A federal district judge ruled Sept. 30 that a Maryland Public Service Commission (PSC) initiative to encourage in-state power plant construction violates the “Supremacy Clause” of the U.S. Constitution.
“While 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,” according to the opinion from the U.S. District Court of Maryland.
“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 held.
The nearly 150-page ruling by U.S. District Judge Marvin Garbis is a blow to a PSC effort to force in-state utilities to enter into long-term contracts with a new combined-cycle gas plant planned by Competitive Power Ventures (CPV) in Charles County.
The case, as well as a similar one in New Jersey, has been watched closely by merchant generators critical of so-called “subsidized generation” efforts by states.
Plaintiffs win one out of two on major arguments
Plaintiffs including PPL (NYSE:PPL) affiliate PPL Energy Plus argued that the PSC’s 2012 order violated the Supremacy Clause and the Commerce Clause of the U.S. Constitution.
The judge ruled that the order violates the Supremacy Clause by virtue of “field preemption” but does not violate the dormant Commerce Clause. In April 2012 the PSC had issued an order directing Exelon (NYSE:EXC) subsidiary Baltimore Gas and Electric (BG&E) along with Pepco Holdings Inc. (NYSE:POM) subsidiary Potomac Electric Power Co., and Delmarva Power & Light Co. to enter into a “contract for differences” with CPV Maryland.
The differences contract provided that regardless of the price set by the federally regulated wholesale market, the Maryland utilities would assure that CPV received a guaranteed price fixed by a contractual formula. This would provide CPV with a secure income stream.
The PSC had selected CPV’s 660-MW Charles County project for this contract for differences treatment following a September 2009 competitive bid process. The in-state utilities were directed by PSC in April 2012 to enter into the contract for differences with the CPV Charles County project.
Some parties complained that customers would be “burdened” with additional costs for unneeded “and uneconomic generation.” Foes said the project was not needed given that the competitive market was forecasting reserve margins of at least 20% through 2015.
Maryland restructured market in 1999; PSC voiced doubts in 2007
Prior to 1999 Maryland used a traditional vertically integrated system of electric power regulation. The utilities were “one-stop shops with monopolies over designated service territories.”
But that changed when the Maryland General Assembly passed the Electric Customer Choice and Competition Act that restructured or deregulated the state electricity market.
Maryland-based utilities now no longer own power plants and must buy electricity on federally-regulated wholesale markets.
The PJM Interconnection (PJM) is one such market that gained regional transmission organization (RTO) status in late 2002, the court said.
Concerning the prices received by power plants for energy sold into the PJM Energy Market, generation facilities across the PJM region have the ability to bid electric energy into the PJM Energy Market at a bid price. PJM, as the operator of the power grid, dispatches that energy to meet load demand by taking generation bids in ascending order of cost.
PJM also administers a wholesale capacity market.
FERC has described the PJM Capacity Market as providing long-term price signals to attract needed investment in the PJM region through a competitive auction process three years in advance.
In 2007, the Maryland PSC filed a report that expressed dissatisfaction with the wholesale markets and their ability to meet Maryland customer needs going forward.
The report predicted a “looming capacity shortage” for Maryland. The PSC report also said it should require Maryland utilities to enter into long-term contracts to induce new power plant construction.
The Federal Power Act gave the Federal Energy Regulatory Commission (FERC) jurisdiction over all facilities for the transmission or sale of electricity of electricity in interstate commerce. The parties generally agreed that FERC has no authority or power to order directly the siting, building, or construction of a generation facility generally or in any particular location within a state.
The Case No. is 1:12-cv-01286-MJG.