July 19, 1999

VIA HAND DELIVERY
Mark W. Musser, Esq., Secretary
Board of Public Utilities
Two Gateway Center
Newark, New Jersey 07102

Re: I/M/O the Energy Master Plan Phase II Proceeding to Investigate the Future Structure of the Electric Power Industry -- Restructuring Proceeding

BPU Docket Nos. EX94120585Y, EO97070457, EO97070460, EO97070463, EO97070466

 

Dear Secretary Musser:

    Enclosed for filing please find an original and eleven copies of the comments of the Division of the Ratepayer Advocate ("Ratepayer Advocate") concerning the draft interim renewable energy
portfolio and net metering standards of the Board of Public Utilities ("Board") in the above referenced matter. Please date-stamp the extra copy as "filed" and return it to our messenger. Thank you for your assistance in this matter.

DRAFT INTERIM RENEWABLE ENERGY PORTFOLIO STANDARDS

The recent power outages -- in which more than 170,000 New Jersey utility customers lost power -- provided timely reminders that we must focus on preparing our power supply and distribution system for the 21st century. As the New York Times stated in an Op-Ed on July 13, "One answer is to build more power plants and transmission capacity. But that should be only one element in a broader strategy that seeks as well to conserve energy and exploit newer, more efficient technologies."

The Division of the Ratepayer Advocate supports the Board’s proposed renewable energy portfolio standards as part of this State’s "broader strategy" to address all the technical issues that will insure safe, adequate and reliable service well into the next century.

When fully implemented, we believe that these portfolio standards will help create a balanced and mutually reinforcing program to provide New Jersey with the environmental benefits of additional renewable resources at a modest cost.

New Jersey is moving to a system of competition in the provision of electricity and natural gas. This transition necessitates re-examination of the role of electric and gas utilities in delivering energy efficiency and renewable energy to energy consumers.

One of the primary objectives of competition is to reduce the cost of electricity services. However, absent public policy initiatives, markets may not recognize the external environmental costs associated with electricity production and consumption. Some electricity sellers may seek to reduce all discretionary costs associated with environmental protection, to the detriment of the environment. Similarly, some retail suppliers may also seek to encourage the consumption of electricity in order to increase their revenues. Therefore, it is important that the Board adopt policies that mandate that competitive markets be structured to ensure the delivery of renewable energy as an integral part of electricity services.

However, for all the reasons that support the decision to change the State’s monopoly electric utility industry to a competitive marketplace, we should also seek to rely as much as possible on competitive markets to deliver the amount of renewable energy that is societally cost-effective but that may not be provided by competitive markets on their own. Moreover, the provision of renewable energy does not have natural monopoly characteristics and therefore these programs should not only be provided by the electric distribution utilities. Rather, the same market forces that will affect the delivery of electricity should also come to bear on delivering renewable energy into the system mix serving New Jersey.

A market-based renewable portfolio standard should require each retail seller of electricity to deliver their proportionate share of the total amount of renewable energy resources that public policy analysis has determined to be societally cost-effective. These social goals will be delivered at the least possible cost because competitors will seek to minimize their compliance costs in order to improve their competitive position. For example, retail suppliers will seek out the lowest-cost renewable energy resources in the most cost-effective market niches. Thus, market forces will be brought to bear on the cost of these social programs in a way that utility- or bureaucratically-administered programs, funded solely through regulated utility rates, cannot. Portfolio standards require no public collection, administration or dissemination of funds; rather, they rely entirely on market participants to deliver these resources. The role of the government should be limited to monitoring compliance with the standards and imposing penalties for noncompliance.

Renewable energy refers to energy from sources that can be replenished forever. Renewable energy technologies, such as solar power, wind power, and use of organic matter from woods or water can supplement our traditional sources of electricity from power plants that use fossil or nuclear fuel.

Renewable energy can decrease environmental impacts from traditional electricity production. At the same time, it can increase the diversity and reliability of the supply of electricity to the state. This is critical in an era of increased power demands such as have become evident in recent weeks and will place increasing stresses on our electric system in the years to come.

