REMARKS OF SEEMA M. SINGH, ESQ.
RATEPAYER ADVOCATE
NEW JERSEY DIVISION OF THE RATEPAYER ADVOCATE

 THE STATE OF ENERGY DEREGULATION

  ASSEMBLY HEARING

Assembly Telecommunications & Utilities Committee
10 a.m. February 27, 2003
Committee Room 15, State House Annex, Trenton

Good morning Chairman Caraballo and members of the committee, thank you for inviting me to speak on the state of energy deregulation in New Jersey.  While this is a very complex and technical subject matter, my goal is to provide you with some background as to what has occurred over the past three years, and what’s potentially ahead for New Jersey consumers.

As you know, deregulation was approved in New Jersey under the Electric Discount and Energy Competition Act, commonly referred to as “EDECA.” 

The concept of energy deregulation was born out of the high cost of energy for big energy users such as steel mills, oil refineries, and manufacturing plants.   With the new global economy, these large companies were competing against foreign companies whose labor costs are extremely low, in countries with poor environmental standards.   In order to stay in business, the U.S. companies began to look into reducing their costs.  Some of the biggest costs to U.S. companies were labor, which is traditionally high in the Northeast, environmental pollution control technology and electricity. 

To compete globally, many of these companies threatened to leave the Northeast and relocate to the Midwest or Southeast, where energy costs as well as labor costs were cheaper.  After realizing that these companies were very serious about moving their businesses, several states forged ahead and put together a package of economic incentives to entice these companies to remain in their states, one of these incentives was energy deregulation.  For example, Pennsylvania, Connecticut, California, and Massachusetts implemented energy deregulation before us.  There was concern around 1998, that if New Jersey did not act to implement deregulation to reduce energy costs, we would lose large companies to our neighboring states.

Also, at that time, New Jersey business and residential consumers were facing some of the highest electric rates in the country.  For example, in 1990, the cost of energy in New Jersey was about 9 cents per kilowatt, whereas the national average was about 6 ½ cents.  In 1998, New Jersey’s average cost of energy was around 10 ½ cents whereas the national average was about 6 3/4 cents.   It was believed, then, that energy deregulation was the best direction to take in order to protect the state’s economy.  Keep in mind that these large companies provide thousands of jobs to New Jersey residents.  If they were to pick up and leave our state, we would all directly feel the impact of these job losses.

It is my understanding that the intent of the legislation was to encourage competition among energy suppliers and thereby achieve lower rates and better service for residential and business customers.  However, as we now know, energy deregulation, so far, has not worked as envisioned. Today, there is very little competition in the state.  According to the most recent statistics, out of 3.1 million residential electric customers statewide, only 1,800 have switched electricity suppliers, and out of 465,000 industrial and commercial customers, only 638 have switched to an electricity supplier other than their local utility. 

For those customers who choose not to switch, customers will receive their electricity from the local utility under what’s called Basic Generation Service.  The BPU authorized the basic generation service component to be competitively bid through an auction.  One was held last year and another just a couple of weeks ago. 

This year’s auction achieved competitive prices for customers who wish to remain with their utility.   There were two separate auctions, one to serve the large industrial customers, referred to as the Hourly Energy Price or HEP auction and one to serve the rest of the utilities’ customers, namely residential and small to medium commercial customers, referred to as the Fixed Price or FP Auction.  The HEP auction set the rates for those large customers who can adjust their manufacturing processes to take advantage of hourly market energy rates.  The FP auction set the rates for those customers who choose to get their power from the local utility.  In order to take advantage of both the short term and long term energy markets, the FP rate was obtained by bidders supplying power for a ten month and thirty four month term.  This way, consumers should not be exposed to price volatility if the rates were set based solely upon the long or short term market.

Under the provisions of EDECA, the four-year transition period to full energy deregulation ends this July.  As a result, the rate caps set by the Act come off August 1st exposing consumers to significant rate hikes.  The Ratepayer Advocate, along with the Board of Public Utilities as well as industry representatives, have been working together to find legislative solutions to ease the impact of energy deregulation on consumers.  Working together, reforms to address rate shock have been passed by this Legislature.  They include Securitization and Municipal Aggregation.

