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Fourth Circuit Finds Conflict and Field Preemption, Thus Invalidating Maryland Energy Program Intended to Foster In-State Plant Generation through Long-Term Power Subsidies

PPL EnergyPlus, LLC v. Douglas R.M. Nazarian
--- F.3d ---, 2014 WL 2445800, (4th Cir., June 2, 2014)
by Morgan N. Gough, Summer Associate
Semmes, Bowen & Semmes (www.semmes.com)

Available at http://www.ca4.uscourts.gov/Opinions/Published/132419.P.pdf

In PPL EnergyPlus, LLC v. Douglas R.M. Nazarian, the United States Court of Appeals for the Fourth Circuit invalidated the Maryland Public Service Commission’s (MPSC) General Order for its direct and extensive impediment to the federal wholesale energy market. The federal government has a history of unambiguously regulating wholesale energy rates, as it currently does through extensions of the Federal Power Act (FPA). Congress’s intention to occupy this field preempts the orders of the Maryland program. Further, the effects of the Maryland program pose substantial obstacles to Congress’s objectives and methods for regulating the wholesale energy market, thus supporting a finding of conflict preemption. Energy companies that compete in the interstate market brought suit in the United States District Court for the District of Maryland against MPSC and its subsidized plant that competes in the interstate market, resulting in judgment for the plaintiff utility companies after a bench trial. On appeal, the district court decision was affirmed. Judge Wilkinson authored the majority opinion, in which Judges Keenan and Diaz joined.

The FPA grants authority to the Federal Energy Regulatory Commission (FERC) to occupy and regulate the field of wholesale energy in the interstate market. FERC’s goal is to maintain the integrity of the interstate market by efficiently allocating supply and demand. The “carefully calibrated” scheme of FERC successfully balances competing interests: encouraging new plants while sustaining the old, fulfilling short-term demand while ensuring adequate long-term supply, and preserving federal regulation of wholesale prices while allowing state control over generation sources. FERC created regional organizations to oversee multistate markets, with PJM Interconnection, LLC (PJM) being the Maryland and District of Columbia administrators.

PJM, via FERC, operates both energy and capacity markets. The energy market is a live market in which PJM buys and sells electric energy to distributors for delivery in the next twenty-four hours. The capacity market is “forward-looking,” in that it provides an option for buyers to purchase electric energy that they will sell for a single year, three years in the future. To do so, PJM sets a quota by predicting the future demand, and then uses the Reliability Pricing Model (RPM) to determine the price per unit. Bids are submitted and PJM accepts bids, working up from the lowest, until it has sufficient capacity to satisfy the quota. The highest bid that PJM accepts in order to meet its quota is dubbed the clearing price; each generator whose bid was accepted is paid this clearing price, regardless of the price at which it actually bid. Clearing prices vary nationwide, thereby signaling regions that are prone to supply shortages, spurring construction of new plants in those areas. To further incentivize generation, the New Energy Price Adjustment (NEPA) guarantees new generators a fixed price for three years, while the Minimum Offer Price Rule (MOPR) prevents manipulation of clearing prices by mandating bids to be at or above a specified price (which is set based on the estimated cost of the project). This entire federal scheme seeks to “protect the integrity of its markets against below-cost bids by subsidized plants that might artificially suppress clearing prices.” According to the Fourth Circuit, Maryland’s program stood as a direct attempt to circumvent this federal scheme.

Maryland participates in the federal wholesale energy market. In 2012, feeling that RPM was not incentivizing new generation in Maryland, the MPSC issued its General Order, which invited bids for a new power plant, offering the winning bidder a twenty-year fixed revenue stream achieved by contracts for difference (CfDs) that the state would oblige its local electric distribution companies (EDCs) to enter. Commercial Power Ventures Maryland, LLC submitted the winning bid and was awarded the CfDs. Per the CfDs, CPV must build a new power plant and participate in the federal interstate energy and capacity markets. When CPV’s bid was accepted by PJM, the EDCs would pay CPV various rebates and subsidies based on the market rate that PJM paid to CPV, so that CPV would receive a fixed sum for each unit of bought, regardless of the market price; effectively, this state scheme replaced the rate generated through auction with a rate preferable to the state.

The court rejected Defendants’ argument that the CfDs were subsidies unrelated to the federal market in that they merely fixed the rates the in-state plant would receive without affecting the rate that PJM paid to CPV for its participation in the auction. The court declined to apply the presumption against preemption, as encouraged by Defendants, which weighs against a finding of federal preemption, especially in areas that are traditionally regulated by the states. See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947). The court clarified that this presumption is not triggered in areas historically prone to federal presence, and is certainly not applicable in this instance in light of the federal government’s long regulation of wholesale energy prices. See United States v. Locke, 529 U.S. 89, 108 (2000). The court humored the argument, stating that “even were we to apply the presumption, we would find it overcome by the text and structure of the FPA, which unambiguously apportions control over wholesale rates to FERC.” Lastly, Defendants unsuccessfully argued that there could be no conflict because FERC passed MOPR, which accommodated the participation of subsidized generators in the interstate auction. However, as held by the court, the use of MOPR was evidence of a conflict in that FERC was forced to implement MOPR to mitigate the distorting effect of the General Order on the auctions.

Looking to statutory language and intent, the Fourth Circuit declared that the General Order was field preempted. Congress conveyed exclusive authority to set interstate wholesale rates to the FERC. The General Order suppressed PJM prices, reduced federal revenue from the PJM market, and distorted price signals that the market relied on in order to control supply and demand. Such an intrusion on exclusive federal authority amounted to field preemption; wholesale energy prices affirmed by FERC and its administrators under the FPA must be given binding effect by states, leaving no room for state regulation in this field.

Conflict preemption exists where a state law creates an obstacle to Congress’s accomplishment and execution of its full objectives. The obstacle posed may potentially interfere with either Congress’s actual goals or the methods by which Congress has chosen to achieve its goals to find conflict preemption; no actual conflict in law is required. The General Order would likely disrupt Congress’s goal of using price signals set by auctions to incentivize new power sources. In addition, the General Order’s twenty-year contract substantially exceeds the three-year period set by the FPA for such incentives. The Fourth Circuit reminded Defendants of their 2009 petition to FERC, at which time CPV petitioned PJM to extend the NEPA period from three years to ten years, claiming that the three-year period was insufficient to achieve its goals. See PJM Interconnection, LLC, 128 FERC P 61157 (2009). In rejecting the request, FERC explained that, in order to ensure integrity of the market, it must strike a balance between incentivizing new plants and retaining the old by not skewing price signals in favor of new plants. The Fourth Circuit dubbed the General Order a “backdoor” effort to achieve an interest that it could not through the “front door of FERC proceedings.”

The court repeatedly noted that both the field and conflict preemption holdings were narrow in scope, applying only to the Maryland program at hand due to its “direct and transparent impediment to the functioning of the PJM markets.”

For a discussion of the rejected dormant Commerce Clause arguments raised by Plaintiffs, see the district court case, PPL EnergyPlus, LLC v. Nazarian, 974 F. Supp. 2d 790 (D. Md. 2013). For a related case invalidating a similar New Jersey program, see PPL EnergyPlus, LLC v. Hanna, 977 F. Supp. 2d 372 (D. N.J. 2013).