|
|
|
|
|
Did Federal Court Just Eviscerate States' Right to Set Prices for Default Service (Court Says State "Impotent" to Establish Price for Wholesale Energy)
A nonsensical opinion from a federal court appears to void state public service commissions' ability to set the prices paid to their wholesale default service providers, because "state action that regulates" within the field of "setting wholesale electric energy and capacity rates or prices" is, "void under the doctrine of field preemption."
The decision, from the United States District Court for the District of Maryland, deals specifically with a complaint from PPL EnergyPlus, LLC against a Maryland PSC order directing the states' electric distribution companies to enter into contract for differences with CPV Maryland to support the construction of new generation.
However, the grounds upon which the Court voids this Maryland contract implicates all wholesale agreements entered into at the direction and approval of state regulators, and therefore, under the clear language of the Court's ruling, places default service contracts between full requirements providers and electric distribution companies under the "exclusive" jurisdiction of FERC.
We readily admit that the Maryland generation CfD, and full requirements SOS contracts, are very different, and have one key difference -- the CfD required the sale of energy into the PJM-cleared energy market where the LMP has been determined by FERC to be the just and reasonable rate for such sales, while (we presume), supply for full requirements SOS contracts are self-scheduled into PJM, and therefore do not receive the LMP.
The Court's decision, at certain points, does emphasize that the Maryland CfD essentially directs the "sale" of energy into the PJM market, but provides a non-market price for such service -- a scenario distinct from SOS contracts. However, elsewhere the Court clearly voids all state regulation of wholesale pricing, and the obvious argument against such a finding, reliance on market-based rate authority, is dismissed by the Court as not saving the Maryland CfD. If market-based rate authority cannot save the CfD from being voided due to preemption, we don't see how market-based rate authority could be used to find that default service contracts, entered into at the behest of state PUCs, are not voided by federal preemption.
Turning now to the Court's specific findings:
"Accordingly, it appears well accepted that Congress intended to use the FPA [Federal Power Act] to give FERC exclusive jurisdiction over setting wholesale electric energy and capacity rates or prices and thus intended this field to be occupied exclusively by federal regulation. Thus, state action that regulates within this field is void under the doctrine of field preemption."
"[A]fter a generator physically comes into existence and operation and participates in the wholesale electric energy market, the prices or rates received by that generator in exchange for wholesale energy and capacity sales are within the sole purview of the federal government," the Court said (emphasis added). Note here that the Court found that "the prices or rates received by that generator in exchange for wholesale energy and capacity sales," generally, are within FERC's sole purview, not solely those sales into the PJM-run market.
"While Maryland may retain traditional state authority to regulate the development, location, and type of power plants within its borders, the scope of Maryland's power is necessarily limited by FERC's exclusive authority to set wholesale energy and capacity prices under, inter alia, the Supremacy Clause and the field preemption doctrine," the Court said (emphasis added).
"Maryland cannot ... regulat[e] in such a manner as to intrude into the federal field of wholesale electric energy and capacity price-setting," the Court said.
As noted above, certain of the Court's conclusions rested specifically on the CfD's requirement that energy and capacity be sold into the PJM markets:
"The price or rate received by CPV or by any generation resource within the PJM region for energy and capacity sales to PJM in the PJM Markets is regulated exclusively by FERC under the FPA. PJM sets the prices received by generators for sales into the PJM Markets through market-based auction processes that are filed with, and approved by, FERC. The heart of the parties' dispute relates to whether the PSC has effectively 'set the wholesale prices' that CPV will receive for its energy and capacity sales into the PJM Markets by issuing the Generation Order, which requires the Maryland EDCs to enter into the CfD with CPV. In essence, the CfD permits CPV ultimately to recover its proposed 'contract price' -- accepted and approved by the PSC in the Generation Order -- for energy and capacity sales into the PJM Markets."
"[T]he Generation Order fixes the monetary value of the energy and capacity generated by CPV's facility and actually sold by CPV into the PJM Markets. The monetary value of CPV's wholesale energy and capacity sales dictated by the PSC in the Generation Order is determined outside of the auction mechanisms approved by FERC and utilized by PJM," the Court said.
However, this focus on the specific CfD and its interaction with PJM-run auctions should not lead to the conclusion that the setting of prices paid to wholesale default service suppliers by state PUCs is distinguishable, and not implicated by the Court's preemption finding.
Indeed, the Court said:
"If the PSC had ordered CPV to sell, at wholesale, and deliver energy to the EDCs for the contract price, then the unconstitutionality of the Generation Order would certainly be obvious."
This essentially appears to be the situation which occurs with default service contracts. Wholesale full requirements providers sell, at wholesale, and deliver power to electric distribution companies, at a price set by the state PSC.
Of note to default service contracts, the Maryland PSC had argued that the price under the CfD was not "set" by PSC, but was rather a competitive market price because CPV initially proposed that price as part of the RFP.
However, the Court rejected this argument. "The contract price became operative only after reviewed, evaluated, and accepted by the PSC in an agency order ... Accordingly, although it was proposed by CPV, the contract price in the CfD is a price 'set' or 'determined' by the PSC." (emphasis added)
The Court would therefore, we must conclude, view default service prices paid to wholesale suppliers in the same way. While these prices might originate from descending clock auctions or sealed-bid RFPs, the mass market default service prices paid to suppliers in every major restructured market are reviewed and accepted by the PSC, and therefore "set" by the PSC.
"[U]nder field preemption principles, the PSC is impotent to take regulatory action to establish the price for wholesale energy and capacity sales," the Court said, again, not narrowing its finding to sales "to the PJM market."
Now comes the nonsensical part of the Court's order.
