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PPL Energyplus, LLC v. Hanna

United States District Court, D. New Jersey

October 11, 2013

PPL ENERGYPLUS, LLC, et al., Plaintiffs,
v.
ROBERT M. HANNA, in his official capacity as President of the New Jersey Board of Public Utilities, et al., Defendants

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[Copyrighted Material Omitted]

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For PPL ENERGYPLUS, LLC, PPL BRUNNER ISLAND, LLC, PPL HOLTWOOD, LLC, PPL MARTINS CREEK, LLC, PPL MONTOUR, LLC, PPL SUSQUEHANNA, LLC, LOWER MOUNT BETHEL ENERGY, LLC, PPL NEW JERSEY SOLAR, LLC, PPL NEW JERSEY BIOGAS, LLC, PPL RENEWABLE ENERGY, LLC, Plaintiffs: DAVID JOHN FIOCCOLA, MORRISON & FOERSTER LLP, NEW YORK, NY; MARA E. ZAZZALI, GIBBONS, PC, NEWARK, NJ.

For CALPINE ENERGY SERVICES L.P., CALPINE MID-ATLANTIC GENERATION, LLC, CALPINE NEW JERSEY GENERATION, LLC, CALPINE BETHLEHEM, LLC, CALPINE MID-MERIT, LLC, CALPINE VINELAND SOLAR, LLC, CALPINE MID-ATLANTIC MARKETING, LLC, CALPINE NEWARK, LLC, EXELON GENERATION COMPANY, LLC, NAEA OCEAN PEAKING POWER, LLC, Plaintiffs: LAWRENCE S. LUSTBERG, MARA E. ZAZZALI, WILLIAM P. DENI, JR., GIBBONS, PC, NEWARK, NJ.

For GENON ENERGY, INC., Plaintiff: LAWRENCE S. LUSTBERG, MARA E. ZAZZALI, GIBBONS, PC, NEWARK, NJ.

For PSEG POWER, LLC, PUBLIC SERVICE ELECTRIC AND GAS COMPANY, Plaintiffs: MARA E. ZAZZALI, GIBBONS, PC, NEWARK, NJ; WILLIAM J. O'SHAUGHNESSY, MCCARTER & ENGLISH, LLP, NEWARK, NJ.

For ATLANTIC CITY ELECTRIC COMPANY, Plaintiff: MARA E. ZAZZALI, GIBBONS, PC, NEWARK, NJ; PHILIP JOSEPH PASSANANTE, PEPCO HOLDINGS, INC, ATLANTIC CITY ELECTRIC COMPANY, NEWARK, NJ; WILLIAM J. O'SHAUGHNESSY, MCCARTER & ENGLISH, LLP, NEWARK, NJ.

For LEE A. SOLOMON, in his official capacity as President of the New Jersey Board of Public Utilities, Defendant: ALEX MOREAU, LEAD ATTORNEY, OFFICE OF THE NJ ATTORNEY GENERAL, NEWARK, NJ; BRIAN O. LIPMAN, LEAD ATTORNEY, OFFICE OF THE NJ ATTORNEY GENERAL, DIVISION OF LAW, NEWARK, NJ; JENNIFER S. HSIA, LEAD ATTORNEY, NEW JERSEY OFFICE OF THE ATTORNEY GENERAL, DIVISION OF LAW, BOARD OF PUBLIC UTILITIES, NEWARK, NJ; LISA J. MORELLI, STATE OF NEW JERSEY, OFFICE OF THE ATTORNEY GENERAL, TRENTON, NJ.

