United States: Supreme Court Confirms State Limits On Wholesale Power Generation

Stephen Humes is a Partner in Holland & Knight's New York office
Christine Ryan is a Partner in Holland & Knight's Washington D.C. office

Federalism vs. States' Rights Again at Issue in Court's Third Energy Case This Term

HIGHLIGHTS:

• In Hughes v. Talen Energy Marketing, et al., the third and final energy case decided by the U.S. Supreme Court this term, the Court clarified the Federal Energy Regulatory Commission's (FERC) plenary authority over interstate wholesale pricing while explaining the important role states continue to have in encouraging the development of new or clean power generation.
• The Court affirmed that state energy regulators in Maryland and New Jersey went too far in trying to incentivize wholesale power generating plant construction in their states with long-term contracts.
• States still may encourage development of new or clean generation with tax incentives, land grants, direct subsidies, construction of state-owned generation facilities or re-regulation of the energy sector, as long as such state efforts are "untethered to a generator's wholesale market participation."

The U.S. Supreme Court on April 19, 2016, issued its decision in the third and final energy case this term. In Hughes v. Talen Energy Marketing, et al., the Court clarified the Federal Energy Regulatory Commission's (FERC) plenary authority over interstate wholesale pricing while explaining the important role states continue to have in encouraging the development of new or clean power generation.

With its 8-0 decision in the Talen Energy case, the Court affirmed that state energy regulators in Maryland and New Jersey went too far in trying to incentivize wholesale power generating plant construction in their states with long-term contracts. The plants were required to bid their wholesale capacity into the regional power markets run by PJM Interconnection LLC, a regional transmission organization authorized to run wholesale power markets in certain mid-Atlantic and Midwest states. Other generators in these markets sued the states, arguing that states were improperly subsidizing competitors and interfering in the markets regulated by FERC pursuant to the Federal Power Act (FPA). The lower courts – including the U.S. Court of Appeals for the Third Circuit in the case of New Jersey and the Fourth Circuit in the case of Maryland – agreed with the challengers, and the states appealed.

It was widely expected that the Court would affirm the Third Circuit and Fourth Circuit. However, especially given the other two Court decisions issued earlier this term, the key question remaining was whether the Court would find the states' action "field preempted," in that FERC has broad jurisdiction to occupy the entire field of wholesale power plant compensation, or "conflict preempted," in which case the Court would reach a narrower ruling focused on the facts and circumstances of the particular case. Alternatively, an even narrower holding was possible.

The Court's opinion strives to strike a delicate balance, finding conflict preemption phrased as "implied preemption," and stating that "Maryland's program invades FERC's regulatory turf." The Court's opinion, written by Justice Ruth Bader Ginsburg, said that "States may not seek to achieve ends, however legitimate, through regulatory means that intrude on FERC's authority over interstate wholesale rates, as Maryland [and New Jersey] has done here."

The opinion includes some helpful language – in light of a variety of state programs designed to incentivize clean energy as tax incentives and programs supporting renewable energy certificates – suggesting that other state programs involving power generation could survive without conflicting with FERC's exclusive jurisdiction. States still may encourage development of new or clean generation with tax incentives, land grants, direct subsidies, construction of state-owned generation facilities or re-regulation of the energy sector, as long as such state efforts are "untethered to a generator's wholesale market participation." If a state's program does not "condition payment of funds on capacity clearing the auction, the state's program would not suffer from the fatal defect that renders Maryland's program unacceptable."

Previous Energy Cases This Term

In January, the Court issued a decision in the other electricity case it faced this term, Federal Energy Regulatory Commission v. Electric Power Supply Association et al., wherein the Court considered what is essentially a mirror image of the Talen Energy cases. That case dealt with whether FERC went too far and infringed on states' rights when it issued a 2010 rule, called Order No. 745, that requires wholesale power market operators to pay electric consumers for commitments not to use power at certain key times. Order No. 745 also required that these payments be equal to the same amount that wholesale power generators were to be paid for generating electricity. In this way, FERC was essentially ordering that "negawatts" equal megawatts.

The third recent case that illustrated the Supreme Court's current view of cooperative federalism and energy law involves states' efforts, under state antitrust laws, to investigate wholesale natural gas sellers' direct sales to large industrial customers. In Oneok, Inc. v. Learjet, Inc. et al, the Court held that the Natural Gas Act (NGA) – a statute analogous to the FPA in many respects – did not preempt a state antitrust investigation of sales of natural gas. In that case, the Court observed that "Congress occupied the field of matters relating to wholesale sales and transportation of natural gas in interstate commerce." The key difference for purposes of natural gas preemption under the NGA is the "target at which the state law aims", i.e, measures aimed directly at interstate purchasers and wholesale for resale are preempted, but measures aimed at subjects left to the states survive muster.

The Learjet case teaches that when a state law can be applied to nonjurisdictional (i.e., a state's realm) as well as jurisdictional sales (i.e., FERC's realm), the Court will find preemption only when the matter falls within the preempted field. Antitrust laws, the Court said, like blue sky laws, are not aimed at natural-gas companies in particular but rather all businesses in the marketplace. This broad applicability, not aimed at wholesale natural gas sellers, convinced the Court to find no preemption.

Federal-State Interdependence

In the Talen Energy cases, the Court went out of its way to emphasize the collaborative federalism and role of the states in coordinating energy regulation. Justice Sonia Sotomayor, writing a concurring opinion, emphasized that the federal-state relationship is marked by interdependence: The Court rightly "recognizes the importance of protecting the states' ability to contribute, within their regulatory domain, to the Federal Power Act's goal of ensuring a sustainable supply of efficient and price-effective energy."

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