A New Jersey Board of Public Utilities (BPU) plan to have ratepayers subsidize the cost to build new natural gas-fired power plants has been ruled unconstitutional by a judge in the U.S. District Court for the District of New Jersey.

In a 67-page decision issued Friday, Judge Peter G. Sheridan found that the state’s Long Term Capacity Agreement Pilot Program Act (LCAPP) is preempted by the Federal Power Act and in violation of the Supremacy Clause of the U.S. Constitution.

“Although the State of New Jersey and the Board retained the responsibility for the siting and construction of power plants, they are required to exercise this responsibility without interfering with the [Federal Energy Regulatory Commission]’s exclusive authority to regulate wholesale sales of electricity in interstate commerce,” Sheridan wrote in his decision.

“…[T]here were other alternative measures which New Jersey could have employed to incentivize the development of new generation. While New Jersey retained the authority to take a wide range of actions to ensure reliable electric service for its citizens and encourage the construction of new electric generation facilities, it chose to advance those goals through a mechanism that intrudes upon the authority of the Commission and violates federal law.”

By using ratepayer subsidies the plan would undermine a basic tenet of the open grid, the FERC-authorized competitive auction run by the PJM Interconnection in which generators bid to provide service to the grid, the judge said.

He noted that the parties agreed there were a number of other ways New Jersey could have incentivized more power plant construction in the state. “These include the utilization of tax exempt bonding authority, the granting of property tax relief, the ability to enter into favorable site lease agreements on public lands, the gifting of environmentally damaged properties for brownfield development, and the relaxing or acceleration of permit approvals.”

The plaintiffs — Calpine Corp., Exelon Generation Co., PSEG Power, Public Service Electric and Gas Co., Atlantic City Electric Co. and subsidiaries of PPL Corp. — won the day, though Sheridan found it reasonable that the BPU “would incentivize construction in areas where reliability concerns are in flux.”

Two years ago, Gov. Chris Christie unveiled the state’s draft 2011 energy master plan, which among other things called for coal-fired generation to be phased out in favor of natural gas (see Daily GPI, June 8, 2011). Through the LCAPP, New Jersey has planned three gas-fired combined-cycle generation projects.

Sheridan’s decision comes on the heels of another District Court judge invalidating a Maryland Public Service Commission order that required utilities to enter into long-term power supply contracts with a developer chosen by the PSC to build a natural gas-fired plant (see Daily GPI, Oct. 3). In both cases, the developer selected by the states to build the generation facilities was an affiliate of Competitive Power Ventures.