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.

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