Supreme Court finds Maryland generation law preempted by FERC jurisdiction

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The U.S. Supreme Court ruled April 19 that a power generation program in Maryland, which is a de-regulated state, is preempted because it disregards the interstate wholesale rate required by the Federal Energy Regulatory Commission.

The ruling affirms an earlier one by the 4th U.S. Circuit Court of Appeals. The case had been argued in front of the Supreme Court on Feb. 24.

“We agree with the Fourth Circuit’s judgment that Maryland’s program sets an interstate wholesale rate, contravening the [Federal Power Act’s] division of authority between state and federal regulators,” the high court held.

Concerned that the PJM Interconnection capacity auction was failing to encourage development of sufficient new in-state generation, Maryland enacted its own regulatory program. Maryland selected, through a proposal process, CPV Maryland to construct a new gas-fired power plant and required load serving entities (LSEs) to enter into a 20-year pricing contract (called a contract for differences) with CPV at a rate CPV specified in its proposal.

Under the terms of the contract, CPV sells its capacity to PJM through the auction, but—through mandated payments from or to LSEs—receives the contract price rather than the clearing price for these sales to PJM.

A state law is preempted where “Congress has legislated comprehensively to occupy an entire field of regulation, the high court said.

FERC has approved PJM’s capacity auction as the sole rate setting mechanism for capacity sales to PJM, and has deemed the clearing price per se just and reasonable. However, Maryland—through the contract for differences—guarantees CPV a rate distinct from the clearing price for its interstate capacity sales to PJM.

That Maryland was attempting to encourage construction of new in-state generation does not save its program, the high court said.

Because Maryland sits in a particularly congested part of the PJM grid, importing electricity from other parts of the grid into the state is often difficult.

Justice Ruth Bader Ginsburg wrote the court opinion, which noted that Maryland no longer relies on a vertically integrated monopoly structure for electric generation, transmission and sale to retail customers.

Maryland had initially sought to have a change in the New Entry Price Adjustment (NEPA) guarantees for new generators from three years to 10. FERC rejected the proposal. FERC reasoned that such an arrangement would favor new generation over existing power sources.

Shortly after FERC rejected Maryland’s NEPA proposal, the Maryland Public Service Commission promulgated the Generation Order at issue here. CPV won the contract for construction of a new gas-fired power plant.

The court noted that New Jersey implemented a similar program around the same time. The duration of the price guarantee for the New Jersey program is 15 years rather than Maryland’s 20-year program.

The court indicated that it is forced to act when a subsidized program by states or localities has the effect of disrupting the competitive price signals that PJM’s capacity auction is designed to produce.

Justice Sonia Sotomayor issued a concurring opinion. Sotomayor said the contract for differences is different from traditional bilateral contracts in a significant respect.

“The contract for differences does not transfer ownership of capacity from one party to another outside the auction,” Sotomayor wrote. “Instead, the contract for differences operates within the auction; it mandates that LSEs and CPV exchange money based on the cost of CPV’s capacity sales to PJM."

The Electric Power Supply Association (EPSA) said it was pleased with the 8-to-0 ruling by the Supreme Court.

“EPSA members brought the case the Court decided today,” said the trade group, which represents competitive generators. “This decision is a victory for the economic integrity and viability of wholesale power markets. The unanimous decision strengthens FERC's hand at a critical time when it comes to properly defining the appropriate roles for federal and state actions impacting wholesale power markets."

The American Public Power Association, however, said that it “sees the Court’s Hughes v. Talen Energy Marketing, LLC decision as yet another regrettable setback for restructured states in Regional Transmission Organization regions that take seriously their obligations to ensure that their state’s retail customers have reliable, affordable and environmentally responsible electric service.”

APPA added: “We note, however, that the decision is narrowly drafted, and does not impair the ability of public power utilities to serve their own retail customers with owned and contracted-for generation resources. For this, APPA is appreciative.”

Maryland PSC Chairman Kevin Hughes versus Talen Energy et al., 14-614, and CPV Maryland versus Talen Energy et al 14-623.

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