The standards proposed by the Board will, in a straightforward manner, implement the requirements of the Electric Discount and Energy Competition Act ("Competition Act") that each electric power supplier or basic electric generation service include a minimum amount of electricity from renewable energy resources in its overall portfolio or electricity supply sources.

The Competition Act, and the Board’s draft interim standards, specify that renewable energy resources must provide at least 2.5 percent of electricity supplied in the next year, rising to 6.5 percent in the year 2012.

The Ratepayer Advocate believes that these market-based portfolio standards will require each retail seller of electricity to deliver their proportionate share of the total amount of renewable energy resources in the most economic manner possible. Competitors will seek to minimize the cost of complying with these regulations in order to improve their competitive position.

The Board’s interim standards would also permit suppliers to meet renewable portfolio standard requirements through trading once a renewable resource trading program is adopted by the Board, in consultation with the Department of Environmental Protection. In the view of the Ratepayer Advocate, a trading program is needed to assure that the environmental benefits of a renewable portfolio standard program are realized at the lowest possible cost to retail energy consumers. We therefore encourage the Board to establish a firm schedule for developing such a trading program. In addition, we also encourage the Board to explore the possibility of developing a multi-state verification system based on a tradable credits program, which would prevent "double-counting" of renewable resources in more than one state. Currently, states in the Northeast with RPS include Maine, Massachusetts, Connecticut and New Jersey.

The following are further comments on more specific sections of the draft interim standards. The Ratepayer Advocate particularly supports the gradually increasing implementation schedule (Section 3) during the first five years. This will provide a steadily growing market for qualifying technologies and avoid "boom and bust" cycles of development. The limitation on hydro facility size will also help deter an oversupply in the Class II market with power from large hydro facilities.

The Ratepayer Advocate submits for consideration the following suggestions that we believe will provide additional assurance that the renewable portfolio standards ("RPS") provision of the Competition Act will be met efficiently and effectively. Our suggestions are aimed at providing clarity to:

(a) suppliers, who, in order to fully comply with the law, must be clear about what is required of them and the consequences of failing to comply, and

(b) potential investors in qualifying technologies, who will not make investments in those technologies if there are significant weaknesses or loopholes in the law.

1. CLARIFY SECTION 4, DOCUMENTATION REQUIREMENTS.

(a) Section 4(1) requires an annual report on renewable energy percentages by each supplier by April 1. It does not state what year the first report must be filed. Presumably it is April 1, 2001, since the report must include information about the previous year's compliance and the standards do not begin to require renewable energy until 2000. We request that the Board specify that the first report is due April 1, 2001.

(b) Subsections 4(2)(D)(1) (clause beginning "and receipt . . .") and 4(3) should be made more clear and specific. The documentation requirement should be expanded to require: (i) identification of each generating unit, including location and fuel type; (ii) verified total kWh generated by the unit; (iii) the portion of output sold to or used by the supplier; (iv) evidence that the electricity was delivered into the PJM control area; and (v) an affidavit from the owner of the unit that the power was sold once and only once. Further, subsection 4(2)(D)(1) uses the term "control area operator" which is not defined in the definitions section. The Ratepayer Advocate recommends that a definition be added to the definitions contained in section 2.

(c) Subsection 4(4) should also be more clear. The first sentence should be restated as follows: "If an electric power supplier or basic generation service supplier sells electricity in any other state and is subject to renewable energy portfolio requirements in that state, the supplier shall list any such requirement and shall indicate how it satisfied those portfolio requirements." The first sentence of Subsection 4(4)(A) appears to duplicate the previous sentence of 4(4) and is unnecessary.

2. THE BOARD SHOULD ESTABLISH A RPS CREDIT TRADING SYSTEM IN COOPERATION WITH OTHER RPS STATES.

Despite the fact that the documentation requirements attempt to prevent any double-counting across RPS states in the Northeast, this is not possible without a multi-state verification system because of the fungibility of electrons. For example, just because a supplier presents evidence that it has not used the same resource to comply with RPSs in two states does not mean that the resource was not sold to another supplier for compliance in another state. Each supplier may have no knowledge of the other's purchase of the resource. The same will be true of any CPA auditing an individual supplier's records.

