The U.S. Supreme Court heard oral argument Wednesday on the legality of Maryland orders that will answer, at least in part, the question of how far states can go to induce construction of new electric power generators within their borders. The case pits the state of Maryland and Competitive Power Ventures Holdings, LLC, a Silver Spring, Maryland developer of electric generation, against other regional generators that sell power into PJM Interconnection LLC, the regional entity that oversees the mid-Atlantic wholesale market for electricity.
Winning the case will provide Maryland with 20-year contract commitments requiring Competitive Power Ventures to sell all the capacity of its electric generation plant into the PJM market. In addition to long-term reliability, Maryland projects that energy customers in the state will save money over the life of the contracts due to the price mechanism.
By way of background, in 1999, Maryland ordered the restructuring of the way public utilities provide electricity to the energy customers within the state. Maryland lawmakers replaced the vertical integration model of electricity service with a market-based approach. As a result, retail utilities in the state began purchasing their power supply – the electricity they sell and deliver to homes and businesses – from the federally-regulated PJM market.
The PJM market operates through competitive bidding under rules approved by the Federal Energy Regulatory Commission. In addition to the market for power supply, PJM also oversees the regional transmission of electricity through the grid to local Maryland utilities, which is significant because pockets of “overcrowded transmission” can lead to higher wholesale electricity prices.
Approximately a decade after adopting the new market-based re-structuring, Maryland officials came to the view that the PJM wholesale market for electricity did not sufficiently incentivize enough new power generation in the state. Because of Maryland’s location within PJM, Maryland officials set about to find a way to entice the construction of more local generation in an effort to lower electricity prices.
In 2012, the Maryland Public Service Commission issued orders that required the state’s retail utilities, Baltimore Gas and Electric Co., Potomac Electric Power Co. and Delmarva Power & Light Co., to enter into 20-year power supply contracts with a generator selected by the state. Unlike any old bilateral contract for power supply with a guaranteed fixed price, these state-mandated contracts required the generator to sell all of its power into the PJM wholesale market.
Both sides at Wednesday’s argument seemed to agree that states have the authority to provide financial incentives to electric generators in order to attract local generation. The rub is that the Maryland-ordered contracts required Competitive Power Ventures to sell all of its power into the PJM market. The regional generators and federal government claim this mechanism distorts the otherwise competitive nature of the PJM wholesale marketplace. A federal district court and U.S. Court of Appeals for the Fourth Circuit have sided with the challengers and found the Maryland program unconstitutional.
The justices at Wednesday’s argument peppered counsel with questions about the line between those state subsidized generation contracts that pass constitutional muster and those that do not. Both Paul D. Clement, who argued on behalf of the generators, and Ann O’Connell, who argued for the federal government, pointed to the Maryland requirement that Competitive Power Ventures sell all its electricity into the PJM market. “It’s directly altering the incentives of the people in that market,” O’Connell argued.
But Maryland’s attorney, Scott H. Strauss, argued that Competitive Power Ventures bid its generation into the PJM market based on its actual cost in 2011, after a FERC-order PJM rule change. Competitive Power Ventures won a spot in the PJM resource queue based upon its actual costs and, thus, could not have distorted market incentives, as alleged by the other generators challenging the Maryland program, Strauss argued.
Competitive Power Ventures plans to complete construction of its Charles, County, Maryland plant, projected for December 2016, and sell up to 725 megawatts of generating capacity into PJM, enough to power 700,000 homes, whether or not Maryland wins its case. But aside from ruling on the important jurisdictional questions about state power to induce local generation, the outcome of the case will decide the fate of the Maryland program and the associated long-term contract and price benefits to Maryland consumers.
The linked Maryland cases the Court heard Wednesday are W. Kevin Hughes v. Talen Energy Marketing, LLC and CPV Maryland v. Talen Energy Marketing, LLC. Hughes is the chairman of the Maryland Public Service Commission. CPV is Competitive Power Ventures.