PSEG Seeks New Jersey Subsidy To Build New Power Plants

Public Service Enterprise Group Inc. (PEG) has submitted a proposal to build power plants in New Jersey through a new state subsidy even as the company fights that same program.

New Jersey legislators passed a law last month providing long-term incentives to build 2,000 megawatts of natural gas-fired power generation in the state, enough to serve two million homes. Utility customers will pay for the program through a special charge on their bills, guaranteeing a minimum return for new plants that would not have been economic to build otherwise.

PSEG and other power producers say this program undermines the U.S.'s largest competitive-electricity market by skewing market prices. They are in the process of suing the state over the legislation in a U.S. District Court and filed a complaint with the Federal Energy Regulatory Commission.

Just in case those efforts fail, PSEG is preparing to work under the program. On Tuesday, New Jersey's largest utility filed a plan with the state utility regulator to build 1,100 megawatts of generation at three existing plants in Hudson, Sewaren and Kearney, spokesman Michael Jennings said Wednesday.

The program to build new generation in the state has received widespread support from state lawmakers as a way to create jobs, reduce some of the highest power prices in the country and reduce carbon emissions.

The problem, power companies have said, is that New Jersey is part of the 13-state grid operated by PJM Interconnection LLC, where companies have used market price signals to determine whether to build a new plant or pursue other investments. They are worried that subsided generation will skew market prices and given an unfair advantage to building power plants instead of pursuing transmission line or demand-response projects.

The New Jersey subsidy centers around so-called capacity payments that are made to power generators to keep their plants ready to meet demand three years into the future. These payments are currently set through an annual spring auction held by PJM and the costs are passed on to ratepayers, and such capacity contracts are set for one-to-three years. But the New Jersey program will guarantee capacity payments for new generation up to 10 years based on prices set outside of the auction.

Last year's auction set the price at about $245 a megawatt a day for New Jersey residents compared to roughly $30 in less congested areas of the PJM region. Existing power producers are concerned that new plants receiving guaranteed payments through the state program will place zero-dollar bids into the PJM auction, which would unfairly depress capacity market prices and company revenues.

In the complaint filed to FERC, power producers are asking the federal regulator to require subsidized generators to place auction bids based on the costs for their project without discounting for the subsidy. FERC will likely make a ruling on the issue in April, PSEG executives said Tuesday.

Under the New Jersey program, no single company can receive a subsidy for more than 700 megawatts of generation. Other potential projects include a 640-megawatt plant by LS Power Development LLC in West Deptford, the town where proponent State Senate President Stephen Sweeney lives, and a roughly 700-megawatt plant by Competitive Power Ventures LLC in Woodbridge.

-By Naureen S. Malik, Dow Jones Newswires; 212-416-4210; naureen.malik@dowjones.com

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