When States Try to Manipulate Wholesale Power Markets

This has not been the best of times for state regulators trying to control the future of their regional power markets.

In September, a federal court in Maryland shot down that state’s attempt to force the construction of a combined cycle power plant outside of PJM’s capacity auctions. The Maryland Public Service Commission has spent several years trying to address what it sees as potential capacity shortfalls, and in April 2012 it finally ordered several regional utilities to execute power purchase agreements (PPAs) with a company that wanted to build such a plant but was unable to clear PJM auctions. The utilities sued to block the order, and on Sept. 30, the court agreed that the state commission impermissibly invaded the Federal Energy Regulatory Commission’s (FERC’s) authority over wholesale power prices.

Just two weeks later, a federal court in New Jersey threw out that state’s attempt to circumvent PJM in a similar fashion. Acting under New Jersey’s Long-Term Capacity Pilot Project, enacted in 2011, the New Jersey Board of Public Utilities conducted its own selection process for new generation and ordered the state’s utilities to sign PPAs with the winning companies. As in Maryland, the utilities sued, and the court there also agreed that the state had no authority to interfere in the wholesale power market.

In both cases, the decisions turned on a principle of constitutional law known as preemption. Somewhat simplified, this rule holds that where Congress intends to occupy a regulatory field within its jurisdiction, states have no authority to impose their own regulations. Federal courts have long held that the Federal Power Act leaves no room for states to regulate interstate power sales, and that that authority rests solely with FERC. With FERC having authorized PJM to manage the wholesale power market in New Jersey and Maryland, those states cannot second-guess PJM’s judgment when the market doesn’t function to their liking.

Cases in this area have historically turned on efforts to boost capacity or reduce power prices. There are signs, however, that future litigation may concern methods to support renewable generation.

Renewable energy mandates have passed muster under this rule to the extent they merely require a percentage of renewable generation while leaving it to the market to determine the prices paid and the generators that supply the power. Attempts to go beyond that, however, have often run into trouble.

A Mighty Wind

That brings us to the Cape Wind offshore wind project in Massachusetts.

Cape Wind, potentially the nation’s first offshore wind farm, has been in development for more than 10 years and has spawned fierce opposition from a variety of quarters, among them the same conservative groups that have fought renewable energy mandates elsewhere in the country. Still, it has managed to navigate a gauntlet of permit approvals and litigation, in no small part because of strong support from the Massachusetts government, particularly Governor Deval Patrick.

Cape Wind’s most formidable obstacle has been the cost of its power. Even with subsidies, it has been unable to offer its electricity into the ISO New England market at competitive prices, even against other renewable generation. Nevertheless, it was able to secure a no-bid PPA with National Grid in 2010 for 50% of its output. The PPA came about in large part because the Massachusetts Green Communities Act favored in-state renewable generation at the time. As I wrote in the August 2013 issue of POWER, that provision was rescinded in the face of a lawsuit from TransCanada.

Without that advantage, Cape Wind was unable to convince NSTAR, another area utility, to enter a PPA because NSTAR had received much lower-priced bids from land-based wind generators, some of them out of state. Thus things stood until NSTAR and Northeast Utilities sought approval from commonwealth regulators for a merger.

It’s difficult to characterize what happened next as anything but an attempt to strong-arm NSTAR into signing a PPA with Cape Wind. The Massachusetts Department of Energy Resources moved to block the merger, and it only withdrew its opposition when NSTAR and Northeast Utilities agreed, after a secret, yearlong negotiation, to sign a PPA under the same well-above-market rates as the National Grid deal.

How About Another Round?

Cape Wind, as I noted above, has faced years of litigation, and its opponents have failed in every attempt to block the project, most recently on Jan. 23, when the Court of Appeals for the District of Columbia Circuit upheld Federal Aviation Administration approval. But on the same day that decision came down, opponents filed a new suit, arguing that the merger-PPA deal constituted state inference in wholesale power prices, given that it required the utilities to accept a specific price rather than one freely negotiated on the market.

The fact pattern here is not quite the same as in the New Jersey and Maryland cases, where state regulators ordered PPAs to be signed; here, Massachusetts apparently conditioned approval of the merger on the PPA. Thus, it may argue that NSTAR had a choice to forgo both.

As of this writing, the Commonwealth of Massachusetts has not filed an answer to the suit, but this case is clearly one to watch, both for the future of renewable mandates and wholesale power markets. ■

Thomas W. Overton, JD is a POWER associate editor.