SCOTUS Rules On Power-Generation Incentives

By William Atkinson | Jun 15, 2016
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In a unanimous decision, the U.S. Supreme Court ruled 8–0 that a controversial Maryland program designed to incentivize new in-state power generation should be thrown out because it intrudes on federal authorities’ jurisdiction over wholesale energy markets.

Hughes v. Talen Energy Marketing hinged on a Maryland program that guaranteed income for new in-state power generation to ensure that it cleared wholesale market auctions. Some utilities and the Obama administration argued that the program artificially suppressed power prices, infringing on the Federal Energy Regulatory Commission’s (FERC) exclusive authority over interstate wholesale markets.

The justices left the door open for other state generation incentives but said states may not “intrude on FERC’s authority over interstate wholesale rates, as Maryland has done here.”

A coalition of states and industry interests spurred the high court to take the case last year, arguing that allowing a lower court decision that threw out the program to stand would endanger dozens of state laws under which private parties are investing billions in needed generation plants, including clean-coal facilities and wind farms.

State officials argued that the program was simply aimed at ensuring a natural gas plant being constructed in Maryland would later clear PJM Interconnection (a regional transmission organization) market auctions, something they said was essential to ensure reliability and reasonable power prices for consumers.

Utilities, PJM and FERC argued that the state incentives were in direct conflict with PJM’s Minimum Offer Price Rule, which prevents market participants from offering a new resource into the capacity market at a price lower than the grid operator’s estimate of the resource’s competitive costs.

The court attempted to draw a line between the Maryland program and other state generation incentive programs. Justice Ruth Bader Ginsburg wrote that not all state generation incentives would infringe on FERC’s wholesale market jurisdiction but that the Maryland program went too far.

“Maryland’s program is rejected only because it disregards an interstate wholesale rate required by FERC,” Ginsburg writes. “Neither Maryland nor other states are foreclosed from encouraging production of new or clean generation through measures that do not condition payment of funds on capacity clearing the auction.”

Many observers noted the narrow nature of the ruling. 

“The Court issued a narrow ruling in this matter,” said Travis Kavulla, president of the National Association of Regulatory Utility Commissioners, in a press release. “Indeed, following the Supreme Court’s logic, it seems possible that the State of Maryland could have accomplished substantially the same result of obtaining new generating capacity in the state, just so long as it did not condition the generator’s compensation on the wholesale market’s clearing price for capacity.

“This narrow ruling inevitably will result in further litigation of these issues by leaving many open questions. Someday soon, consumers, utilities, power generators, and regulators alike will need greater certainty about what is and is not permissible on the part of federal and state regulators. But today is not that day,” he said.

About The Author

ATKINSON has been a full-time business magazine writer since 1976. Contact him at [email protected]

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