Reprint of Bergen Record article 1/19/01

Staff Writer Kevin G. DeMarrais looks at some of the questions New

Jersey residents might have in light of the power crisis in California.

Can it happen here?

That's the widespread fear as California's electricity problems worsen,

resulting in two days of rolling blackouts, potential bankruptcies among the

state's largest utilities, and a multimillion-dollar financial bailout by the state

itself.

"What's happening in California makes customers and regulators nervous,"

said Kathy Ellis, a spokeswoman for Public Service Electric and Gas Co.,

the state's largest utility.

Even before the California situation worsened in recent days, legislators

from both political parties in New Jersey were calling for hearings to see

how vulnerable state residents might be.

But Paul DiGaetano, R-Passaic, the Assembly majority leader and one of

the prime movers behind energy deregulation in the state, said the fears are

unfounded.

New Jersey's deregulation law "was enacted under a different set of

circumstances than California," DiGaetano said. "When we crafted our

legislation, we were very mindful of what California was doing and went to

great lengths to make sure we were not making some of the same

mistakes."

The reality is somewhere in the middle, said David Brown, a vice president

at National Utility Service, a Park Ridge-based utility auditing and

consulting company. "The situation here in New Jersey is better [than in

California], but it's still not ideal."

New Jersey does not face major shortages, and the pricing mechanisms

included in the state's deregulation legislation preclude soaring electricity

bills, at least for now. But all bets are off in 2 1/2 years, when New Jersey

enters a free market system that resembles California's in many ways.

Q. Could we face temporary power shutdowns, or rolling blackouts,

similar to those in California?

A. That's always a possibility in times of high demand, especially during a

heat wave when air conditioners are going full tilt. It almost happened early

last May, when temperatures soared just as 19 percent of the region's

generating plants were shut down for pre-summer maintenance.

Fortunately, the heat wave lasted just three days, voluntary cutbacks

worked, and power producers in other states had excess capacity to sell.

But any extended heat wave could put similar pressure on supplies.

Q. Can New Jersey handle unexpected demand?

A. Yes. One of the biggest differences between deregulation in the two

states is that California did not require power producers to have reserve

capacity, while all those participating in the PJM Interconnection LLC,

which operates the power pool for New Jersey and other states in the

region, requires 19 percent in reserve.

The all-time high demand was 51,700 megawatts, set in 1999, and

generating capacity is now at 65,544 megawatts -- about 27 percent

above record need.

Q. What about supplies to meet growing demands for electricity?

A. Officials at PJM power pool -- which serves most of Pennsylvania,

New Jersey, Maryland, Delaware, the District of Columbia, and the

northern part of Virginia -- insist that we're in good shape.

Here and in California, third-party providers have been slow in building

new generating plants, waiting to see what the deregulation rules would be.

Even so, PJM officials project that capacity will grow 1.4 percent annually

over the next 10 years.

But the approval process for building new plants can be long, expensive,

and contentious. Although people want electricity, elected officials and

environmentalists oppose building plants needed to generate it.

Typical is the decision Saturday by mayors from northwestern Bergen

County to oppose two power plants proposed within a half-mile of each

other near Torne Mountain in New York's Rockland County because of

concern about the impact on the region's aquifer.

Q. Why won't prices soar in New Jersey as they have in California?

A. There are several key differences in how the states designed

deregulation. Most important, utilities here can purchase power on futures

markets, allowing them to shop carefully and hedge costs. California

officials, so certain that prices would come down with deregulation, forced

utilities to buy all their power on the open market, which has been

extremely volatile in periods of high demand.

Another big difference is the power mix. Northern California and the

Pacific Northwest, which rely heavily on hydroelectric power, have had

little rain and snow.

"New Jersey relies on a more diversified mix of natural gas, coal, and

nuclear power, which have a more predictable output," DiGaetano said.

Last week, when the wholesale price of electricity in California was $170

per megawatt-hour, it was $47 in New Jersey, he said.

Q. All this seems to indicate we have no problems here.

A. Not really. A couple of factors could lead to problems, short-term and

down the road.

Natural gas is increasingly used to power generating plants, and if its price

continues to soar, electricity will become more expensive to produce. But

rates charged by the utilities here and in California are rates capped by the

states.

"It's a tough balancing act," said Dennis O'Boyle, manager of customer

choice for GPU Energy in Morristown.

"But it does present a mismatch," O'Boyle said. "What is deregulated is

what other folks [third-party suppliers] can charge. We are regulated on

any price we charge our customers."

Even if the utilities escape now, "all this is going to come to a head in two

years," Brown said. In 2003, GPU and Orange and Rockland Utilities will

be able to go back and recoup all their IOUs, and their rates and those of

PSE&G will be based on market pricing.

"People could be in for a shock," he said.