By Rich Heidorn Jr.

WASHINGTON — The U.S. Supreme Court today unanimously rejected Maryland regulators’ attempt to subsidize Competitive Power Ventures’ combined cycle plant in Charles County, saying it interfered with FERC’s jurisdiction over wholesale electric markets.

The court upheld a ruling by the 4th Circuit Court of Appeals, which found that Maryland’s contract for differences with CPV could distort price signals in PJM’s annual capacity auctions (Hughes v. Talen, 14-614, 14-623).

“We agree with the 4th 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,” Justice Ruth Bader Ginsburg wrote for the court. She said the contract also violated the Constitution’s Supremacy Clause, which establishes that federal law preempts contrary state law.

In April 2012, the Maryland Public Service Commission ordered Baltimore Gas and Electric, Potomac Electric Power Co. (PEPCO) and Delmarva Power and Light to enter into a contract that guaranteed CPV — winner of a PSC competitive solicitation — an income stream so that it could finance the facility.

Contract for Differences

Under the contract for differences, CPV St. Charles’ revenues for the sale of 661 MW of energy and capacity would be compared to what the company would have received had the contract prices been controlling. If the contract prices were higher than the market prices, the three electric distribution companies would pay the difference to CPV; if market prices were higher than the contract, CPV would make payments to the EDCs.

The contract was challenged by Talen Energy’s predecessor, PPL, and other generators. The opponents said Maryland’s action would suppress capacity prices and that allowing the contract to stand would mean that eventually only subsidized units would enter the auction because those without support could not compete.

“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,” the court said. “By adjusting an interstate wholesale rate, Maryland’s program invades FERC’s regulatory turf.”

Maryland and CPV contended the contract for differences was no different than traditional bilateral contracts for capacity, which FERC allows.

But the court said Maryland’s contract with CPV “does not transfer ownership of capacity from one party to another outside the auction. Instead, the contract for differences operates within the auction; it mandates that [load-serving entities] and CPV exchange money based on the cost of CPV’s capacity sales to PJM.”

The Supreme Court had declined to review a ruling by the 3rd Circuit Court of Appeals finding New Jersey regulators’ subsidy of a CPV generating plant also in violation of the Constitution’s Supremacy Clause (PPL EnergyPlus LLC, et al. v. Hanna, 11-0745).

Guidance for States

But the court did provide state regulators’ guidance for crafting their programs in the future, saying it rejected Maryland’s initiative only because it disregards FERC’s wholesale rate.

“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,” it said. “So 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.”

Justice Clarence Thomas concurred in the judgment but said the court did not need to cite “implied preemption” under the Supremacy Clause.

“To resolve these cases, it is enough to conclude that Maryland’s program invades FERC’s exclusive jurisdiction” under the Federal Power Act’s division of federal (wholesale) and state (retail) jurisdiction, Thomas wrote.

The court’s ruling was unsurprising. At oral arguments in February, none of the justices showed any support for Maryland’s stance. (See Supreme Court Offers Little Support to CPV, Md.)

EPSA, APPA, NARUC React

The Electric Power Supply Association, which had filed amicus briefs in support of federal preemption of the Maryland and New Jersey subsidy programs, called the ruling “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 (APPA) called the decision “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.”

The group said it was pleased, however, that the ruling was 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.”

Travis Kavulla, president of the National Association of Regulatory Utility Commissioners, said “the line between the federal and state jurisdictions appears largely unaltered” by the ruling.

“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,” he said in a statement.

But Kavulla said the ruling will “inevitably will result in further litigation of these issues 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.”