Supreme Court Nixes Two PPAs

Supreme Court nixes two PPAs

June 06, 2016 | By Keith Martin in Washington, DC

Two state-mandated power contracts were set aside in court.

The US Supreme Court said in April that power contracts that Maryland and New Jersey ordered utilities in those states to sign with an independent generator had the effect of setting the wholesale power rate the generator would receive for its electricity.

Only the Federal Energy Regulatory Commission can set wholesale power rates for electricity sold in interstate markets. States retain the power to regulate retail sales of electricity within their borders. The case raised the issue whether the state action to encourage a new capacity resource crossed the line into wholesale ratemaking.

The court said Maryland and New Jersey went too far.

Maryland regulators became concerned around 2009 that not enough new power plants were being built in the state to supply electricity, and out-of-state power from the PJM grid was becoming more expensive to import.

The Maryland Public Service Commission solicited proposals from generators for construction of a new gas-fired power plant in a particular location. Competitive Power Ventures, or CPV, was the winning bidder. The Maryland PSC then ordered all utilities in the state to enter into a 20-year contract for differences with CPV at the rates in the CPV proposal. A contract for differences is a form of hedge. CPV sells the capacity from the project into the PJM grid by bidding into annual auctions to supply capacity for a single year three years in the future. If the price CPV is paid exceeds the fixed price in the contract for differences, then CPV must pay the utilities the excess revenue. If the price is below the fixed price, then the utilities pay CPV the shortfall.

New Jersey implemented a similar plan around the same time, except that the New Jersey contract runs for 15 years rather than 20 years.

CPV receives no payment under the contract for any year in which the price it bid into the auction to supply capacity to PJM fails to clear the auction. Therefore, it has an incentive to bid as low a price as possible to ensure it wins, knowing that it will always receive the fixed price in the contract for differences.

A US appeals court said in 2014 that the arrangement has the effect of setting an interstate wholesale price for electricity. The Supreme Court agreed.

The Supreme Court said FERC approved the PJM auctions as the “sole rate setting mechanism” for wholesale electricity sales into the grid. Maryland went too far, it said, by guaranteeing CPV a different price than the rate set in the auction.

The case was being watched with great interest for whether the decision might leave a cloud over the ability of states to order utilities to buy power in other contexts: for example, from renewable energy generators under state renewable portfolio standards or under legislation requiring utilities to buy a certain amount of power from offshore wind.

The decision is “limited,” the court said. “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 rendered Maryland’s program unacceptable.”

The decision came in a case called Hughes v. Talen Energy Marketing. The Supreme Court released its decision on April 19.  On April 25, the Supreme Court issued a short decision applying the Hughes decision to the New Jersey program in PPL Energy Plus v. Solomon.