For JEANNE M. FOX, in her official capacity as Commissioner of the New Jersey Board of Public Utilities, Defendant: ALEX MOREAU, LEAD ATTORNEY, OFFICE OF THE NJ ATTORNEY GENERAL, NEWARK, NJ; JENNIFER S. HSIA, LEAD ATTORNEY, NEW JERSEY OFFICE OF THE ATTORNEY GENERAL, DIVISION OF LAW, BOARD OF PUBLIC UTILITIES, NEWARK, NJ; BRIAN O. LIPMAN, OFFICE OF THE NJ ATTORNEY GENERAL, DIVISION OF LAW, NEWARK, NJ; LISA J. MORELLI, STATE OF NEW JERSEY, OFFICE OF THE ATTORNEY GENERAL, TRENTON, NJ.

For JOSEPH L. FIORDALISO, in his official capacity as Commissioner of the New Jersey Board of Public Utilities, NICHOLAS V. ASSELTA, in his official capacity as Commissioner of the New Jersey Board of Public Utilities, Defendants: ALEX MOREAU, LEAD ATTORNEY, OFFICE OF THE NJ ATTORNEY GENERAL, NEWARK, NJ; BRIAN O. LIPMAN, LEAD ATTORNEY, OFFICE OF THE NJ ATTORNEY GENERAL, DIVISION OF LAW, NEWARK, NJ; JENNIFER S. HSIA, LEAD ATTORNEY, NEW JERSEY OFFICE OF THE ATTORNEY GENERAL, DIVISION OF LAW, BOARD OF PUBLIC UTILITIES, NEWARK, NJ; LISA J. MORELLI, STATE OF NEW JERSEY, OFFICE OF THE ATTORNEY GENERAL, TRENTON, NJ.

For PJM INDUSTRIAL CUSTOMER COALITION, Intervenor Defendant: STEPHEN R. KERN, LEAD ATTORNEY, MCNEES WALLACE & NURICK LLC, HARRISBURG, PA.

For CPV POWER DEVELOPMENT, INC., Intervenor Defendant: SEAN J. KIRBY, LEAD ATTORNEY, SHEPPARD MULLIN RICHTER & HAMPTON LLP, NEW YORK, NY.

For NEW JERSEY, DIVISION OF RATE COUNSEL, Intervenor Defendant: BRIAN WEEKS, LEAD ATTORNEY, NEW JERSEY DIVISION OF RATE COUNSEL, NEWARK, NJ.

For NRG ENERGY, INC., NEW JERSEY POWER DEVELOPMENT LLC, Intervenors: DAVID R. KING, HERRICK, FEINSTEIN LLP, PRINCETON, NJ.

OPINION

PETER G. SHERIDAN, United States District Judge.

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MEMORANDUM

This non-jury case was tried before the Court over thirteen separate days in April and May, 2013. After trial, the parties submitted proposed findings of fact and conclusions of law as well as briefs, and thereafter, summations were heard. The Court, having considered the parties' submissions and having deliberated over the facts and the law, submits this memorandum as its decision.

In broad terms, the issue before the Court is whether the New Jersey Long-Term Capacity Pilot Project Act, P.L. 2001, c. 9, approved Jan. 28, 2011, codified at N.J.S.A. § § 48:3-51, 48:3-98.2-.4 (" LCAPP" or " Act" ), should be declared unconstitutional as violating the Supremacy Clause, and whether the New Jersey Board of Public Utilities (" NJBPU", " BPU", or as referred to herein as the " Board" ) should be enjoined from engaging in activities in furtherance of the Act because the LCAPP is preempted by the Federal Power Act, 16 U.S.C. § 824 et seq. . That is, whether actions by the State of New Jersey taken pursuant to the LCAPP intrude upon and interfere with the authority delegated to the Federal Energy Regulatory Commission (as referred to herein, " FERC" or " Commission" ) by the Federal Power Act.

