In the latest salvo in an ongoing controversy over state efforts to subsidize local generation capacity development, the Third Circuit in New Jersey Board of Public Utilities v. FERC upheld a final FERC order approving a PJM Interconnection tariff governing its wholesale capacity market.  The court denied appeals by the New Jersey and Maryland utility commissions, concluding that the challenged tariff provisions (which sought to prevent uneconomic entry by suppliers in the PJM capacity market that could be facilitated by the use of state subsidies) were a valid exercise of FERC’s jurisdictional authority over regional wholesale electricity markets. The state challengers had argued that the tariff constituted an illegal federal regulation of local generators. The Third Circuit’s decision affirming FERC’s order comes on the heels of two related but distinct district court opinions in New Jersey and Maryland which had struck down the state subsidy programs themselves as preempted by federal law.

 

Under the Federal Power Act (FPA), electric power regulation is divided between zones of federal and state authority. The federal government, through FERC, has exclusive authority over wholesale sales of electric energy in interstate commerce. State governments regulate local retail electricity sales, as well as the actual zoning and siting of individual power plants. When the FPA was passed in 1935, most electricity was sold at retail by vertically integrated utilities and there was relatively little interconnection amongst different state utilities, making it (relatively) easy to demarcate the line between areas of state and federal regulation. As the electricity grid became increasingly interconnected, and with the advent of robust wholesale electricity markets in the 1990s and regional auction market operators such as PJM, this division of authority has blurred, with state and federal actors regularly sparring over the precise boundaries of their respective authority over market activities.

 

This particular case arose out of the PJM regional wholesale electric capacity market. New Jersey and Maryland, seeking to promote the development of additional capacity resources in their respective states, offered guaranteed revenue streams to certain new generators that would allow them to offer their capacity into PJM markets at below-market prices. PJM’s tariff had a complicated test that would require certain sellers, which offered their capacity to PJM at prices below the net cost of new entry, to mitigate their prices upward toward a level closer to market value. Originally resources built in accordance with a state mandate were exempt from these mitigation requirements, but once New Jersey and Maryland announced their subsidy plan PJM moved to alter its tariff to eliminate this exemption.  FERC approved the tariff change, and the states petitioned for review.

 

The case demonstrates the complexity of ascertaining precisely where federal authority ends and state authority begins under the FPA. The states contended that the PJM tariff was an attempt to regulate internal state efforts to promote the creation of additional generation resources, an area they argued was squarely within state jurisdiction under the FPA. FERC, on the other hand, argued that the state subsidies interfered with the FERC-jurisdictional wholesale capacity market auctions by artificially depressing wholesale prices. While the Third Circuit ruled in FERC’s favor and affirmed the Commission’s authority over wholesale prices and tariffs, it did not issue broad guidance on the limits of state and federal power. The issue will likely remain contested in years to come as both state and federal actors continue to explore the outside edges of their respective regulatory authorities.