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
Events from this Firm
26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

10 Oct 2018, Conference, Florida, United States
Julie Totten is Program Chair of this year’s conference, Lynne Hermle is speaking on women in the courtroom, boardroom, and c-suite, and Erin Connell is speaking on pay equity and pay transparency.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions