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Monday, February 26, 2024 | Back issues
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SCOTUS to Consider Energy Pricing Dispute

(CN) - The Supreme Court on Monday agreed to take up the question of how federal and state governments divide up authority over energy markets and the ultimate price of electricity.

The two cases the court will hear, Nazarian v. PPL EnergyPlus and CPV Maryland v. PPL EnergyPlus, have been consolidated for the purpose of oral argument and decision.

At issue is a Maryland program to subsidize the participation of a new power plant in the federal wholesale energy market, and the controversy has deep historical roots.

For much of the 20th Century, the energy market was dominated by vertically integrated firms that produced, transmitted, and delivered power to end-use customers. Early on this market was heavily regulated by local governments, but there was a consensus that as electricity became a interstate business, the federal government needed to play a greater role in setting the rules for the market.

Congress responded in 1935, by passing the Federal Power Act, which vested the Federal Energy Regulatory Commission with authority over the interstate transmission of electricity and the sale of electricity on the wholesale market.

However, the rules did not mandate an end to vertically-integrated energy production, and several states retained some semblance of the of that system.

In 1999, Maryland decided to abandon the vertical integration model and throw in its lot with the federal interest markets, believing they would ultimately produce more efficient and cost-effective service that traditional energy monopolies and provide state residents with lower prices.

Initially, all was well and good, but over time, Maryland came to believe that the interstate power regime failed to adequately incentivize new power generation. In response, the Maryland Public Service Commission solicited proposals for the construction of a new power plant to serve a portion of the state and all of Washington, D.C.

But to make the new plant a reality, the state offered the successful bidder on the project a fixed, 20-year revenue stream.

The plaintiffs in the underlying cases are energy firms that contend Maryland's scheme is pre-empted by the Federal Power Act, and if allowed to go forward would greatly disrupt the wholesale pricing mechanisms the federal government put in place.

Maryland argued its plan didn't actually set a rate for power from the new plant, but merely ensured the rate the operator would get from sales of its electricity. In essence, it said, it had carved out a separate supply-side subsidy entirely outside the federal market.

Senior U.S. District Judge Marvin Garbis, presiding in Baltimore, sided with the plaintiffs and the Fourth Circuit affirmed.

U.S. Circuit Judge J. Harvie Wilkinson III, writing for the three-judge panel, held that Maryland's scheme was preempted because it "functionally set" the rate paid for electricity from the new plant on the wholesale market, creating the "imminent possibility of collision between" the state and federal regimes.

"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 whole rates," Wilkinson wrote.

The Supreme Court previously took no action on a pair of New Jersey cases that raised much the same question.

As is their custom, the justices did not explain their rationale for taking on the issue this time.

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