The U.S. Supreme Court, in a narrowly crafted opinion by Justice Ginsburg, has unanimously invalidated Maryland's program to promote construction of new natural gas capacity by guaranteeing new generating capacity. The Maryland program ensured that new generating capacity located in the state and selected in PJM's capacity auction would receive the equivalent of 20-year fixed wholesale capacity price (possibly over and above the applicable PJM wholesale market prices) through a contract-for-differences with each of the state’s regulated utilities.

In Hughes v. Talen Energy Marketing, LLC, the Court affirmed the Fourth Circuit's decision, holding that the Maryland program is preempted by the Federal Power Act (FPA) because it was crafted with the intent and result of disregarding the interstate wholesale rate required by the Federal Energy Regulatory Commission (FERC).

The Maryland program was adopted after FERC rejected a proposal by Maryland to address a perceived capacity shortfall in the state by extending the New Entry Price Adjustment feature of PJM's capacity market, which guarantees new generators a fixed capacity price in some circumstances for their first three years in the PJM capacity market, to 10 years. FERC expressly rejected Maryland’s proposal because it would improperly favor new generation over existing generation "throwing the auction's market-based price-setting mechanism out of balance." FERC's previous elimination of an exemption for state-supported generation for similar reasons had been upheld by the Third Circuit. Subsequent to FERC's rejection of Maryland's proposal to amend PJM's New Entry Price Adjustment, the Maryland Public Service Commission promulgated the order at issue in this case. Under the order, Maryland solicited proposals from various companies for construction of a new gas-fired power plant at a particular location, and accepted the proposal of CPV Maryland, LLC (CPV). Maryland then required LSEs to enter into a 20-year pricing contract (the parties refer to this contract as a "contract for differences") with CPV at a rate CPV specified in its accepted proposal. Under this arrangement, CPV would sell its capacity into the PJM capacity market, but Maryland's program guaranteed that CPV would receive the contract price rather than the PJM capacity auction clearing price.

The Court agreed with the Fourth Circuit's judgment that Maryland's program sets an interstate wholesale rate, contravening the FPA's division of authority between state and federal regulators. The Court's reasoning made it clear that states may not encourage new generation by acting directly on FERC regulated markets:

Doubting FERC's judgment, Maryland—through the contract for differences—requires CPV to participate in the PJM capacity auction, but guarantees CPV a rate distinct from the clearing price for its interstate sales of capacity to PJM. By adjusting an interstate wholesale rate, Maryland's program invades FERC’s regulatory turf. See EPSA, 577 U. S., at ___ (slip op., at 26) ("The FPA leaves no room either for direct state regulation of the prices of interstate wholesales or for regulation that would indirectly achieve the same result."(internal quotation marks omitted)).

The Court stressed the limited nature of its holding. It specifically indicated that it "need not and do[es] 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 opinion also expressly does not call into question whether generators and LSEs could enter into long-term financial hedging contracts.

The Court did not address programs, such as emissions trading and pricing mechanisms, which affect the cost of supplying certain electricity but do not work directly on capacity or wholesale electricity markets. However, the Court's reasoning and its effort to craft a very narrow ruling supports the conclusions that these types of programs would not be affected. The opinion would not, of course, affect states' ability to implement programs expressly approved by FERC, including a renewable portfolio standard.

Ballard Spahr's Energy and Project Finance and Environment and Natural Resources Groups advise clients on federal and state rulemaking as well as rulemaking challenges and litigation arising from those rules. Our attorneys assist clients in developing strategies to thrive in the fast-changing regulatory, technological, and financing environment of the energy industry. This includes advice and representation on national and regional compliance, rulemaking, development, business planning, and contamination matters. The Groups also provide representation in litigation, during investigations, and for transactions.


Copyright © 2016 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.