Power’s Out for New Jersey Electric Law

(CN) - Granting New Jersey-based power generators preferential capacity rates to add another 2,000 megawatts to its power grid exceeded the state's authority, the 3rd Circuit ruled.

New Jersey adopted the Long Term Capacity Pilot Program Act (LCAPP) in January 2011 to encourage new plant construction by power-generation firms.

Rather than pay for such construction directly, however, the Board of Public Utilities crafted "standard offer capacity agreements" that promised new electric energy generators 15 years of periodically increasing revenue from local utilities and, ultimately, New Jersey ratepayers.

Of the 34 power companies that submitted bids to participate in LCAPP, the board chose CPV Power Development Inc., Hess Newark LLC and NRG Energy Inc.

The board then had those firms sign 15-year contracts to supply a set amount of capacity at a fixed rate. While CPV and Hess' projects have since moved forward, NRG's has not.

Several electrical-energy generators and two electricity distributors soon sued the board's commissioners, seeking an injunction of LCAPP, which it claimed was pre-empted by the Federal Power Act.

Despite CPV's intervention in defense of the law, a federal judge found that LCAPP infringed on the Federal Energy Regulatory Commission's exclusive control over the price received for interstate sales of capacity.

The law also interfered with price-determining methods of PJM Interconnection LLC - the federally regulated transmission organization for Pennsylvania, New Jersey and Maryland, according to the ruling.

With the 15-year contracts invalidated and LCAPP's enforcement enjoined, the Board of Public Utilities and CPV appealed and Hess Newark intervened.

A three-judge panel for the 3rd Circuit affirmed Thursday, tossing aside New Jersey's claim that each contract functions "like a hedge" and, therefore, does not transact in capacity.

"LCAPP's price assurance insulates LCAPP generators from market volatility and thus eliminates their risk," Judge Julio Fuentes wrote for the Philadelphia-based federal appeals court. "But the agreements provide more than risk-hedging; they provide for the supply and sale of capacity, as well."

The panel also brushed aside the claim that New Jersey's interference with capacity prices is a lawful exercise of the state's authority to promote new generation resources.

"New Jersey does have authority over local energy matters, including the construction of power plants," Fuentes wrote. "But LCAPP incentivizes the construction of new power plants by regulating the rates new electric generators will receive for their capacity. New Jersey could have used other means to achieve its policy goals."

The court emphasized that its opinion addresses only the field of interstate rates, not to electric energy markets generally.

"LCAPP guaranteed revenue to new generators by fixing the rates those generators would receive for supplying electrical capacity, that is, the ability to make energy when called upon," Fuentes wrote.

"The federal government, however, has exclusive control over interstate rates for wholesales of electric capacity," he added. "So when New Jersey arranged for LCAPP generators to receive preferential capacity rates, the state entered into a field of regulation beyond its authority. Accordingly, federal law preempts, and thereby invalidates, LCAPP and the related standard offer capacity agreements. We, therefore, affirm the district court's judgment."

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