The Fourth Circuit Affirms District Court Decision Finding Maryland’s Contract for Differences Unconstitutional

As we reported here, in October 2013, the United States District Court for the District of Maryland declared unconstitutional an order of the Maryland Public Service Commission (PSC) directing the state’s utilities to enter into a contract for differences with Competitive Power Ventures (CPV), pursuant to which CPV would construct a 661 MW natural gas-fired combined cycle generator in Charles County, Maryland.1  Under the contract, the actual revenues received by CPV for its sale of energy and capacity in the markets administered by PJM Interconnection, L.L.C. (PJM) 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.  On June 2, 2014, the United States Court of Appeals for the Fourth Circuit affirmed the District Court’s decision.2

Relying on a “wealth of case law” confirming the exclusive power of the Federal Energy Regulatory Commission” (FERC) to regulate wholesale sales of energy in interstate commerce, the Fourth Circuit concluded that the Maryland PSC order is field preempted “because it functionally sets the rate that CPV receives for its sales in the PJM auction” and “thus effectively supplants the rate generated by the auction with an alternative rate preferred by the state.”  The court rejected the argument that the Maryland program to incentivize new generation within its borders does not actually set a rate, finding rather that contract price guaranteed by the state supersedes the PJM rates that CPV would otherwise earn.  In response to the argument that the court should “apply a  robust version of the presumption against preemption,” the court found that, while states retain the ability to regulate generating facilities, they may not exercise that authority in such a manner as to impinge on FERC’s exclusive jurisdiction over wholesale rates.  

The court further concluded that the Maryland PSC order is conflict preempted by federal law.  While the court recognized the “inevitable” state/federal jurisdictional tensions under the Federal Power Act, the court concluded that the order could seriously distort PJM price signals, thereby interfering with the manner by which the FPA was designed to meet its goals. 

The court expressly noted that its holding was limited to the Maryland program, and that it was not offering an opinion on other state efforts to incentivize new generation, either through direct subsidies or tax rebates.  While the court concluded that, “[o]bviously, not every state regulation that incidentally affects federal markets is preempted,” the decision does not provide much additional guidance as to where the boundaries for acceptable state programs should be drawn.

1 PPL Energyplus, LLC v. Nazarian, 974 F. Supp. 2d 790 (D. Md. 2013).

2 PPL Energyplus, LLC v. Nazarian, 2014 U.S. App. LEXIS 10155. 

 

Topics:  Capacity Market, Conflicts of Laws, FERC, Interconnections, Natural Gas, Power Purchase Agreements, Public Utilities Commission, Utilities Sector

Published In: General Business Updates, Conflict of Laws Updates, Constitutional Law Updates, Energy & Utilities Updates

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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