A multi-state verification system would create a central authority with complete knowledge of the use of all renewable resources in all RPS states. Such a system should be based on a tradable credits program, which is required by the Act.¹  The Board should immediately initiate a process among all RPS states in the Northeast (Maine, Massachusetts, Connecticut and New Jersey) to develop a regional trading program. Absent the willingness of these states to participate,² the Board should develop its own trading program because of the benefits provided. Tradability both: (a) provides retail sellers with a flexible, cost-reducing compliance alternative to acquiring or contracting for renewable power, and (b) creates a competitive market for renewable power since renewable generators will compete to lower the cost of their power generation and, therefore, lower the price of their tradable certificates, to assure that both their power and their certificates are purchased.

A trading system (which could be largely computerized) should work as follows:

(a) Renewable electricity generators apply to the Board (or a regional authority) for "Renewable Energy Credits" (RECs) based on the past quarter's documented generation. RECs are denominated in kilowatt-hours.

(b) The Board (or regional authority) verifies the documentation and issues the appropriate number of RECs to the renewable energy generator. False documentation should be deterred by serious penalties or disqualification of the provider from future program participation. Once issued, the RECs are a separate, tradable product from the actual renewable power sold and require no further verification.

(c) The tradable credits system creates the opportunity for a private REC market to develop in which retail suppliers may purchase RECs directly from renewable energy suppliers or from a REC broker. (The retail seller may also be affiliated with or own a particular renewable energy generator.) The price of RECs is determined in the market, with the most economically-efficient renewable energy producers selling RECs at the lowest prices.

(d) At the end of the year, every retail supplier provides the Board with the number of RECs that it is required to have as a proportion of total retail sales under the RPS. As the RECs have already been verified, the Board only needs to ensure that the supplier has the requisite number of RECs.

Using a trading system will allow for market-implementation of the RPS, driving down the cost of renewables required under the RPS.

3. EXCLUDE FROM ELIGIBILITY RENEWABLE RESOURCES UNDER EXISTING UTILITY CONTRACTS.

Section 2(2) requires "Class II renewable energy" to be "located where retail competition is permitted." The Ratepayer Advocate urges the Board to expand this requirement to cover only those facilities that are available to directly serve competitive retail markets. Thus, the Board should exclude any renewable resource that is receiving above-market rates under a pre-retail-competition contract to a utility. In this circumstance, the renewable facility is unlikely to require any additional assistance to remain in operation, and the utility (which may resell the contracted power) is likely to have been compensated for its contract expenses through stranded cost recovery provisions.

The purpose of the RPS for Class II resources should be to help existing renewable energy facilities remain in operation in a market which might not otherwise provide adequate support. It should not provide windfall profits to facilities and utilities that are already receiving above-market compensation.

4. CLARIFY THAT THE "CLASS I & II" REQUIREMENT CAN BE MET BY EITHER CLASS I OR II.

Section 38.d(1) of the Competition Act states that the kilowatt hours for the 2.5% requirement be from Class I "or" Class II renewable energy sources. This is appropriate since existing renewable resources should not be protected indefinitely, but should be exposed to competition from new renewable technologies and resources.

The draft interim standards do not make it entirely clear, however, that both Class I and Class II resources are eligible to fulfill the requirement under the third column ("Class I & II") in the table in Section 3. The column should be re-labeled "Class I or II", and the Board should clearly state that resources from either class satisfy the requirement reflected in that column.

5. CLARIFY THE ELIGIBILITY OF BIOMASS RESOURCES.

Suppliers and investors must be clear about which technologies and resources will qualify for the RPS. The Board, in conjunction with the Department of Environmental Protection, should therefore clear up existing uncertainty in the law regarding technologies using solid biomass as fuel.

(a) "Class I renewable energy" apparently limits biomass facilities to those using methane gas derived from sustainably cultivated and harvested biomass fuels, but this should be clarified. In addition, some definition of "sustainable" is necessary, since differences of opinion are likely.

6. SIMPLIFY THE DEFINITION OF "TOTAL OUTPUT."

The definition of "total output" or "total energy load" seems unnecessary and unnecessarily complicated. A retail supplier should simply be required to possess a quantity of renewable energy equivalent to the required percentage of its total in-state retail sales. Whether these sales derive from bilateral contracts, the wholesale market, or owned resources is irrelevant. For compliance purposes, suppliers should simply be required to document their total retail sales.

