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April 19, 2016Client Alert

U.S. Supreme Court Upholds FERC Pre-emption of Maryland Generator Rate Subsidy Program

In a unanimous 8-0 opinion issued April 19, 2016, the United States Supreme Court confirmed the Federal Energy Regulatory Commission’s (FERC) exclusive jurisdiction over rates for wholesale sales of electric capacity, further clarifying the line between state and federal jurisdiction over electric energy markets.

The Supreme Court upheld the Fourth Circuit Court of Appeals’ holding that Maryland Public Service Commission’s (Maryland Commission) regulatory program to subsidize the rate paid to a new generation facilities approved by the Maryland Commission invades FERC’s exclusive jurisdiction and partially displaces the FERC-endorsed market mechanism administered by the PJM Interconnection, LLC for determining wholesale capacity rates.[1] The Supreme Court specified, however, that the states may find other means by which to encourage generation development within their regulatory authority.

Facts

These appeals[2] involved the capacity auction administered by PJM, the regional transmission organization that oversees the electricity grid in all or parts of 13 Mid-Atlantic, including Maryland, Midwestern states and the District of Columbia.[3] The FERC extensively regulates the structure of the PJM capacity market and its auction mechanism to ensure that it efficiently balances supply and demand, producing a just and reasonable clearing price.[4] Two FERC-approved rules in the PJM capacity market, the Minimum Offer Price Rule and the New Entry Price Adjustment (NEPA), operate to ensure new generation resources can efficiently enter the capacity market and participate in the PJM capacity auctions.[5]

In 2009, the Maryland Commission became concerned that the PJM capacity auction was failing to encourage development of sufficient new in-state generation. Because Maryland sits in a particularly congested part of the PJM grid, importing electricity from other parts of the grid into the State is often difficult. The Maryland Commission proposed that FERC extend the duration of the NEPA rule from three to 10 years. FERC rejected Maryland’s proposal on the basis that giving new generators longer payments and assurances unavailable to existing suppliers would improperly favor new generation over existing generation and throw the PJM capacity auction’s market-based price-setting mechanism out of balance.[6]

Following FERC’s rejection of Maryland’s NEPA proposal, the Maryland Commission issued the “Generation Order” under which Maryland solicited proposals for construction of a new gas-fired power plant at a particular location and accepted the proposal of CPV Maryland, LLC (“CPV”). Maryland then required public utilities which are load serving entities (“LSEs”) in the state to enter into a 20-year pricing contract in the form of a “contract for differences” with CPV at a rate CPV specified in the proposal accepted by Maryland. Under the contracts, ownership of capacity would not transfer from CPV to the LSEs. Instead, CPV sells its capacity on the PJM market, but Maryland’s program guarantees CPV the contract price rather than the PJM auction clearing price. In other words, if CPV’s capacity bid into the PJM market clears the PJM capacity auction and the clearing price falls below the price guaranteed in the contract for differences, Maryland LSEs pay CPV the difference between the contract price and the auction clearing price, and LSEs pass the costs of these required payments along to Maryland consumers in the form of higher retail prices. If CPV’s capacity clears the auction and the clearing price exceeds the contract price guarantee, CPV pays the LSEs the difference between the clearing price and the contract price and the LSEs pass along the savings to their retail consumers through lower retail prices. Because CPV sells its capacity exclusively in the PJM auction market, CPV receives no payment from Maryland LSEs or PJM if its capacity fails to clear the auction. But CPV is guaranteed a certain rate if its capacity does clear, so the contract for differences encourages CPV to bid its capacity into the auction at the lowest possible price.[7]

A group of existing, incumbent generators sued the Maryland Commission in the U.S. District Court for the District of Maryland to eliminate the contract for differences as a state-supported subsidy of new generation entrants that violated FERC’s exclusive jurisdiction, claiming that the Maryland program violates the Supremacy Clause by setting a wholesale rate for electricity contrary to the exclusive jurisdiction of the FERC and thus interfering with FERC’s capacity-auction policies.

