Today, the U.S. Supreme Court issued a very narrow 8-0 decision in Hughes v. Talen Marketing finding that Maryland Public Service Commission’s program for in-state long-term capacity procurement set an interstate wholesale rate that interfered with the Federal Power Act’s (FPA) division of authority between state and federal regulators. The decision is limited to Maryland’s program that conditioned payment of funds for an in-state bilateral capacity contract on wholesale capacity clearing auctions in the PJM wholesale market. The decision does not address the permissibility of other State measures – such as clean energy procurement, tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector – that are untethered to wholesale market participation.

This decision will have limited implications in the California Independent System Operator (CAISO) wholesale market and the west for several reasons.

First, the CAISO wholesale market does not use a comparable capacity auction as PJM. In PJM, a three-year ahead capacity auction is used to ensure that enough capacity exists to serve forecasted demand. PJM forecasts demand three years in advance and then assigns a share of that demand to each participating load serving entity (LSE). The auction accommodates long-term bilateral contracts for capacity to meet this forecasted demand. Owners of capacity to produce electricity in three years bid that capacity into the auction for sale to PJM at rates the sellers set in their bids. PJM accepts bids until it has purchased enough capacity to satisfy demand anticipated demand with all accepted capacity sellers receiving the highest accepted rate, or clearing price (just like the CAISO’s day-ahead market). LSEs then purchase requisite amounts of electricity from PJM to satisfy their assigned share of overall projected demand.

In California, electricity planning is accounted for by three long-term procurement planning processes:

• Long-term forecasts of energy demand produced by the CEC as part of its biennial Integrated Energy Policy Report (IEPR);
• Biennial Long-Term Procurement Plan proceedings (LTPP) conducted by the CPUC; and
• Annual Transmission Planning Process (TPP) performed by the CAISO.

These processes ensure that enough electric and transmission capacity exists to meet forecasted demand with procurement driven by California Public Utility procurement mechanisms as opposed to a wholesale capacity auction.

This also holds true in the west because the CAISO is the only wholesale market. All other balancing authorities remain integrated with individual utilities forecasting demand and procuring supply to meet future need without wholesale markets.

Second, because the west lacks a wholesale capacity auction, it is impossible for a western state to adjust a wholesale rate through bilateral contract regulation to facilitate in-state energy capacity. Maryland sought to develop additional in-state generation that it felt PJM’s capacity auction was failing to encourage. Maryland enacted a regulatory program that allowed LSEs to enter into a 20-year pricing contact (called a contract for differences) with petitioner CPV Maryland, LLC (CPV) at a rate CPV specified in its proposal to the Maryland Public Utilities Commission. CPV then sells its capacity to PJM through the auction instead of transferring the capacity rights to the LSE who would normally sell the capacity into the PJM auction. CPV would then receive the mandated payments from or to the LSE (depending on the clearing price) under the contract terms instead of the clearing price for the capacity sales in PJM. This guaranteed that CPV would receive a specific contracted for price not subject to the wholesale auction clearing price and why the U.S. Supreme Court found that the FPA preempts Maryland’s program because it adjusts a wholesale rate.

Third, the proposed CAISO regional expansion does not include a capacity market and will most likely integrate existing state procurement mechanisms in the same way that California procurement is integrated. This should not create a similar adjustment to wholesale rates because a capacity market will not exist and the power of procurement to meet future demand will remain with the individual states, untethered to a wholesale market.

Fourth, the decision is extremely narrow and only appears to apply to the specific Maryland regulatory program concerning in-state generation in PJM. This means that existing procurement mandates like California’s and Oregon’s 50% RPS programs are not subject to the decision. Additionally, other western state actions will not adjust wholesale rates where there are no wholesale markets.