United States: Supreme Court Invalidates Maryland Power Plant Subsidy Program And Reaffirms FERC's Exclusive Authority Over Wholesale Capacity Markets

On April 19, 2016, for the second time in three months, the Supreme Court of the United States reaffirmed the exclusive jurisdiction of the Federal Energy Regulatory Commission (FERC) over the formation of wholesale rates in organized electric generating capacity markets, invalidating a Maryland program that sought to spur construction of new natural gas-fired generation capacity in the state by providing developers with long-term capacity contracts at rates different from those established in PJM Interconnection, L.L.C. (PJM) capacity auctions.

In Hughes v. Talen Energy Marketing, LLC (No. 14-614) and CPV Maryland, LLC v. Talen Energy Marketing, LLC (No. 14-623)—the District Court and 4th Circuit cases underlying which we discussed here and here—Justice Ginsburg, writing for the unanimous Court, held that the Maryland program is pre-empted by the Federal Power Act (FPA) because it usurps FERC's exclusive authority to regulate wholesale sales of electricity. Relying both on the statutory framework and text of the FPA and on principles of field and conflict pre-emption arising from the Supremacy Clause of the Constitution, the Court affirmed the 4th Circuit's judgment that the Maryland program set a wholesale rate in contravention of the FPA's division of authority between FERC and the states and impermissibly invaded FERC's "regulatory turf."

Background

As we explained here, the challenged Maryland program, which arose from concerns that PJM's capacity auctions were "failing to encourage development of sufficient new in-state generation," involved (1) a solicitation of proposals from developers for a new natural gas-fired powerplant at a particular location and ultimately acceptance of a bid from CPV Maryland, LLC (CPV) to build that plant and (2) a requirement for several Maryland utilities "to enter into a 20-year . . . contract . . . with CPV at a rate CPV specified in its accepted proposal." Those contracts would guarantee CPV the contract price for its capacity, rather than the price for that capacity established in PJM's three-year forward capacity auctions. Incumbent generators—competitors of CPV—sued in federal court, seeking a declaratory judgment that the Maryland program "violates the Supremacy clause by setting a wholesale rate for electricity and by interfering with FERC's capacity-auction policies" and regulatory authority.

The District Court agreed, finding that Maryland's program "improperly set[] the rate CPV [would] receive[] for interstate wholesale capacity sales," and that, while Maryland "may retain traditional state authority to regulate the development, location, and type of power plants within its borders," the scope of the state's "power is necessarily limited by FERC's exclusive authority to set wholesale energy and capacity prices." As we reported here, the 4th Circuit affirmed, holding that Maryland's program "functionally set[] the rate that CPV [would] receive[] for its sales in the PJM auction," which FERC extensively regulates, and therefore "strikes at the heart of [FERC's] statutory power."  Because Maryland's program could "seriously distort the PJM auction's price signals" and would "undermin[e] the incentive structure FERC has approved for construction of new generation" in PJM, the 4th Circuit held that it "impermissibly conflicts with FERC policies" and could not stand.

The Supreme Court's Holding

Relying on the Supremacy Clause and related doctrines of field and conflict pre-emption, the Court rejected the Maryland program, agreeing with the 4th Circuit's judgment that Maryland's program "sets an interstate wholesale rate, contravening the FPA's division of authority between state and federal regulators." The state program's guarantee to CPV of a rate for capacity different from the rate for capacity resulting from PJM's capacity auctions—which FERC, through its close regulation of the auction structure and rules, has deemed just and reasonable—adjusts an interstate wholesale rate, impermissibly "invades FERC's regulatory turf" and therefore cannot stand. According to Justice Ginsburg, the critical flaw of the contracts in the Maryland program is that they would operate "within the [PJM] auction," mandating that the Maryland utilities and CPV "exchange money based on the cost of CPV's capacity sales to PJM" through PJM's auction, unlike bilateral capacity contracts formed outside the auction, under which ownership of a generator's capacity would transfer to the buyer.

Justice Ginsburg was clear, however, that the Court's holding is limited, noting that states "may regulate within the domain Congress assigned to them [under the FPA] even when their laws incidentally affect areas within FERC's domain." But they "may not seek to achieve ends, however legitimate, through regulatory means that intrude on FERC's authority over interstate wholesale rates." Nothing in the opinion, Justice Ginsburg emphasized, "should be read to foreclose" states from "encouraging production of new or clean generation through measures 'untethered to a generator's wholesale market participation.'" As long as such programs "do[] not condition payment of funds on capacity clearing [an] auction," they "would not suffer from the same fatal defect that renders Maryland's program unacceptable."

Concurring Opinions

Justice Sotomayor wrote separately in concurrence, eschewing "talismanic pre-emption vocabulary" and emphasizing close examination of pre-emption questions involving statutes like the FPA, a collaborative federalism statute that "envisions a federal-state relationship marked by interdependence." She agreed that Maryland's program "impermissibly impeded the performance of one of FERC's core regulatory duties"—to ensure just and reasonable wholesale rates—in contravention of the goals of the FPA and thus must be preempted. But she also noted that the Court "rightly recognizes the importance of protecting the States' ability to contribute, within their regulatory domain, to the [FPA's] goal of ensuring a sustainable supply of efficient and price-effective energy."

Justice Thomas also wrote separately, concurring with the opinion in part and in the judgment. He agreed that the FPA's text and framework compel the Court's conclusion, but noted that he would have reached the same result on the text and structure of the FPA alone, without also relying on principles of implied preemption underlying the Court's opinion.

Implications

Despite Justice Ginsburg's emphasis on its limited nature, the Court's decision leaves open the question of just what state measures to incentivize new generation development would be permissible under the Supremacy Clause and the FPA, as virtually any such program could affect outcomes (i.e., the formation of rates) in wholesale markets. Justice Ginsburg mentions, as discussed in the 4th Circuit decision, direct subsidies and tax rebates, as well as land grants, construction of state-owned generation facilities or re-regulation (i.e., returning to vertical integration, where transmission and distribution utilities also own and operate the power plants necessary to serve their own load). However, like the 4th Circuit decision, the Court's decision provides little clarity regarding where the boundaries for such state programs should be drawn to avoid invalidation on grounds similar to those that doomed the Maryland program. Indeed, the Court said only that its decision regarding the Maryland program "need not and do[es] not address the permissibility of" such measures.

The Court's decision likely also sealed the fate of a New Jersey program similar to Maryland's program, which we discussed here and here. On April 25, 2016, the Court denied petitions for certiorari regarding the 3rd Circuit decision invalidating that New Jersey program on similar grounds, in Fiordaliso v. Talen Energy Marketing, LLC (No. 14-694) and CPV Power Holdings v. Talen Energy Marketing, LLC (No. 14-634).

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