E-Alert Case Updates

Federal Power Act Preempts Maryland Program Designed to Incentivize In-State Electricity Generation

Hughes, Chairman, Maryland Public Service Commission, et al. v. Talen Energy Marketing, LLC
No. 14-614 (Supreme Court of the United States, April 19, 2016)
by Caroline E. Willsey, Law Clerk
Semmes, Bowen & Semmes (www.semmes.com)

On April 19, 2016, United State Supreme Court decided Hughes v. Talen Energy Marketing LLC, No. 14-614, in a unanimous 8–0 decision. The Court held that a Maryland program, designed to incentivize in-state electricity generation, was preempted by the Federal Power Act (FPA), 16 U.S.C. § 791a et seq.

The FPA vests exclusive jurisdiction over wholesale sales of electricity in the interstate market in the Federal Energy Regulatory Program (FERC). The FPA assigns to FERC responsibility for ensuring that all wholesale electricity rates are just and reasonable. The States are left to regulate any other sale of electricity – including retail sale. Until recently, most state energy markets were vertically integrated monopolies – i.e., one entity, often a state utility, controlled electricity generation, transmission, and sale to customers. In the past decade, many States, including Maryland have deregulated their energy markets. In deregulated markets, the entities that deliver electricity to retail consumers – called “load servicing entities” (LSEs) – purchase electricity at wholesale from independent power generators. To ensure the reliable transmission of energy, FERC has charged non-profit entities – known as Regional Transmission Organizations (RTOs) or Independent System Operators (ISOs) – with managing certain segments of the electrical grid.

In the deregulated market interstate wholesale transactions occur in two ways. The first is bilateral contracting: LSEs sign agreements with generators to purchase a certain amount of electricity at a certain rate over a certain period of time. FERC then reviews the rate for justness and reasonableness. Second, RTOs and ISOs administer competitive wholesale auctions through which LSEs can purchase electricity.

These cases involved an auction administered by PJM Interconnection (PJM), an RTO that oversees the electricity grid in thirteen (13) mid-Atlantic and mid-Western states. FERC extensively regulates PJM auctions to ensure that supply and demand are effectively balanced, producing a just and reasonable price. FERC has two (2) rules that are particularly relevant in this regard. First, the Minimum Offer Price Rule (MOPR) requires new generators to bid at or above a price specified by PJM. Once the new generator clears the auction at the MOPR price, it is exempt from the MOPR and is allowed to bid at any price it elects, including $0. Second, the New Entry Price Adjustment (NEPA) guarantees new generators a stable capacity price for their first three years in the market.

In 2009, Maryland regulators became concerned that the PJM auctions were failing to encourage development of sufficient in-state electricity generation and were thus creating an energy supply shortage. Maryland solicited proposals from various companies for construction of a new gas-fired power plant and accepted the proposal of CPV Maryland, LLC (CPV). Maryland then required LSEs to enter into a 20-year pricing contract with CPV at a rate CPV specified. Unlike a traditional bilateral contract, the contract does not transfer ownership from CPV to the LSEs. Instead, CPV sells on the PJM auction market, but Maryland’s program guarantees CPV the contract price, rather than the auction clearing price. If CPV’s auction clearing price falls below the guaranteed contract price, Maryland LSEs pay CPV the difference. The LSEs then pass these required payments along to Maryland consumers.

Several incumbent generators – respondents in this case – brought suit in the District of Maryland against members of the Maryland Public Service Commission in their official capacities. The incumbent generators sought a declaratory judgment that Maryland’s program violated the Supremacy Clause by setting a wholesale rate for electricity and by interfering with FERC’s auction policies. After a six-day bench trial, the District Court issued a declaratory judgment holding that Maryland’s program improperly set the rate CPV received for interstate wholesale sales to PJM. The Fourth Circuit affirmed.

The Supreme Court affirmed in an opinion delivered by Justice Ginsburg. Chief Justice Roberts and Justices Kennedy, Breyer, Alito, Sotomayor and Kagan joined in the opinion. Justices Sotomayor and Thomas also delivered separate concurring opinions.

Under the Supremacy Clause federal law preempts contrary state law. The Supreme Court determined that Maryland’s program disregards the interstate wholesale rate required by FERC. The FPA allocates exclusive jurisdiction to the FERC over rates and charges received for wholesale sales. The Court noted that when Congress has legislated so comprehensively as to occupy an entire field of regulation, any state law is preempted – especially when the challenged state law stands in opposition to the execution of the full purposes and objectives of Congress. The Court concluded that Maryland’s rate-setting program contravened the FPA’s division of authority between federal and state regulators. The Court was not persuaded by the fact that Maryland was trying to encourage the construction of new in-state energy generation because states may not seek to achieve ends through regulatory means that intrude upon FERC’s authority over interstate wholesale rates.

The Court was careful to limit its holding, specifically stating that its opinion did not apply to other means that states may implement to encourage the development of energy generation. States remain free to establish programs that encourage the production of energy, so long as those measures are unconnected to the generator’s wholesale market participation.