Federal Court Upholds Challenge to NJ’s Power Plant Subsidy

State's attempt to add capacity via long-term subsidies to power suppliers stymied yet again

New Jersey has suffered another setback in its much contested effort to develop new power plants in the state by funneling ratepayer subsidies to three firms to build additional generating capacity.

A U.S. District Court judge has rejected the state’s motion to dismiss a challenge to the law brought by power suppliers and electric utilities who argued that the measure, among other things, is preempted by a federal law giving the Federal Energy Regulatory Commission (FERC) jurisdiction over wholesale electricity sales.

The ruling could further muddle an increasingly bitter debate over the New Jersey law, which has attracted widespread scrutiny because many industry executives and energy analysts view it as undermining the competitive energy markets.

Attracting Power

The dispute arises from New Jersey’s efforts to lure new power plants by passing a bill giving three developers long-term subsidies from electric customers to make their projects financially viable. The move has been contested by incumbent power suppliers in court and before the federal agency.

With bipartisan backing the bill providing the subsidies won approval in the legislature and was signed by Gov. Chris Christie earlier this year, despite heated opposition from incumbent power suppliers. Advocates have argued it will drive down energy prices by providing an additional 2,000 megawatts of generating capacity.

The state’s businesses and residents pay some of the highest electric bills in the country, usually falling somewhere in the top 10 most costly states for energy. Part of the problem is due to unusually high capacity prices for electricity, a problem especially troublesome to New Jersey because of congestion on the power grid. Capacity payments ensure there are enough power plants on standby to produce electricity at times of peak demand, typically on hot summer days.

Rules and Regulations

The decision comes as the state continues to press for changes in various rules and regulations of both FERC and the PJM Interconnection, the operator of the regional power grid. At a hearing earlier this month, PJM agreed to make revisions to many of its procedures, which the state and others have criticized as impeding the development of new power plants, a step state officials argue would never have occurred without the New Jersey law being passed.

The plaintiffs, a coalition of power suppliers and electric utilities, argued the law violates the interstate commerce clause of the U.S. Constitution. In its arguments to U.S. District Court Judge Peter Sheridan, they also said that the law, by artificially depressing wholesale prices for capacity and energy, will cost them millions of dollars, a harm that would justify the case being heard by the court.

In addition, the electric utilities argued that even if they recouped the mandatory payments they are required to make to the three power plant developers, they would still have to pay more to service debt because of the law, as well as having their available credit line reduced.

The State’s Defense

In its defense, the state contended that the law has yet to be implemented and the plaintiffs have yet to be injured. Any claims of harm suffered by the power suppliers and the utilities, the state argued, are merely speculative.

That view was rejected by the judge, who found the plaintiffs alleged “anticipatory injury with particularity and the consequential injuries they may suffer are more than uncertain possibilities.”

The court also ruled the law is preempted because it intrudes on FERC’s exclusive jurisdiction to regulate wholesale electricity transactions. Further, the decision said the power suppliers advance a credible cause that the intent and effect of the law is to discriminate in favor of in-state generation at the expense of out-of-state generation.

Opponents of the law welcomed the court’s decision, including the Public Service Enterprise Group (PSEG), the owner of Public Service Electric & Gas (PSE&G), the state’s largest electric utility, and PSEG Power, an unregulated affiliate that is one of the largest power suppliers in the region.

“PSEG is pleased by the decision; we believe there is a strong legal argument that the law is unconstitutional,” said Michael Jennings, a spokesman for the company.

A spokesman for the state Board of Public Utilities (BPU), which sought to dismiss the case, said the agency does not comment on ongoing litigation.