Good morning, President Hughes and Commissioners Butler and Murphy. Thank you for giving the Ratepayer Advocate this opportunity to appear at the Board of Public Utilities’ public/legislative-type hearing. We are here to discuss a proposal by New Jersey’s four power utilities to conduct a reverse auction in which all of the state’s electricity needs for an entire year are to be procured in a single day this coming December.

Please allow me to take a few moments to summarize the concerns that the Division of the Ratepayer Advocate. The state’s four electric distribution companies are proposing to use a unique and untested procurement process to provide basic generation service during Year 4 of the Transition Period -- from August 1, 2002, through July 31, 2003 -- as required under the state’s Electric Discount and Energy Competition Act of 1999.

done so. Their supply of energy automatically defaults to the incumbent utility, the provider of last resort, in whose service territory they are located. If the utilities’ proposal is adopted, this is how 98 percent of New Jersey’s electric consumers would receive their energy.

The Ratepayer Advocate has two major concerns. First, the utilities’ proposal does nothing to promote retail competition as required under the Electric Discount and Energy Competition Act -- or EDECA. This is not the transition plan as envisioned by EDECA. It is an outsourcing plan for the utilities.

The utilities’ proposal would deny competitive BGS suppliers the benefit of establishing a commercial relationship with retail customers. This is not consistent with the clearly stated goals of EDECA, which was enacted to promote vigorous energy competition with lower energy prices, improved quality of service, new technologies, and choices of services for consumers.

Under the proposal, the state’s four incumbent utilities would continue to maintain their retail relationship with customers, leaving the suppliers invisible to consumers. This serves as a barrier to competition because suppliers would be unable to create brand identity or establish their own retail relationship with consumers by providing services such as metering, billing, and customer relations. The incumbent utility, and its affiliates, would maintain their competitive advantage, built upon their longstanding relationships with retail customers.

Denying suppliers the possibility of establishing any retail relationship with consumers would leave in place the status quo where the utility controls all retail relationships. It is worth noting that Pennsylvania permits suppliers to establish a retail relationship with consumers to foster competition.

Furthermore, the utilities’ proposal, which appears to have been untested in any statewide BGS market or any other similar context, has been submitted to the Board with no supporting testimony and no analysis of whether it will result in reasonable prices for BGS customers.

Let me address the specifics of the proposal. New Jersey’s utilities would use the Internet to solicit bids from energy suppliers to provide all of the electricity consumed by BGS customers in a year. The power is to be procured in 180 "slices" of 100 megawatts each. If the auction works as intended, the price for the 100-megawatt slices would drop until there are no longer enough bidders to supply all of the electricity needed. The auction is to be completed in 24 hours to supply the four utilities with electricity to meet their BGS residential and business customers’ needs from Aug. 1, 2002, through July 31, 2003.

It is the view of the Ratepayer Advocate and our experts that the utilities are proposing to use a novel and untested auction format which could produce high and volatile energy prices for BGS customers. The number of bidders to supply BGS is inherently limited. For the auction to be successful, suppliers must offer more than New Jersey’s total load of 20,000 MW of capacity. However, total available capacity is only 22,000 MW.

It is questionable whether there will be sufficient bidders to result in prices that reflect vigorous competition. If you have barely enough energy on the auction block, you are not going to get a competitive price. You need an abundance of energy to be offered to get a good price.

Under the utilities’ proposal, if there are not enough bidders for an effective auction to obtain supplies for 100% of New Jersey’s electric load, the utilities would be required to purchase the remainder on the spot market. We have all seen what happened in California when utilities were forced to resort to the spot market. As a utility representative testified in a recent proceeding before the Board, reliance on the spot market for a portion of New Jersey’s BGS supply "could send us in the direction of California," which has experienced volatile prices for electricity, in part, because of a heavy reliance on the spot market to provide basic service.

The Board and the parties require additional time to resolve these concerns and develop a more appropriate plan for BGS supply. To give more time for this process, the Board should order the utilities to put out RFPs for generation service to meet BGS supply through September 2002. To address the concerns about market conditions, the Board should also consider ordering the utilities to procure BGS supply in increments, rather than procuring all of the supply for the entire state in a single auction.

The utilities have presented a proposal which would subject ratepayers to unnecessary risks, while doing nothing to encourage retail competition as contemplated by EDECA. The Board must take the time to devise a better energy procurement system by carefully considering the many alternatives to the utility proposal, and choose an alternative which will promote EDECA’s objective of a vigorous competitive energy marketplace for New Jersey.

I would also like to address an even larger issue. This is an important case before the Board that directly affects ratepayers’ pocketbooks. Perhaps it is the most important energy issue the Board will decide this year. Because of its importance, the Ratepayer Advocate requested evidentiary hearings to cross-examine witnesses in front of the presiding commissioners. However, this request was denied and, in its place, we were given the opportunity to conduct depositions. In the practice of law, depositions are merely a substitute for written discovery. Depositions are not considered a substitute for the cross-examination of witnesses. The Board of Public Utilities is a quasi-judicial agency that is subject to Title 48 and the Administrative Procedure Act, which includes the standard rules of evidence. The Board should not act in an arbitrary and capricious manner, a position that has been repeatedly upheld by courts in our state. Most importantly, the Ratepayer Advocate’s motion for evidentiary hearings was denied, even though we recently won an Appellate Court decision in which the court overturned a previous Board’s decision, for the specific reason that the Board failed to conduct evidentiary hearings.

In closing, I would like to refer to our expert testimony, which was filed last month. It outlines a number of options available to develop a BGS procurement system that better meets the objectives of EDECA. One of the recommendations is to structure a competitive bidding process that enables non-utility BGS providers to develop a retail relationship with consumers by providing a full package of retail electric services directly to consumers.

We are also recommending that BGS be purchased in stages rather than procuring all 18,000 MW of load plus 2,000 MW of reserves in a single day. The most troubling aspect of the utilities’ proposal can be easily summed up with one simple question: Why are the utilities proposing to place all of our energy eggs in one basket?

The energy market is subject to volatility and uncertainty. It can be buffeted by a wide array of factors, including OPEC, natural gas availability, the conditions of pipelines, nuclear plant operations, the survive and other factors we cannot even anticipate or predict. Let’s consider a worst case scenario. What if on the day all 18,000 megawatts of our electric load is to be auctioned there is an international energy crisis and prices spike? The utilities’ proposal -- even in a best case scenario -- shifts all of the risk onto the consumer.

I would like to leave you with a word of caution, not pessimism, just caution. Clearly, the experience in other newly created competitive markets has shown that things can go very wrong, very quickly -- and the expected results do not always occur. As we all well know, the best-laid plans often go astray. Let us work together for a proposal which will restore the confidence of ratepayers in the promised benefits of EDECA. Better services, new technologies at lower rates are the benefits of competition, which flourish in a system of free enterprise.

Thank you.

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