A federal judge in Trenton, N.J., said a New Jersey statute providing incentives for power plant construction to help lower electricity rates and head off shortages is pre-empted by federal law.

The 2011 Long-term Capacity Agreement Pilot Project, by allowing energy generators participating in the state program to auction off wholesale electricity at a discounted price, effectively sets a new market rate — an authority that has belonged to federal regulators for nearly eight decades, U.S. District Judge Peter Sheridan for the District of New Jersey held October 11.

The LCAPP authorized construction of power plants and required New Jersey’s four electricity distributors — Atlantic City Electric Co., Public Service Electric and Gas Co., Jersey Central Power & Light Co. and Rockland Electric Co. — to enter 15-year contracts with approved energy generators.

The generators had to submit successful bids at an annual auction to allow them to trade future electric capacity based on projected need and production. The distributors had to pay the difference between the generators’ plant development costs and the sale prices bid at the auctions.

The trading rates are regulated by the Federal Energy Regulatory Commission (FERC), and the auctions administered by PJM, an organization made up of stakeholders in 13 states.

Out of 34 LCAPP applicants, six electricity generators were pre-approved, and three were ultimately selected for construction projects within New Jersey: CPV Power Development Inc., Hess Corp. and NRG. Each generator’s contract set a price it would receive for producing electricity.

CPV applied for participation in the May 2012 auction, and PJM allowed it to enter a bid to sell electric capacity for $151 per megawatt-day.

That ultimately successful bid was well below the “clearing price,” set to keep rates as low as possible for customers. Hess, too, placed a successful bid, though NRG did not.

In approving the bids, PJM did not consider the subsidies that the generators would receive from the distributors through the LCAPP contracts.

CPV, for example, would actually be paid $286 per megawatt-day, not the $151 rate it bid at auction — with the difference to be paid by the distributors.

The distributors objected to the process but nonetheless signed their contracts.

Meanwhile, the bleak energy outlook that LCAPP was meant to mitigate improved: usage came down with the recession, government-mandated retirement of coal-fired plants had a lesser-than-anticipated impact on production and auction bids reached record levels.

The plaintiffs — Calpine Corp., Exelon Generation Co., PPL Corp., PSE&G and Atlantic City Electric — sued, seeking injunctive relief.

They claimed that LCAPP prompted them to put electric generation projects on hold because it interfered with the predictability of market prices.

Practically, the law discouraged new electricity-generating projects because any company seeking to undertake one would demand the same advantages as the LCAPP participants, the distributors argued.

Legally, they said, LCAPP interfered with FERC’s rate-making authority and thus flouted the U.S. Constitution’s supremacy clause.

The New Jersey Board of Public Utilities countered that the contracts were between the distributors and the generators, didn’t involve the actual sale of electric capacity and weren’t executed with PJM.

Sheridan found LCAPP pre-empted by the Federal Power Act. The contracts “occupy the same field of regulation as [FERC] and intrude upon [its] authority to set wholesale energy prices,” he said.

He noted that the agreements are contingent upon success at the FERC-regulated auction.

The judge relied on decisions in which courts have held that FERC “has the exclusive authority to regulate wholesale electricity sales and the transmission of energy in interstate commerce,” starting in 1927 with the U.S. Supreme Court’s ruling in Public Utilities Commission v. Attleboro Steam & Electric.

There, the court upended an effort by the Rhode Island government to regulate sale of electricity by an in-state plant to a Massachusetts company.

That decision, which left a regulatory void, was followed in 1935 by passage of the Federal Power Act, which gives sole rate-making authority to FERC.

Even though states “retained the responsibility for the siting and construction of power plants, they are required to exercise this responsibility without interfering with [FERC's] exclusive authority,” Sheridan said.

He noted other alternative measures New Jersey could have employed to incentivize the development of new generation.

These include tax-exempt bonds or donation of brownfield property for development.

Instead, the state “chose to advance these goals through a mechanism that intrudes upon the authority of [FERC] and violates federal law,” Sheridan said.

Sheridan added that LCAPP amounts to an “obstacle” to the FERC-mandated auctions.

Lawrence Lustberg of Gibbons in Newark, N.J., who represents the plaintiffs, did not respond to an email seeking comment.

Neither did Lee Moore, spokesman for the New Jersey Attorney General’s Office, which represented the BPU.

David Gialanella is a reporter for the New Jersey Law Journal, a Legal affiliate. •