PPL Energyplus, LLC v. Nazarian

• Decision Date: 30 September 2013
• Docket Number: Civil Action No. MJG–12–1286.
• Citation: 974 F.Supp.2d 790
• Parties: PPL ENERGYPLUS, LLC, et al., Plaintiffs v. Douglas R.M. NAZARIAN, in his official capacity as Chairman of the Maryland Public Service Commission, et al., Defendants.
• Court: U.S. District Court — District of Maryland

974 F.Supp.2d 790

PPL ENERGYPLUS, LLC, et al., Plaintiffs
v.
Douglas R.M. NAZARIAN, in his official capacity as Chairman of the Maryland Public Service Commission, et al., Defendants.

Civil Action No. MJG–12–1286.

United States District Court,
D. Maryland.

Sept. 30, 2013.

[974 F.Supp.2d 794]

Andrew Jay Graham, John Augustine Bourgeois, Geoffrey H. Genth, Kramon and Graham PA, Baltimore, MD, David L. Meyer, Madeleine A. Hensler, Pablo A. Nichols, Morrison and Foerster LLP, Washington, DC, Mark David McPherson, Morrison and Foerster LLP, New York, NY, Stuart C. Plunkett, Morrison and Foerster LLP, San Francisco, CA, for Plaintiffs.

[974 F.Supp.2d 795]

Kristin Case Lawrence, Ransom E. Davis, Maryland Public Service Commission, Baltimore, MD, for Defendants.

Adam Proujansky, Daniel A. Broderick, Jennifer Duncan Hackett, Joel Barry Kleinman, Lisa M. Kaas, Richard Lehfeldt, Dickstein Shapiro LLP, Larry F. Eisenstat, Crowell & Moring LLP, Robert Burke, Competitive Power Ventures Inc., Silver Spring, MD, for Intervenor Defendant.

MEMORANDUM OF DECISION
MARVIN J. GARBIS, District Judge.

The Court has heard the evidence, reviewed the exhibits, considered the materials submitted by the parties, and had the benefit of the arguments of counsel.

The Court now issues this Memorandum of Decision as its findings of fact and conclusions of law in compliance with Rule 52(a) of the Federal Rules of Civil Procedure. The Court finds the facts stated herein based upon its evaluation of the evidence, including the credibility of witnesses, and the inferences that the Court has found reasonable to draw from the evidence.

I. INTRODUCTION

Prior to 1999, Maryland utilized a vertically integrated model of electric energy regulation. A single electric utility (such as BGE or Pepco) owned the facilities that produced and delivered electricity to the users in its exclusive territory. Maryland electric power users purchased electricity from the one utility that served the territory in which they were located. The Maryland Public Service Commission (“PSC”) ultimately determined whether additional generation resources were needed in Maryland and provided for the financing of those resources through the approval of rate increases.

In 1999, the Maryland General Assembly passed the Electric Customer Choice and Competition Act (the “1999 Act”), which restructured, or deregulated, Maryland's electric energy market. The 1999 Act separated the Maryland “utilities' generating assets from their distribution and transmission functions” by transferring ownership of those generation assets to other companies that owned and operated the power plants. P.391 (2007 PSC Interim Report) at 10.

The PSC is empowered by the State of Maryland to assure “safe, adequate, reasonable, and proper [electric] service.” Md.Code Ann., Pub. Util. § 5–101(a). However, Maryland-based utilities, which now no longer own generating facilities, must purchase energy on federally regulated wholesale markets. Thus, the utilities and, correspondingly, Maryland ratepayers are directly affected by the wholesale prices determined on the federally regulated wholesale markets.

In mid–2000, the PSC and others began to voice concerns over the operations of Maryland's electricity markets, the post-restructuring consumer electricity rates, and the existence of adequate generation resources to serve the energy needs of Maryland ratepayers. In 2007, the PSC filed a report with the General Assembly, stating that the federally regulated wholesale markets had not responded to Maryland's needs and opining that those markets were unlikely to respond in the immediate future to the state's “looming capacity shortage.” P.391 (2007 PSC Interim Report) at 1. The PSC concluded that it should require the Maryland utilities to enter into long-term contracts to induce the construction of new electric generation facilities in Maryland.

Ultimately, on April 12, 2012, the PSC

[974 F.Supp.2d 796]

issued the Generation Order at issue,¹ directing Baltimore Gas and Electric Company (“BGE”), Potomac Electric Power Company (“Pepco”), and Delmarva Power & Light Company (“Delmarva”) to enter into a Contract for Differences (“CfD”) with CPV Maryland, LLC (“CPV”). In essence, the CfD provided that regardless of the price set by the federally regulated wholesale market, the Maryland utilities would assure that CPV received a guaranteed price fixed by a contractual formula.² The result was that CPV had a secure income stream available to finance construction of a generating facility in a designated area within Maryland.³

Plaintiffs ⁴ present claims in three Counts:

• Count I Violation of the Supremacy Clause, U.S. Constitution, art. VI, cl. 2;

• Count II Violation of the Commerce Clause, U.S. Constitution, art. I, § 8, cl. 3; and

• Count III Violation of 42 U.S.C. § 1983.

