Press of Atlantic City

Electric Rates Set To Rise With Auction

Press of Atlantic City — Monday, February 4, 2008

Staff Writer

The next big increase in your electric bill is taking shape in cyberspace right now.

An annual auction, monitored by the New Jersey Board of Public Utilities, begins online today and allows energy and investment companies to bid for the sale of electricity to the state's four main electric utilities, Atlantic City Electric among them.

The winning bids will help determine how much the utilities will charge their residential customers for the year starting June 1. Those results could be announced by Friday.

State deregulation that was meant to increase competition and lower costs to consumers has instead brought double-digit increases to electricity bills the past two years.

Consumer advocates and energy experts say the pattern of increasing prices will continue in New Jersey. Before deregulation, the utilities were on their own in buying or generating electricity.

"I'd love to see price increases start to get smaller and smaller, but I don't have any reason to believe that this year will be different," said Stefanie Brand, director of the New Jersey Division of Rate Counsel, which proposed changes last year to the auction.

In 2006, the outcome of the auction resulted in prices that were 55 percent higher than the auction in 2005 and 90 percent higher than in 2004, according to the federal Energy Information Administration.

Atlantic City Electric customers' bills increased by an average 12.54 percent and 10.54 percent in 2006 and 2007, respectively.

Other states that opted for deregulation have seen limited success with their auctions, which vary from New Jersey's. In 2006, an auction in Illinois resulted in rates rising by 22 percent to 55 percent. That same year, an Ohio auction didn't even attract bidders.

But for better or worse, New Jersey has remained faithful to its format.

How it works

New Jersey's Basic Generation Service auction is referred to as a "reverse auction," with power suppliers naming prices they hope will be low enough to get them a contract to supply electricity.

Through the auction, Atlantic City Electric, Public Service Electric & Gas, Jersey Central Power & Light and Rockland Electric are securing the electricity that they will provide and charge to their more than 3.5 million customers.

One part of the auction covers the residential market, which includes small businesses, while another supplies industrial and large commercial customers. The latter auction began Friday.

The bidding is done in rounds for a set amount of megawatts. Last year, 20 companies competed in the online auction to supply the four big utilities with a combined 7,200 megawatts of power valued at $6.5 billion.

To protect customers from the volatility of prices, which can fall or spike annually, utilities purchase only one-third of the power that they need for the year in the current auction. The rest comes from purchases in the two previous years.

This year, Atlantic City Electric will use power costing 10.4 cents per kilowatt-hour from 2006, when the country's energy output was reeling from the Gulf Coast hurricanes, and 9.9 cents per kilowatt-hour from 2007. Last year, the utility had power from 2005 that cost 6.6 cents per kilowatt-hour.

With the rising costs of energy, the Mays Landing-based electric company is planning new technology and conservation initiatives to help customers save money.

One rate-hike component remains the rising cost of natural gas, which is used to power the plants that generate electricity and has tripled in price in the past decade.

"Unfortunately, we're in a period of increasing demand and decreasing sources," said Richard Rathvon, president of the Retail Energy Supply Association in Harrisburg, Pa.

Changing the auction

With auction prices rising and consumer advocates demanding change, the Board of Public Utilities last year again asked for recommendations on improving the process.

New Jersey's Public Advocate suggested that the BPU use a portfolio manager who could shop for the best electricity prices year-round.

The state Division of Rate Counsel wanted auction modifications to secure lower prices, including allowing suppliers to keep underbidding their competitors.

The Retail Energy Supply Association of power producers, meanwhile, had its own idea to make the auction better: Instead of a three-year contract, it suggested a "real time" pricing structure that it said would encourage consumers to conserve energy.

The utility companies and the BPU rejected all of the proposed changes, saying they wouldn't improve the auction or benefit consumers. They've also said the auction has attracted enough bidders to make it competitive.

"The board continues to believe that the auction model is well-designed and is currently the best available option to procure electricity for New Jersey," BPU President Jeanne M. Fox said in a statement Friday.

Ev Liebman, the southern New Jersey director of New Jersey Citizen Action, a watchdog coalition, said the auctioning process lacks transparency and people should know exactly how suppliers bid.

She added that the coalition is reaching out to legislators to push a revision of the auction.

"In the face of electricity prices that have almost doubled in the last few years, it appears to us they (the BPU) would prefer to keep their heads in the sand," Liebman said.

The cost of deregulation

A wave of energy deregulation initiatives rolled through the country in the mid-1990s, as commercial consumers petitioned states for relief from high-charging utility monopolies.

In New Jersey, energy deregulation was signed into law in 1999, and the BPU predicted that electricity rates here - historically among the highest in the nation - could be cut by at least 5 percent to 10 percent once the market opened up to alternate suppliers.

As part of a transitional period before the first electricity auction was held in 2002, the state imposed an annual rate cut that benefited consumers and small businesses by about $2.4 billion. But by 2003, the year the rate cut expired, some residents saw their electricity bills increase by about 15 percent.

"The states that have gone to the (deregulated) market like in New Jersey are actually increasing in (average retail) price faster than the regulated states," said Ken Rose, a researcher and economist in Ohio who studies the industry.

A recent study of his found that average prices in regulated states increased by 21 percent from 2002 to 2006, but in deregulated states where the rate caps expired, prices jumped 36 percent.

Some states have either gone back to regulation, such as Virginia, or are considering it, such as Ohio.

"For policy makers, (deregulation's) been a kind of 'Field of Dreams': Do I build it, and will they come?" said Rathvon, also a vice president with Reliant Energy, a Houston-based retailer with industrial and commercial clients in New Jersey, including casinos in Atlantic City.

Rathvon supports a deregulated market and blames the shock from the loss of rate caps for turning people off to deregulation. A tweaking of the auction in New Jersey, he insists, would spur new suppliers to set up shop here.

"I still believe we're in the infancy of competition in the residential sphere," Rathvon said. "I think the competitive markets ultimately will prevail."

But a wait-and-see attitude only hurts residential ratepayers, Liebman said, adding that New Jersey Consumer Action wants rates regulated again and the BPU to certify the electricity market in New Jersey as noncompetitive.

"We've had enough," Liebman said.

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