STATEMENT
OF PAUL CHERNICK ON BEHALF OF
THE DIVISION OF THE RATEPAYER ADVOCATE
BEFORE
THE BOARD OF PUBLIC UTILITIES
PUBLIC/LEGISLATIVE-TYPE HEARING
IN THE MATTER OF BASIC GENERATION SERVICE PURSUANT TO
THE ELECTRIC DISCOUNT AND ENERGY COMPETITION ACT
Newark, New Jersey, Thursday, October 4, 2001, 9:30 a.m.
Good morning, Commissioner Murphy.
Thank you for the opportunity to provide this summary of the Ratepayer
Advocate’s technical concerns raised by the proposal of the four New Jersey
Electric Distribution Companies (EDCs) for acquiring BGS supply for the fourth
year of the transition to competition.
The basic theme running through my direct
testimony, which was filed on August 29, 2001, is that of the risks it poses for
ratepayers. The EDCs have proposed an approach to acquiring BGS supply that
exposes the ratepayers to tremendous risks. Let’s just look at a few of the
risky aspects of the proposal:
·
All the
state’s electric supply eggs would be in one basket. All 20,000 MW of BGS
supply would be acquired in one auction on one day. If any event or circumstance
increases the price of that auction—an indication that markets will be tighter
in 2002–03, a FERC order creating new uncertainties in market rules, an uptick
in gas futures, an attack on Mideast oil facilities or an American refinery, a
flaw in the auction design, exercise of market power—it will increase the
costs of all of the state’s BGS
supply for the entire 2002–03 supply year.
·
The scale
of this auction is enormous, representing about a third of the capacity in the
PJM market and roughly $5 billion.
·
The
proposed auction method has never been used to purchase anything. It has been
used only for sales of licenses and entitlements. Purchases of a real commodity,
such as electricity, are very different from sales of licenses; while buyers of
licenses need only have money, the bidders in the BGS auction will need to have
access to generation, which is in limited supply in the 2002–03 period. There
is no experience with the Simultaneous Multi-Round Clock Auction approach in
circumstances similar to the proposed BGS auction.
·
The
proposed auction would involve two levels of the market in generation services.
If all went well, generation owners would compete to provide energy and capacity
to marketers, and the marketers would compete to more efficiently bundle
generation services, manage their risks, and provide the lowest bids in the
auction. Unfortunately, the EDCs have not provided any information on the extent
of competition the Board might expect at either market levelCamong
generation owners or among the marketers who will actually be bidding in the
auction.
·
The
generation market is quite tight in 2002, with only about 10% more uncommitted
generation—that is, generation not already committed to serving other
customers—available in PJM than would be acquired in the auction. The EDCs
estimate that they need excess interest of 26% to 60% to have a successful
auction, and past successful Simultaneous Multi-Round Auctions generally had
bidding ratios of 150% or more.
·
The tight
market in uncommitted generation appears to be dominated by a few generation
owners, particularly PSEG Power and Reliant Resources, who may be able to
control bid prices by controlling the prices they charge the marketers,
including their affiliates. Reliant’s market power will be increased by its
pending acquisition of Orion.
·
Given the
shortage of generation capacity, multiple marketers will have their bids backed
up by commitments from the same generation. The auction rules do not prohibit
this behavior, and the EDCs expect it. As a result, the Board and its agent will
not know how much real independent interest has been expressed when the first
bids come in, and may find that the auction collapses soon after the Board loses
the power to restrict the scope of the auction.
·
While the
Board’s agent would know which marketers are bidding, how many slices of
supply they bid on, and how those bids change during the auction, the
generation market underlying the auction will be composed of bilateral
contracts, and will be entirely hidden.
·
To the
extent that the auction fails to attract sufficient bidding interest, the EDCs
propose that the Board commit itself in advance to acquiring all the remaining
BGS supply from the PJM spot markets. Utilities would be prohibited from
acquiring any power through bilateral contracts. Electric energy spot market
prices are volatile, and most purchasers avoid buying from them except for
balancing. The requirement that the California utilities purchase their BGS
supply on the spot markets contributed to the crisis in the California energy
markets. While the EDCs’ stated intent is to punish marketers for failing to
bid, and force them into the auction, the effect may be to punish ratepayers.
·
The EDCs
recognize that excess reliance on the spot markets is undesirable, and suggest
that the Board determine the maximum level of acceptable spot purchases. All the
remaining purchases would be from the auction, no matter how weak the interest
or how high the prices.
·
At a
recent informal conference meeting with the Ratepayer Advocate, the EDCs’
consultant suggested that the EDCs could hedge their spot-market purchases with
financial contracts, such as options, while refusing to sign contracts with
generators for physical delivery of electricity. Since the same marketers who
refused to bid in the auction may be selling the options that the EDCs would be
buying, this suggestion seems incompatible with the EDCs’ proposal that the
Board prohibit bilateral contracts outside the auction. The Board should not
limit its options for mitigating risk of BGS supply requirements through
bilateral contracts of any type.
·
Finally,
the EDCs have failed to provide any mechanism for establishing a benchmark
market price, to determine whether the auction prices are reasonable. I fail to
see why anyone would start an auction for $5 billion of power without any idea
of what it should cost if the market is working properly.
I would be happy to answer
any questions you might have.