Before proceeding to the substance of this case, the Court provides two cautionary observations regarding writing style and organization and a general reservation as to the presentation and scope of the findings within this decision. First, on writing style. The electric energy industry has its own jargon which makes great use of acronyms. With so many acronyms being used, the testimony and briefs become like alphabet soup where all the letters swirl around and may confuse the reader. As such, a list of acronyms which have been substantially agreed upon by the parties is attached as Rider A. The Court minimizes use of these acronyms in this

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decision. By way of reservation, the first part of the trial reviewed the extensive history of how the electric energy industry has developed into its present state. This opinion includes an overview of the relevant background for the purpose of providing sufficient information to decide the issues, however, it does not purport to be a historical work. And lastly on organization, there are many non-controversial facts presented within the Court's overview of the relevant background, and a new term may present itself without prior introduction. In this case, the term will be explained later in the Court's decision. After sifting through a confluence of facts, the Court has gleaned a set of manageable facts with which to evaluate the preemption issue. The decision is subdivided into several sections: (A) an identification of the parties to the action; (B) an identification of important non-parties; (C) an identification of witnesses who testified at trial; (D) a description of some basic facts regarding electricity; (E) background information on the electric energy industry; (F) a description of the " Reliability Price Model" (" RPM" ) process; (G) a description of the LCAPP statute; (H) an explanation of the impacts of the LCAPP; (I) a description of the credibility of witness; (J) analysis; and (K) a conclusion.

A. PARTIES TO THE ACTION

1. Defendants

New Jersey Board of Public Utilities. The defendants are Robert M. Hanna [1], Jeanne M. Fox, Joseph L. Fiordaliso, and Nicholas Asselta, all of whom are current or former commissioners of the New Jersey Board of Public Utilities [2]. Each is named in his official capacity against whom declaratory and injunctive relief is sought. Since each currently serves or formerly served as a commissioner on the Board, this opinion collectively refers to them as the " Board." The Board has broad statutory authority over the activities of public utilities within the State of New Jersey. See In re Centex Homes, LLC, 411 N.J.Super. 244, 254, 985 A.2d 649 (App.Div. 2009). Specifically, Title 48 of the New Jersey Statutes provides that the Board has " general supervision and regulation of and jurisdiction and control over all public utilities." N.J.S.A. § 48:2-13(a). As part of that authority, the BPU is authorized to require any public utility operating within the State to furnish safe, adequate, and proper service to consumer ratepayers at " just and reasonable" rates. N.J.S.A. § 48:2-21.

CPV Power Development, Inc. CPV Power Development, Inc. (" CPV" ) is an Intervenor/Defendant. CPV is a Delaware corporation that, through its subsidiaries, is engaged in the development, ownership, and management of natural gas-fired facilities in North America (T. 1587, 10-24). CPV owns and manages a natural gas-fired generation facility in Riverside County, California, and has taken steps to develop other natural gas-fired facilities, including

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projects in Maryland, New York and New Jersey. CPV began to develop its Shore Project in New Jersey prior to implementation of the LCAPP Act. (T. 1588, 6 through T. 1589, 17). Most importantly for purposes of this case, CPV was named an eligible generator under the LCAPP by the Board and cleared the RPM Auction on its 2012 bid (T. 1588, 15-22).

2. Plaintiffs

The Plaintiffs are a group of wholesale, retail, and marketing companies who produce and sell energy and are located within the PJM market [3]. Several Plaintiffs are identified below.

Plaintiff Calpine Corporation is an electric generation and marketing corporation with a number of subsidiaries. It is a publicly traded, independent power producer based in Houston, Texas which operates ninety-one (91) power plants throughout the United States and Canada. The Calpine generation companies are physically located in the PJM market and participate in the PJM wholesale energy and capacity markets.

Plaintiff Exelon Generation Company, LLC is a Pennsylvania corporation headquartered in Kennett Square, Pennsylvania. Exelon Generation is a wholly-owned subsidiary of Exelon Corporation. Exelon Generation's business consists of owning and operating electric generating facilities, wholesale power marketing operations, and competitive retail supply operations. Exelon Generation sells energy and capacity in the PJM interstate market and competes in PJM's wholesale capacity auctions.

