IOil and gas industry - refinery, factory, petrochemical plantt’s not every day that a decision by the United States Supreme Court has the potential to impact the construction industry. But the Court handed down a decision last month that could hinder the pace of power plant construction around the country. In Hughes v. Talen Energy Marketing, LLC, the Court unanimously struck down a Maryland regulatory program that provided subsidies to incentivize new power plant construction in the state. According to the Court, the program intruded on the federal government’s authority to regulate the interstate wholesale market for electricity. Because several other states have similar programs, more cases challenging state power plant construction incentives could be on the horizon.

In 2008, Maryland, fearing a looming capacity shortage, created a program that provided for fixed-rate, long-term power purchase agreements with local distribution utilities. Under the program, the State solicited proposals for power plant construction and offered the successful bidder 20-year “contracts for differences.”  These “contracts for differences” shifted the risk of market rate fluctuation to the state and away from developers looking to secure financing for construction. Essentially, the developer could lock in a rate, and any rate fluctuation would be covered by the state. The program, similar to programs in other states, attracted developers to build power plants in Maryland and provide new generation capacity to the state.

Not everyone was in favor of Maryland’s incentive program, however. Electricity providers who participated in wholesale capacity auctions regulated by the federal government filed suit, claiming that the Maryland program artificially depressed the wholesale rate in auctions and unfairly benefitted new generation developers. The Fourth Circuit Court of Appeals agreed, finding that the program invaded on the federal government’s turf and undermined its ability to regulate the electricity market. The Supreme Court affirmed that decision and found that federal regulations on interstate wholesale markets preempted Maryland’s incentive program. The Supreme Court further explained that its holding was narrow and did not opine on the legality of other state incentive programs, such as tax breaks, land grants or direct power plant subsidies that did not impact wholesale rates.

It is worth mentioning that only a week after the Hughes decision, the Supreme Court refused to hear New Jersey’s appeal from a similar holding out of the Third Circuit Court of Appeals, essentially affirming the Third Circuit’s invalidation of New Jersey’s power plant subsidy program.

What does the Hughes decision mean for developers and contractors? At least 12 other states, including Pennsylvania and New York, and the District of Columbia expressed great concern about the impact that the Supreme Court’s decision could have on other power generation incentive programs, many of which arguably impact wholesale markets. Without long-term contracts and subsidies, developers will be less inclined to invest in new construction in some states, potentially chilling power plant infrastructure projects across the nation. Because the Supreme Court stated that its holding was limited to the Maryland program, there is no doubt that other legal challenges will arise as states grapple with their own incentive programs to encourage energy development.  We will continue to monitor this developing issue.

Jason A. Copley is the Managing Partner of Cohen Seglias and a Partner in the Construction Group. His practice is focused on representing contractors, subcontractors and owners in the areas of construction and commercial litigation.

Allie J. Hallmark is an Associate in the Firm’s Construction Practice Group. She represents the Firm’s construction clients in litigation matters such as delay and design defect claims, contract disputes, enforcement of liquidated damages provisions, and mechanics’ liens and bond claims on both private and public projects.