Federal court knocks down a second state generation law

PPL Corp. (NYSE: PPL) on Oct. 14 marked the fact that for the second time in two weeks, a federal court has struck down a state law that sets up favorable regulatory treatment for specific new gas-fired power generation in two different states.

A U.S. District Court judge in New Jersey on Oct. 11 invalidated a New Jersey state law subsidizing development of new natural-gas-fired generation. The law, enacted in January 2011 with the support of the New Jersey Board of Public Utilities (BPU), required utilities to enter into long-term capacity contracts with generators chosen by the BPU. PPL generating and marketing companies joined other merchant generators in filing a lawsuit seeking to block the law.

“We’re pleased with the U.S. District Court’s decision, which upholds the integrity of competitive generation markets,” said Robert Grey, executive vice president, general counsel and secretary for PPL Corp. “We are especially gratified that this New Jersey federal court decision comes less than two weeks after a Maryland federal court held in our favor that an order of that state’s Public Service Commission requiring subsidized generation was unconstitutional on the same grounds.”

The Long-Term Capacity Pilot Project Act (LCAPP) required New Jersey-based public utilities to enter into long-term contracts with developers selected by the BPU that essentially would guarantee that the selected developers would receive subsidized capacity prices when they sold their output. PPL said that gave them an unfair advantage over other generators and allowed them to bid in artificially low prices into PJM Interconnection’s annual capacity auction. The state in part wanted to grant these incentives to meet local PJM reliability concerns.

PPL has long argued that state programs that subsidize power plant development ultimately wind up costing consumers more, create barriers to future investment and unnecessarily shift the financial risk of new construction from developers to ratepayers. The company said it believes in allowing well-structured, properly regulated competitive markets to work and send price signals to developers, instead.

Because of competitive markets, gas-fired generation is being built in PJM without state subsidies, and there are ample supply resources in the wholesale electricity market to meet the state’s and region’s energy needs, PPL noted.

PPL‘s generating and marketing companies argued that the LCAPP law was unconstitutional because it infringed on the Federal Energy Regulatory Commission’s exclusive authority to regulate the wholesale sale of electricity in interstate commerce. In its Oct. 11 ruling, the U.S. District Court agreed, stating that the law “is preempted by the Federal Power Act and in violation of the Supremacy Clause of the United States Constitution; and is therefore null and void.”

Ruling calls into question the status of Competitive Power Ventures project

The New Jersey BPU had in 2011 selected the gas-fired, 700-MW CPV Woodbridge Energy Center project of Competitive Power Ventures under the LCAPP program. Competitive Power Ventures, GE Energy Financial Services and ArcLight Capital Partners had announced Sept. 20 that they have closed financing for the $842m CPV Woodbridge Energy Center.

CPV Power Development was an intervenor in the Jew Jersey court case in defense of the Woodbridge project, which is being developed under its CPV Shore subsidiary. Besides PPL, plaintiffs in the case included Exelon (NYSE: EXC) and Calpine (NYSE: CPN).

PPL testified in the court case that it had to modify its business strategies in light of the requirements imposed by the LCAPP. Michael Cudwadie, Vice President for PPL EnergyPlus, testified that PPL relies on capacity forward market prices and energy forward market prices to make decisions regarding investments in new and existing generation, including whether to upgrade units, add pollution control equipment, or retire specific units. And it said the LCAPP program distrupted those normal price signals.

The judge noted that the BPU had other alternatives to encourage new generation besides LCAPP. “Since the Board retained authority over the siting of generation facilities, a question arose as to whether the Board had any alternative means to incentivize construction of new generation facilities besides enacting a statute like the LCAPP,” the Oct. 11 decision said. “The parties agree that the Board had a number of ways to support and encourage the development of generation projects. These include the utilization of tax exempt bonding authority, the granting of property tax relief, the ability to enter into favorable site lease agreements on public lands, the gifting of environmentally damaged properties for brownfield development, and the relaxing or acceleration of permit approvals.”

There were these other alternative measures which New Jersey could have employed to incentivize the development of new generation, the judge noted. While New Jersey retained the authority to take a wide range 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, the judge added.

The New Jersey judge, Peter Sheridan, said it wasn’t a good idea to try and look at the Maryland statute that got struck down by a separate federal court on Sept. 30. The Maryland statute is based upon reimbursement of 400 MW of new demand response as opposed to a capacity requirement as in New Jersey. “Any analysis of the Maryland proposal would necessarily require this Court to review a set of facts as substantial as those presented herein,” said the New Jersey decision. “Based on the facts presented at trial, the Court is not able to discern whether Maryland’s proposal is sufficiently similar to the LCAPP. As such, the Court considers the value in comparing and contrasting the Maryland initiative and the LCAPP to be minimal for purposes of this opinion.”

Maryland judge found that state’s program to also be unconstitutional

The federal district judge in Maryland ruled Sept. 30 that a Maryland Public Service Commission (PSC) initiative to encourage in-state power plant construction violates the “Supremacy Clause” of the U.S. Constitution.

“While Maryland may retain traditional state authority to regulate the development, location, and type of power plants within its borders, the scope of Maryland’s power is necessarily limited by FERC’s exclusive authority to set wholesale energy and capacity prices,” said the opinion from the U.S. District Court for the District of Maryland.

“Based on this principle, Maryland cannot secure the development of a new power plant by regulating in such a manner as to intrude into the federal field of wholesale electric energy and capacity price-setting,” the court held.

The ruling by U.S. District Judge Marvin Garbis is a blow to a Maryland PSC effort to force in-state utilities to enter into long-term contracts with a new combined-cycle gas plant planned by Competitive Power Ventures in Charles County, Md.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.