The PPL Parties are a group of related companies principally located in Allentown, Pennsylvania which are market and generation subsidiaries of PPL Corporation. They are physically located in the PJM market and participate in the PJM wholesale energy and capacity markets. Together they control or own about 19,000 megawatts of generating capacity in the United States, some of which is located within the PJM market.

Plaintiff PSEG Power, LLC is a Delaware limited liability company, headquartered in Newark, New Jersey. PSEG Power is a wholly-owned subsidiary of Public Service Enterprise Group, Inc.. PSEG Power owns approximately 11,850 megawatts of generating capacity within the PJM area, approximately 9,950 megawatts of which is located in New Jersey. PSEG Power sells energy and capacity at wholesale in interstate commerce, including in PJM's capacity and energy markets.

Plaintiff Public Service Electric and Gas Company (" PSE& G" ), a subsidiary of Public Service Enterprise Group, is located in New Jersey and is one of the largest combined electric and gas companies in the United States. It is also New Jersey's oldest and largest publicly owned utility. PSE& G currently serves nearly three quarters of New Jersey's population from Bergen to Gloucester Counties.

Plaintiff Atlantic City Electric Company, based in New Jersey, is a subsidiary of Pepco Holdings, Inc., which provides electric service to approximately 547,000 customers in southern New Jersey. Pepco Holdings, Inc. is one of the largest energy delivery companies in the Mid-Atlantic region, serving about 1.9 million customers in Delaware, the District of Columbia, Maryland and New Jersey.

B. OTHER IMPORTANT NON-PARTIES

The Federal Energy Regulatory Commission (" Commission" or " FERC" ) and

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PJM Interconnection, LLC (" PJM" ) are two entities that are key players in the sale and delivery of energy. The Commission and PJM are not parties to this action, but are discussed throughout this memorandum.

Pursuant to the Federal Power Act, 16 U.S.C. § 824 et seq., the Commission has federal statutory authority to regulate the transmission of electric energy in interstate commerce and the sale of electric energy at wholesale in interstate commerce. (Stipulated Facts ¶ 5). In this case, the scope of the Commission's jurisdiction in regulating the sale of electric capacity in the wholesale market, and whether such jurisdiction is exclusive or concurrent with the Board's jurisdiction, is at issue. The applicable federal statute from which the Commission derives its authority reads:

(b) Use or sale of electric energy in interstate commerce.
(1) The provisions of this subchapter shall apply to the transmission of electric energy in interstate commerce and to the sale of electric energy at wholesale in interstate commerce, but except as provided in paragraph (2) shall not apply to any other sale of electric energy or deprive a State or State commission of its lawful authority now exercised over the exportation of hydroelectric energy which is transmitted across a State line. The Commission shall have jurisdiction over all facilities for such transmission or sale of electric energy, but shall not have jurisdiction, except as specifically provided in this subchapter and subchapter III of this chapter, over facilities used for the generation of electric energy or over facilities used in local distribution or only for the transmission of electric energy in intrastate commerce, or over facilities for the transmission of electric energy consumed wholly by the transmitter. 16 U.S.C. § 824(b)(1).

PJM Interconnection, LLC is a voluntary association of different energy stakeholders which includes administrative bodies and electric generators. [4] (Stipulated Facts ¶ 13). PJM is primarily subject to Commission regulation through a tariff. It operates a regional wholesale market that includes all or part of thirteen states including New Jersey. In addition, PJM is a regional transmission organization (" RTO" ). (T. 47, 17 through T. 48, 11).

PJM was originally founded in 1927. The name " PJM" is the brainchild of its earliest members who were from the states of " Pennsylvania (P), New Jersey (J), Maryland (M)" . (T. 410, 22 through T. 411, 8). It was formed as a " power pool" for traditional utilities which recognized that a regional transmission organization could easily accommodate sharing of electric capacity more efficiently (T. 39, 5-10). The sharing of electrical capacity through such arrangements drastically drops consumer costs by limiting the number of electrical generation facilities required for peak hour production. As noted above, PJM operates pursuant to a tariff filed by PJM with the Commission called the " Open Access Transmission Tariff." (Stipulated Facts ¶ 23).