It seems obvious that, whether it be the Maryland CfD, or default service contracts, while FERC might have exclusive jurisdiction, the contracts at issue, with prices reviewed by state PUCs, are permissible, because the sellers have market-based rate authority from FERC, and therefore, may agree to sell at a price as negotiated in whatever process adopted by a state PUC.
However, without any substantive explanation, the Court dismissed this market-based rate authority argument. Although the Court's reasoning it not thoroughly detailed, by implication, it appears the Court found that because the CfD was directed by the PSC, such direction was de jure preempted, even if all the parties to the contract agreed to it pursuant to market-based rate authority. This has enormous implications for default service procurements.
"Plaintiffs have challenged the Maryland PSC's ability under the Supremacy Clause to issue the Generation Order, which directed market participants to enter into the CfD with CPV. While the Court's finding that the Generation Order is field preempted raises the implication that the CfD, standing by itself, is a FERC-jurisdictional contract as opposed to a purely financial arrangement that is generally considered outside the purview of FERC, such an implication does not strip this Court of jurisdiction to decide the constitutionality of the PSC's regulatory actions and to enjoin enforcement of an unconstitutional state action," the Court said.
Accordingly, notwithstanding market-based rate authority of the seller, because the Court found that the PSC cannot compel the electric distribution companies to enter the CfD at issue, we are forced to conclude that, because default service contracts likewise set the wholesale rate to be paid for the provision of wholesale power, state PSCs are federally preempted from directing electric distribution companies to enter into contracts for the procurement of wholesale supply to serve default service load if such direction includes the setting of a rate paid to the wholesale supplier (as all mass market default service procurements do)
In resolving the case, the Court concluded, "[W]hen generators are selling energy and capacity at wholesale, Congress intended the price or rate of such sales to be regulated exclusively by FERC."
"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 Court said (emphasis added).
For its part, PPL EnergyPlus dismissed any impact from the Court's decision on default service. In a statement to Matters, PPL EnergyPlus said, "The issues are very different. We do not believe there is any precedent for default service rates. Default service consists of a wholesale transaction between a supplier and an electric distribution company and a subsequent second sale from the EDC to the consumer. The wholesale sale price is set willingly by the wholesale suppliers bidding into the auction. Wholesale transactions between the supplier and EDC are subject to FERC jurisdiction. Retail prices between the EDC and the consumer are set by the state and subject to state jurisdiction."
We are not so sure that the Court's findings can be limited to only the Maryland generation CfD. Although PPL EnergyPlus itself does not raise this point in the response above, we will address any argument that because default service suppliers act as the load serving entity, they are actually providing retail supply, not wholesale supply, and therefore the Court's order is inapplicable to default service procurements.
This retail argument fails for several reasons, most notably because the default suppliers do not serve specific end use customers, and do not retain the title to the power. Notably, for example, the PECO SMA explicitly states that, "all full requirements service provided by seller to buyer shall be sales for resale, with buyer reselling such full requirements service to default service customers." So, clearly, default service contracts are wholesale contracts.
As noted by PPL EnergyPlus in its statement to Matters, "Default service consists of a wholesale transaction between a supplier and an electric distribution company."
Although, as noted above, certain conclusions from the Court stemmed from the Maryland PSC setting compensation for CPV for its specific sales into the PJM energy market (meaning CPV was not being compensated solely at LMP), elsewhere, and in numerous instances, the Court more broadly finds that state regulators lack the authority to set any wholesale rate for energy, and therefore state regulators can not direct electric distribution companies to enter into contracts that set a wholesale rate to be paid to the supplier.
PPL EnergyPlus characterizes the wholesale prices resulting from default service procurements as being, "set willingly by the wholesale suppliers bidding into the auction," however, these auctions occur at the direction of the PUC.
While the suppliers may be willing, the buyers in these default service auctions (the electric distribution companies) are compelled to participate by the state PUC. In no PJM state relying on wholesale full requirements contracts for mass market default service are we aware of a situation where the PUC does not specifically review and approve in an order, be it from the full Commission or via secretarial letter, the rates resulting from each default service procurement (the PSC therefore "sets" the rates, as the Court would describe it)
We see no distinction, then, between the Maryland generation CfD and wholesale default service procurements in terms of being "freely" negotiated. In each, the buyer (the electric distribution company) is directed to execute the procurement at the behest of the state PSC. In each, the PSC specifically establishes the mechanism for how the rate will be determined, then specifically reviews and approves the rate.
If the Court has found that the Maryland generation CfD is federally preempted and void, we cannot see how wholesale default service contracts which electric distribution companies have entered into at the direction of state PSCs, and at rates ultimately "set" by state PSCs, can survive.
We admit, this conclusion seems nonsensical, especially since, absent PSC direction, the contracts would clearly qualify as market-based rate sales, and there would be no question as to their validity. But our conclusion flows from the Court's opinion itself, and we cannot reconcile the inability of the Maryland PSC to order the generation CfD with an ability to, at the same time, order the procurement and pricing of wholesale default service supplies.
The Maryland CfD case is No. 1:12-cv-01286-MJG
ADVERTISEMENT Search for more retail energy careers: Copyright 2010-
October 2, 2013
Email This Story
Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com
NEW Jobs on RetailEnergyJobs.com:
• NEW! -- Accounting Manager -- Retail Provider -- Houston
• NEW! -- Indirect Sales Representative -- Retail Provider -- Texas
• NEW! -- Vice President, Residential Sales and Marketing -- Retail Provider -- Houston
• NEW! -- Indirect Sales Coordinator -- Retail Provider
• NEW! -- Database Reporting Analyst -- ESCO -- NY
• Director of Operations & Compliance
• Director of National Accounts -- DFW
• Sales Associate -- Houston
• Marketing Coordinator -- Retail Supplier
• Risk Manager -- Retail Provider -- Houston
RetailEnergyJobs.com
|
|
|
|