United States: U.S. Supreme Court Invalidates Maryland Program That Supplements FERC-Approved Capacity Payments

In a unanimous opinion issued on April 19, the U.S. Supreme Court invalidated a Maryland program designed to incentivize construction of a new natural gas plant.  The Court concluded that the program infringed upon the Federal Energy Regulatory Commission's exclusive jurisdiction under the Federal Power Act over rates for wholesale sales of capacity.  The decision affirmed that states may continue to use traditional incentives to encourage power plant construction, including "clean" power plants but ruled that the infirmity in the Maryland program was its requirement that two Maryland utilities enter into 20-year "contracts for differences" with the developer of a new 725 MW natural gas fired combined-cycle plant selected by the Maryland Public Service Commission, and the requirement that the new plant sell its capacity into the PJM capacity market.  The opinion extends the Court's prior holdings invalidating state or state commission policies that directly or indirectly interfere with the FERC-regulated interstate wholesale power markets.  Justice Ginsburg wrote for the majority.  Justices Sotomayor and Thomas filed concurring opinions.

The underlying dispute relates to the wholesale capacity auctions conducted by PJM, the regional transmission operator that administers wholesale energy markets in many Mid-Atlantic states, including Maryland.  PJM uses an auction to set market prices for the purchase and sale of capacity from generation resources three years in advance of delivery of capacity from those resources.  Opponents of the Maryland program argued that PJM's FERC-approved capacity market is designed to ensure that sufficient generation resources are available to satisfy wholesale load requirements and that the PJM capacity market sends price signals that reward existing capacity resources that clear in the PJM auctions and incentivize the construction of new generation that can serve markets where capacity prices are high.  As Justice Ginsburg explained, "a high clearing price…encourages new generators to enter the market, increasing supply….; a low clearing price discourages new entry and encourages retirement of existing high-cost generators."  Accordingly, the price signals established by the PJM auction are fundamental to its purpose of procuring sufficient capacity to serve load.  In contrast, as FERC observed in a prior decision, "subsidized entry supported by one state's or locality's policies has the effect of disrupting the competitive price signals that PJM's [capacity auction] is designed to produce." 

Taking the view that the PJM capacity market had not properly incentivized construction of in-state generation, the Maryland PSC solicited proposals for the construction of a new natural gas-fired plant.  CPV Maryland, LLC won the bid and proceeded with construction of a new, $700 million power plant, which is expected to achieve commercial operation later this year.  The Maryland PSC required two Maryland electric utilities whose retail sales it regulates, to enter into 20-year "contracts for differences" with CPV Maryland. 

The "contracts for differences" require CPV Maryland to bid capacity from its generating plant into the PJM capacity auctions.  In addition, the contracts establish a minimum price that must be paid to CPV Maryland for sales of capacity from its plant.  If CPV Maryland's bids clear in the PJM capacity auction and the resulting auction clearing price falls below the minimum contract price, the contracts require Maryland utilities to pay CPV Maryland the difference between PJM's auction prices and the contract price.  The Maryland utilities would then pass on these contract costs to Maryland utility customers through higher retail rates.  Under this approach, the Maryland PSC guaranteed that CPV Maryland would receive a minimum price for capacity regardless of the results of the FERC-approved PJM capacity auction.  In effect, the contracts for differences offer a subsidy that compensates CPV Maryland for its wholesale sales of capacity, a matter that falls exclusively under FERC's jurisdiction.    

A group of CPV Maryland's competitors, led by PPL EnergyPlus, LLC (now known as Talen Energy Marketing, LLC) challenged the Maryland PSC's program, arguing that the contracts were preempted under the Federal Power Act because it required CPV Maryland to bid into wholesale capacity auctions and guaranteed compensation for its sales of capacity to PJM.  In addition, these competitors argued that the contracts removed the incentive for CPV Maryland to competitively bid capacity from its facility into the PJM capacity auctions, and thereby impinged on FERC's jurisdiction under the Federal Power Act.  The U.S. District Court for the District of Maryland agreed, finding that Maryland's program intruded upon FERC's jurisdiction over rates established in wholesale electricity markets.  The U.S. Court of Appeals for the Fourth Circuit affirmed the district court's decision, stating that Maryland's program "strikes at the heart of [FERC's] statutory power" and impermissibly conflicts with FERC policies.  CPV Maryland petitioned the Supreme Court for review of the lower court orders.

The Supreme Court upheld the lower court rulings, concluding that, however legitimate its goals, Maryland's program is preempted under the Federal Power Act.  Writing for the Court, Justice Ginsburg stated that "FERC has approved the PJM capacity auction as the sole rate setting mechanism for sales of capacity to PJM and has deemed the clearing price per se just and reasonable."  Justice Ginsburg further stated that "[b]y adjusting an interstate wholesale rate, Maryland's program invades FERC's regulatory turf."  In his concurrence, Justice Thomas quoted Justice Scalia's dissent to another opinion issued earlier this year relating to FERC jurisdiction, stating that by "fiddling with the effective … price" that CPV Maryland receives for its wholesale sales, Maryland has "regulate[d]" wholesale sales "no less than does direct ratesetting."

Recognizing the potentially broad implications of the ruling, Justice Ginsburg clarified that the opinion should not be interpreted as barring states from implementing programs to encourage development of new or clean generation through measures that are unrelated to wholesale market participation.  In particular, Justice Ginsburg found that "[s]o long as a State does not condition payment of funds on capacity clearing the auction, the State's program would not suffer from the fatal defect that renders Maryland's program unacceptable." Accordingly, the Court's ruling does not affect the ability of states to use tax credits, subsidies, or other incentives, as long as they are not tied to wholesale sales of energy or capacity. 

A copy of the Court's opinion can be found here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.