In The Matter of the Petition of Calpine Corporation (Cir. Ct. Balt. City)

Filed: October 3, 2013

Opinion By: Judge Audrey J. S. Carrion

Held: The Circuit Court affirmed the Public Service Commission’s (“PSC”) actions with regards to certain regulated utilities in Maryland, where the PSC: (a) required that the utilities negotiate and enter into contracts with a new power generation facility for cost recovery, (b) conducted a hearing with notice to the utilities to investigate all options “to ensure an adequate and reliable supply of electricity to Maryland customers;” and (c) the PSC’s actions were supported by substantial evidence and were therefore not “illegal, unreasonable, arbitrary, or capricious.”

Facts: The PSC initiated a regulatory proceeding on September 29, 2009 “to investigate the long-term reliability and adequacy of [electrical] service in Maryland…”  On December 29, 2010, the PSC prepared a draft Request for Proposals for New Generation (“RFP”), which would be issued by the regulated utilities to solicit proposals from parties interested in building a power plant in the region.  On receipt of comments, the PSC modified the RFP and directed the utilities to issue the modified RFP.  The PSC also notified the utilities that a hearing would be held on January 31, 2012 on the need for new power generation.  The RFP sought bids for the construction of new, natural gas-fired power generation.  

Following the hearing, the PSC issued an order on April 12, 2012, finding that there was a long-term need for an additional 650 to 700 megawatts of electricity in Maryland by 2015, and accepting the bid of Competitive Power Ventures Holdings, LLC (“CPV”) to build a 661 megawatt natural gas-fired combined cycle facility in Charles County.  The commission also ordered the utilities to negotiate and enter into a “Contract for Differences” with CPV.  The contract would establish a fixed price for power generated by CPV, and would have the utilities guarantee payment of that fixed price, with the utilities making up the difference if sales were lower, and CPV paying any sales over the fixed price to the utilities. 

Analysis: A court’s review of the order of an administrative agency is generally deferential to the agency’s expertise, reviewing for “illegal, unreasonable, arbitrary, or capricious” decisions of the agency.  The court will also review whether the administrative agency made an error of law, though the court will be more deferential to the agency when the agency “is interpreting or applying the statute it itself administers…”

What’s at issue in this case is whether the PSC acted contrary to law in determining that additional power generation was necessary to ensure that demand can be met for “standard offer service” (“SOS”) in Maryland, ordering the regulated utilities in Maryland to issue an RFP for additional power generation facilities, and subsequently ordering those utilities to contract with CPV for a gas-fired combined cycle facility in Charles County.  Ultimately the circuit court concluded that the PSC acted within its authority and on substantial evidence in the record in support of its administrative orders.

The court began its analysis by looking at the authority granted to the PSC under the Public Utility Article.  The court found that sections 2-113, 5-101 and 7-510 give the PSC general powers to regulate utilities that operate in Maryland, and to ensure the availability of SOS.  However, the utilities had argued that the PSC had exceeded its statutory authority in ordering the utilities to enter into a contract with a third party, on the language of section 7-509(a) which states that the PSC, except for two situations not applicable to the case at bar, may not regulate “the generation, supply, and sale of electricity” as an electronic company service or function.  The court found, however, that interpreting this language to deprive the PSC of its otherwise general authority to regulate public utilities would result in an illogical conclusion of the intention of the legislature and would conflict with the overall statutory scheme, which empowers the PSC to ensure that SOS is available to Maryland customers into the future.  The court concluded that the PSC acted within its authority in directing the utilities to contract with CPV.

The utilities had also challenged the procedures used by the PSC in conducting its hearings concerning the need for additional power generation, and the PSC’s order requiring the utilities to contract with CPV.  The court concluded that the PSC had not violated the utilities’ due process rights because the utilities had notice of the proceedings, the PSC sought and received feedback on the RFP to which it issued amendments, heard testimony from fourteen witnesses concerning the issue, and the utilities had participated in the hearings.

Finally, the utilities had challenged the evidence upon which the PSC relied in concluding that a gas-fired combined facility constructed by CPV was necessary.  The court found that there was substantial and uncontested evidence in the record supporting the PSC’s decision, including: (a) coal-fired plants in Maryland may be forced into premature retirement because of new environmental regulations, (b) the need for more investment in power generation in the region and the failure of the current pricing model to attract such investment, (c) geographic limitations in the region that increase power generation costs, and (d) the downward trend in the reserve margin for power generation capacity over the last several years.  The utilities had argued that the PSC failed to consider transmission system upgrades, and Calpine had argued that its exclusion from consideration because of its location outside of Maryland was arbitrary and capricious.  However, the court was unconvinced of these arguments, in part because of its deferential review standard for agency decisions.  As a result, the court affirmed the orders of the PSC.

The full opinion is available in PDF.