by Ari Peskoe
A Federal District Court Judge for New Jersey struck down the state’s incentive program to encourage construction of in-state generation capacity. New Jersey’s scheme was similar to Maryland’s scheme that was the subject of a District Court ruling last month. The Judges in both cases found that the state intruded on Federal ratemaking authority in violation of the Supremacy Clause of the Constitution.
New Jersey regulators concluded that insufficient transmission and increasing demand could lead to reliability problems in the state. Working with state legislators, the Board of Public Utilities (BPU) developed the Long-Term Capacity Agreement Pilot Program (LCAPP), an incentive scheme designed to encourage gas-fired generation in or near New Jersey. Like the Maryland incentive, New Jersey’s program guaranteed developers of new generation payments from the state’s incumbent utilities if PJM’s capacity auction resulted in a price lower than a set price that reflected development costs of new in-state generation.
The Judge found that state’s LCAPP occupies the same field of regulation and intrudes upon FERC’s authority to set wholesale rates through its approved PJM capacity auction. Because LCAPP requires generators to clear the PJM capacity auction and the LCAPP rules incorporate PJM’s auction rules, the Judge determined that the state’s LCAPP is “not separate from, and to the contrary, occup[ies] the same field” as PJM’s auction. The Judge rejected the state’s argument that LCAPP contracts are merely financial arrangements and therefore not subject to FERC jurisdiction. According to testimony presented by a plaintiff witness and cited by the Judge, a purely financial contract does not “involve any real performance.” New Jersey, on the other hand, required developers to build a plant, make capacity available, and clear that capacity in the PJM auction. The Judge therefore found that payments under the state’s LCAPP contracts were in exchange for performance.
The Judge also found that plaintiffs had not met their burden of proof that LCAPP violated the Commerce Clause of the Constitution. Plaintiffs argued that in-state generators had advantages in securing LCAPP contracts, which effectively prohibited out-of-state generators from competing. According to the Judge, the BPU has authority to incentivize construction in New Jersey, and it “appears reasonable that the [BPU] would incentivize construction in areas where reliability concerns are in flux.” The Judge therefore found that the in-state benefit is reasonable in light of New Jersey’s interest in ensuring reliable electric service.
The decisions in this case and in the Maryland case both struck down state incentive schemes that required utilities to pay the difference between a set contract price and a price determined by a FERC-regulated wholesale auction market. Such a scheme, according to these two judges, sets the price received by a generator and therefore impermissibly intrudes on federal ratemaking and is void under the Supremacy Clause.
The Judge in the New Jersey case suggested alternative incentives, including tax exempt financing, property tax relief and favorable leases on public lands. However, rather than routing incentives through the state treasury, as in these alternatives, Maryland and New Jersey both attempted to require its utilities to pay the incentives to developers. Under these two decisions, a state is not prohibited from requiring its utilities to pay for incentives as long as those incentives are not directly tied to clearing prices in a FERC-regulated wholesale auction market.