Justices Appear Convinced State Subsidy Enters FERC Turf

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By Rebecca Kern

Feb. 24 — The majority of the U.S. Supreme Court justices appeared convinced during oral arguments that a Maryland subsidy program to encourage new electricity generation in the state crossed into the Federal Energy Regulatory Commission’s authority over the wholesale energy markets.

Most of the eight justices who heard the Feb. 24 oral arguments in Hughes v. Talen Energy Mktg. LLC seemed skeptical of the intentions of the Maryland Public Service Commission, which ordered utilities to enter into 20-year contracts with CPV Maryland LLC to build a new generation facility and bid into PJM Interconnection LLC capacity markets, which FERC oversees.

“I'm not sure why it is that when you say it was subject to FERC's jurisdiction that doesn't end the case right there against you,” Justice Elena Kagan said.

She added that it's FERC's authority “to set the rates and other terms of wholesale sales, and that's not for the states to do. So that means you're preempted.”

Scott Strauss argued on behalf of the Maryland Public Service Commission that states have the authority to regulate and build new power plants and facilities as they see fit. Maryland saw a need for new generation, and it entered into a long-term contract with CPV Maryland. However, he stressed that Maryland didn't select the price or impose it upon the utilities.

Preemption Arguments

Justice Sonia Sotomayor said the case is an example of conflict preemption, wherein a federal law preempts a state law that conflicts with the federal law.

She said that Maryland’s subsidy program intruded into FERC’s mechanism for setting wholesale electricity rates.

This was the argument that Paul Clement, who argued on behalf of Talen Energy Marketing LLC, a large electricity generation company, who said that Maryland's subsidy program directly targeted the FERC-controlled PJM market.

However, Sotomayor said she wasn't convinced the case was necessarily an example of field preemption, which would involve a broader ruling. In field preemption, a federal law can preempt an entire area, or field, so it leaves no room for state regulation.

But Ann O'Connell, assistant to the U.S. solicitor general who argued on behalf of FERC, said the Maryland subsidy program changes “the incentives of the people in the market in a way that conflicts with the market mechanism that FERC has set up. We think that shows both field and conflict preemption.”

Directly Targeting PJM Auction

O'Connell acknowledged that states have their own sphere of power to regulate retail rates and build new generation, which can have indirect effects on FERC's field of authority.

What FERC has issue with is state regulations that have direct impacts on the auctions that lie within FERC's authority, she said.

She argued that Maryland's program directly entered FERC's turf in requiring the contract to be bid and cleared in the PJM markets.

“In this case the problem is that, because of the bidding­and­clearing requirement, it's directly altering the incentives of the people in that market,” O'Connell said.

Prediction of Narrow Ruling

Experts predict a narrow ruling to come from the court, based on observations that the justices seemed convinced that FERC's authority preempts the Maryland program.

Joel Eisen, law professor at the University of Richmond School of Law, said the justices seemed pretty certain that FERC's authority was invaded.

“They appeared to be firmly convinced that no matter how the Maryland scheme was characterized, that the scheme intruded upon FERC jurisdiction,” Eisen told Bloomberg BNA Feb. 24.

He said a ruling will likely focus on “leaving room for state initiatives to support power plants, but striking down this particular scheme.”

Similarly, Christi Tezak, managing director of research at ClearView Energy Partners LLC, an energy research firm, told Bloomberg BNA Feb. 24, “I think there's a really good possibility that we get a really narrow ruling that says, ‘The real issue is these provisions that say bid-in and clear the capacity market and we'll pay you.' ”

Both Eisen and Tezak said they expect the court to reach a relatively quick decision and predict a ruling as soon as late April.

To contact the reporter on this story: Rebecca Kern in Washington at rkern@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com