PJM has been a relatively successful operation. For instance, today, PJM is the " largest centrally dispatched power market . . . in the world," covering 60 million customers and 185,000 megawatts.

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(T. 69, 20 through T. 70, 1). Within PJM there are over 1,300 power plants and approximately 56,000 miles of transmission lines. (T. 406, 24 through T. 407, 11). Mr. Massey testified that PJM is the most sophisticated of all of the regional transmission organizations. In fact, " there are government officials and market participants from around the world that regularly travel to PJM for briefings about how the markets work. So [it is] considered state of the art." (T. 70, 1-8).

Gradually, the traditional utilities within PJM transferred operational control of all their transmission to PJM. Currently, PJM is responsible for " [m]anaging a regional transmission grid encompassing all or part of thirteen states and the District of Columbia." (Stipulated Facts ¶ 11).

PJM, under the supervision of the Commission, is " responsible for planning the electric system to preserve the reliability of the electricity supply" in New Jersey. (Pl.'s Ex. 45, at 27). That is, PJM " plan[s] expansions to transmission to improve the ability to transmit energy from where it is generated to serve load." (Stipulated Facts ¶ 11). Most importantly, PJM is also responsible for the " dispatching" of generation in real time. It does this from " a very sophisticated control room in Valley Forge, Pennsylvania . . . which looks like an air traffic control system." (T. 50, 6-13). From this control room, PJM " direct[s] this generator[], to ramp up [and] . . . to ramp down all in real time. Because over this 13 state area they must insure that supply and demand are matched almost perfectly in real time." (T. 50, 12-13). Despite these functions, PJM has no authority to construct or build a power plant, and likewise it has no authority to retire antiquated power plants. (Def.'s Ex. 183).

C. TESTIFYING WITNESSES

There were a number of witnesses who testified at trial, each of whom is identified below. All of these witnesses were very professional and proficient in their careers, and the Court weighed their credibility in light of these qualifications.

1. Plaintiffs' Witnesses

William L. Massey obtained his Law Degree from the University of Arkansas School of Law in 1973, and later earned an LLM from Georgetown University Law Center in 1985. Upon his law school graduation, he clerked for the U.S. Circuit Court of Appeals for the Eighth Circuit. He later became Chief Counsel for U.S. Senator Dale Bumpers of Arkansas, where he focused on energy matters before the Senate Committee on Energy and Natural Resources. President Clinton later appointed Mr. Massey to be a Commissioner of the Commission where he served for over ten years. Mr. Massey currently serves as a partner in the Washington, DC office of the law firm Covington and Burling and is an Adjunct Professor at the Georgetown University Law Center. Mr. Massey was qualified as an expert " in the history and evolution of the electricity industry." (T. 23, 12-15).

Joseph Dominguez is the Senior Vice-President for Governmental and Regulatory Affairs and Public Policy for Exelon Corporation. He obtained a Bachelor of Science Degree in Mechanical Engineering from the New Jersey Institute of Technology and a Law Degree from Rutgers University School of Law. He previously worked at the law firm of White & Williams in Philadelphia, Pennsylvania and served as an Assistant United States Attorney in the Eastern District of Pennsylvania.

Robert D. Willig, Ph.D. is a Professor of Economics and Public Affairs at Princeton University. Professor Willig studied

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mathematics at Harvard College and later obtained a Masters of Arts in Operations Research and Statistics, and a Doctorate in Economics from Stanford University. Professor Willig previously worked at Bell Labs performing research on the theory of economic regulation of regulated industries. After working there for five years, he became a Professor of Economics and Public Affairs at Princeton in 1978. Professor Willig's specialty is industrial organization which involves the interrelationships between business, technology, the marketplace, and government. He was qualified as an expert in the fields of economics and regulatory policy with particular expertise in electric energy. (T. 623, 21-25).

