Supreme Court Strikes Down Maryland Power Plant Subsidies

In a unanimous ruling, the U.S. Supreme Court upheld a lower court decision that a program Maryland initiated in 2012 to subsidize power plant construction impermissibly invaded the Federal Energy Regulatory Commission's (FERC's) authority over interstate power markets.

The case, Hughes v. Talen Energy Marketing, grew out of a decision by the Maryland Public Service Commission (PSC) that ordered several regional utilities to execute power purchase agreements with a company, CPV, that wanted to build a new combined cycle plant in the state but was unable to clear PJM capacity auctions. The state felt that the auctions were not sufficiently incentivizing generation in Maryland, and the PSC was concerned about impacts on future reliability.

Program Affected Auction Prices

An important element of the program was that the power plant subsidies were conditioned on the plant clearing the capacity auctions, and it consequently exerted downward pressure on auction prices. The utilities sued to block the order, and were supported by PJM and FERC, both of which agreed the program reached too far into operations of the interstate power market. In 2013, a federal district court agreed the program was invalid under the Federal Power Act (FPA), which vests exclusive authority over interstate power markets in FERC and the independent system operators it oversees. The Fourth Circuit affirmed that ruling in 2014.

On April 19, the Supreme Court upheld both lower court decisions in an 8-0 decision by Justice Ruth Bader Ginsberg.

"We agree with the Fourth Circuit's judgment that Maryland's program sets an interstate wholesale rate, contravening the FPA's division of authority between state and federal regulators," the court said. "Doubting FERC's judgment, Maryland . . . requires CPV to participate in the PJM capacity auction, but guarantees CPV a rate distinct from the clearing price for its interstate sales of capacity to PJM. By adjusting an interstate wholesale rate, Maryland's program invades FERC's regulatory turf. . . . That Maryland was attempting to encourage construction of new in-state generation does not save its program."

Power Plant Subsidies Not Per Se Invalid

The court did not per se invalidate all state programs to incentivize generation, however. It stressed that the holding here was limited.

"Nothing in this opinion should be read to foreclose Maryland and other States from encouraging production of new or clean generation through measures untethered to a generator's wholesale market participation," the court 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."

A similar program in New Jersey was likewise challenged by that state's utilities, and that case is also before the court but was put on hold pending the outcome in Hughes. Given the limited holding in this case, it is not clear how the court will rule there.

-Thomas W. Overton, JD is a POWER associate editor (@thomas_overton, @POWERmagazine).

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