The following is an executive summary of the testimony filed on behalf of the Division of the Ratepayer Advocate in a proceeding initiated by the New Jersey Board of Public Utilities ("Board") to establish a competitive bidding process to allow non-utility providers to bid to provide electricity to the State’s basic generation service ("BGS") customers. BGS customers are those who have not chosen an alternative electric power supplier, currently about 98% of the State’s energy consumers. On June 29, 2001, the State’s four electric distribution utilities submitted a proposal to procure the electricity needed to serve New Jersey’s BGS customers through a state-wide action to be conducted on a single day in December 2001.

Paul Chernick is an expert in electric utility economics. His experience includes utility supply planning and electricity markets. Mr. Chernick’s testimony concluded that the utilities’ proposal could subject New Jersey’s BGS customers to the risks of high and volatile electricity prices, while doing nothing to promote retail competition. The following is a summary of Mr. Chernick’s testimony:

• The utilities are proposing to use a novel and untested auction format which could produce high and volatile prices for BGS customers.

• The utilities are proposing to use a "Simultaneous Descending Clock Auction" format which appears never to have been used before.
  
• The proposed auction format is a form of Simultaneous Multi-Round ("SMR") auction. SMR auctions have been used only for sales, never to purchase anything.
  
• The auction would be used to procure supply that is likely to cost on the order of $5 billion. This is an astoundingly large scale for an experimental procurement method.
  
• Serving the 17,300 MW of retail load in the proposed auction would require about 20,500 MW of installed capacity, or approximately 34% of PJM’s summer 2001 capacity of 61,000 MW. An acquisition this large could distort an already tight market.
  
• If the response to the auction were inadequate, the utilities’ proposal would constrain the utilities to purchase the remainder of the power from the PJM spot markets, and would preclude any contract purchases. Spot markets for capacity and particularly energy are highly volatile; mandatory reliance on spot-market purchases is one of the factors widely cited as contributing to the California debacle.
  
• The utilities have not been able to provide any supporting theory in the absence of any relevant experience. In particular they are unable to provide a basis for setting such crucial parameters as (1) the amount of capacity and the number of bidders necessary to produce a competitive and efficient auction or (2) the formula for determining how much prices would drop for each round of the auction.
  
• The utilities’ approach would preclude any test of the bid prices against the costs of other approaches for supplying BGS.
  
• The utilities recognize that one of the critical decisions in the type of auction they propose is the relationship between the initial level of interest by bidders and the amount of BGS service to be purchased. They further recognize that the Board must establish the rules for determining whether all BGS, or some smaller fraction, will be acquired through the auction. Yet the utilities have not provided proposals for these rules or their rationale for those proposals.
  
• The proposed period for the acquisition of BGS supply, from August 1, 2002 through July 31, 2003, does not match PJM’s currently proposed capacity responsibility periods, which would run from June 1 through September 30 of each year. This complicates the task of acquiring capacity.

• For all its complexities and risks, the utility proposal does nothing to promote retail competition. BGS supply would be procured entirely at the wholesale level, leaving the BGS suppliers invisible consumers. This approach will not increase consumer understanding of or interest in the competitive energy marketplace.
  
• The Board and the parties require additional time to resolve the above concerns and develop a more appropriate plan for BGS supply. To give more time for this process, the Board should order the utilities to acquire generation service to meet BGS supply through September 2002, so that prospective BGS supplier would not need to obtain summer generation resources, which are more expensive and scarcer, until June 2003. This should allow the Board a few more months to develop an auction format, while also aligning subsequent BGS supply years to PJM’s proposed summer capacity responsibility periods.
  
• To address the above concerns about market conditions, the Board should 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.

Scott Hempling is an attorney and a national expert on legal and policy issues related to regulated industries. He has advised numerous state commissions and testified before Congress and state legislatures on issues relating to energy restructuring. He also is a frequent lecturer on restructuring-related issues at professional conferences and training sessions. Mr. Hempling’s testimony recommended several principles and objectives that should be followed in developing a method of providing BGS, and examined the many available alternatives to the utilities’ proposal for a BGS auction. The following is a summary of Mr. Hempling’s testimony: