In the United States Supreme Court case CPV Maryland, LLC v. PPL EnergyPlus (“CPV Maryland”), LLC; and Hughes v. PPL EnergyPlus, LLC (“Hughes New Jersey”), the Supreme Court made a determination on whether state and/or federal jurisdictions are over-reaching when it comes to certain pricing matters. In these cases, the states attempted to mitigate potential capacity shortages by directing utilities to enter into contracts with wholesale energy suppliers at state regulated rates. On April 19, the Supreme Court ultimately decided that the states went too far and infringed on federal authority.
CPV Maryland and Hughes New Jersey address whether the states are over-reaching their jurisdictional boundaries. State Commissions typically have jurisdiction over the siting of new generation and transmission facilities, as well as the installation of distribution lines. States also may offer state subsidies to encourage generation and capacity build-out. States have generally asserted that they have the right to ensure the existence of long-term contracts for power plants that they may deem necessary in order to support infrastructure development. However, there is some question regarding whether a state’s actions in offering these subsidies could detrimentally impact capacity auctions by subverting appropriate price signals. In these cases, both Maryland and New Jersey created subsidy constructs that gave pause to certain generators and incumbent utilities.
Both Maryland and New Jersey worried that the PJM capacity auctions were not sufficiently incentivizing local generation build. In response, both states separately determined that, in order to maintain electric reliability and encourage generation development within their respective borders, they would require their jurisdictional utilities to enter into long-term contracts (15 years in New Jersey, 20 years in Maryland) with successful generation developers. The states intended that these contracts would provide stable revenues to encourage the investment and support construction costs. In New Jersey, the energy price was fixed regardless of wholesale market prices. In Maryland, the pricing was more complicated: If the developer’s bid price exceeds what it earns in the capacity market auction, then the utility would make up the difference; if the auction revenue exceeded the bid price, the developer would rebate the overage to the utility. Under both New Jersey’s and Maryland’s constructs, the utilities’ customers bear the capacity prices, for better or for worse.
Other generators in PJM’s footprint complained to FERC, requesting that the minimum bid exemption be eliminated because artificially low bids would disrupt the competitive pricing signals inherent in the auction process. This disruption could keep other generators from clearing the capacity auction and impact their revenue streams. Certain of these generators, together with state-jurisdictional distribution companies required to enter in contracts with the developers, challenged the states’ actions as unconstitutional and in contravention with the Federal Power Act because they were tantamount to wholesale rate regulation.
The lower courts sided with the generators and incumbent utilities, determining that a states’ actions amounted to the regulation or setting of wholesale rates, which is over-reaching into FERC’s jurisdiction. What the states had proposed, according to the lower courts, not only interfered with a federally regulated program (capacity auctions), but mandated a state-approved wholesale energy price. Instead, one lower court argued, the states should pursue other means to incentivize local generation development and rely on the federally regulated power markets to ensure reliable investment in capacity resources. Other than state regulated contracts, states can still offer tax-exempt bonds, property tax relief, favorable site lease agreements on state land, free land, or relaxed permit approvals.
On April 19, the Court issued a unanimous decision finding that the states had overstepped their jurisdiction. Maryland and New Jersey argued that they were specifically incentivizing generation build via state-mandated contracts with incumbent utilities at a price different from the auction price. The states maintain that at no time did they impinge upon the capacity auctions themselves; they were simply providing a steady revenue stream to a developer that would be recovered from retail consumers per their jurisdictional right. Other generators availing themselves of PJM’s capacity market, however, argued that the ability of their competitors to underbid the market to ensure they cleared both impinged upon and undermined a wholesale market already regulated by FERC.
The Court held that federal law preempts state law when the state law is in an area that Congress has already extensively legislated or when the state law is an obstacle to the objectives of the federal law. In this case, the program at issue invades the regulatory space that Congress has granted to FERC. Although states may regulate in areas incident to FERC’s domain, states may not do so when their regulations intrude on FERC’s ability to regulate interstate wholesale rates. Because the program at issue in this case does so, federal law preempts it.
The Supreme Court’s decision dictates the impact incentives for local generation build have on the retail market. States will not be able to incentivize local generation build in any way that effects the wholesale market. For retail marketers, this could lead to an increase in prices as generators are retired in the coming years.