Michael Cudwadie is employed by PPL Energy Plus as Vice-President of Trading East. In that role, he is responsible for the hedging and trading activities of 9,000 megawatts of generation in the PJM markets. He has a Bachelor's Degree in Accounting from Pennsylvania State University, and an MBA from Lehigh University.

Zamir Rauf has been employed by Calpine Corporation as its Chief Financial Officer since 2008. In that role, he is responsible for the accounting and treasury functions of Calpine which include project finance, investor relations and risk management.

Daniel Cregg is the Vice-President of Finance for PSEG Power within PSEG Services Corporation. In this role, he develops business plans and near term earnings forecasts, prepares forecasts of market direction and analyzes elements of major investment decisions. He has a Bachelor's Degree in Accounting from Lehigh University and an MBA from the University of Pennsylvania's Wharton School of Business.

Anthony Robinson is employed by PSE& G as Director of Basic Generation Service and Basic Gas Supply Service. He has a Bachelor's Degree in Economics, Applied Math and Statistics from Stoney Brook University. (T. 939, 14-17).

2. Defendants' Witnesses

James P. Giuliano is Director of the New Jersey Board of Public Utilities' Division of Reliability and Security. He is responsible for natural gas pipeline safety, underground damage prevention and emergency management and security. He has a Bachelor's Degree in Communications, and has completed many state certifications in courses related to his job.

Oden Sherman Knight is the Senior Vice President of Marketing and Organization at CPV where he manages power sales and gas purchases. (T. 1584, 16). He has a Bachelor's Degree in Mechanical Engineering from Stanford University and a Masters in Business from Columbia University (T. 1584, 4-7).

Craig R. Roach is a principal of Boston Pacific Company, a consulting firm which focuses on power plant development. He has a Bachelor's Degree in Economics from John Carroll University and a Doctorate in Economics from the University of Wisconsin. Mr. Roach was qualified as an expert in the design and implementation of competitive procurements and competitive markets for electricity.

Mr. Richard L. Levitan was the Board's advisor for implementation of the LCAPP. He has served as President of the consulting firm Levitan & Associates since its founding in 1989. The firm provides management consulting and analytic expertise to regional transmission organizations and short form independent system operators. He is a graduate of Cornell University and received a Masters with a specialization in Energy Economics from Harvard University.

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D. BASIC FACTS REGARDING ELECTRICITY

Energy is " the actual electricity" that electric generators produce and which residential and business consumers ultimately use [5]. (Stipulated Facts ¶ 20). It cannot be stored in quantities large enough to supply customers during times of peak demand. ( Id. ). That is, energy cannot be canned or placed in a battery for a long period of time. It has no shelf life. As a result, " energy generally must be produced when it is needed, and at the rate at which it is consumed." ( Id. ) As Mr. Massey stated during his testimony, " [o]ne of the things about electricity is that it cannot be easily stored, and so supply and demand have to be matched instantaneously in real time." (T. 35, 4-6).

Energy is a product in interstate commerce. Regardless of which generator dispenses the energy, it ordinarily travels through interstate commerce to reach its destination. In 1927, the Supreme Court held that the interstate commerce clause prohibits states from regulating the rates for wholesale energy sales between utilities in different states because those sales are interstate transactions. Pub. Utils. Comm'n of R.I. v. Attleboro Steam & Elec. Co., 273 U.S. 83, 47 S.Ct. 294, 71 L.Ed. 549 (1927); (Stipulated Facts ¶ 4). Surprisingly, no witness precisely described the logistics of an energy delivery transaction (i.e., how energy is transmitted from a generator to a consumer) except to say that the delivery of energy is overseen by PJM and PJM routes energy through its transmission system. (T. 50, 6-13)

Amount of Energy. Energy is usually measured in megawatts. One megawatt of electricity powers approximately 1,000 households. Usually, megawatts are associated with lengths of time such as " per day" or " per hour." (Stipulated Facts ¶ 18).

