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Partnership, Not Preemption

How state-sponsored planning can fit with FERC’s capacity markets.

Fortnightly Magazine - December 2013
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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.

Figure 1 - PJM Capacity Requirements

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.

Second, if the logic of the plaintiffs’ arguments is carried forward it could wipe away a broad swath of state programs. The logic is that states are preempted when their programs “affect” or alternatively “set” prices in wholesale markets. The latter argument was what both judges accepted in ruling that the Supremacy Clause had been violated. 2 Yet since almost any state program will affect supply or demand, all could be said to “affect” wholesale prices. Moreover, the policy structures of the Maryland and New Jersey programs that were challenged by the plaintiffs were no different from many other widely accepted state programs that also happen to “set” prices. The policy structure is first to say that the state wants more of

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