On June 2, 2014, the U.S. Court of Appeals for the Fourth Circuit (“Fourth Circuit”) affirmed the U.S. District Court for the District of Maryland’s opinion that a Maryland generation subsidy program was preempted by federal law because it intrudes on FERC’s exclusive jurisdiction to regulate wholesale electric markets in interstate commerce. 

In April 2012, the Maryland Public Service Commission (“MPSC”), concerned with reliability issues and high capacity prices in markets run by the PJM Interconnection, LLC, developed a program to incentivize the construction of new generating capacity.  Under the program, the MPSC would solicit bids for the construction of a new power plant and offer long-term, fixed contracts to the winning bidder.  Upon the selection of Commercial Power Ventures Maryland, LLC (“CPV”) as the winning bidder, the MPSC directed several utilities to enter into 20-year contracts for differences with CPV.  Under these contracts, the capacity from the new plant would be offered into the market, but the utilities would pay CPV the difference between contract prices and market prices if the contract prices exceeded market prices in the capacity market.  These costs would then be passed on to the utilities’ retail customers.  In the alternative, if the market prices were higher than the contract prices in the capacity market, CPV would be required to pay the difference to the utilities.

Incumbent generators objected to MPSC’s program as unconstitutional and brought suit in federal court.  Specifically, the generators alleged that the program resulted in setting wholesale rates in interstate commerce, and therefore violated FERC’s sole authority to set rates pursuant to the Federal Power Act.  The district court agreed and held that the Federal Power Act preempted the MPSC program.

On appeal, the Fourth Circuit affirmed the district court’s ruling and held that the MPSC program is “preempted because it functionally sets the rate that CPV receives for its sales” in an interstate market.  The Fourth Circuit reasoned that the difference payments “plainly [qualified] as compensation for interstate sales at wholesale, not simply for CPV’s construction of a plant.”  The Fourth Circuit also found that the program undermines auction rates and replaces it with an alternative state-preferred rate, and in doing so, intruded on FERC’s exclusive jurisdiction.  In responding to the MPSC’s argument that states must be able to attract ample generation, the Fourth Circuit noted that states enjoy wide latitude in incentivizing and regulating generators, provided it is not done in a way that impinges on FERC’s wholesale ratemaking.

While the Fourth Circuit affirmed the preemption decision, it emphasized that its ruling was limited in scope to the current MPSC program, and not other state efforts to encourage new generation.  However, the Fourth Circuit noted that the current case was in direct violation of FERC’s jurisdiction as it “strikes at the heart of [FERC’s] statutory power to establish rates for the sale of electric energy in interstate commerce by adopting terms and prices set by Maryland, not those sanctioned by FERC.”

A copy of the opinion is available here.