In a 149-page opinion, the U.S. District Court for the District of Maryland ruled in PPL EnergyPlus, LLC et al. v. Nazarian that the state of Maryland‘s actions to secure the development of new power plants by setting the price to be received by a new plant in the PJM market for the next 20 years intruded on the federal government’s role to set wholesale prices and thus violates the Supremacy Clause of the U.S. Constitution due to field preemption.
This case is critically important to incumbent generators because successful state actions to suppress wholesale prices in organized markets by mandating the execution of contracts for new generation at non-market prices would undermine the ability to make merchant investments based upon expectations of future supply and demand dynamics.
A similar case is pending in the U.S. District Court for the state of New Jersey based on that state’s law requiring utilities to purchase supply from “new generators” at an established price.
In addressing the competing claims between the plaintiffs and defendant as to the authority of the federal government versus the states, the court explained as follows:
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 under, inter alia, 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.
Furthermore, Maryland’s stated purpose to use the Generation Order to secure the existence of sufficient and reliable electric energy for Maryland residents does not permit invasion into a federally-occupied field. Where a state action falls within a field Congress intended the federal government alone to occupy, the good intention and importance of the state’s objectives are immaterial to the field preemption analysis.
The court went on to hold that the Contract for Differences (“CfD”) mechanism the state scheme employed, which guaranteed that CPV would be paid at least the CfD rate during the term of the contract so long as CPV cleared the PJM capacity auction, was inconsistent with the Supremacy Clause:
Accordingly, the court finds that the Generation Order, through the CfD, establishes the price ultimately received by CPV for its actual physical energy and capacity sales to PJM in the PJM Markets. However, under field preemption principles, the PSC is impotent to take regulatory action to establish the price for wholesale energy and capacity sales. FERC has exclusive domain in that field and has fixed the price for wholesale energy and capacity sales in the PJM Markets as the market-based rate produced by the auction processes approved by FERC and used by PJM.
Since the court ruled in favor of the plaintiffs on their field preemption claims, it did not engage in the academic exercise of also addressing their conflict preemption claims. However, the court did disagree with the plaintiffs’ claims that the Generation Order violated the dormant commerce clause.
Authors: Sandra Rizzo is the head of the Bracewell & Giuliani’s Energy Regulatory Group. She represents electric utilities, power marketers, independent power producers, and investment and hedge funds owning securities of electric utility holding companies. She assists in litigated proceedings before FERC and state and federal courts; advocates on federal regulatory policies, regulations and rules; and advises on regulatory compliance and enforcement issues, including compliance with the NERC reliability standards.
Seth Quinn is a member of the firm’s energy regulatory group. He counsels energy industry clients on regulatory matters involving the Federal Energy Regulatory Commission (FERC) and state public utility commissions. Seth’s practice includes advising clients that participate in electric and natural gas markets on compliance, enforcement and tariff matters. He also prepares regulatory filings, develops compliance programs and assists clients with litigated proceedings.