On September 11, 2014, a three-judge panel of the U.S. Court of Appeals for the Third Circuit unanimously affirmed an October 2013 decision of the U.S. District Court for the District of New Jersey that New Jersey’s Long-Term Capacity Pilot Program Act (LCAPP) is preempted by federal regulation of interstate capacity markets.

LCAPP, which sought to promote the development of new electric generating capacity in New Jersey, instructed the New Jersey Board of Public Utilities (BPU) to solicit bids for new generation facilities and award fifteen-year, fixed-price Standard Offer Capacity Agreements to new generators that met certain requirements.  The BPU then compelled New Jersey electric distribution companies to enter into the Standard Offer Capacity Agreements with successful LCAPP bidders.  Several existing generators and two electric distribution companies sued the BPU in the District Court, arguing that the Federal Power Act (FPA) preempts LCAPP and seeking an injunction prohibiting the enforcement of the New Jersey law.  As we reported here, the District Court in October 2013 determined that the FPA does preempt LCAPP, declared the law unconstitutional, invalidated the Standard Offer Capacity Agreements, and enjoined New Jersey from enforcing the law.  The BPU and an LCAPP generator appealed.

Judge Julio M. Fuentes, writing for the Third Circuit panel, found that, by legislating the rates that LCAPP generators would receive for their capacity, New Jersey “entered into a field of regulation beyond its authority” because the FPA gives the Federal Energy Regulatory Commission (FERC) exclusive jurisdiction over interstate capacity markets and rates.  FERC regulates capacity prices in the PJM Interconnection, L.L.C. (“PJM”) region, of which New Jersey is a part, through PJM’s Reliability Pricing Model.  The LCAPP program, Judge Fuentes found, “attempts to regulate the same subject matter” and therefore cannot stand.  Because the court focused on field preemption with respect to FERC regulation of interstate rates, it did not reach arguments regarding whether the District Court correctly determined that LCAPP posed an obstacle to PJM’s implementation of its capacity markets and therefore is conflict preempted.

Importantly, Judge Fuentes recognized “FERC’s authority over interstate rates does not carry with it exclusive control over any and every force that influences interstate rates,” and that states, by statute and tradition, “maintain an [important] regulatory role in the nation’s electric energy markets.”  However, states like New Jersey will have to advance their energy policy goals, such as increasing electric generating capacity, by means other than capacity rate regulation that infringes on FERC’s exclusive jurisdiction.