July 24, 2001

Frances L. Smith, Esq., Secretary
New Jersey Board of Public Utilities
Two Gateway Center
Newark, NJ 07102

Re: I/M/O the Provision of Basic Generation Service Pursuant to the Electric Discount and Energy Competition Act
BPU Docket No. EX01050303

Dear Secretary Smith:

Please accept this letter and ten copies as a motion on behalf of the Division of the Ratepayer Advocate ("Ratepayer Advocate") to reconsider the procedural schedule established at the July 12, 2001 procedural conference in this matter. Copies of this motion are being served to the parties listed on the attached service list by hand delivery or first class mail. Copies are being provided by e-mail to those parties which have provided e-mail addresses.

The schedule established by the Board will not permit either the parties or the Board to give adequate consideration to a proposal submitted by the State’s four electric distribution companies ("EDCs") which would, if implemented, have profound impacts on New Jersey electricity markets, both wholesale and retail. Based on the Ratepayer Advocate’s preliminary review of the EDCs’ proposal, it would subject New Jersey’s basic generation service ("BGS") customers to the risk of high and volatile electricity prices, rather than promoting vigorous competition with lower energy prices, improved quality and choices of service as mandated by

EDECA. For the reasons explained below, this proposal should not be entertained without full evidentiary proceedings under a timetable which will permit a complete analysis of the implications of the proposal for New Jersey’s energy markets and energy consumers.

This proceeding has its origins in the enactment of the Electric Discount and Energy Competition Act of 1999 ("EDECA") and the stranded cost, unbundling and restructuring proceedings conducted by the Board for New Jersey’s EDCs. Under Section 9 of EDECA, the EDCs are required to provide basic generation service for customers who have not chosen a competitive supplier for at least three years following the implementation of retail electric choice, that is, through July 31, 2002. N.J.S.A. 48:3-57 (a). By that same date, the Board is required to "issue a decision as to whether to make available on a competitive basis the opportunity to provide basic generation service to any electric power supplier, any electric public utility, or both." N.J.S.A. 48:3-57 (c).

The process for the Board to consider the structure of BGS after July 31, 2002 was addressed in the Board’s rate unbundling, stranded costs and restructuring Orders for each of the four EDCs. As noted in the Board’s June 6, 2001 Order Establishing Procedural Schedule ("Procedural Order") in this matter, the Board’s Final Orders for three of the EDCs, Atlantic City Electric Company, d/b/a/ Conectiv Power Delivery ("Conectiv"), Jersey Central Power and Light Company, d/b/a/ GPU Energy ("GPU"), and Public Service Electric and Gas Company ("Public Service") directed them to file, by August 1, 2001 "specific proposals to implement an RFP process" to provide for BGS during Year 4 of the Transition Period, from August 1, 2002 through July 31, 2003. Procedural Order at 1. The Summary Order for Rockland Electric Company ("RECO"), provides that the Board will under take a review, beginning on August 1, 2001, to determine whether, and in what manner, RECO will be permitted to bid out BGS responsibility during year 4. Id.

In the Procedural Order the Board determined that, in view of the "current status of electric retail competition in New Jersey and the current state of the region’s electric wholesale markets," there was a need accelerate the review, discussion, and consideration of how BGS is to be provided during Year 4. Procedural Order at 1. Specifically, the Board found that an early decision by the Board was necessary to allow for an orderly bidding process, or, if the Board were to decide to retain the EDCs’ responsibility for BGS, to allow the EDCs sufficient time to develop their BGS supply portfolios for Year 4. Therefore, the EDCs were directed to file, by June 29, 2001, their "specific proposals to implement an RFP process for BGS for Year 4 of the Transition Period ...." Procedural Order at 2. The Board further established a "preliminary procedural schedule" which contemplated a Board decision by November 1, 2001. At a scheduling meeting on July 12, 2001, a final schedule was established, including the following timetables:

• Completion of discovery as to the EDCs’ proposals and the filing of non-EDC positions by August 17, 2001.
• "Public legislative hearings," with no opportunity for cross-examination, on October 3 and 4.
• The filing of "final comments" by October 17, 2001, with replies due one week later on October 24, 2001.

