Maryland officials aren’t saying what their next move is in the wake of a federal court ruling that voided the state’s contract with developers of a 725 MW combined cycle plant in St. Charles.

U.S. District Judge Marvin J. Garbis ruled that the “contract for differences” the state Public Service Commission negotiated with Competitive Power Ventures unconstitutionally interfered with the Federal Energy Regulatory Commission’s jurisdiction over interstate wholesale energy sales.

“Because states have no authority, either traditional or otherwise, to set wholesale rates, the compensation received by CPV for its wholesale energy and capacity sales is exclusively subject to the regulation of FERC,” the judge wrote in a 149-page order.

The ruling invalidates the PSC’s April 2012 order directing Baltimore Gas and Electric Co., Potomac Electric Power Co., and Delmarva Power & Light Co. to enter into contracts that guaranteed CPV Maryland LLC an income stream so that it could finance construction of the Charles County facility.

Robert J. Grey, general counsel for PPL Corp., one of the companies that challenged the CPV deal, said the ruling “upholds the integrity of competitive generation markets.” PSEG Power LLC and Essential Power LLC were the other plaintiffs.

An appeal is likely, although Regina L. Davis, spokeswoman for the PSC said Friday that the agency was reviewing the ruling and had no immediate comment.

Charles County Commissioner Ken Robinson said the county remained “cautiously optimistic” that the project will proceed.

Merchant Option?

CPV officials did not respond to requests for comment. Last month, the company announced that it would build a 700-MW combined cycle plant in Woodbridge, New Jersey as a merchant facility because of uncertainties created by legal challenges to state-sponsored contracts there.

On Oct. 11, a federal court judge threw out New Jersey’s contracts, also on constitutional grounds, with CPV, Hess Corp. and NRG Energy. The three were selected through a solicitation by the New Jersey Board of Public Utilities for construction of 2,000 MW of generation.

Despite the ruling, the CPV and Hess plants are being built. Hess, which began construction late last year on its 655 MW plant in Newark, said it expects to complete the plant in 2015. CPV said it expects construction on the $842 million Woodbridge project to begin within weeks. NRG cancelled its project after failing to clear in two consecutive capacity market auctions.

CPV said in 2009 that it needed state backing to secure long-term financing to build in Maryland. In the interim, however, low natural gas prices and retirements of coal-fired plants have led to a spurt of unsubsidized generation in PJM. CPV said the debt syndication for its New Jersey plant was oversubscribed “reflecting the project’s strong fundamentals.”

Panda Power Funds in July proposed an unsubsidized 859-MW combined cycle plant in the Washington suburb of Prince George’s County, Md. LS Power Group, which had earlier sought subsidies to build in New Jersey, is building a plant in West Deptford without state backing.

Contract for Differences

Under the Maryland contract, CPV St. Charles’ revenues for the sale of 661 MW of energy and capacity would be compared to what the company would have received had the contract prices been controlling. If the contract prices are higher than the market prices, the three electric distribution companies would pay the difference to CPV; if market prices are higher than the contract, CPV would make payments to the EDCs.

Boston Pacific Co., a consultant hired by the PSC, estimated the contract would save residential ratepayers $0.32 to $0.49 per month over the life of the 20-year contract. However, PSC General Counsel Robert Erwin told FERC’s technical conference Sept. 25: “No one knows whether at the end of 20 years Maryland ratepayers will pay CPV or if CPV will have paid Maryland ratepayers.” (See Capacity Market Attracts Praise, Criticism at FERC).

PJM Capacity Market ‘Failed’

The PSC took its action to spur new generation after concluding that the state faced “a critical shortage of electricity capacity” because it is a net importer and is subject to higher prices because of transmission congestion.

The PSC said that PJM’s capacity market “has failed to attract new generation” to the Southwest Mid-Atlantic Area Council (SWMAAC), which encompasses most of Maryland.

“Since its inception in 2007, RPM has brought no new generation to Maryland, in spite of the fact that clearing prices for capacity in the SWMAAC have averaged almost double those of the non-constrained portions of PJM,” the PSC said. Existing generators had no incentive to build more capacity, regulators said, because increasing supply would reduce prices.

Request for Proposals

CPV was selected over two other bidders that responded to the state’s request for proposals (RFP).

The contract for differences required CPV’s plant to clear in PJM’s annual Base Residual Auction. New generators participating in the auction are subject to the Minimum Offer Price Rule (MOPR), which sets a minimum offer price based on the net Cost of New Entry (net CONE), a measure to prevent buyer-side market power.

In the 2012 capacity auction, PJM approved a MOPR bid floor of $96.13/MW-day for the CPV plant. Prices in SWMAAC and MAAC cleared at $167.46/MW-day in SWMAAC and MAAC, although a PJM sensitivity analysis found prices in SWMAAC would have been almost $30 higher had the bid capacity been 750 MW lower.

MD Argument ‘Unpersuasive’

Garbis said he found “unpersuasive” Maryland’s argument that the contract price is a competitive market price because CPV initially proposed it as part of the RFP. He noted that the PSC had reserved the right to select none of the proposed contract prices. “Accordingly, although it was proposed by CPV, the contract price in the CfD is a price ‘set’ or ‘determined’ by the PSC,” the judge ruled.

Garbis also rejected the state’s contention that the contract was a “mere financing arrangement outside the jurisdiction of FERC.”

“While there exist legitimate ways in which states may secure the development of generation facilities, states may not do so by dictating the ultimate price received by the generation facility for its actual wholesale energy and capacity sales in the PJM Markets without running afoul of the Supremacy Clause,” he wrote.

‘Win’ for Consumers?

The COMPETE Coalition, an organization that represents generators and others, called the ruling “an important win for electricity consumers,” saying subsidized development would “needlessly shift the financial risk of new construction from power plant developers to consumers.”

The Maryland Office of People’s Counsel, which represents residential utility customers, was less sanguine. “If the order stands, it could restrict the state’s ability to address reliability problems within the state,” People’s Counsel Paula M. Carmody told The Baltimore Sun.