Power market provides cheapest energy, PJM tells NJ

* New Jersey says PJM charges cost over $1 billion

* New Jersey wants to build new power plants

NEW YORK, June 17 (Reuters) - PJM, the operator of the U.S. Mid-Atlantic and Midwest power grid, told New Jersey utility regulators at hearing on Friday that the grid's electric market provides the lowest cost energy to supply the state's consumers.

New Jersey regulators called for a hearing on the power market in New Jersey after battling PJM over the high cost of capacity for the past several months.

Electricity in New Jersey is expensive. Retail power costs about 14.5 cents per kilowatt hour, which is almost 50 percent over the 9.8 cent national average. New Jersey wants lower cost power to help stimulate the economy and create more jobs.

To help lower power costs, New Jersey has subsidized the construction of new generation and has even considered leaving the PJM grid.

The state has blamed PJM's capacity and other charges for adding over $1 billion a year to consumers' power costs.

"PJM's pricing model causes New Jersey ratepayers to pay substantially higher prices for electricity than most other states in PJM," Lee Solomon, President of the New Jersey Board of Public Utilities (BPU), said in a statement in April.

Solomon said the the higher PJM prices were due partly to the extra capacity and congestion charges levied under PJM's Reliability Pricing Model.

Officials at the BPU were not immediately available for comment due to the ongoing hearing.

In a statement, PJM said, its officials would tell the BPU the capacity market "provides resource adequacy at the lowest possible cost from both new and existing resources, including demand response." Demand response programs pay consumers to reduce power usage when needed.

WHAT IS CAPACITY?

Capacity is one of several complicated electricity markets in PJM. It provides incentives to energy suppliers to stimulate investment in both maintaining existing generation and encourage development of new energy sources in the future.

Like other power markets in the Northeast, PJM replaced its previous short-term capacity market over the past several years, with a forward looking model. The old system was not attracting investment needed to keep the grid reliable. PJM locks in capacity that will be needed three years ahead.

But New Jersey and Maryland, another state seeking to subsidize construction of new generation to escape high PJM charges, said the capacity market is still broken.

Generating companies looking to build new plants in PJM have complained that three years is not enough time to finance their projects. They argue that financing requires long-term contracts of at least 10 years, like those available in California and other parts of the country.

Other states with competitive power markets like Texas are watching the battles in PJM closely, because they too are struggling to find ways to get new generation built.

In a notice about Friday's hearing, the BPU said, it was seeking information to see if there is a need to pursue additional generating capacity beyond the 2,000 MW already under contract through the state's long-term capacity plan.

In its statement, PJM warned, "Focusing only on new generation construction to meet future resource adequacy needs is too limiting and doesn't consider lesser cost solutions," like energy efficiency programs.

RATEPAYER SUBSIDIES

Under New Jersey's plan, ratepayers will subsidize the construction of three power plants capable of producing about 2,000 megawatts. The state said the investment would pay off by saving consumers about $1.8 billion over the next 15 years.

In March, New Jersey's BPU approved separate 15-year agreements with Hess Corp (HES.N), NRG Energy (NRG.N) and privately-owned Competitive Power Ventures to build three new natural gas plants in New Jersey.

But in April, state officials said, a ruling in favor of PJM's capacity market by the U.S. Federal Energy Regulatory Commission (FERC), which oversees the nation's power markets, could make those plants uneconomic to build.

So, the BPU started looking at more options, which led to Friday's hearing.

"It is our duty to protect New Jersey's ratepayers. I do not believe that New Jersey forfeited its sovereignty when PJM became the regional transmission operator," Solomon said following the FERC ruling.

Energy analysts said, the real battle is between the companies with power plants already in New Jersey, like Public Service Enterprise Group (PEG.N), one of the founding members of PJM, and the firms that want to build the new generation.

The problem is the new generation, which would receive the state subsidies, will displace some of the older generation that has remained available in part due to the PJM capacity payments they receive. (Reporting by Scott DiSavino; Editing by Carole Vaporean)