Thanks to the efforts of Assemblymen Caraballo and Ahearn, the Assembly sponsors of S-869/ A-2108, regulators now have a tool to lessen the impact of the pending rate increases. The bill, signed into law on September 9, 2002 by Governor McGreevey, permits the Board of Public Utilities to authorize the securitization of deferred energy balances of electric utilities. The potential to securitize the deferred energy balances gives the BPU another vehicle, should it be determined to be in ratepayers best economic interests, to use securitization to control the rate impact upon consumers. 

Thanks to the efforts of Assemblymen Burzichelli and Fisher, sponsors of Assembly Bill A-2165, the municipal aggregation reform legislation, local governments will now be able to efficiently and economically pursue aggregating their residents, thereby making them more attractive to third party energy suppliers.  The measure received final legislative approval on January 23, 2003 and is now on the Governor's desk.  It is the Ratepayer Advocate’s position that successful municipal aggregation will benefit consumers by enabling them to negotiate with the third party energy suppliers as a pool of customers, with the goals of achieving lower rates and better service.  The amendments allow municipalities to not only adopt an “Opt-In” program but towns can also pursue “Opt-Out” aggregation, whereby residents must affirmatively indicate they do not want to be part of the aggregation program.  This provides the third party supplier with a better idea of the size of the power pool or amount of energy they are bidding on up front.  Also, the legislation requires that the aggregation price be equal to or lower than the BGS rate of the local utility.  The aggregation price can be higher than the BGS rate if it is based upon a greater amount of electricity coming from renewable sources than what is being provided through the BGS rate.  Municipalities will also be able to obtain the load profile and other customer information in electronic format, which was a stumbling block in the past.  

            Again, I must say that energy deregulation is a very complex area, and there appears to be some confusion between stranded costs, securitization of stranded costs, deferred energy balances and the securitization of the deferred energy balances.  I will try to explain the differences. 

     Due to the enactment of EDECA, utilities were faced with the reality of not being able to recover the costs they incurred in building power plants and entering long-term contracts to buy power from other entities instead of constructing more power plants of their own.  In order to assist the utilities to make the transition to a competitive environment, the Act allows the utility to recover all prudent and reasonable costs incurred by the utilities in acquiring power for their customers.

            An unforeseen consequence of EDECA was the accumulation of large deferred costs that the utilities amassed by buying power to meet their customers demand during the last three years.  The utilities had to purchase this power because they sold or “divested” their electric generating plants.  As New Jersey’s energy rates were already quite high, it was believed that the price of power would not exceed these high rates.  In retrospect, we now know that was inaccurate.

The actual cost of electricity over the last three years has been more than the mandated rates set by the Act.  As a result, the utilities have been carrying these additional costs as a deferred balance.  The deferred balance is the amount of money a utility spent to buy power for its New Jersey customers at prices above what the utility can charge customers due to the mandated rate caps put in place by EDECA. 

At this time, according to filings made by the four electric utilities, the total accrued deferred balances claimed by the electric utilities since the beginning of deregulation in 1999 are approximately $1 billion.  JCP&L has requested $684 million; PSE&G has requested $248 million; Rockland Electric has requested $110 million; and Atlantic Electric has requested $176 million.    

As you are aware, New Jersey is facing some significant issues regarding electricity rates. Well, what’s in store for the future?

Since being named Ratepayer Advocate, a little over one year ago, the first directive I gave my staff was to undertake a thorough review of EDECA to ascertain what could be done to bring the benefits of competition to the small commercial and residential consumer.  We have done that by working with the Administration and the Legislature in amending the municipal aggregation and securitization sections of EDECA. 

My staff is updating our “Manual for Government Aggregators” to assist municipalities in aggregating their residents.  I am working closely with the Administration and the League of Municipalities to provide municipal officials with my staff’s technical expertise.

The Ratepayer Advocate also submitted comments to the Governor’s Deferred Energy Balance Taskforce.  Governor McGreevey, who is very concerned about the impact on New Jersey’s ratepayers, established the Deferred Balance Task Force last fall to review the reasons for the accumulation of the deferred balances and to propose mechanisms to mitigate their impact.   These costs are being carefully scrutinized by the Ratepayer Advocate to ensure that the utilities took the most prudent steps in purchasing this power and paid the lowest rate possible to provide their customers with that power.

