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High Court Strikes Down Maryland Incentives

April 20, 2016 By Cheryl Kaften

In a case (Docket No. 14-614) that pitted state versus federal authority, the U.S. Supreme Court on April 19 unanimously ruled (8-0) that a Maryland initiative to subsidize the construction of a power plant infringed on the jurisdiction of the Federal Energy Regulatory Commission (FERC) over the wholesale power markets.

The case, CPV Maryland v. Talen Energy Marketing, hinged on a 2012 decision by the Maryland Public Service Commission to order the construction of a 725-megawatt (MW) natural gas power plant in Charles County. The winning bidder received a financial incentive in that utilities were required to buy electricity from the plant for 20 years at a fixed price.

As described in the court’s brief, “Concerned that the PJM 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, petitioner CPV Maryland to construct a new power plant and required load-supplying 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.”

However, some of the region’s power suppliers immediately objected. “State subsidies for generation development degrade the integrity of competitive electricity markets, which were established to shift the financial risk of plant construction from consumers to generators,” Talen Energy spokesman Todd Martin said in a statement to The Baltimore Sun. “The Maryland … order put the financial risk back on consumers.”

Lower courts sided with the competitive power suppliers. who said the incentive interfered with pricing in wholesale markets, which are subject to federal regulation.

In its decision, the Supreme Court agreed. “Our holding is limited,” Justice Ruth Bader Ginsburg wrote in the court’s opinion. “We reject Maryland’s program only because it disregards an interstate wholesale rate required by FERC. We therefore need not and do not address the permissibility of various other measures states might employ to encourage development of new or clean generation, including tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector.”

The ruling adds, “Nothing in this opinion should be read to foreclose Maryland and other states from encouraging production of new or clean generation through measures ‘untethered to a generator’s wholesale market participation.’”

That leaves the door open for a different ruling in a similar New Jersey case, in which a law was passed allowing utilities to pay a guaranteed price to develop 2,000 MW of electricity from natural gas. As in the Maryland case, New Jersey sought to encourage the development of new generating units, relying on subsidies from ratepayers to encourage construction of the facilities. That approach was rejected by lower courts as being preempted by jurisdiction given to the Federal Energy Regulatory Commission. NJ Spotlight reports that, while the high court did not take up the New Jersey case because it raises an issue similar to the one involving Maryland, it still could affect Garden State litigations.

In fact, Travis Kavulla, President of the National Association of Regulatory Utility Commissioners, believes, The court issued a narrow ruling in this matter. Indeed, following the Supreme Court’s logic, it seems possible that the State of Maryland could have accomplished substantially the same result of obtaining new generating capacity in the state, just so long as it did not condition the generator’s compensation on the wholesale market’s clearing price for capacity. The line between the federal and state jurisdictions appears largely unaltered by this ruling. As the Supreme Court reiterated today, the ‘need for new power facilities, their economic feasibility, and rates and services are areas that have been characteristically governed by the States.’

“This narrow ruling, however, inevitably will result in further litigation of these issues .” Kavulla stated, “by leaving many open questions. Someday soon, consumers, utilities, power generators, and regulators alike will need greater certainty about what is and is not permissible on the part of federal and state regulators. But today is not that day.”

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