Maryland and New Jersey Programs Supporting New Generation Invalidated

by King & Spalding

Two federal district courts recently found that the exclusive jurisdiction of the Federal Energy Regulatory Commission ("FERC") over wholesale sales of electricity under the Federal Power Act (the "FPA") preempts state requirements that regulated utilities enter into contracts-for-differences ("CfDs") with generators under which utilities would make additional payments to generators for capacity sold into Reliability Pricing Model ("RPM") capacity auctions held by PJM Interconnection, L.L.C. ("PJM"). Specifically, on September 30, 2013, the U.S. District Court for the District of Maryland issued a decision invalidating a Maryland Public Service Commission ("Maryland PSC") order requiring Maryland utilities to enter into a CfD with Competitive Power Ventures ("CPV") intended to facilitate construction of a new 600 MW generating facility. The U.S. District Court for the District of New Jersey on October 25, 2013 entered a judgment invalidating the Long-Term Capacity Pilot Project (the "LCAPP") adopted by the New Jersey legislature and signed into law by New Jersey's governor.

In the Maryland case, the court found that the Maryland PSC's order was barred under field preemption principles, because it "seeks to secure new generation by setting or establishing the prices to be received by CPV for its wholesale energy and capacity sales in the PJM Markets . . . ." With Congress having occupied the field by giving FERC exclusive jurisdiction over wholesale rates, the court found that the Maryland PSC was "impotent to take regulatory action to establish the price" for such sales. The court acknowledged that the State "has a legitimate interest and federally permissible role in securing an adequate supply of electric energy for Maryland residents in the present and in the future," and emphasized that it was "the means by which the [Maryland] PSC sought to [do so that was] field preempted, not the securing of the [CPV] facility itself or the purpose of taking action to do so." Having found the Maryland PSC's action to be field preempted, the court did not address conflict preemption claims.

In the New Jersey case, the court likewise found the State's action field preempted, because the CfDs awarded under the LCAPP "occupy the same field of regulation as [FERC] and intrude upon [FERC's] authority to set wholesale energy prices through its preferred RPM Auction process . . . ." Like the court in the Maryland case, this court emphasized that it was the means and not the ends that were preempted, stating: "While New Jersey retained the authority to take a wide variety of actions to ensure reliable electric service for its citizens and encourage the construction of new electric generation facilities, it chose to advance those goals through a mechanism that intrudes upon the authority of [FERC] and violates federal law." Unlike the court in the Maryland case, the court in New Jersey also found the State action to be conflict preempted, holding that "the LCAPP Act poses as an obstacle to [FERC]'s implementation of the RPM."

In both cases, the courts rejected claims that the States' actions were barred by the dormant commerce clause, which generally forbids states from discriminating against interstate trade. In the Maryland case, the court found that the plaintiffs had failed to demonstrate that the Maryland PSC's requirement that the generation eligible for CfDs be in a particular PJM capacity zone was facially discriminatory for dormant commerce clause purposes. It also found no evidence that the addition of a State-sponsored market participant in this zone "imposes a burden, let alone an undue burden, on interstate commerce." In the New Jersey case, the court found it reasonable that the State would be seeking to incentivize generation development "in areas where reliability concerns are in flux," and that, as a result, the granting of such benefits to generators in New Jersey appeared reasonable.

 Neil L. Levy
 Washington, D.C.
 +1 202 626 5452

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 David G. Tewksbury
 Washington, D.C.
 +1 202 626 5454

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 Stephanie S. Lim
 Washington, D.C.
 +1 202 626 8991

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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