United States: High Court Decides Hughes v. Talen Energy Marketing, LLC

Last Updated: June 3 2016
Article by Jones Day

In a landmark decision, Hughes v. Talen Energy Marketing, LLC, 136 S.Ct. 1288 (2016) ("Hughes"), the U.S. Supreme Court invalidated a Maryland program aimed at incentivizing new in-state power generation as preempted by federal law. Hughes found that Maryland's scheme, which centered around the capacity auction administered by PJM Interconnection ("PJM"), the regional transmission operator overseeing the grid, inappropriately intruded on the Federal Energy Regulatory Commission's ("FERC") exclusive authority to regulate interstate wholesale electricity sales.

In the capacity auction, PJM predicts electricity demand three years ahead of time and assigns a share of that demand to each participating load serving entity ("LSE"). Owners of capacity available to produce electricity in three years bid that capacity into the auction at proposed rates. PJM accepts bids, beginning with the lowest proposed rate, until it has purchased enough capacity to satisfy expected demand. Id. at 1293. However, all accepted bidders receive what is known as the "clearing price," which is the price paid for the highest bid accepted, no matter each bidder's proposed price. Id.

Maryland electricity regulators had grown concerned that the prices set in the PJM capacity auction were insufficient to attract development of new in-state generation to enter the market. To remedy this, Maryland regulators implemented a program in which Maryland solicited proposals from various companies for construction of a new gas-fired power plant at a particular location. Maryland accepted a proposal by CPV Maryland, LLC ("CPV"), after which Maryland required its LSEs to enter into a 20-year "contract for differences" with CPV at a rate that CPV had specified in its accepted proposal. Id. at 1294-95.

Under the contract for differences, CPV would sell its capacity in the PJM market and would, through the contract for differences, receive the contract price, rather than the clearing price established in the auction. If CPV's capacity cleared the auction, and the clearing price was below the price guaranteed in the contract for differences, Maryland LSEs would be required to pay CPV the difference between the contract price and the clearing price. If CPV's capacity cleared the auction and the clearing price exceeded the price specified in the contract for differences, CPV would be required to pay the LSEs the difference between the two prices. LSEs would pass either the higher costs or savings on to their retail electricity customers. Because CPV could receive the difference between the clearing price and the price set forth in the contract, CPV would be incentivized to bid its capacity at the lowest possible price. Id. at 1295. If the capacity failed to clear the market, CPV would receive no payment from Maryland LSEs.

The Supreme Court struck down Maryland's program, finding that it effectively set an interstate wholesale rate, contrary to the Federal Power Act's ("FPA") division of jurisdiction between state and federal regulators, and impermissibly guaranteed CPV a rate distinct from the auction clearing price for interstate sales of capacity to PJM. Id. at 1297. The Court determined that the FPA allocates to FERC exclusive jurisdiction over rates and charges received for or in connection with interstate wholesale electricity sales. Id. (citing 16 U.S.C. § 824d(a)). Through the contract for differences program, Maryland inappropriately undermined FERC's approval of the PJM capacity auction as the exclusive rate-setting mechanism for sales of capacity to PJM. The Court noted that "[b]y adjusting an interstate wholesale rate, Maryland's program invades FERC's regulatory turf[,]" as it violates the Supremacy Clause. Id. (citing FERC v. Electric Power Supply Ass'n, 136 S.Ct. 760, 780 (2016) ("The FPA leaves no room either for direct state regulation of the prices of interstate wholesales or for regulation that would indirectly achieve the same result.") (internal quotations omitted in original)).

Further, the Court found that Maryland's motivation behind implementing the program—encouraging construction of new in-state generation—could not save its program. States may not seek to achieve ends, however legitimate, through regulatory means that impinge on FERC's authority over interstate wholesale electricity rates. Id. at 1298-99 (citing Mississippi Power & Light v. Mississippi ex rel. Moore, 487 U.S. 354 (1988) and Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953 (1986)).

The Court, however, made clear that the decision is to be construed narrowly, as the Court's only concern with Maryland's program was that it "disregard[ed] an interstate wholesale rate required by FERC." Id. at 1299. Hughes does not rule on the merits or permissibility of various other measures that states could employ to encourage development of new or clean generation, "including tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector." Id. The Court continued: "Nothing in this opinion should be read to foreclose Maryland and other States from encouraging production of new or clean generation through measures 'untethered to a generator's wholesale market participation.' So long as a State 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." Id. (internal citation omitted). Thus, Hughes permits states to implement programs aimed at promoting new clean or renewable in-state generation, as long as they do not supplant FERC's regulation over wholesale interstate electricity markets.

However, questions regarding whether other types of similar arrangements—e.g., power purchase agreements entered into by FirstEnergy Solutions Corporation and American Electric Power, which guarantee income associated with a number of generators for purposes of reliability and cost stabilization—still remain.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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