POWER March 2014 - 28

When States Try to
Manipulate Wholesale
Power Markets
Thomas W. Overton, JD
T
his 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
28
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.
www.powermag.com
POWER | March 2014
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POWER March 2014

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