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Pre-Sandy New Jersey Court Cites Potential Power Loss Due to Hurricanes

Many consumers in the northeastern states are without power due to the devastating effects of Hurricane Sandy.  Interestingly, a federal court in New Jersey heard ominous testimony last September concerning the potential impact of catastrophic hurricanes and other natural disasters on transmission assets.  In support of a New Jersey law designed to ensure reliable power, witnesses cited the potential impact of hurricanes, thunderstorms, forest fires, and other events that affect electric transmission. 

The case centered on whether the law improperly encroached on the authority of the Federal Energy Regulatory Commission (“FERC”) in its regulation of interstate wholesale power.  Based on the factual questions remaining open for resolution, the court denied several utilities’ motion for summary judgment.

Background

New Jersey passed the Long-Term Capacity Agreement Pilot Program Act (the “Act”) to promote reliable power through the construction of new generation facilities.  The Act establishes a pilot program that allows a limited number of electric generation companies (“NewGens”) to contract with public utilities in New Jersey with terms that promote new generation (the “Program”).

These contracts are irrevocable long-term contracts that guarantee a fixed price for electric capacity.  NewGens must sell their capacity at PJM auctions, but the Program insulates NewGens from any losses they incur by selling their capacity below the market price.  In return, public utilities are permitted to recover their losses through New Jersey ratepayers.

Preemption Ruling

Several utilities filed a lawsuit challenging the Act based on preemption.  “Preemption arises when a state ‘is deprived of the power to act’ because it is in direct conflict with federal law.”  The utilities argued that the Act impedes FERC’s jurisdiction over wholesale electricity transactions.

In separate proceedings, FERC held hearings to determine whether any changes were needed to PJM’s wholesale auction procedures to mitigate any adverse effects of New Jersey’s Program.  FERC determined that certain changes were necessary, in spite of New Jersey’s objections that FERC was interfering with a matter of state jurisdiction.  FERC replied that it “is not infringing on the sovereignty of the state, but is merely regulating the wholesale prices charged in the capacity market.”

On the issue of preemption, the court ruled that several questions of fact remain to be resolved at trial.  Specifically, a jury needs to determine whether the Act and Program “interfere with comprehensive federal regulatory authority” and whether they are “an obstacle to reaching a federal goal.”   Because these are questions of fact, the court denied the utility’s motion for summary judgment.

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