On June 29, 2001 the EDCs submitted a proposal to procure BGS by means of a state-wide auction in which BGS supplies would be procured simultaneously for all of the EDCs. This proposal, which appears to have been untested in any statewide BGS market or other similar context, has been submitted with no supporting testimony, and no analysis of whether or how the proposal will encourage wholesale or retail competition, or whether or how it will benefit consumers. Further, at a discovery meeting held on July 19, 2001 the EDCs acknowledged that many of the details of their proposal are still under development, and will not be provided until the end of July, 2001.

The Ratepayer Advocate strongly urges the Board to reconsider the highly abbreviated schedule established for consideration of the EDCs’ proposal. This schedule is neither legally sufficient nor adequate to permit a thorough examination of the many serious issues the EDCs’ proposal raises for New Jersey’s energy marketplace. To arbitrarily rush into a proposal prepared by and for the electric utilities without ample opportunity to go behind the proposal or to review alternative proposals can lead to serious harm to both ratepayers and the economic well being of New Jersey. The Ratepayer Advocate would urge the Board and its Staff to explore other scenarios, and to engage its own independent consultants to both review the EDCs’ proposal and develop alternatives designed to encourage effective competition in New Jersey’s energy markets.

The standards for determining when the Board is required to hold a full evidentiary hearing were recently reviewed by the Appellate Division in its decision involving Verizon’s proposal to reclassify its directory assistance services as competitive services. I/M/O Application of Bell Atlantic-New Jersey, Docket No. A-6018-98T2 (N.J. Super. App. Div. July 13, 2001). As explained in the opinion of the Honorable Howard Kestin for the Appellate Division, "[w]hat is required in each instance, as a hearing appropriate to the nature of the case, is a proceeding that promotes fundamental fairness and fosters the integrity of the governmental process." Id., slip op. at 5. Addressing the issue of when a full evidentiary hearing is required, the Appellate Division stated as follows:

If the agency is exercising its administrative expertise to make a policy determination not involving the adjudication of disputed facts, a trial-type hearing is ordinarily not required .... Manifestly, however, if the question turns on a factual-type determination, including expert opinion submitted for the agency’s evaluation and reliance, an interested party with the requisite standing must be able, in some effective way, to contest the bases offered. Therefore, if the issues require the agency to consider material facts and to apply the law and the agency’s understanding of public policy to the facts found, a hearing suitable to a discharge of those functions is necessary.

Id., slip op. at 6, citing High Horizons Dev. Co. v. Department of Transp., 120 N.J. 40, 50 (1990).

The EDCs’ proposal in this matter raises a number of serious concerns that cannot be resolved without the benefit of thorough expert analyses of the impact of the proposal on New Jersey’s energy markets and, ultimately, on the State’s residential and business customers. Due to the short time available to date for review of the EDCs’ proposal, as well as its incompleteness and lack of supporting analysis, the Ratepayer Advocate has not been able to perform a complete review of the proposal. However, a preliminary analysis has identified the following significant issues:

• Under the EDCs’ proposal, BGS suppliers would not be permitted to provide metering or billing services, and thus would have no opportunity to establish meaningful retail relationships with consumers, and would be essentially invisible to BGS customers. Thus, one of the key objectives of competitive BGS would not be met. At least one other state, Pennsylvania, has permitted BGS suppliers to establish retail relationships with consumers.
  
• The Company is proposing that all industrial and commercial customers, including small businesses, not be permitted to leave BGS service for the entire one-year period from August 1, 2001 through July 31, 2003. This would severely limit these customers’ ability to switch to competitive suppliers in response to high BGS prices, or to seek alternative "bundled" energy opportunities.
  
• The EDCs would be relieved of their obligation to provide BGS, without any examination by the Board as to whether this is in the public interest.
  
