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Supreme Court to review Maryland electricity subsidies

— The Supreme Court is expected to hear an electric utility case from Maryland this month that could resolve a national dispute over how far states may go to encourage power generation for their residents.

The case centers on a 2012 decision by the Maryland Public Service Commission to order the construction of a 725-megawatt natural gas power plant in Charles County. State regulators said the plant, the first built in Maryland in more than a decade, was needed to meet demand and prevent the possibility of brownouts during peak use.

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But a group of power generation companies that will compete with the new facility say Maryland officials gave its owner — Silver Spring-based Competitive Power Ventures — an unfair advantage because of how the state structured subsidies to finance the project.

Dozens of other states have created similar incentives to increase power capacity or to encourage utilities to rely on a larger share of renewable energy sources. Maryland officials say billions of dollars in investment nationwide could be affected by the court's decision.

"For ratepayers, the issue is: Are they going to be assured of adequate supply to meet the demand?" said Scott L. Nelson, an attorney with the Washington-based Public Citizen watchdog group, which is siding with Maryland in the case. "There's a lot riding on it for people in Maryland who use electricity."

The case is working its way through federal courts as states and power companies are wrestling with Obama administration regulations intended to address climate change by reducing emissions from coal-fired power plants. Many states, including Maryland, have sought to encourage development of alternative power sources as part of that effort.

The Supreme Court put those proposed regulations on hold last week under a separate lawsuit being considered by the Court of Appeals for the District of Columbia.

An attorney for the Maryland Public Service Commission, the state entity charged with regulating utilities, declined to comment on the case.

To make the financing of the new power plant feasible, the state commission required regional utilities — including Baltimore Gas and Electric Co. — to buy electricity from the new plant at a set price for 20 years, guaranteeing steady revenue.

Competitive Power Ventures won the contract and partnered with two Japanese firms, Marubeni Corp. and Toyota Tsusho, to build the plant in Waldorf. The facility, which will cost $775 million and which remains under construction, will generate enough electricity to power about 700,000 homes.

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But some of the region's largest power suppliers, including Pennsylvania-based Talen Energy, sued. They argued that the guaranteed price distorts the wholesale electricity market.

"State subsidies for generation development degrade the integrity of competitive electricity markets, which were established to shift the financial risk of plant construction from consumers to generators," Talen Energy spokesman Todd Martin said in a statement. "The Maryland ... order put the financial risk back on consumers."

The wholesale market is regulated by the Federal Energy Regulatory Commission, not states. The plaintiffs, including Talen, said Maryland overstepped its authority.

The U.S. District Court in Maryland and the 4th Circuit Court of Appeals agreed.

"Although states plainly retain substantial latitude in directly regulating generation facilities, they may not exercise this authority in a way that impinges on FERC's exclusive power to specify wholesale rates," U.S. Circuit Judge J. Harvie Wilkinson III wrote in a 2014 decision.

The Supreme Court is set to hear oral arguments in the case next week.

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It's not clear whether the litigation will be affected by the death of Supreme Court Justice Antonin Scalia on Saturday.

Scalia, dissenting in a Federal Energy Regulatory Commission case earlier this year, argued the agency exceeded its authority by creating a program that encouraged large-scale electricity consumers to reduce their use. A majority of justices sided with the agency.

In that litigation, which involved some of the same companies, the conservative Scalia was skeptical of overreach by federal regulators. In the Maryland case, the question is whether state officials went too far and influenced the market.

Maryland officials have argued in court that the decision will have national implications because dozens of states have relied on similar arrangements to encourage more power generation, or a greater share of wind and solar power production.

New Jersey, for instance, passed a law allowing utilities to pay a guaranteed price to develop 2,000 megawatts of electricity from natural gas. Massachusetts has used the contracts to spur development of 1,000 megawatts of wind-powered generation in New England, including one of the nation's first offshore wind projects, called Cape Wind.

The Maryland case is being watched closely by the energy industry. The Washington-based American Public Power Association, which represents about 2,000 not-for-profit, publicly owned electric utilities with 48 million customers nationwide, has argued that a decision against Maryland could disrupt the "sound functioning" of the nation's wholesale electric power markets.

"What's at stake here is how much autonomy does a state or ... a locally controlled utility have to determine what our resource mix should be, what kind of generation we should have," said Sue Kelly, the president and CEO of the group. "We should be able to make those decisions."

For ratepayers, the impact from the case is harder to discern. Under the Maryland contract, Competitive Power Ventures would charge utilities more for its power if it could not sell that electricity at the price guaranteed by the state, a cost that would ultimately be shifted to ratepayers.

But if the company got more than the guaranteed price in the market, ratepayers would be rebated the difference.

"Essentially every single ratepayer is represented in this suit across the country," said Braith Kelly, a senior vice president at Competitive Power Ventures, which has about 60 employees in Maryland. "The impact of this ruling could be stunning."

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