Capacity. " Capacity" is defined as " the ability to produce electricity when called upon." (Stipulated Facts ¶ 17). In essence, capacity is the ability to produce sufficient energy to meet demand. At certain times, such as during the summer months when temperatures increase, demand for energy increases. Regardless of fluctuations, there must be sufficient capacity to meet the demand of high energy use at all times.

Capacity Resources. " Capacity resources include electric generation facilities (e.g., nuclear, natural gas, coal, wind, or solar), demand resources (i.e., the ability to call upon consumers to reduce their electricity demand), and energy efficiency resources (measures that reduce demand)." (Stipulated Facts ¶ 19).

Reliability. " Reliability" is the delivery of electricity to customers in the amounts desired and within acceptable standards for frequency, duration and magnitude of outages and other adverse conditions or events. (T. 81, 23 through T. 83, 12). According to Mr. Levitan, electric reliability means being able to " keep consumers' lights on" under duress and maintaining the power system when operating contingencies arise. (T. 1549, 8-11); see also I/M/O the Petition of Public Service Gas and Electric Company for a Determination Pursuant to the Provisions of N.J.S.A. 40:55D-19 (Susquehanna-Roseland Transmission Line). Resource adequacy is a key component of reliability. (T. 1549, 6-14). The key factor in meeting the reliability standard is having sufficient generators and transmission lines available to

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deliver energy as required by the circumstances.

Generation Plants. Generation plants are categorized into three types - base load, mid-merit, and peaking plants. The parties agree on the definition of base load and mid-merit. A base load plant is a plant that operates all or most of the time. A mid-merit plant, such as a combined-cycle gas turbine, is a plant that operates less than a base load plant but more than a peaking plant. The parties disagree on the definition of a peaking plant; but generally, a peaking plant is " a gas turbine, a simple cycle unit, a unit that is typically run sparingly, a unit that has certain technology characteristics that allow it to get started from a cold stand-by mode, and achieve full operation in just a few minutes." (T. 1289, 12-16).

E. BACKGROUND OF THE ELECTRIC ENERGY INDUSTRY

In the beginning of the twentieth century, the New Jersey Legislature, like many other state legislatures at the time, enacted a statute creating a public utility to oversee the operation of electric and gas utilities. During the early stages of utility regulation, states had exclusive authority over such utilities. During this time, the energy industry " was dominated by vertically integrated utility companies" (hereinafter, referred to as " traditional utilities" ) [6]. (T. 24, 24 through T. 25, 1); (Stipulated Facts ¶ 1).

Typically, the traditional utility was granted an exclusive right by state and local governments to provide electric service to all consumers located in a defined territory. The traditional utility also had other powers, such as eminent domain authority, that would allow it to construct and operate power plants and local distribution networks to connect those power plants to local customers. In return, the traditional utility obligated itself to operate as a " common carrier" with the duty to provide service on a non-discriminatory basis, and to subject its rates to regulation by a state public utility commission. The regulatory standards adopted by state commissions permitted rates that would reimburse utilities for their costs incurred in providing service and debt incurred in financing the construction of power plants and other equipment. The standards were also meant to afford investors in these utilities a reasonable rate of return. This structure enabled the traditional utility to raise capital through the issuance of stock or selling of debt, which, in turn, would allow the utility to expand its facilities. Recovery of and on an investment in a traditional utility, however, was always subject to a " prudence review" by the Board in New Jersey. (Stipulated Facts ¶ 2).

In 1927, the Supreme Court of the United States decided the landmark case Pub. Utils. Comm'n of R.I. v. Attleboro Steam & Elec. Co., 273 U.S. 83, 47 S.Ct. 294, 71 L.Ed. 549 (1927). In that case, the Public Utilities Commission of Rhode Island attempted to regulate the sale of electricity from the Narragansett Electric Lighting Company to the Attleboro Steam & Electric Company located in Massachusetts. The Court struck down the Public Utilities Commission of Rhode Island's efforts deeming that its regulation had placed a direct burden on interstate commerce. The Court's decision ultimately created a regulatory gap wherein no regulator had the authority to oversee interstate transactions made by traditional utilities.

