Another Federal Court Strikes Down State Capacity Contracts, Narrower Decision Does Not Raise Default Service Issues

Another U.S. District Court has found that state-procured capacity contracts which are offered into the Reliability Pricing Model violate federal law, but this recent decision is more narrowly tailored and does not raise (as much) issues regarding states' general ability to set wholesale rates for other endeavors (such as default service).

Specifically, the United States District Court for the District of New Jersey concluded that New Jersey's Standard Offer Capacity Agreements are preempted by federal law, due to FERC's "exclusive" jurisdiction with respect to the Reliability Pricing Model.

"[T]he Court declares that the Long Term Capacity Agreement Pilot Program Act (LCAPP) is preempted by the Federal Power Act and in violation of the Supremacy Clause of the United States Constitution; and is therefore null and void."

In striking down the SOCA contracts, the New Jersey district court's opinion emphasized that the contracts invaded the field of the Reliability Pricing Model, which FERC had explicitly created to set wholesale capacity prices. Among other things, capacity under the SOCAs had to clear RPM.

"[T]he SOCAs are not separate from, and to the contrary, occupy the same field as the RPM Auction," the Court said (emphasis added).

This emphasis on RPM means the order is centered on the SOCA contracts alone, and unlike a recent opinion from a federal court for the Maryland district, does not raise issues with states' ongoing ability to set wholesale rates for suppliers of default service (see prior story).

Unlike the Maryland decision, the New Jersey district court does not rest its conclusion on an expansive analysis that, "the prices or rates received ... in exchange for wholesale energy and capacity sales are within the sole purview of the federal government."

As noted previously, this finding from the Maryland district court throws into question states' ability to conduct procurements, where wholesale rates are set, for default service.

Fortunately, the New Jersey court specified that the SOCA contracts were preempted specifically because they invaded the specific field of RPM, not because they generally set a wholesale rate. As such, the conclusions from the New Jersey district court do not implicate default service.

The New Jersey case is 3:11-cv-00745