On October 11, 2013, the United States District Court for the District of New Jersey issued its decision in PPL Energyplus, LLC v. Hanna.  This case follows a recent decision in which the U.S. District Court for the District of Maryland invalidated the Maryland Public Service Commission’s directive to state utilities to enter into a contract for differences with Competitive Power Ventures, as we reported here on October 2, 2013.

In PPL Energyplus, the Court addressed whether the New Jersey Long-Term Capacity Pilot Project (“LCAPP”) violates the Supremacy Clause and the “Dormant” Commerce Clause of the U.S. Constitution, and whether the New Jersey Board of Public Utilities (the “Board”) should be enjoined from engaging in activities under LCAPP because it is preempted by the Federal Power Act (“FPA”).

LCAPP, enacted on January 28, 2011 by the New Jersey legislature with the Board’s support, authorized the construction of several gas-fired generators in or near New Jersey.  The purpose of LCAPP was to address the supposed lack of incentives under the PJM Interconnection, L.L.C. (“PJM”) capacity market, referred to as the “Reliability Pricing Model” (“RPM”), and foster construction of new, efficient generation to ensure sufficient generation availability to the region.  LCAPP established a pilot program to issue “Standard Offer Capacity Agreements” (“SOCAs”) to selected eligible generators.  LCAPP also required that New Jersey’s four distribution utilities enter into SOCAs with the eligible generators and pay any difference between the RPM auction price and their actual development costs approved by the Board.  LCAPP further provided that the generators must participate and clear in the annual base residual auction conducted by PJM for each delivery year of the entire term of the SOCA.  Moreover, LCAPP required the Board to conduct a competitive solicitation of capacity and required winning bidders to enter into SOCAs lasting no longer than fifteen years with the State utilities.

The Board awarded CPV Power Development, Inc. (“CPV”) a SOCA with a fifteen-year term.  CPV participated in the May 2012 RPM auction for the 2015/2016 delivery year consistent with RPM’s rules for new generation entry.  CPV sold capacity in the May 2012 RPM auction, which had a clearing price of $167.46 MW-day in New Jersey.  CPV’s SOCA price for 2016 was set forth in the contract at $286.03/MW-day.

The plaintiffs, comprised of several wholesale, retail and marketing companies who produce and sell energy within the PJM market, filed suit against the Board, arguing that LCAPP makes it more difficult for such companies to make decisions on whether to develop new generation resources or make investments in existing resources.  The plaintiffs argued that they can no longer rely on the RPM auction price signals to evaluate future costs and predict future revenue streams.  They claimed that the RPM auction price was essentially displaced and supplanted by the price in the SOCA contracts, causing less predictability in the energy capacity markets.  The defendants, on the other hand, argued that the SOCA is a purely financial contract, and thus is not subject to the Federal Energy Regulatory Commission’s (“FERC”) oversight.

The Court found that the SOCAs were unconstitutional under the doctrines of field preemption and conflict preemption.  As to the field preemption finding, the Court noted that precedent has consistently held that there is a dominant federal interest over wholesale sales of electricity in interstate commerce.  The Court rejected the defendants’ argument that SOCAs are purely financial contracts, finding instead that the financial arrangements specifically condition payment on physical performance.  Thus, LCAPP supplants and intrudes upon the exclusive jurisdiction of FERC by establishing the price that LCAPP generators will receive for their sales of capacity.  In doing so, LCAAP places a direct burden upon interstate commerce, and invades the field occupied by Congress and is preempted by the FPA.  The Court also noted that there were alternative measures which New Jersey could have employed to incentivize the development of new generation discussed during the trial.

The Court also found that LCAPP failed under conflict preemption, stating that, after reviewing the entire scheme of the RPM process, it is clear that LCAPP posed as an obstacle to FERC’s implementation of RPM.

Finally, the Court addressed, but rejected the plaintiffs’ arguments under the Commerce Clause, finding that the plaintiffs had not met the burden to show that LCAPP’s goal to provide an incentive for community benefits to generators in New Jersey discriminated against out-of-state producers.