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PPL lawsuit strikes Md. natural gas power tactic

Required contracts with distribution utilities were to help support 661 MW project

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Allentown-based PPL Corp. subsidiaries along with other firms said they have won a lawsuit saying an order by a regulator in Maryland to subsidize output of a new power plant was improper.

The U.S. District Court in Maryland Sept. 30 determined the order in 2012 from the Maryland Public Service Commission violated the supremacy clause of the U.S. Constitution.

The order called for price-support payments from utilities, if needed, to develop a more-than-660-megawatt plant fired by natural gas in Charles County.

PPL said the order enabled the energy center's developer to lower the price that generators received in a 2012 capacity auction within the regional grid managed by Montgomery County-based PJM Interconnection.

With the order, regulators in Maryland sought to help make sure the lights stay on in Maryland, but an industry group leader said the results could have led to reliability issues across a wider region, including Pennsylvania.

"We hope it becomes a precedent, but time will tell," John Shelk, president of the Washington, D.C.-based Electric Power Supply Association, said of the decision.

Another ruling was pending early this week in a similar court case in New Jersey, he said.

But other states do not appear to be going down the same road, in part because energy efficiency and the economic downturn have lowered demand projections within the multistate PJM grid, Shelk said. Capacity also exists across PJM, he said.

Shelk compared actions such as those in Maryland and New Jersey to subsidizing construction projects in a town with a high vacancy rate.

A "nail in the coffin" is capacity auction results, Shelk said.

Because generators make money by selling capacity as well as power when it is produced, lower capacity auction prices would make it harder for some generators across the grid to stay in business, he said.

Specifically, three Maryland distribution utilities had been directed by the PSC to enter contracts that would have guaranteed a minimum amount of compensation to CPV Maryland LLC for generation capacity that CPV would have sold within PJM.

If CPV didn't get a certain price, the utilities would have had to cover the difference and could have recouped the money from rate payers, according to the PSC's order.

But the supplier would have had to pay the utilities, with the savings passed onto rate payers, if it got more than the contracted amount.

CPV made a successful bid in a 2012 PJM annual capacity auction.

The auctions create commitments three years ahead of time for a generator's production as well as other resources commonly referred to as demand response.

Such auctions accept bids from lowest to highest until the projected need is met, and then everyone who came in below the stop point gets the same price based on the highest bid.

PJM has to have enough capacity committed to meet needs plus some cushion, said Ray Dotter, spokesman for PJM.

The entities that bid can either offer generating capacity or demand response, which is a commitment to lower use if and when it's needed. The payment is similar to a retainer or reservation fee and is not an actual power purchase.

"But in return, if we say we need your electricity, you have to provide it within PJM," he said.

The capacity auction also allows power generators to finance construction, because they get an additional fee before they have to deliver power. However, there are penalties if a capacity provider does not deliver.

The PSC was reviewing the ruling and had no comment at the time, Regina L. Davis, communications director with the commission, said this week by email.

Maryland-based Competitive Power Ventures Holdings LLC, or CPV, did not respond before press time to a message seeking comment.

PPL said the CPV bid in 2012 lowered the price for everyone for selling their capacity for the year in question.

The court ruling referenced an analysis that indicated a so-called marketing clearing price received for capacity commitments would have been $195 per megawatt day if there had been 750 megawatts less capacity offered.

Instead, the comparable market clearing price was actually about $167 per megawatt day.

PPL opposes government efforts to subsidize new generation because they are unnecessary, spokesman Ryan Hill said. And natural-gas-fired plants are being built in PJM's territory without this support, he said.

What Maryland put in place is a distortion of market conditions, Hill said.

"It guaranteed a price for that supplier, a fixed price on a contractual formula, and allowed the developer to bid artificially low prices," he said.

About the order

In issuing its order, the Maryland Public Service Commission had worried there has not been enough generation available to assure reliability in the coming years in the state.

Existing coal plants are at high risk for going offline, and renewable energy such as wind and solar is growing but its output was viewed as variable, according to the document.

Testimony included in the PSC’s order also noted natural gas can be operationally flexible, making it a great choice for making sure the lights stay on.

However, some of the evidence the PSC listed in issuing its order does contradict whether new capacity has been necessary because transmission lines could bring in enough power and the economic downturn pushed prior estimates for demand growth.

In testimony, Baltimore Gas and Electric Co. called the plan unnecessary and said it would burden customers with unneeded costs.

The utility said there was excess of generation capacity throughout PJM Interconnection’s grid territory already and that new transmission projects were identified to meet needs in the state.

The other two utilities covered by the order to enter so-called contracts for differences were Potomac Electric Power Co. and Delmarva Power and Light Co., according to the order.

Brent Burkey

Brent Burkey

Brent Burkey covers York County, agribusiness, energy and environment, and workforce issues. Have a tip or question for him? Email him at brentb@cpbj.com. Follow him on Twitter, @brentburkey.

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