• The utilities are proposing a "descending clock auction" format which has never been used to procure BGS, or in any similar context. A similar format has been used to sell broadband frequencies in auctions by the Federal Communications Commission, and to sell capacity being divested by electric utilities in Alberta, Canada and in Texas. These auctions all involved a large number of potential bidders for the resources being sold, and none of them involved procurement of BGS supplies. The number of bidders to supply BGS is inherently limited. Thus, it is questionable whether there will be sufficient bidders to produce prices for BGS which reflect vigorous competition.
  
• Under the EDCs’ proposal, if there are not enough bidders for an effective auction to procure supplies for 100% of New Jersey’s BGS load, the EDCs would be required to procure the remainder on the spot market. As a representative of Public Service testified in a recent proceeding, reliance on the spot market for a portion of 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. Testimony of Pierre Landrieu at June 15, 2001 evidentiary hearing in BPU Docket No. GR00080564, Tr. 1089.
  
• The PJM capacity market requires suppliers to procure capacity for the peak summer period from a four-month period, from June 1 through September 30. Under the EDC’s proposal, suppliers would be required to provide BGS supply from August 1, 2001 through July 31, 2003, thus requiring them to acquire capacity for two summer periods in order to provide BGS for one year.
  
• The EDCs are proposing to require suppliers to bid on "slices" of each EDCs’ entire BGS requirements. This creates risks which may discourage bidders and/or drive up prices.
  
• Making arrangements to obtain the resources needed to provide a "slice" of BGS is a complicated process. The proposed timing of the auction, in December, 2001, does not appear to provide prospective bidders with enough time to accomplish this, especially when details of the proposal are still in progress.
  
• A significant share of the State’s electric generation resources are controlled by an affiliate of Public Service, which appears to be playing the leading role in developing the rules for the proposed auction, which, as noted, have not yet been completed. This raises serious concerns about insuring an effective separation between Public Service and its affiliate.

Resolving these issues will require a thorough analysis of New Jersey’s wholesale and retail electricity markets, and the potential impacts of the EDCs’ proposal on the State’s energy markets and energy consumers. Thus, the Board will be required to make factual determinations based on expert opinion, and apply the Board’s understanding of legal and policy issues to the facts found. Under the standards recently articulated by the Appellate Division, this is precisely the type of determination that requires a full evidentiary hearing, in which the Ratepayer Advocate and other parties must be give the opportunity to cross-examine the factual bases for the EDCs’ proposal, and present their own factual testimony, in an effective way.

The procedure adopted by the Board does not meet this objective. As noted above, the EDC’s proposal is not yet complete, and was submitted with no supporting testimony it is currently a "trust me" proposal. Nevertheless, the Ratepayer Advocate and other parties are expected to submit all discovery requests by July 25, 2001 and prepare counter proposals by August 17, 2001. Furthermore, there will be no opportunity to create a complete record though cross-examination. By any standard, this procedure is inadequate to provide the Ratepayer Advocate and other interested parties with a meaningful opportunity to explore the details of and the factual bases for the EDCs’ proposal.

The EDCs’ proposal requires a hearing commensurate with the complexity and importance of the issues it raises. Initially, the EDCs’ should be required to file a complete proposal, which should be supported with testimony demonstrating that the proposal will benefit consumers and further the pro-competitive policies of EDECA. After the complete proposal is filed, the Board should establish a schedule which will allow ample time for review and discovery, the development and filing of proposals by other parties, full evidentiary hearings, briefing, and a reasoned decision by the Board based upon a complete record.

The Board is treading here on the development of the future energy marketplace in New Jersey, which under EDECA must be opened to competition. Three years after the enactment of EDECA the retail energy marketplace still is not competitive. The EDCs are seeking approval of a proposal which will determine the future of both the wholesale and retail electric markets in New Jersey, with no meaningful opportunity to fully explore and challenge the EDC proposal, and an inadequate opportunity for other parties or the Board’s own staff to develop alternatives which will better encourage a robust competitive market. The issues implicated in the EDCs’ proposal require careful consideration, not the perfunctory approach advocated by the utilities.

BAP/bj

BACK | HOME