7. CLARIFY SECTION 9, PENALTIES

(a) Subsection 9(1) contains a typo in the second sentence. The word "arrange" should be "arrearage".

(b) Subsection 9(2) says that violations of the standards "shall be referred to the Board for its consideration", but does not say referred by whom. Presumably this section refers to the Board Staff and customers, so this section should specify that.

(c) Subsection 9(2)(a)(2) says violators are subject to "financial penalties as permitted by law", but does not cite any specific laws or penalties. If the Board contemplates any specific laws and penalties now in existence, they should cite them here to give violators notice of them.

DRAFT INTERIM NET METERING, SAFETY AND POWER QUALITY STANDARDS FOR WIND AND SOLAR PHOTOVOLTAIC SYSTEMS

The Ratepayer Advocate also supports the Board’s draft net metering standards for power suppliers and customers. These Interim Standards require each electric power supplier and basic generation service producer to draw up a standard contract for net metering and to make it available on a first-come, first-served basis.

However, the Board’s standards do not establish a deadline by which time these contracts must be available to consumer-generators. The Ratepayer Advocate believes that these contracts should be drafted in a collaborative process involving all interested stakeholders as soon as possible. Therefore, we ask the Board here, too, to establish a deadline by which the draft contracts must be submitted to the Board and be made available to the marketplace.

The Ratepayer Advocate also submits the following comments on more specific sections of these standards.

1. THE STANDARDS DO NOT ADDRESS RECONCILIATION OF A CUSTOMER'S ACCOUNT IF THE CUSTOMER SWITCHES ENERGY SUPPLIERS.

The standards should make clear that the provider must pay the customer-generator for credits that remain when a customer switches suppliers, even within a twelve-month period. The standards provide that the supplier "shall credit the customer for excess kilowatt hours until the end of the annualized period at which point the customer-generator will be compensated ...." It is unclear whether the "annualized period" allows for a partial-year reconciliation in the event of a switch in suppliers.

2. THE DEFINITION OF "NET METERING" SHOULD NOT REQUIRE USE OF A SINGLE METER.

The Standards define net metering as follows:

"Net metering" means the difference between the electricity generated on the customer's side of the meter using wind or solar photovoltaic systems and the amount of electricity supplied by the electric power supplier or basic generation service provider over an annualized period as determined by a meter which is allowed to run backwards.

§ 1, p. 2.

The Board should permit, but not require, the use of a single meter that runs backward as the customer generates electricity because a single meter eliminates the costs associated with a second meter. Requiring a single meter is problematic, however, for customers that choose demand or time-of-use metering. If demand metering customers want to participate in net metering, they must be able to use two meters. It is fair, however, to require such a demand metering customer to pay the cost of the second meter.

3. THE STANDARDS SHOULD PROVIDE FOR BOARD AND RATEPAYER ADVOCATE REVIEW AND APPROVAL OF STANDARD CONTRACTS.

The Standards require suppliers to develop and make "available" standard contracts or tariffs for net metering. The Standards do not establish a process for Board or Ratepayer Advocate review and approval of the standard contracts, nor do they establish standards regarding such issues as contract termination and assignability.

In light of the Competition Act's mandate of net metering requirements on all electric service providers, there are likely to be many versions of net metering contracts in the marketplace. These circumstances warrant establishing contract standards, or at least a procedure for submission of contracts to the Board and Ratepayer Advocate for approval, so that the supplier has an approved contract prior to providing service. As stated, as part of the process, the Board should make the contract available to interested parties, including the Ratepayer Advocate for review and comment.

The Competition Act provides that the Board may authorize a supplier to cease providing net metering when at the specified threshold levels, but does not provide that the Board may prohibit a supplier from continuing to provide net metering:

The board may authorize an electric power supplier or basic generation service provider to cease offering net metering whenever the total rated generating capacity owned and operated by net metering customer-generators statewide equals 0.1 percent of the State's peak electricity demand or the annual aggregate financial impact to electric power supplier and basic generation service providers statewide, as determined by the board, exceeds $2,000,000, whichever is less;

§ 38(e), (emphasis added).

