A few months back, the Federal Energy Regulatory Commission directed Deutsche Bank Energy Trading LLC to show cause why it shouldn’t be assessed a civil penalty of $1.5 million and be made to...
Partnership, Not Preemption
How state-sponsored planning can fit with FERC’s capacity markets.
Two cases decided recently in federal court have reignited the long-standing debate over the jurisdictional boundary between federal and state regulation of the electricity business. 1 The plaintiffs in both cases argued that because the Federal Energy Regulatory Commission (FERC) had created a capacity market within the PJM regional transmission organization, the states were preempted from playing their traditional role in resource planning. In a companion argument, they claimed such state action would unduly restrict interstate commerce.
The judges in the two U.S. District Courts in Maryland and New Jersey – the two states that were defendants – each ruled in favor of the plaintiffs on the preemption issue. They declared that the efforts of the two states to procure new generation to serve their ratepayers violated the Supremacy Clause of the U.S. Constitution. Our purpose in this article isn’t to analyze or to critique the judges’ decisions; each was thorough and well explained from a legal standpoint. Nor do we speculate on the future of the new generation projects procured by these two state programs. Instead, our purpose is to explain the potential negative policy implications of these rulings going forward.
Preempting the states is a bad idea. Let’s consider four reasons, founded in public policy and economics.
First, only the states have authority under the Federal Power Act to order the construction of new generation capacity to mitigate long-term risks. Such risks include delays in building major transmission facilities, sudden and substantial retirements of existing power plants (often in the face of new environmental regulations), abrupt changes in load (especially as we come out of the Great Recession), the need to accommodate intermittent generation by solar and wind facilities, and the failure of the PJM capacity market to attract a diversified portfolio of resources in transmission-constrained areas. It would be dangerous to take that authority away from the states in the face of these significant risks.