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In 1935, envisioning that the federal government should have a role in regulating interstate energy transactions, Congress enacted the Federal Power Act, which gave the Commission exclusive regulatory authority over " the transmission of electric energy in interstate commerce" and " the sale of electric energy at wholesale in interstate commerce. 16 U.S.C. § 824(b). While the statute vested this authority in the Commission, it also " reserved to the States certain . . . regulatory authority, including that over generation facilities." (Stipulated Facts ¶ 5). Under the statute, state commissions " continued to regulate local utilities' construction of new power plants, operations, and rates charged for retail service to customers" including " the costs incurred by local utilities in constructing and operating the power plants they used to generate electricity to service their retail customers. ( Id. ) From 1920 until the late 1980s, utilities operated under the concurrent supervision of both federal and state regulations. During that time, the Board and Commission acted cooperatively and respected their jurisdictional limits.

Before the advent of federal authority in the electric power industry, a traditional utility " performed three main operational tasks: it built, owned, and operated electric power plants; it transmitted electricity from the power plants to the area of service in which it enjoyed a monopoly; and it distributed the electricity to its customers in that area of service using its local distribution network, that is, the poles and wires that it owned and maintained." (Stipulated Facts ¶ 1). Each traditional utility was, in essence, a " single company" that " generated power, transmitted that power, and distributed that power to its own customers, the homes and businesses that it serves" . (T. 2008, 13-18). In these early years, there was little to no relationship among the traditional utility companies, so each company generally only produced sufficient capacity to service its own customers' needs. Each traditional utility had a service territory established by state regulation, a monopoly for electricity service within that territory, and an obligation to serve all customers in that service territory. " [I]n return for fulfilling that obligation to serve all customers, [traditional utilities] were given an assurance of a reasonable rate of return." (T. 27, 16-21); (Stipulated Facts ¶ 2). As a result, a traditional utility's sales of electricity to residential and business users within its service territory were considered retail sales to consumers and " largely regulated at the state level." (T. 25, 5-6); (T. 30, 12-13); (Stipulated Facts ¶ 5).

Often the lack of interaction among traditional utilities created inefficiencies because each utility would construct its own power plants to meet peak electric demand; that is, each traditional utility " was insuring that it had enough capacity to serve its own load." (T. 37, 16-18). Because electricity demand peaks at limited times throughout the year, a utility may have needed to build a power plant that runs only " 10, 15, 20, 50 hours a year." (T. 35, 3-13). As a result, each traditional utility tended to have " plants that [were] sitting idle most of the time, because they [were] needed for a few hours." (T. 37, 16-24). " [T]hat created some inefficiencies in the sense [that] . . . too many power plants to provide this capability were being built." (T. 37, 16-24).

In the early twentieth century, some electric utilities smartened up, adjusted their strategy, and " began to sell power or standby capacity to each other." (Stipulated Facts ¶ 3). In order to accomplish this, the traditional utilities " built high voltage transmission lines among them in order to transact such 'wholesale' purchases and sales. This allowed utilities to

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lower costs because they no longer had to maintain sufficient capacity to supply peak demand at all times; instead, they could contract bilaterally in the interstate wholesale market to ensure that they had access to sufficient resources to supply peak demand when it was needed." (Stipulated Facts ¶ 3). Thereafter, to protect against outages, traditional utilities would buy and sell capacity from one another for future years, so that they could be assured they would have sufficient supply when operating contingencies arose, without having to develop more power plants.

As the traditional utilities engaged in increased wholesale sales and capacity purchases, the need for federal regulation became more obvious. In order to manage stand-by capacity sales, PJM was created to ensure reliability by managing interstate transmission lines ...


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