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September 15, 2014Client Alert

“Walking the Line” between State and Federal Regulatory Jurisdiction over Electric Energy Market Gets another Stanza in this Long Running “Tune”

On September 11, 2014, the 3rd Circuit Court of Appeals upheld the Federal District of New Jersey’s decision in PPL EnergyPlus, LLC vs. Hanna, 977 F. Supp 2d 272 (D.N.J. 2013) striking down a New Jersey statute that provided price support for new generating capacity to be constructed in New Jersey. The New Jersey Public Utility Board created a Standard Offer Capacity Contract to fulfill the statutory requirements. The Court unequivocally concluded that such contracts were pre-empted by Federal Energy Regulatory Commission (FERC) authority to regulate the electric wholesale market.

The courts continue to walk the line in an effort to articulate the boundary between state and federal jurisdiction over regulation of energy markets. In this case, PPL EnergyPlus LLC vs. Lee Solomon, ____ Fed. 3rd _____ (13-433, 13-4501), the 3rd Circuit unanimously found that New Jersey’s efforts to create more generating capacity in New Jersey was “field pre-empted” by the Federal Power Act and the FERC’s regulation of that market and upheld Judge Sheridan’s decision.

The dispute leading to this decision arose from the New Jersey Legislature’s 2011 enactment of the “Long Term Capacity Pilot Program Act” (LCAPP) directing the New Jersey Board of Public Utilities to promote the construction of new generating facilities to be located in New Jersey. Rather than direct state utilities to construct generating facilities, the Board implemented the LCAPP by soliciting offers from interested parties to construct generating facilities, and selected three “winners” to build new generating capacity. The Board ultimately received 34 offers.

Under its rules, the Board created a “Standard Offer Capacity Agreement” that it then ordered the local distribution companies under its jurisdiction to sign with the three generator developers it had approved. The Standard Offer Capacity Agreement provided for a minimum guaranteed payment to the generator owners over a 15 year period for the generating capacity irrespective of the capacity payment received by the generator in the PJM capacity auction.

The Court found that the New Jersey LCAPP program was “field pre-empted.” The Federal Power Act (FPA) provides the FERC with authority to regulate wholesale electric markets. The FERC exercised that authority by authorizing PJM Interconnect’s Reliability Pricing Model method of determining the price of generating capacity on a forward-looking basis. New Jersey’s LCAPP provided a “fixed price” for capacity for a “fixed term.” The Court determined that the LCAPP effort sought to establish the capacity price in the PJM market and thus “New Jersey’s efforts to regulate the same subject matter cannot stand.” (Slip Op. at 26)

The Court, however, did not reach the issue of whether New Jersey’s LCAPP efforts were “conflict pre-empted” (i.e., conflicted with an existing FERC methodology), or whether there was a dormant Commerce Clause issue.

In an intriguing element of the Court’s decision, it left the “door open” for some forms of state regulation. In dismissing the argument that the mere fact of creating new generating capacity would “affect” the wholesale price by increasing the amount of generating supply the Court noted:

The law of supply and demand is not the law of pre-emption. When a state regulates within its sphere of authority, the regulations incidental effect on commerce does not render the regulation invalid.

The Federal Power Act grants FERC exclusive control over whether interstate rates are “just and reasonable,” but FERC’s authority over interstate rates does not carry with it exclusive control over any and every force that influences interstate rates.

While the Court’s determination appears to be dispositive concerning LCAPP and states efforts to determine the price of capacity in the wholesale market, the Court’s determination appears to fully support the exercise of state jurisdiction in its “sphere of authority.” Regulating capacity prices in the wholesale market is clearly not in that sphere. What is in that sphere is likely to be the subject of future stanzas to the tune of “walking the line.”

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