduce consumer electric and natural gas costs. My initial comments will primarily address electric issues.

I. PROBLEMS IN WHOLESALE POWER MARKETS -- FIX THE WHOLESALE MARKET PROBLEMS FIRST!!!

Without a vibrant wholesale market, even the most innovative state plans to promote retail competition will fail. Currently, high wholesale electricity prices are the driving factor behind the current combination of high prices and lack of retail competition in New Jersey. This is particularly the case for utilities that have divested all or most of their generating plants and must rely on wholesale markets for the energy and capacity necessary to serve their customers. There are several reasons for high wholesale prices. First, there has been an increasing reliance on natural gas as a fuel source for electric generation. This increased demand, combined with low natural gas reserves, has had both a cause and effect impact on electricity costs. Second, generators, convinced that wholesale market prices would fall during the next 5 to 10 year time frame, were not actively developing many new generation facilities (although this has changed during the last 2 years).

In addition, the guidance from the FERC on national transmission policy and wholesale power issues has been weak and ineffective. In 1996, the FERC announced principles to guide the development of Independent System Operators (ISOs) to implement open transmission access to the nation's power grid. But, before many regions of the country even had functional ISOs, the FERC shifted its focus to "voluntary" participation in Regional Transmission Organizations (RTOs), which now, presumably, may include for-profit transcos that lack independence, one of the bedrock principles of an ISO.

However, the FERC may not be entirely to blame for current situation. Due to the FERC's apparent lack of jurisdiction (under federal law) to compel transmission owners to participate in either an ISO or and RTO, there has been only sporadic compliance with Orders 888 and 2000, resulting in little more than a "crazy quilt" of different terms and conditions for transmission service and wholesale energy transactions throughout the nation. The rules for buying, selling and transmitting power vary from region to region and state to state. This uncertainty about the direction of transmission policy and wholesale market rules has created volatility. Uncertainty and volatility lead to higher prices. Minor rule changes in one regional ISO can effect wholesale market prices. For example, just last Fall, capacity prices in PJM surged when there were suggestions that it might revisit the rules for the unforced capacity market.

What is the solution to the wholesale market problems? A comprehensive federal plan, including legislation, for the provision of transmission service and related wholesale energy markets in the USA. Federal agencies need the authority to:

1. Monitor wholesale markets;

2. Eliminate undue concentrations of market power in any relevant market;

3. Remedy anti-competitive conduct or the abuse of market power, including the authority to administer both behavioral and structural remedies;

4. Require the creation of independent RTOs that all transmission owners must join. FERC should also have the authority to investigate and remedy practices such as those which give an unfair advantage to affiliates of transmission owning companies;

5. assure reliability of electric supply throughout the United States. Encouragement should be given to the development of load shifting and load management programs such as fostering demand side markets designed to reduce peak demands;

6. continue and expand DOE funding of research, development, demonstration, and commercialization of renewable energy resources as part of a long-term strategy to reduce dependence on non-renewable and potentially price-volatile energy sources.

II. MONITOR AND REMEDY OBSTACLES TO COMPETITION IN NEW JERSEY

While wholesale market problems are currently paramount, there are also several things those of us in New Jersey need to work on to improve the competitive markets, and in turn, reduce energy costs. First, several provisions of the EDECA have yet to be implemented: the energy efficiency and renewable programs, the universal service fund, and competitive customer account services (billing and metering). Implementation of these initiatives is necessary to reduce demand, make energy more affordable for those in need, and to make the market more attractive to new energy suppliers.

Conservation, renewable energy, load management, and what used to be called "integrated resource planning" failed to receive enough emphasis in deregulation plans. Automated load management and financial incentives to curtail usage at times of peak demand need to be encouraged, to complement the development of additional generating facilities.

There have been several obstacles to new market entrants in New Jersey. The wet signature requirement increases costs to acquire customers. Although internet enrollment is now permitted, the bill now pending to remove the wet signature requirement should be enacted. In addition, government aggregation, while permitted, has so many legal and regulatory obstacles that it is practically impossible to implement in New Jersey. The delay in implementing competitive billing and metering options has also made New Jersey less attractive to new market participants. Perhaps now is the time to review the EDECA as necessary to ensure that competition works for all consumers.

Finally, an issue that has been overlooked recently is that the high level of stranded cost recovery awarded to New Jersey electric utilities also negatively impacts competition and results in higher prices. Stranded cost recovery fixed in time to a 1997-98 estimate (e.g., PSE&G, which recently securitized $2.5 billion) makes a significant portion of the bill "immune from competition." If an evaluation of stranded costs was done today, using current energy market prices and projections, New Jersey utilities would have little, if any stranded costs. Higher stranded cost surcharges on the bill means that shopping credits are lower -- i.e., a smaller portion of the bill is "open to competition."

Looking ahead, New Jersey faces three main, interrelated challenges that will all interface at the same time -- the end of the electric "transition period" in August 2003. They are: the pending rate impacts from the utilities' recovery of cost deferrals during the transition period; how to structure "default service"; and how to set the shopping credit or "price to compare." In a market where 98% of electric customers are still buying electricity from the distribution utility, resolution of these issues is paramount, not only to ensure affordable energy in the near term, but to foster competition and technological innovation that should reduce energy costs over the long term as well.

Thank you.

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