Saturday, September 13, 2014
Third Circuit Holds that Federal Power Act Preempts New Jersey’s Long-Term Capacity Agreement Pilot Program
On September 11, the Third Circuit (Fuentes, Shwartz, Rosenthal (by designation)) issued a decision in PPL EnergyPlus, LLC v. Solomon, No. 13-4330. Existing electric power generators and distribution companies sued the commissioners of the New Jersey Board of Public Utilities challenging New Jersey’s Long-term Capacity Agreement Pilot Program (LCAPP), enacted by the state legislature in 2011 to address a perceived deficit in electric power capacity, and resulting high electricity prices, in New Jersey. The LCAPP furnishes new generators with a guaranteed fifteen-year contract at a predetermined rate to provide capacity to electricity distribution companies in New Jersey. New generators are required to participate in PJM’s capacity auction markets, but the LCAPP contracts offset the difference between the PJM market price and the LCAPP contract price. That is, if the LCAPP contract price exceeds the market price, the distribution company must pay the difference so that the generator receives the contract price; if the market price exceeds the LCAPP contract price, the generator must pay the difference. The district court, following a bench trial, held that the Federal Power Act preempts the LCAPP.
Numerous amici participated to express either criticism or support for state policies that regulate power contracts that affect capacity markets. FERC, the Pennsylvania Public Utility Commission, the Electric Power Supply Association and Edison Electric Institute, and PJM Power Providers Group supported the plaintiffs-appellees and argued the LCAPP should be preempted. Several other state public utility commissions, New Jersey Division of Rate Counsel, American Wind Energy Association, American Public Power Association and National Rural Electric Cooperative Association, and NRG Energy supported the defendants-appellants and argued the LCAPP should not be preempted.
The Third Circuit affirmed. The court reasoned that the Federal Power Act gives FERC authority to regulate interstate sales of electric capacity and that the LCAPP impermissibly constitutes regulation of capacity rates because it essentially sets capacity prices. The court noted the concern of the pro-appellants amici that a ruling against the LCAPP “will hamstring state-led efforts to develop renewable and reliable electric energy resources” (p. 29), but opined that the concern is unwarranted because states are free to use other means, including direct subsidies to generators, as long as they only incidentally affect—rather than directly set—wholesale electricity rates (including capacity prices).
The case—the facts, the parties, the outcome, and the court’s reasoning—is very similar to the Fourth Circuit’s recent decision in PPL EnergyPlus, LLC v. Nazarian, No. 13-2419 (June 2, 2014).