On October 11, 2013, New Jersey’s Long-Term Capacity Pilot Program (LCAPP) became the second state program designed to foster the development of new in-state power plants to be found unconstitutional in as many weeks. In late September, a federal judge ruled that a comparable Maryland program was unconstitutional on similar grounds.1
At issue in both cases was whether the states’ respective programs violated the Supremacy Clause of the U.S. Constitution. State laws and programs that interfere with and/or are contrary to federal law are in violation of the Supremacy Clause and unconstitutional. Both of the programs in question were found to be in violation of the Supremacy Clause and therefore unconstitutional.
Specifically, each decision relied upon the theory of “field preemption.” State law will be held unconstitutional within a certain field, such as the regulation of wholesale energy market prices, where Congress has legislated to the point where the federal government occupies the “entire field of regulation.” If a court determines that Congress intends to occupy a given field, then any state law falling within that field will be preempted and held unconstitutional.
The Wholesale Energy Marketplace
LCAPP and the Maryland program were intended to spur the creation of new in-state energy and capacity resources. These new resources would be a part of the interstate wholesale energy marketplace (PJM markets).
The PJM markets are regulated by PJM, a regional transmission organization (RTO) whose geographical scope encompasses 13 states including Maryland and New Jersey as well as Washington, D.C., (the PJM region). Wholesale electric energy and capacity is generated by power plants and then bought and sold within the PJM markets to meet demand within the PJM region.
The Federal Energy Regulatory Commission (FERC), which is responsible for the regulation of wholesale sales of electricity and the interstate transmission of electric energy, has ordered all utilities participating in the interstate transmission of electric energy to participate in their regional RTO. Thus, New Jersey’s and Maryland’s electric distribution companies (EDCs) are required to participate in the PJM markets.
LCAPP and the Maryland Program
LCAPP and Maryland’s program were developed to alleviate a perceived critical shortage of electric generating capacity that New Jersey and Maryland believed the wholesale energy markets were not responding to.
Prices in the PJM markets are effected by congestion within transmission areas. New Jersey and Maryland both have relative high congestion costs in comparison to other states within the PJM region. In theory, PJM’s pricing models encourage the construction of new transmission or generation facilities where congestion is common. However, New Jersey and Maryland saw the PJM markets as unresponsive. The public utility commissions of both states believed that the PJM markets were failing to attract new generation resources and were not providing the pricing signals necessary to finance such projects.
In order to attract generation resources, New Jersey and Maryland developed similar programs under which suppliers were guaranteed a long-term contracted price for energy and capacity resources regardless of prices in the PJM markets. In Maryland, this contract was known as a Contract for Differences (CfD). In New Jersey, the contract was known as a Standard Offer Capacity Agreement (SOCA).
The state programs worked as follows: if in year one of the agreement, the contracted price for energy and capacity was $20 per MW-day and a supplier sold energy into the PJM markets at $15 per MW-day, then the EDCs would be responsible for paying the supplier the $5 per MW-day difference. However, if the supplier sold energy into the PJM markets at $25 per MW-day, then the supplier would be responsible for paying the EDCs the $5 per MW-day difference.
The Federal Decisions
Maryland and New Jersey argued that their respective programs were purely financial arrangements that were intended to secure the construction and development of new in-state generation facilities. The Federal Power Act (FPA) mandates that FERC is exclusively responsible for regulating the nation’s wholesale energy markets. However, the FPA preserves state jurisdiction over the siting and construction of physical facilities used for the generation of electric energy. The states asserted that the programs fell within their jurisdiction over the siting and construction of generation facilities and therefore did not violate FERC’s exclusive field under the Supremacy Clause.
Both courts, however, rejected this argument. The courts determined that LCAPP and the Maryland program in effect establish the price ultimately received by suppliers for energy and capacity sales to PJM in the PJM wholesale energy markets. Since regulation over the price of energy and capacity sales in PJM’s wholesale energy markets falls within the exclusive jurisdiction of FERC, both LCAPP and Maryland’s program were found to be in violation of the principle of field preemption, and therefore unconstitutional under the Supremacy Clause of the Constitution.
As stated by the Maryland court, “Because states have no authority, either traditional or otherwise, to set wholesale rates, the compensation received by [the supplier] for its wholesale energy and capacity sales is exclusively subject to the regulation of FERC. While there exists legitimate ways in which states may secure the development of generation facilities, states may not do so by dictating the ultimate price received by the generation facility for its actual wholesale energy and capacity sales in the PJM markets without running afoul of the Supremacy Clause.”
What These Decisions Mean for the Future
Unless reversed on appeal, these decisions firmly close the door on any state program that regulates or sets prices within the PJM markets. Any EDC that entered into a CfD or SOCA, and therefore the ratepayers from whom these EDCs recover their costs, will not be responsible for guaranteeing new suppliers a minimum price for energy and capacity sold into the PJM markets.
However, if New Jersey and Maryland wish to proceed with programs to encourage the development of in-state generation resources, the decisions leave room for states to develop such programs through other approaches. While capacity constraints and previously forecasted reliability issues appear to have been tempered due to the economic recession, retail energy prices in New Jersey and Maryland remain high in comparison to other states within the PJM region due to congestion costs. If these states do not have additional transmission and capacity resources in place as the economy regains full momentum, then reliability issues could arise again in the future.