The Standards state:

Net metering will cease to be offered whenever the total rated generating capacity owned and operated by net metering customer-generators . . . .

§ 2(d), (emphasis added).

The Standards legally may provide that a supplier may cease offering net metering under those circumstances, but preferably should provide that the threshold circumstances will trigger a Board review regarding continuation of net metering obligations. The Interim Standards should be modified accordingly.

5. THE STANDARDS SHOULD ESTABLISH A PROCEDURE FOR SUPPLIER REPORTING, BOARD FINDINGS, AND NOTIFICATION OF CUSTOMERS REGARDING TERMINATION OF NET METERING OBLIGATIONS.

The Standards provide that suppliers "shall submit an annual report to the Board" with data as to the capacity of its customer-generators and the value of credits it has provided customer-generators for the previous year. The Standards should establish a process for the Board's evaluation, findings and notification as to the termination of net metering obligations, with the opportunity for input by interested parties, including the Ratepayer Advocate.

6. THE BOARD SHOULD CLARIFY THE STANDARDS TO MAKE CLEAR THAT THE TERMINATION OF NET METERING OBLIGATIONS APPLIES ONLY TO NEW NET METERING CONTRACTS.

The Standards should make clear that if the Board exercises its authority to permit suppliers to cease offering net metering, the suppliers are relieved of net metering obligations only as to new net metering contracts.

7. THE STANDARDS SHOULD SPECIFY HOW THE SUPPLIER WILL VALUE KILOWATT HOURS CREDITS THAT ROLL OVER TO SUBSEQUENT BILLING PERIODS.

If a customer-generator generates electricity in excess of its consumption for a billing period, the Standards provide that the supplier "shall credit the customer for the excess kilowatt hours until the end of the annualized period ...." The Standards should clarify whether the excess kilowatt hours will be valued at the rate that applied when the customer generated the electricity or at the rate that applies during the subsequent billing period when the supplier applies the credit.

8. THE STANDARDS SHOULD CLARIFY THE DEFINITION OF THE AVOIDED WHOLESALE COST OF ENERGY.

The Standards provide that the supplier compensates the customer-generator for remaining credits at the end of the annualized period at the supplier's "avoided wholesale cost of energy, defined as the average spot energy price in the applicable control area." § 2 (c), p. 3. It is unclear whether this "average" is the average over the annualized period or over the applicable control area. The Standards should be absolutely clear as to how the supplier should calculate the avoided wholesale cost of energy.

CONCLUSION

In conclusion, the Ratepayer Advocate believes the Competition Act’s provisions and the Board’s interim standards are a good first step toward assisting the development of renewable energy resources for energy providers serving New Jersey customers. However, we request that the Board modify the draft Standards in accordance with the Ratepayer Advocate's comments. In addition, the Board must carefully monitor the development of renewables in this State, and be ready to issue new regulations in this area, when necessary, to encourage power suppliers to rely on environmentally sound technologies for a significant portion of their supply portfolios, while promoting competition in the energy marketplace and reducing costs to customers.

Very truly yours,

BLOSSOM A. PERETZ, ESQ., RATEPAYER ADVOCATE
N.J. DIVISION OF THE RATEPAYER ADVOCATE

By: __________________________

Gregory Eisenstark, Esq.
Deputy Ratepayer Advocate

On the comments:
Badrhn M. Ubushin
Deputy Ratepayer Advocate

c: President Herbert H. Tate, Jr.
        Commissioner Carmen J. Armenti
        Commissioner Frederick F. Butler
        Elizabeth Murray, Chief of Staff
        Dr. Fred S. Grygiel, Chief Economist
        Robert Chilton, Director - Energy
        George Riepe, Assistant Director - Energy
        Service list attached

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Footnotes

1. Section 38(d)(2) states that suppliers "may satisfy the requirements of this section by participating in a renewable energy trading program approved by the board in consultation with the Department of Environmental Protection." Thus, suppliers must be provided the opportunity to participate in such a program. ^Back

2. Even RPS states that do not currently allow trading should be interested in a multi-state verification system that allows trading, because such a system can be used even if some states do not allow trading. ^Back