As discussed at length herein, the Court holds that Plaintiffs have established their claim that the Generation Order violates the Supremacy Clause of the United States Constitution by virtue of field preemption ⁵ but does not violate the dormant Commerce Clause.⁶

II. BACKGROUNDA. Electric Power Grids In A Nutshell

As once said in reference to the Rule in Shelley's case, it is one thing to put the subject of electric power grids in a nutshell, but impossible to keep it there.⁷ Nevertheless, even an oversimplified, incomplete, and imprecise introduction may be useful to those totally unfamiliar with electric power grids.

To start, think of a power grid as analogous to a network of pipes utilized to transport water from various pumping stations, which take water from natural sources (lake, river, etc.), to reservoirs. The water in the reservoirs is then, as demanded by a local utility, transported by pipes in the grid to the local utility for distribution to the utility's customers.

[974 F.Supp.2d 797]

However, for a closer analogy, think of the same grid without any reservoirs. When an amount of water is placed into the grid by a pumping station, an equal amount must flow out of the grid to a local utility. Thus, the grid operator must insure that, at all times, the supply (water put into the grid by the pumping stations) equals the demand (water sent out of the grid to the local utilities). This balance is maintained by affecting the supply through adjustments of the price paid to pumping station suppliers, payments to local utilities (or customers) to reduce their usage, adjustments to the price paid by the local utilities for the water they demand, etc.

B. Federal Regulation of Electric Energy1. The Federal Power Act and FERC

In 1927, the United States Supreme Court held that the dormant Commerce Clause prohibited states from regulating the rates for wholesale power sales between utilities in different states. The Court reasoned that, unlike the regulation of the rates charged to local consumers, regulation of interstate rates places “a direct burden upon interstate commerce, from which the state is restrained by the force of the commerce clause.” Pub. Utils. Comm'n of R.I. v. Attleboro Steam & Elec. Co., 273 U.S. 83, 89, 47 S.Ct. 294, 71 L.Ed. 549 (1927).⁸

In response to the Attleboro decision, Congress enacted the Federal Power Act (“FPA”) in 1935, which “closed the ‘Attleboro gap’ by authorizing federal regulation of interstate, wholesale sales of electricity—the precise subject matter beyond the jurisdiction of the States in Attleboro.” ⁹New York v. F.E.R.C., 535 U.S. 1, 20, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002). Specifically, the FPA gave the Federal Power Commission, the predecessor agency to FERC, jurisdiction over the regulation of interstate wholesale sales of electricity and of interstate transmissions of electric energy. See16 U.S.C. § 824(a); New York, 535 U.S. at 20–21, 122 S.Ct. 1012.

The FPA vested FERC with the responsibility for setting the “rates and charges” of wholesale electric energy and for ensuring that those rates are “just and reasonable.” Id.§ 824d(a); Entergy La., Inc. v. La. Pub. Serv. Comm'n, 539 U.S. 39, 47–48, 123 S.Ct. 2050, 156 L.Ed.2d 34 (2003). In essence, FERC exercises this authority through an intricate regulatory framework whereby transactions for the wholesale sale of electricity are filed with FERC (on either an individual basis or, more often, under a market-based rate tariff). FERC determines on its own initiative, or in response to a request by some party, whether such rates are “just and reasonable” and not unduly preferential, discriminatory, or disadvantageous to any party. ¹⁰See16 U.S.C. § 824e; id.§ 824d.

As to the physical facilities that generate electric energy, the FPA gave FERC jurisdiction “over all facilities for [the] transmission or sale of electric energy” in interstate commerce. Id.§ 824(b)(1). But, “except as specifically provided in this subchapter and subchapter III of this chapter,”

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FERC has no jurisdiction “over facilities used for the generation of electric energy or over facilities used in local distribution or only for the transmission of electric energy in intrastate commerce, or over facilities for the transmission of electric energy consumed wholly by the transmitter.” Id.

The witnesses generally agreed that FERC has no authority or power to order directly the siting, building, or construction of a generation facility generally or in any particular location within a state. Tr. Mar. 5(PM) at 82:4–21 (Nazarian); Tr. Mar. 6(AM) at 44:1–21, 46:12–47:7 (Massey); Tr. Mar. 7(AM) at 32:10–21 (Wodyka). As discussed infra, that authority is retained by the states under the FPA.

The FPA created an exclusive area of federal jurisdiction in the electric energy realm regarding the regulation of interstate wholesale energy sales and transmission, including the entities that engage in such acts. The FPA also retained a sphere of state jurisdiction with respect to interstate retail sales, distribution of electric energy, and the construction of local generation facilities. See New...