The U.S. Supreme Court struck down a Maryland electricity subsidy scheme on April 20, 2016, concluding in a unanimous decision, in Hughes v. PPL EnergyPlus, the arrangement impermissibly interfered with federally regulated wholesale electric power markets.
Maryland’s Public Service Commission solicited bids for the development of a new power plant in the state, ultimately accepting a proposal for a natural gas plant by CPV Maryland. Maryland committed to protecting CPV from competition in the interstate electric power market by requiring the state’s electricity providers to enter into a 20-year pricing contract with CPV to buy its electricity at a set price, regardless of the price established in the region’s wholesale market.
Maryland’s program ran afoul of Federal Energy Regulatory Commission, which oversees wholesale electricity markets nationwide. Existing power generators filed suit challenging the special protection given CPV by Maryland, arguing it threatens the normal functioning of the wholesale market by pushing down capacity prices.
Interfering with Wholesale Markets
Maryland is one of 13 states serviced by PJM Interconnection, the region’s electric power transmission organization. PJM operates the region’s competitive wholesale electric market to ensure an adequate supply of electricity. It attempts to accomplish this by accepting the lowest bids from electricity producers for set amounts of power for particular periods and selling the electricity to utilities in its region. PJM is also responsible for maintaining the reliability of the grid.
Maryland interfered with this system by promising CPV a set rate for its power, assuring the company a set price for payment regardless of prices paid in the regional auction. If the PJM clearing price was below the contractual rate, power providers in the state were required to pay CPV the difference.
Devin Hartman, senior fellow at the R Street Institute, says under this system, CPV could offer artificially low bids to PJM, ensuring the purchase of the company’s power while being reimbursed for the difference by Maryland distributors.
“You’re going to lowball your offer to guarantee that you clear, and if the capacity auction clears at a price lower than the price you need, then the subsidy is going to pay out that difference,” Hartman said.
“Artificially depressing price[s], could [result in] the premature retirement of some power plants, and it could bar entry of other plants that are actually more efficient,” said Hartman.
A Narrow Ruling
The Supreme Court’s ruling was narrow in its scope. It ruled subsidies, such as Maryland’s, that are tied to the price set by the capacity auction were impermissible, but the Court determined other types of schemes to support renewable energy may be permissible.
Writing for the entire court, Justice Ruth Bader Ginsburg said: “We … do not address the permissibility of various other measures States might employ to encourage development of new or clean generation, including tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector. 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.’ … 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.”
Hartman says the decision was indeed narrow, but he says he is not convinced other subsidy forms couldn’t ultimately be invalidated down the road.
“Under most circumstances, almost any subsidy is going to create an incentive to bid lower in a capacity market,” said Hartman. “I’m encouraged by the fact [it may be possible to] demonstrate a causal linkage [that] could occur under other forms of subsidies.”
David Schnare, general counsel of the Energy and Environment Legal Institute, says he would not be surprised to see other states attempt to exercise more control over their intrastate power markets.
“What’s notable about all this is states feel the federal regulatory regime is trampling on state prerogatives, and Maryland’s effort is but one attempt to take back power the states once had,” said Schnare. “States will continue to look for ways to manage the power system within their own borders, including wholesale prices for electricity. Look for even more creativity.”
Ann N. Purvis ([email protected]) writes from Dallas, Texas.
