Supreme Court Reasserts FERC Authority Over Wholesale Markets, Open to Incentives for New Investment
Earlier this year, the Stafford Rosenbaum Appellate Practice blog addressed the U.S. Supreme Court decision in FERC v. Electric Power Supply Association, 136 S. Ct. 760 (U.S. 2016), which discussed the boundary between the jurisdiction of the Federal Energy Regulatory Commission (FERC) and the authority of state regulators over electricity markets. Last week, in Hughes v. Talen Energy Marketing, LLC, No. 14-618 (U.S. Apr. 19, 2016), the Supreme Court decided another case about FERC’s authority.
The Hughes opinion begins by mapping the boundary dividing regulatory authority between states and the federal government with respect to energy markets. Under the Federal Power Act, FERC has “exclusive jurisdiction over wholesale sales of electricity in the interstate market.” Hughes, slip op. at 1. “[T]he law places beyond FERC’s power, and leaves to the States alone, the regulation of ‘any other sale’—most notably, any retail sale—of electricity.” Id. at 2 (internal quotation omitted).
For wholesale markets that cross state lines, FERC regulates “an auction-based market mechanism to ensure wholesale rates that are just and reasonable.” Id. at 1. Non-profit entities called regional transmission organizations, or RTOs, administer these auctions, with each RTO responsible for a portion of the nation’s electric grid. The RTO serving the mid-Atlantic region is PJM Interconnection. Various FERC rules govern wholesale electricity auctions. One of those rules is designed to protect new electricity generators from the risk of fluctuating prices on the wholesale capacity market for a period of three years.
The Maryland Public Service Commission (MPSC) wanted to increase in-state generation capacity. See id. at 6. It had concerns that the PJM auctions and FERC’s three-year protection for new producers were not adequate to incentivize investment in a new electricity generating plant in Maryland. See id. To allay the concern, Maryland first asked FERC to extend the three-year protection policy to ten years. When FERC refused, Maryland regulators adopted their own approach, set forth in a Generation Order. See id. at 7. (New Jersey regulators adopted a similar plan for a new generator in their state; that plan was not directly at issue in Hughes. Id. at 7 n.4.)
The MPSC’s Generation Order authorized a private company to build a new generation facility and sell the generated power through the PJM auctions. However, the MPSC guaranteed that the company would receive, for a period of 20 years, a fixed price for the capacity it sold, rather than the fluctuating price at the PJM auctions. The MPSC provided that any differences between the prices set by PJM auctions (known as the “clearing price”) and the contract’s fixed price would be passed along to in-state retail utilities and, ultimately, to consumers. See id. at 7.
Maryland’s existing electricity generators sued members of the Maryland Public Service Commission in their official capacities, seeking a declaratory judgment that the Generation Order violated the U.S. Constitution’s Supremacy Clause by interfering with FERC’s regulatory scheme under the Federal Power Act. See id. at 9. Both the U.S. District Court for the District of Maryland and the U.S. Court of Appeals for the Fourth Circuit ruled that federal law preempted Maryland’s program. See id. at 1011. Last week, the Supreme Court agreed. Id. at 11.
Under the Supremacy Clause, federal law preempts state law where “Congress has legislated comprehensively to occupy an entire field of regulation,” or where “the challenged state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Id. (internal quotation marks and citations omitted). The Federal Power Act grants FERC “plenary authority over interstate wholesale rates.” Id. at 14 (internal quotation marks omitted). Exercising that jurisdiction, FERC has chosen the auction mechanism as the “sole ratesetting mechanism” on the wholesale market. Id. at 12.
The MPSC has, through the Generation Order, authorized a new generator to participate in the PJM auctions but guaranteed that generator would receive a fixed price for its capacity. Thus, in effect the Generation Order sets an interstate wholesale rate for the new electricity generator—regardless of the clearing price established by the PJM auctions. By doing so, the MPSC “invade[d] FERC’s regulatory turf.” Id. Because “States may not seek to achieve ends, however legitimate, through regulatory means that intrude on FERC’s authority over interstate wholesale rates,” the Generation Order is preempted. Id. at 13.
The Court recognized that the MPSC “was attempting to encourage construction of new in-state generation.” Id. at 12. Such attempts are certainly legitimate, so long as they do not encroach on FERC’s exclusive jurisdiction. The Court explicitly noted other ways a state might go about incentivizing development of new generation and clean power without trespassing on FERC’s turf. Such potentially permissible avenues include “tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector.” Id. at 15.
The Hughes decision is a narrow one. While it reaffirms FERC’s broad and exclusive authority over interstate wholesale markets, it strikes down only a very specific state program. The Court acknowledged the demand for new and clean energy and indicated it will not interfere with state programs, so long as those programs remain consistent with the cooperative federalism envisioned in the Federal Power Act. Importantly, as the Court noted, auction-based energy markets are still a relatively new phenomenon, and the Court’s interpretation of federal energy law in the age of deregulation in some states continues to evolve. For state electricity regulators in Maryland (and elsewhere), it is now back to the drawing board—and then likely the courtroom, to defend whatever plans they develop.
The narrow Hughes holding has little applicability in Wisconsin, which has not deregulated its retail electricity market. Wisconsin’s Public Service Commission authorizes the state’s utilities to construct new power plants, generally rendering the kind of third-party arrangement at issue in Hughes unnecessary here.
Thank you to Joe Diedrich for his assistance with this post.
