Federal Court Finds Maryland’s Long-Term Contract for Differences Unconstitutional

by Akin Gump Strauss Hauer & Feld LLP
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On September 30, 2013, the United States District Court for the District of Maryland issued its decision in PPL Energyplus, LLC v. Nazarian.  The case has been watched by many for its potential implications with respect to the ability of States to direct utilities subject to their jurisdiction to enter into contracts to support the construction of new generating capacity, thereby depressing prices in centralized capacity markets such as those used in the Eastern regions.  In recent years, both the New Jersey Board of Public Utilities and Maryland Public Service Commission (“Maryland PSC”) have pursued such actions and, in response, PJM Interconnection, L.L.C. (“PJM”), the operator of the centralized capacity market in their region, has adopted a number of market rule changes to try to mitigate the effects of these actions. 

In PPL Energyplus, several incumbent generators with assets in PJM (“Plaintiffs”) challenged an order of the Maryland PSC directing the states utilities1 to enter into a contract for differences with Competitive Power Ventures (“CPV”) under which CPV would construct a 661 megawatt natural gas-fired combined cycle generator in Charles County, Maryland.  Under the contract, the actual revenue received by CPV for its sale of energy and capacity in the PJM markets would be compared to what CPV would have received for those sales had the contract prices been controlling, and any difference would be settled between CPV and its utility counterparties. 

The Court found that the contract for differences paid CPV for wholesale sales of capacity and energy, and thus set rates for wholesale sales of electricity, an exercise that is within the exclusive jurisdiction of the Federal Energy Regulatory Commission (“FERC”).  The Court ruled that Congress had implicitly intended the Federal Power Act (“FPA”) to preempt state law with respect to ratemaking for such sales, and the Maryland PSC order directing the contract impermissibly invaded the field occupied exclusively by FERC. 

The Court acknowledged States’ authority to take a variety of actions with respect to generation facilities within their borders and the legitimate interest of States “in securing an adequate supply of electric energy for [their] residents in the present and in the future.”  Yet, the Court concluded that

[w]hile Maryland may retain traditional state authority to regulate the development, location, and type of power plants within its borders, the scope of Maryland’s power is necessarily limited by FERC’s exclusive authority to set wholesale energy and capacity prices under . . . the Supremacy Clause and the field preemption doctrine.  Based on this principle, Maryland cannot secure the development of a new power plant by regulating in such a manner as to intrude into the federal field of wholesale electric energy and capacity price-setting.”

The Court found that CPV would receive one price from bidding into and clearing the PJM centralized-capacity market (called the Reliability Pricing Model or “RPM”) and another price for these same sales under the contract for differences.  Thus, the Court found that the Maryland PSC was attempting to set the price for these wholesale sales instead of the FERC-approved market.  The Court made this finding despite CPV having bid into and cleared RPM under market mitigation rules designed to prevent state-subsidized generation from artificially depressing market prices. 

The Plaintiffs also alleged that the Maryland PSC order (1) violated the Supremacy Clause by virtue of conflict preemption, (2) violated the dormant Commerce Clause, and (3) deprived them of their federal statutory rights protected by 42 U.S.C. Section 1983.  The Court ruled that, having found field preemption, it did not need to reach the conflict preemption arguments. The Court rejected the dormant Commerce Clause claim, finding

The PSC regulated to finance indirectly the development and operation of a generation facility [], which will participate in the wholesale energy and capacity markets in the PJM region like any other generation facility.  Other than increasing the available supply of electric energy and capacity in the PJM region by adding a new generation facility [], the Order does not affect the ability of the other market participants to sell energy and capacity in the PJM Markets.  The Court does not find evidence that the addition of a state sponsored market participant [] imposes a burden, let alone an undue burden, on interstate commerce. 

Finally, the Court summarily rejected the Section 1983 claim on the grounds that the Supremacy Clause is not a source of substantive individual rights that could support and action brought pursuant to Section 1983. 

While the Court’s decision is clearly a win for the Plaintiffs, it is nonetheless a narrow ruling constrained by the facts of the case.  For example, the Plaintiffs did not contend that an act of the Maryland General Assembly or Maryland PSC related to the siting or building of a physical generation facility, the direct financing of the construction of a generating facility, or the encouragement of or limitations on certain types of generating facilities within its borders (such as environmental-related regulation) would be field-preempted by the FPA.  Those actions would have a similar price-depressing effect on RPM, and would need to be litigated in order to determine whether preempted under the Supremacy Clause. 

CPV had previously told the Maryland PSC that it needed a long-term contract to finance the plant.  In the end, the fact that CPV has already offered the plant into RPM and cleared the market may justify CPV’s construction of the plant despite the absence of such a contract. 

1 The utilities were Baltimore Gas and Electric Co., Potomac Electric Power Co., and Delmarva Power & Light Co.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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