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Federal Court Rules Maryland Scheme to Promote Investment in In-State Generation Unconstitutional

by Ari Peskoe

On September 30, a Federal District Court Judge for Maryland declared that the state’s incentive scheme to encourage the construction of new gas-fired generation capacity violates the Supremacy Clause of the Constitution.  By requiring incumbent utilities to supplement PJM’s market-clearing prices with payments to the developer of a new gas-fired generator, the Judge determined that Maryland’s incentive scheme impermissibly sets a wholesale rate.  The Judge’s ruling may complicate states’ efforts to ensure that FERC-jurisdictional electricity markets meet the goals of individual states.

In 1999, Maryland restructured its electricity industry, requiring its investor-owned utilities to divest their generation assets and purchase electricity in federally regulated, regional wholesale markets. In 2007, at the direction of the Maryland General Assembly, the state’s Public Service Commission (PSC) published a report that concluded that the state faced a critical shortage of generation capacity.   According to the PSC, Maryland was located in a highly congested portion of the regional PJM market and therefore paid higher than average prices for wholesale energy.  The PSC found that while the PJM markets are “structured ostensibly to create price incentives for [investment in] new generation and transmission,” the markets had not responded to the state’s “looming capacity shortage.”

Following several proceedings at the PSC, including the issuance of an RFP to construct new gas-fired capacity in Maryland, in April of 2012 the PSC issued an order directing the state’s three incumbent utilities to enter into contracts for differences (CfDs) with a developer that would construct 661 megawatts of new in-state generation capacity. Under the CfDs, the utilities would pay the developer the difference between set contract prices and the PJM clearing prices for energy and capacity.  When the PJM prices were lower than the contract prices, the utilities would pay the developer.  When PJM prices were higher than the contract prices, the developer would pay the utilities.

The plaintiffs – primarily existing generators – complained that the PSC’s order impermissibly regulated the price of wholesale energy sales.  Such sales, they argued, may not be regulated by states because the “scheme of federal regulation . . . [is] so pervasive as to make reasonable the inference that Congress left no room for the states to supplement it.”  The Judge agreed, concluding that the PSC is “establish[ing] the price ultimately received [by the developer] for its physical energy and capacity sales to PJM . . . under field preemption principles, the PSC is impotent to take regulatory action to establish the price for wholesale energy and capacity sales.”  In other words, the Judge concluded that the PSC set the rate and not merely that its order affected the rate by inducing the developer to bid into the PJM markets.

The Judge rejected the defendant’s argument that the CfDs merely finance construction and therefore do intrude on FERC’s ratemaking.  First, to get paid under the CfDs the developer’s bids had to clear the PJM market.  Payment required delivery of energy and not [...]

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Maryland: Split Decision on Two Hydraulic Fracturing Bills; Permanent Ban Proposal Next?

by James A. Pardo and Brandon H. Barnes

Western Maryland sits atop the Marcellus Shale and, since approximately 2008, several companies have leased lands in anticipation of conducting hydraulic fracturing (fracing) operations in the area.  Those operations have been on hold since March 2011 because of a de facto moratorium on fracing that Governor O’Malley and the Legislature put in place to give officials time to complete a two-year study of potential environmental and health impacts, and to propose rules for how fracing operations in the state should be conducted.  That study is due to be completed in 2013, but in the interim Maryland legislators have proposed almost 20 bills aimed at fracing activity in the State.  Stakeholders should be aware of recent actions taken on two of these legislative proposals.

First, $1 milion reportedly is required to finish the  administration’s study, and funding has not been provided for in this year’s state budget.  To close this funding gap, Governor O’Malley recently proposed legislation that would have imposed a one-year fee of $10.00 (Senate version) or $15.00 (House version) per acre on all lands already leased in western Maryland for potential fracing activity.  After the General Assembly rejected that fee legislation, Governor O’Malley announced that his administration will complete the study with funds from other (yet undisclosed) sources.  The issue for stakeholders is that, the lack of funds may delay the study’s completion — meaning that Maryland stakeholders may have to wait until 2014, or longer, to see if fracing will be allowed and under what rules.  

Indeed, whether fracing takes place at all may be the next battle in Maryland.  Representative Heather Mizeur (D-Montgomery County), who introduced the fee legislation in the Maryland House, has warned that she may now seek a permanent ban on fracing in light of industry’s opposition to the fee bill.  Fracing stakeholders with an existing (or potential) interest in Maryland may want to keep an eye on Annapolis in the coming months before committing resources to the Old Line State.

Second, on April 6, the Maryland General Assembly passed another of Rep. Mizeur’s legislative initiatives, a bill that creates a "presumptive impact area" around a well that has been hydraulically fractured.  Under this new rule, well operators will be presumed responsible for any contamination that occurs within 2,500 of a well for one year after the last operational activity on that well.  The operator will bear the burden of proving that any such contamination was not caused by its fracing operations.  If this burden cannot be met, the operator will be required to install a new water supply well (or retrofit the existing supply well) for anyone impacted by the contamination.  Burden-shifting rules exist in several states for contamination caused by leaking underground storage tanks, and legislation similar to Maryland’s also has been proposed in New York.  Because such rules make it easier for property owners to sue for alleged impacts to their private water supplies, they may encourage litigation – something [...]

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