Hughes v. Talen Energy Marketing, LLC (14-614)

argument 14-614

Hughes v. Talen Energy Marketing, LLC

Supreme Court of the United States 1h 1m 5 speakers 8 chapters transcribed 6 days ago official recording ↗

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What is Maryland’s 20‑year contract strategy and why did it create a legal dispute?

John G. Roberts 0:00

We will hear argument this morning in case number 14614, Hughes, Chairman of the Maryland Public Service Commission v. Taylor Energy Marketing, and the consolidated case. Mr. Strauss.

Mr. Strauss 0:12

Mr. Chief Justice, and may it please the Court, Maryland determined that new generation was needed for local reliability, so it directed its retail utilities to sign 20-year contracts with a competitively selected project developer. Maryland's action did not intrude on federal authority, primarily for two reasons. The first reason is that Maryland's new resource did not distort the wholesale capacity auction. FERC revised its auction bidding rules to require the Maryland resource to bid on the basis of its costs, backing out any state contract revenue. The developer bid in accordance with the rules and cleared the auction. FERC says that means that the resource is economic, needed, competitive, and does not suppress prices,

Mr. Strauss 0:54

any state revenue notwithstanding. The second reason is that... If

John G. Roberts 0:57

Mr. Strauss 0:57

doesn't suppress

John G. Roberts 0:58

prices, why did Maryland do

Mr. Strauss 1:00

it? Maryland did it, Your Honor, because they saw a need for generation going forward. As is clear in the generation order, Maryland perceived a problem. It had large coal units that it believed were going to retire in the coming years, and it needed to have resources in place to be able to meet that need. So it undertook to have those resources built pursuant to the contract mechanism before you.

Unknown 1:22

But if that hadn't happened, prices would have been higher. So it was to suppress prices.

Mr. Strauss 1:27

No, it was not to suppress prices, and frankly, Your Honor, it could not have suppressed prices. FERC revised the rules in 2011 to be clear that the resource had to bid on the basis of its costs without regard to the state revenue. So there was no way for it to suppress prices. If the costs had been too high for the resource, it would never have cleared. It wouldn't have been in the market at all. It was only in the market because it was able to clear on the basis of its costs, which showed it was efficient. And FERC made that finding. FERC found it needed, competitive, and not suppressive of prices, notwithstanding the subsidy.

Unknown 1:57

Well, why was this done through stepping on FERC's turf at all? I mean, it could have been done by requiring long-term contracts with the new generator?

Mr. Strauss 2:10

It was done through a long-term contract, Your Honor. But the question of getting involved with FERC's turf is as follows. FERC has set up the capacity auction in PJM. And when under that auction, PJM procures three years in advance for a one-year period, all the capacity the region needs. And then it allocates the cost of that capacity among all the utilities. But it tells the utilities that you have a way to hedge against those costs. If you have long-term resources, resources that you bought or procured through contract, you can bid them in. And if they clear, they will offset the cost. Maryland's concern was this. It wanted and needed the resource. But it was concerned that the resource clears so that it hedges against the cost and customers not pay twice for the same resource.

Mr. Strauss 2:53

So in order to do that, it entered into the contract for differences. And the way it did that was it did a competitive procurement and found a developer who was willing to undertake the risk of non-clearance. And that was the issue. The contract for differences assigns and allocates that risk to the developer, not the state. And that enabled the resource to go forward in a way that would not result in any possibility of a double charge. The contract developer, the developer receives the contract price. The utilities pay the contract price and no more than that receive the market price. That is exactly the way this would have worked if we'd simply done it as a bilateral with one key difference. The difference is that the risk of non-clearance is with the developer.

Samuel A. Alito 3:33

Well, there's another key difference. If you had done it directly with, if CPV had contracted directly with the distribution utilities, that would have been subject to regulation by FERC, would it not?