Lower Court Holdings

The District Court agreed with the incumbent generators, finding that Maryland’s program improperly sets the rates CPV received for interstate wholesale capacity sales to PJM.[8] The Fourth Circuit affirmed, relying on the U.S. Supreme Court’s decision in Mississippi Power & Light Co. v. Mississippi ex rel. Moore, 487 U.S. 354, 370 (1988), which held that state laws are preempted when they “den[y] full effect to the rates set by FERC, even though [they do] not seek to tamper with the actual terms of an interstate transaction.”[9] The Fourth Circuit held that Maryland’s program functionally sets the rate that CPV receives for its sales of capacity in the PJM auction, a FERC-approved market mechanism for pricing capacity in the wholesale electric market, which under the Federal Power Act (FPA), is the exclusive jurisdiction of the FERC. The Fourth Circuit concluded that by adopting the terms and conditions set by Maryland for the payments to CPV, and not the PJM prices sanctioned by FERC, Maryland’s program “strikes at the heart of [FERC’s] statutory power” and that Maryland’s program impermissibly conflicts with FERC policies.[10]

U.S. Supreme Court Holding

The Court upheld the Fourth Circuit’s holding that Maryland’s program is preempted because it disregards the interstate wholesale rates required by FERC.[11] The Court held that

The Supremacy Clause makes the laws of the United States ‘the supreme Law of the Land; . . . any thing in the Constitution or Laws of any State to the Contrary not-withstanding.” U.S. Const., Art. VI, cl. 2. Put simply federal law preempts contrary state law.[12]

The Court agreed with the Fourth Circuit’s holding that Maryland’s program sets an interstate wholesale rate, contravening the FPA’s division of authority between state and federal regulators.[13]  The Court noted that the FPA allocates to FERC exclusive jurisdiction over rates and charges received for or in connection with interstate wholesale sales,[14] and through exercise of this authority, FERC had approved the PJM capacity auction as the sole rate-setting mechanism for sales of capacity to PJM, and has deemed the clearing price per se just and reasonable.[15]

While the decision was 8-0, Justices Sotomayor and Thomas filed concurring opinions. Both essentially concluded that the FPA was sufficient to justify upholding the 4th Circuit’s view and there was no need to consider an “implied pre-emption” of state action by Congress.

In overturning the Maryland scheme, the Court specifically outlined the limits of its holding, stating:

We reject Maryland’s program only because it disregards an interstate wholesale rate required by FERC. We therefore need not and do not address the permissibility of various other measures States might 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. 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 generators’ wholesale market participation.” . . . So long as a State does not condition payment of funds on capacity clearing the [federally regulated] auction, the State’s program would not suffer from the fatal defect that renders Maryland’s program unacceptable.[16]

Thus, while the Court confirmed FERC’s exclusive and pre-emptive jurisdiction over the rates for wholesale sales of electricity in interstate markets, the Court also consciously left the door open for the States to find alternative financial means within the States’ jurisdictional authority by which to encourage generation development. It remains to be seen what those alternatives may be, and whether they might give rise to new challenges for the courts to resolve.


 

[1] Hughes v. Talen Energy Marketing, LLC fka PPL EnergyPlus, LLC, and CPV Maryland, LLC v. Talen Energy Marketing, LLC fka PPL EnergyPlus, LLC, 578 U.S. ___ (slip op.) (2016).

[2] Consolidated on appeal.

[3] Id., slip op. at 3-4.

[4] Id., slip op. at 5.

[5] Id., slip op. at 6 (“The Minimum Offer Price Rule (MOPR) requires new generators to bid capacity into the auction at or above a price specified by PJM, unless those generators can prove that their actual costs fall below the MOPR price. Once a new generator clears the auction at the MOPR price, PJM deems that generator an efficient entrant and exempts it from the MOPR going forward, allowing it to bid its capacity into the auction at any price it elects, including $0. . . . [T]he New Entry Price Adjustment (NEPA) guarantees new generators, under certain circumstances, a stable capacity price for their first three years in the [PJM] market . . . [thus eliminating], for three years, the risk that the new generator’s entry into the auction might so decrease the clearing price as to prevent that generator from recovering its costs.”)

[6] See PJM Interconnection, L.L.C., 126 FERC ¶ 62,563 (2009), order on reh’g, 128 FERC ¶ 61,789 (2009).

[7] 578 U.S. ___ (slip op.) at 7-8.

[8] PPL EnergyPlus, LLC v. Nazarian, 974 F. Supp. 2d 790, 840 (Md. 2013).

[9] 578 U.S. ___ (slip op.) at 10; PPL EnergyPlus, LLC v. Nazarian, 753 F.3d 467, 476 (2014).

[10] 578 U.S. ___ (slip op.) at 10-11 (quoting PPL EnergyPlus, LLC. v. Nazarian, 753 F.3d at 478).

[11] 578 U.S. ___, (slip op.) at 15.

[12] Id., (slip op.) at 11.

[13] Id.

[14] 16 U.S.C. § 824d(a).

[15] 578 U.S. ___ (slip op.) at 12.

[16] 578 U.S. ___ (slip op.) at 15 (footnote omitted).

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