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Weekly Standard Slams Christie Over Long-Term Capacity Contracts, Ignores (Embraces?) Government Mandate to Buy Capacity
August 19, 2011
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In the August 29 edition of the Weekly Standard, published in advance online, author Michael Warren faults New Jersey Gov. Chris Christie's energy policy as being "not so conservative," due to the Long-Term Capacity Pilot Program (LCAPP). However, the Weekly Standard either fails to recognize, or simply ignores, the fact that much like the much-derided (by the Standard) national health care law, the so-called capacity "market" in PJM is simply a government mandate for private individuals to purchase a private commodity from private sellers -- the worst kind of corporate welfare.
Although the Standard never explicitly endorses the Reliability Pricing Model, the inescapable conclusion from Warren's treatise is that New Jersey's long-term capacity contracts are government intrusion into a "free market" which must be allowed to work, and represent a "roll back" of conservative restructuring policies.
However, stripped to its core, the Reliability Pricing Model is nothing but a government mandate for load to buy a government-set level of capacity three years in advance. Customers have no choice -- the foundation of competitive markets -- but to procure (or in most cases, have procured on their behalf except when the Fixed Resource Requirement is used) an amount of capacity "administratively determined" by some demand curve drawn by a bureaucrat -- which is a charitable way of saying: central planning.
In other words, while both the conservatism and wisdom of the long-term contracts that Christie favors in New Jersey are debatable, there is no debate that the Reliability Pricing Model is not a free market, but is simply yet another government mandate, or tax, imposed on customers cloaked under the guise of a "market." Just because a policy is implemented through an auction rather than government-set prices doesn't mean it's conservative -- just look at "cap and trade" (of course, some generators love cap and trade not because it's a free market, but because it artificially rewards certain types of capacity, again at the expense of customers who must pay higher prices, but that's another story)
Indeed, one must ask how the Reliability Pricing Model is any different from the national healthcare law. In neither case is the government actually running, offering, or pricing services, and in both cases proponents argue that customers are free to "choose" how to meet the government mandate. But this an empty choice for customers who essentially must make a choice with a gun to their heads -- buy capacity (or health insurance) they would otherwise eschew due to their own personal valuations of risk, or suffer stiff penalties.
The Reliability Pricing Model is essentially the forced purchase of blackout insurance, which is undeniably not conservative. Regardless of whether a customer thinks the capacity will be needed three years down the road, customers cannot avoid charges for capacity as determined by an auction run by a quasi-government agency (PJM). That's not a market, and it's not conservative. It is, however, very good for large corporate (and incumbent) generation owners and bad for new entrants (e.g. real competition), and is nothing more than corporate welfare at the expense of electric customers, which is maybe why it is finding support in the Standard.
And while the Standard makes much of the choice in power suppliers brought to customers through deregulation, the Reliability Pricing Model has nothing to do with such choice, nor was it even envisioned by when New Jersey restructured its market under former Gov. Christine Todd Whitman, who is praised by the Standard.
Ironically, the Standard gets it right when discussing the ideal of electric restructuring: "Instead of a monopolized market where rate-payers are price takers, the Whitman reforms meant power providers would take their prices from a more competitive market, spread across several states, with consumers in charge."
Unfortunately, RPM does not put consumers "in charge," and essentially makes capacity purchasing decisions for them -- much like the old monopoly system.
Worse, as customers try to "take charge" of their capacity obligations -- through their elected representatives in the state house or appointed representatives on public utility commissions -- and attempt to leverage competition under RFPs to lower capacity prices (or meet their own tastes and preference, such as cleaner, more efficient, or renewable capacity), these efforts are stymied by Big Government federal regulators such as FERC encroaching on states' and customers' rights -- in a process incongruously cheered by the Standard.
Although the Standard cites Pennsylvania PUC Chairman Robert Powelson's support for RPM, Texas -- the true leader when it comes to electric choice -- tellingly doesn't have a half-baked, government-mandated capacity market, and customers pay lower prices as a result, as Texas prices reflect true market conditions, not artificial, government-mandated capacity prices.
Nor is the Reliability Pricing Model consistent with moving risk to investors, as suggested by the Standard. In fact, by forcing customers to pay for capacity three years in advance, even when such capacity may not be needed because of a poor load forecast (think the past two years due to the recession), customers are still on the hook for paying for the originally procured amount of capacity, essentially transferring risk back onto customers.
Whether or not RPM is beneficial, let alone needed, is a legitimate policy question of which there can be reasonable debate (though long-time readers know this publication's position). However, calling RPM conservative, and thus implying a free market driven by personal choice, is simply wrong, and gives true markets a bad name, endangering the continued success of existing retail electric markets and certainly hindering their expansion.
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