By Rich Heidorn Jr. and Michael Brooks

WASHINGTON — Lawyers for Maryland and Competitive Power Ventures got little support from Supreme Court justices during oral arguments in their federal-state jurisdiction case Wednesday.

The justices also interrogated Paul Clement, attorney for Talen Energy Marketing, which challenged Maryland’s deal for CPV’s combined cycle plant now under construction in Charles County as an improper subsidy.

But none gave any indication that they were inclined to reverse in their entirety lower court rulings voiding the contract. Rather, several justices seemed to be wrestling with whether to reject the contract based on “field preemption” — that it was an intrusion into exclusive federal jurisdiction — or a narrower “conflict” ruling — that it undermined FERC policy because its long-term pricing structure includes incentives different from those provided by PJM’s capacity auction. (Hughes v. Talen Energy Marketing (14-614), CPV Maryland v. Talen Energy Marketing (14-623))

In April 2012, the Maryland Public Service Commission ordered Baltimore Gas and Electric, Potomac Electric Power Co. (PEPCO) and Delmarva Power and Light to enter into a contract that guaranteed CPV — winner of a PSC competitive solicitation — an income stream so that it could finance the facility.

Under the “contract for differences,” 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 were higher than the market prices, the three electric distribution companies would pay the difference to CPV; if market prices were higher than the contract, CPV would make payments to the EDCs.

The contract was challenged by Talen Energy’s predecessor, PPL, and other generators.

The U.S. District Court of Maryland ruled with PPL and other plaintiffs in saying the contract violated FERC jurisdiction over the wholesale electric market, a ruling upheld by the 4th Circuit Court of Appeals. The Supreme Court declined to hear two related cases in New Jersey decided by the 3rd Circuit.

Opponents said Maryland’s action would suppress capacity prices and that allowing the contract to stand would mean that eventually only subsidized units would enter the auction because those without support could not compete.

Chief Justice John Roberts picked up on this argument shortly after Maryland attorney Scott H. Strauss began speaking. “If it doesn’t suppress prices, why did Maryland do it?” he asked bluntly.

Strauss responded that the state saw a need for more generation than the PJM capacity market was providing. He and CPV attorney Clifton S. Elgarten argued that FERC had addressed price-suppression concerns with the minimum offer price rule (MOPR), which sets a floor on bids by new entrants.

Clement said FERC was siding with Talen in the dispute because “MOPR is not some kind of cure-all that is designed to ward off any price-­suppressive bid. … It is a coarse screen to deal with the most egregious cost­-reducing bids. It also depends on an estimate of cost.

“And here’s why it doesn’t really work for a bid like this,” Clement continued. “One of the most important costs is your cost of capital. Because [CPV is] getting a 20-­year guarantee and no one else is … it destroys the ability to do an apples­-to-­apples comparison. And then the one thing we know for certain here is that this project ended up displacing a project that actually could be built based on the three-year forward price and without a 20-year contract.”

Strauss insisted Maryland ratepayers would not be providing a subsidy. “Maryland concluded that this was going to be a better deal for ratepayers,” he said. At a time when the generation mix is changing, he said, “the last thing the court should do is to limit state options.”

Boston Pacific, 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 a FERC technical conference later: “No one knows whether at the end of 20 years Maryland ratepayers will pay CPV or if CPV will have paid Maryland ratepayers.”

FERC’s Position

After the 4th Circuit upheld the lower court’s ruling, CPV filed the contract with FERC, asking the commission to find it just and reasonable. The company had hoped this would nullify the courts’ findings, but FERC said it wouldn’t review a contract that had been ruled invalid.

Strauss and Elgarten, however, maintained that the commission would have found it just and reasonable.

“I don’t understand your position,” Justice Samuel Alito told Elgarten sharply. “You’re arguing that FERC does not think this adversely affects the [capacity] auction? Why has FERC filed a brief arguing the opposite? You’re arguing as if they’re not even here.”

Alito was referring to Ann O’Connell, an assistant to the Solicitor General who argued for FERC. O’Connell made clear the commission’s position in her opening argument.

“In the government’s view, the Maryland generator order is preempted because by requiring the state-selected generator to bid into and clear the PJM capacity auction in order to receive the guaranteed payments provided in the contract, the Maryland program directly intrudes on the federal auction, and it also interferes with the free-market mechanism that FERC has approved for setting capacity prices in that auction,” she said.

“I understood why they were making the MOPR argument at the early stages of this litigation before FERC filed the brief,” Clement said. “But I am a little mystified why, at this late stage of the game, after FERC filed three briefs saying that the MOPR is not sufficient to eliminate price-suppressive bids, that they’re still saying ‘We win because FERC’s on our side.’”

Skeptical Justices

The justices questioned whether the contract would have been legal had it not been tied to the auction and simply subsidized by Maryland.

“It does seem to me important what the kind of state action is,” Justice Elena Kagan told Clement. “If the state had just said ‘we need another power plant’ and had delivered a load of money to CPV and said ‘go build a power plant,’ you’re not saying that that would be preempted, are you?”

“It would depend,” Clement responded. “The way you just described it, [it is] not preempted.”

Roberts posed the same question to O’Connell.

“If the state just paid to build a power plant, that’s not directly targeting what’s happening in the PJM auction,” she said. “Sure, it’s adding supply to the market. But as long as the state is staying within its sphere under the Federal Power Act, that’s fine.”

Some of the justices confessed that they were confused by the details of the PJM capacity auction, something that Elgarten pointed out in his arguments.

“All of the conflict preemption issues should be addressed to FERC,” Elgarten said. “They are not really for this court — which is obviously having trouble conceptualizing how this all works — to resolve.”

This remark did not seem to faze the justices, however. “Truer words were never spoken than ‘I am not quite on top of how this thing works,’” Justice Stephen Breyer said later.

“I’m a little bit like Justice Breyer on this,” Justice Sonia Sotomayor said. “I’m not quite sure how everything is working.”