Another directive I gave my staff was “to leave no stone unturned” and to aggressively review every aspect of the utilities’ rate filings.  Currently underway at the Office of Administrative Law, are evidentiary hearings for all four electric utilities regarding their requests for increases in distribution rates and recovery of deferred balances.  As we sit hear today, Ratepayer Advocate staff attorneys are cross examining the utilities’ witnesses.  Based upon the review and analysis of the Ratepayer Advocate’s expert witnesses and staff attorneys, we believe that some of the costs sought to be recovered by each utility regarding their deferred energy balances were not prudently incurred and should not be passed onto ratepayers.  We will be submitting legal briefs to the Judges setting forth our positions.       

However, keep in mind that it is the BPU who will render a final decision on each of the company’s requests.  Only then, will the rates that will be in effect this coming August be known to customers.  Be assured that the Ratepayer Advocate is vigorously advocating on behalf of all customers, with a special emphasis on low and fixed income customers.  That’s why I have been strongly advocating for the creation of a permanent Universal Service Program to address the needs of our least fortunate citizens.  The fund will serve as a safety net for those economically distressed customers who have to make hard choices of whether to pay their utility bills or feed their families.   

            Once the BPU determines the deferred balance amount found to be prudently incurred by the utility, an additional charge will be added to customers’ bills as of August 1, 2003.  Be aware, however, that customers are still responsible for paying these costs regardless of whether they switch energy suppliers or not.

My goal in these rate proceedings is to minimize the rate increases and maximize benefits to ratepayers.  I want to keep rates at affordable levels for all ratepayers, no matter what the status of their economic situation. 

I have also been appointed by Governor McGreevey to the Renewable Energy Taskforce.  The Taskforce is reviewing the renewable energy requirements currently established by EDECA.  The major issues we are addressing are whether to expand the percentage of renewable energy currently being supplied to New Jersey consumers; whether the electricity should come from specific renewable technologies and whether the renewable electricity sources should be generated inside New Jersey.  These are complex policy decisions with no easy answers.  However, I am committed to securing an electricity supply that promotes the health and well-being of our environment and our residents.

            The recent events surrounding Enron have led to increased press coverage on the energy deregulation issue.  Many are concerned that what happened in California regarding huge price increases will happen here in New Jersey.   It is my view that what occurred in California will not occur in New Jersey.  There were many factors that led up to the California energy crisis, some being, the lack of new power plants to meet the demand from the fast growing technology sector of California’s economy, the drought in the Northwest which decreased water flowing through hydroelectric facilities which California relies heavily upon for power, and the operation of their transmission grid.

            New Jersey has hardly any power produced by hydroelectric facilities, so a drought situation, which we were in last year, really doesn’t affect our power supply.  Thankfully, we also have enough reserve supply to meet our consumer’s demand.  And last but not least,  New Jersey’s electric transmission grid is operated by the PJM Interconnection.  This organization is regarded as one of the best in the world for operating and managing the transmission grid.  New Jersey is one of seven states in the Mid-Atlantic area that PJM daily controls and efficiently delivers energy for consumption.  PJM is regarded by FERC as a model for other areas of the country.  The Ratepayer Advocate is working with the BPU to monitor and participate in PJM proceedings and meetings to maintain an efficient electric transmission system.

            While competition has not taken off as all had hoped, the Ratepayer Advocate commends the Legislature and the Administration for taking another look at EDECA to see what else needs to be changed to bring the benefits of competition to our consumers. 

            I also strongly believe that consumer education is vital if energy deregulation is going to be successful.  Although a Consumer Education Campaign was launched with the passage of EDECA, I believe a better message needs to be sent to consumers.   Since becoming Ratepayer Advocate, I have spoken to various constituencies regarding the basics of energy deregulation.  My Staff and I have put together an informative presentation and are always available to come out and speak to the residents and groups in your legislative districts.  I stand ready to assist in whatever way to bring the hoped for benefits of deregulation to consumers.

            We must be patient for a robust competitive energy market to develop.  It won’t happen overnight, or even, as we can see, over four years.  Remember, it took many years for the long distance telecommunications market to develop.  We have deregulated part of an industry that has been rate regulated for over 100 years.  Working together, I believe we can bring about the benefits of a competitive market to all New Jersey consumers. 

            Again, thank you for the opportunity to speak to you today.  I look forward to working with you in the coming months on this important issue.