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Following Recent Maryland Ruling, Federal Court Declares New Jersey Scheme to Promote Investment in In-State Generation Unconstitutional

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 [...]

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Federal Court Rules Maryland Scheme to Promote Investment in In-State Generation Unconstitutional

by Ari Peskoe

On September 30, a Federal District Court Judge for Maryland declared that the state’s incentive scheme to encourage the construction of new gas-fired generation capacity violates the Supremacy Clause of the Constitution.  By requiring incumbent utilities to supplement PJM’s market-clearing prices with payments to the developer of a new gas-fired generator, the Judge determined that Maryland’s incentive scheme impermissibly sets a wholesale rate.  The Judge’s ruling may complicate states’ efforts to ensure that FERC-jurisdictional electricity markets meet the goals of individual states.

In 1999, Maryland restructured its electricity industry, requiring its investor-owned utilities to divest their generation assets and purchase electricity in federally regulated, regional wholesale markets. In 2007, at the direction of the Maryland General Assembly, the state’s Public Service Commission (PSC) published a report that concluded that the state faced a critical shortage of generation capacity.   According to the PSC, Maryland was located in a highly congested portion of the regional PJM market and therefore paid higher than average prices for wholesale energy.  The PSC found that while the PJM markets are “structured ostensibly to create price incentives for [investment in] new generation and transmission,” the markets had not responded to the state’s “looming capacity shortage.”

Following several proceedings at the PSC, including the issuance of an RFP to construct new gas-fired capacity in Maryland, in April of 2012 the PSC issued an order directing the state’s three incumbent utilities to enter into contracts for differences (CfDs) with a developer that would construct 661 megawatts of new in-state generation capacity. Under the CfDs, the utilities would pay the developer the difference between set contract prices and the PJM clearing prices for energy and capacity.  When the PJM prices were lower than the contract prices, the utilities would pay the developer.  When PJM prices were higher than the contract prices, the developer would pay the utilities.

The plaintiffs – primarily existing generators – complained that the PSC’s order impermissibly regulated the price of wholesale energy sales.  Such sales, they argued, may not be regulated by states because the “scheme of federal regulation . . . [is] so pervasive as to make reasonable the inference that Congress left no room for the states to supplement it.”  The Judge agreed, concluding that the PSC is “establish[ing] the price ultimately received [by the developer] for its physical energy and capacity sales to PJM . . . under field preemption principles, the PSC is impotent to take regulatory action to establish the price for wholesale energy and capacity sales.”  In other words, the Judge concluded that the PSC set the rate and not merely that its order affected the rate by inducing the developer to bid into the PJM markets.

The Judge rejected the defendant’s argument that the CfDs merely finance construction and therefore do intrude on FERC’s ratemaking.  First, to get paid under the CfDs the developer’s bids had to clear the PJM market.  Payment required delivery of energy and not [...]

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Possible UK Power Shortages Raise Concerns

by Thomas Morgan and David McDonnell 

A warning from the UK’s energy regulator, Ofgem, on 27 June 2013, that the ‘buffer’ capacity of spare electricity on the UK’s national power grid could drop to as little as 2% of national supplies by 2015, has raised concerns in relation to the possibility of widespread disruptions in service. This spare capacity currently stands at about 4%.

The warning was linked to an extensive Electricity Capacity Assessment Report, also published by Ofgem that same day. Revised studies have indicated that power supplies will shrink considerably by 2015, as electricity demand in the United Kingdom is not decreasing in the manner previously foreseen by successive governments. This is due to a variety of factors, among them, the low uptake by residential households of environmentally friendly incentives and energy-efficient practices.

Ofgem recommends the implementation of far-reaching market changes proposed by the Department of Energy and Climate Change (DECC). Among other things, DECC stated in a report, also published on 27 June 2013, that the UK electricity sector will require approximately £110 billion of capital investment in the next decade to modernise its infrastructure. This would create opportunities for investment which a range of market players are likely to monitor with interest.

DECC has also emphasised the need for a ‘Capacity Market’ – essentially an insurance policy against the possibility of future blackouts – which would work by providing financial incentives to generators to keep a certain percentage of energy capacity in reserve to cope with spikes in demand.

The British government has been quick to retort to concerns of service disruption, downplaying the risk of blackouts to domestic consumers and, while it is unlikely that blackouts reminiscent of those experienced in the United Kingdom in the 1970s will be relived, the very publication of a formal warning from Ofgem highlights the potential significance of the concern.




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