It�s Payback Time
For Power Providers
By Jim Brumm
The state�s four major utilities prepare for
price hikes next year when rate caps are lifted
After four years of falling electric rates, New Jersey consumers and companies will see their rates start to climb again next year during the hottest part of the summer. The increases will be 8% or more for commercial users and at least 10% for households.
The increases will mark the end of rate caps designed to spur competition among power providers during a four-year transition to deregulation. The state launched the plan in 1999 under then-Governor Christine Todd Whitman with claims that it would drive down energy prices. But while the measure has managed to trim utility bills for a while, it has also angered everyone from customers to politicians.
In a little noticed report last August, a task force created by Governor James E. McGreevey criticized implementation of the law by the Board of Public Utilities (BPU), stating, �competition has not developed, consumers have little more choice and wholesale energy prices have risen sharply.�
When the BPU-imposed rate caps expire next August, the state�s 3.6 million electricity buyers will find themselves exposed to rising rates that will include the recovery of $1.4 billion of deferred costs that utilities could not collect while rates were controlled. The state�s four major utilities have asked the board to approve another $370 million in annual revenue to recover investments and operating cost increases since early 1997, the last time a rate increase was allowed.
The increases will put an end to four years of declining electric rates for the state�s utility customers. As a result of the BPU-ordered reductions, rates have fallen 10%-to-14% since July, 1999. The biggest cuts came from the state�s largest utility, Public Service Electric & Gas (PSE&G) of Newark, a unit of Public Service Enterprise Group (see story on page 26). PSE&G was ordered to lower prices by an average of 13.9% for its nearly 2 million customers. The No. 2 utility, Jersey Central Power & Light (JCP&L), a unit of First Energy of Akron, Ohio, cut rates by 11% for its more than 1 million customers.
Also making reductions under the 1999 plan were Rockland Electric, a subsidiary of Consolidated Edison of New York City, which reduced rates by 11.6%, and Conectiv, owned by Pepco Holdings of Washngton, D.C., whose cuts totaled 10.2%.
Under the currently projected rate increases, customers of all four companies will still pay less for electricity when the caps come off next August than they did in July 1999 before the first rate cuts took effect. However, rising wholesale power costs could upset those estimates.
Consumers caught a glimpse of what might happen last February when PSE&G
bought contracts to supply its New Jersey customers from August 1, 2002 to July 31, 2003 for some 13.6% more than the price caps allow it to recover. As a result, PSE&G now intends to sell $250 million of bonds to finance the shortfall.
Mark Sperduto, director of corporate issues for PSE&G, says the bond issue will help to moderate the company�s rate increases. Based on expectations that the BPU will approve the debt sale, Sperduto projected power costs of 11� per KWh for such customers as schools, restaurants and small stores -- up from the 10.07� they now pay but still 5.4% below the 11.63� they paid in July 1999. For residential customers served by PSE&G, rates are projected to rise from today�s 10.5� per Kwh to 11.64� next August. This compares with the 12.11� consumers paid before the first cuts took effect in 1999.
At JCP&L, spokesperson Ron Morano says commercial customers will pay some 6% less when increases take effect next August than they paid in 1999. Morano says schools will pay about 11.32� per KWh compared with 11.98� in July 1999.
In addition, Morano says JCP&L�s requested increases would raise residential rates 7.8% next August to an average of 11.6� KWh. This would still be 5.2% below the 12.2� residential customers paid in 1999.
The big question is how far and how fast rates will rise in the next few years without ceilings to restrain them. While the utilities have not publicly disclosed their forecasts, Trenton is clearly worried. According to the report of McGreevey�s task force, �No other state in the nation has mandated inflexible rate caps for as long as four years and required ratepayers to pay back deferred balances, including interest costs.
Consequently, no other state has a deferred balance debt nearly as as large
as New Jersey�s.�
To ease future increases, the task force urged McGreevey to sign legislation that would empower the BPU to order utilities to collect deferred costs over 15 years instead of immediately.
At the same time, the ceilings on utility rates have stymied efforts to increase competition in New Jersey because traders buying from out-of-state suppliers have little incentive to sell to customers that pay prices that are capped below the market. Sperduto says most business customers who initially chose outside power companies returned when capped prices slipped below the market prices other suppliers charged. According to the BPU, less than 1% of New Jersey utility customers now buy electric power from
suppliers other than their local utility.
Under the partial deregulation set by the 1999 law, the state�s utilities have either sold off their power plants or transferred them to affiliates outside the BPU�s control. The utilities have retained the wires that deliver electricity, which remain under the board�s regulatory authority.
Meanwhile, utility customers will soon feel the impact of a McGreevey administration tax change designed to close the state�s $5 billion budget deficit. Under a 1997 law, a special assessment that utilities collect from ratepayers was to have ended in January 2003. But with budget deficits yawning, the special assessment, which adds about 2.5% to the average commercial customer�s electric bill, will remain in place until 2007. That will be one more bump on the road to full deregulation.