State-mandated power contracts

State-mandated power contracts

April 01, 2014 | By Keith Martin in Washington, DC and Robert Shapiro in Washington, DC

State-mandated power contracts remain under a cloud.

The Federal Energy Regulatory Commission told a US appeals court in late March that certain long-term power purchase agreements that New Jersey required New Jersey utilities to sign went beyond the state’s power to require such contracts.

Last fall, US district courts in New Jersey and Maryland found, using nearly identical reasoning, that bidding programs both states used to direct regulated utilities to buy power from gas-fired independent generators under long-term contracts and pay prices that differed from the prices in the regional competitive market (the PJM market) violated the federal supremacy clause of the US Constitution. The supremacy clause bars states from doing things that conflict with federal rules in the same area. The US Congress has given the Federal Energy Regulatory Commission exclusive power to set wholesale electricity rates for most independent generators.

The public utility regulatory commissions and the affected generators in the two states appealed the US district court decisions to US appeals courts for the 3d and 4th circuits.

The 3d circuit appeal is moving faster than the 4th circuit appeal. All of the briefs have been filed in the 3d circuit. The court asked FERC its view of whether the New Jersey program violated the supremacy clause. FERC said in a brief filed on March 20 that it agrees with the US district court that the New Jersey program “effectively sets the wholesale rate for capacity” in conflict with federal law. FERC said the state directive to independent generators to bid in a capacity auction “directly affects wholesale rates [in PJM], and, to that extent, is a preempted intrusion upon the Commission’s exclusive jurisdiction to regulate wholesales rates and practices affecting rates.” The court heard oral arguments in the case on March 27. A decision is expected within the next few months.

The 4th circuit appeals court is still collecting briefs in the Maryland case. If the two appeals courts decide the cases differently, then chances are greater than the issue will end up before the US Supreme Court.

The cases are being watched closely by other states that have comparable or similar programs to direct utilities to sign long-term wholesale power contracts based on specific state preferences or mandates.