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October 23, 2013

Courts Say States' Energy Pricing Schemes are Preempted

States cannot artificially raise capacity prices for energy wholesale markets according to federal district courts in Maryland and New Jersey.  In Maryland, the district court, on September 30, 2013, held that the Maryland Public Service Commission’s Generation Order overriding the price set by the federally regulated wholesale market impermissibly invaded a field occupied exclusively by the Federal Energy Regulatory Commission (“FERC”).  Then, on October 11, 2013, another district court held that the New Jersey Board of Public Utilities’ implementation of the Long-Term Capacity Pilot Project Act (“LCAPP”) interfered with FERC’s authority to set prices for wholesale energy sales and posed an obstacle to the implementation of FERC’s Reliability Pricing Model.

Both states had enacted programs that involved a “contract for differences,” which essentially provided a side payment from a utility to the generator if capacity prices set in the wholesale markets regulated by FERC fell below specified levels.  The courts found that these programs artificially raised the capacity prices received by these generators to levels in excess of the just and reasonable rate determined by the capacity markets approved by FERC under the Federal Power Act.

The outcomes of these cases may impact the New York State Public Service Commission’s implementation of Governor Andrew Cuomo’s Energy Highway initiative seeking funding for additional sources of supply for New York City in the event that Entergy’s Indian Point facilities are closed, as well as upgrading New York’s AC transmission system.  In its press release announcing a decision approved last week but not yet issued, the New York PSC approved certain transmission upgrades and energy conservation measures proposed by the New York Power Authority and the Consolidated Edison Company of New York, Inc. but stated that proposals by non-utilities were still being reviewed.  The New York PSC also stated that any mechanism for allocating the costs of such non-utility projects among load-serving entities in New York would be filed with FERC, which would avoid the preemption claims at issue in the two cases discussed above.

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