Supreme Court Will Weigh the Scope of States' Authority over Their Electricity Mix

In what is shaping out to be a banner year for energy regulatory law wonks, the U.S. Supreme Court will hear oral arguments tomorrow in its second case this year addressing the boundary between state and federal authority over the electricity sector. While the first case, FERC v. Electric Power Supply Association (EPSA), concerned what the federal government can do, this case, Hughes v. Talen Energy Marketing, will address what the states can do. The Hughes case is important because it will help to determine the range of tools that states can use in influencing the mix of electricity generation that is built to address their needs.

The basic issue in Hughes is the extent to which the Federal Power Act (FPA), the statute that regulates much of the electric sector, restricts states' ability to make certain energy policy choices. The basic issue in EPSA was the scope of the Federal Energy Regulatory Commission's (FERC's) power under the FPA. The two concepts are linked because under the Supremacy Clause of the U.S. Constitution, states are not allowed to take on the role reserved exclusively for FERC under the FPA (FERC is responsible for ensuring that wholesale electricity prices are fair), or to regulate in a manner that otherwise irreconcilably conflicts with federal law. In oversimplified terms, states essentially cannot do FERC's job, prevent FERC from doing its job, or require anyone to take action that would violate FERC's rules.

The Case

In 2011, believing that reliability of the power grid in its state was at risk, Maryland took steps to develop more power plants. The Maryland Public Service Commission (MD PSC) solicited proposals for a new natural gas-fired power plant and eventually selected a winner from the pool of bidding power plant developers. The developer whose proposal was ultimately selected, Competitive Power Ventures (CPV), promised to construct a 661-megawatt (MW) power plant according to the following arrangement:

CPV would build the plant and sell its energy and capacity (a promise to be available if called upon to meet electricity demand during a specified period) into the regional wholesale markets regulated by FERC. Maryland's electric distribution companies--the companies that purchase power in the wholesale markets and deliver it to homes and businesses--would be required to pay (or receive from CPV) the difference between the wholesale market prices CPV received through its sales, and a fixed price proposed by CPV and agreed to by the MD PSC. This "contract for differences" thus guaranteed CPV a fixed income stream so long as it held up its end of the bargain. In return, Maryland would get some assurance that a new plant would be built to address its perceived reliability need.

A number of CPV's competitors filed suit, arguing that these contracts for differences were a sweetheart deal and illegal because Maryland intruded into FERC's exclusive jurisdiction over wholesale energy markets. In their briefs, they contend that the MD PSC's order exceeds state authority under the FPA. They argue that the state's order is "field preempted"--in other words, that Congress has forbidden the state to regulate in the area that it did, because the order intrudes on FERC's exclusive field of authority over wholesale sales of electricity. Alternatively, they argue that the MD PSC order is "conflict preempted" because even if it did not impermissibly regulate wholesale sales, it frustrates (i.e. conflicts with) FERC's ability to send its desired wholesale market price signals.

The MD PSC and CPV counter that the MD PSC's order is not field preempted because the FPA preserves states' traditional authority to determine their own generation mix. They argue that it is not conflict preempted because CPV complied with FERC rules when bidding into its markets, and because FERC's organized markets were intended to supplement other forms of contracting for electricity rather than replace them entirely. Maryland also argues that FERC remains free to determine whether CPV's wholesale sales are just and reasonable under the FPA. Maryland and CPV have had a rough go in the lower courts (as did New Jersey and CPV in a similar case considered in the U.S. Court of Appeals for the Third Circuit). The U.S. Court for the District of Maryland and the U.S. Court of Appeals for the Fourth Circuit both agreed with the companies challenging the MD PSC's order. But, in a move that surprised many observers and ran counter to the recommendation of the Solicitor General (the person who represents the United States before the U.S. Supreme Court), the Supreme Court agreed to hear the MD PSC and CPV appeals.

The Stakes

A decision reversing the Fourth Circuit's ruling against Maryland and CPV would make clear that states have a wide range of tools available to influence the make-up of their resource portfolios, including the ability to require contractual arrangements that alter the market signals sent by organized wholesale markets. The implications of a decision affirming the Fourth Circuit, however, are significantly more complicated, and would depend a lot on how the Court reaches its conclusion. A very broad ruling could limit the range of tools states can use to achieve their energy policy goals, whereas a narrow decision might effectively leave states with nearly all of the practical authority they already have. Whether the Court affirms or reverses the Fourth Circuit, it could use this case as an opportunity to clarify its test for preemption under the FPA. Scalia's death also raises the possibility that the Court could split 4-4, in which case the Fourth Circuit's decision would be affirmed (unless, improbably, the Court were to choose to reschedule the case for another round of arguments), but the Supreme Court's decision would have no precedential value. Such a decision would not bind courts in other regions of the country.

Based on legal theories similar to those at issue in Hughesseveral challenges have been brought against state policies both to promote clean energy and to provide lifelines to otherwise uneconomic fossil-fueled power plants. Our colleagues at the State Power Project track the challenges here. But Hughes involves a relatively unique set of facts, so it remains to be seen whether the Supreme Court's decision will provide any governing precedent one way or the other. This week's oral arguments may provide some hints on this front. Given the Court's decision to take the case over the recommendation of the Solicitor General, a relatively likely outcome is that the Court may, at minimum, narrow the Fourth Circuit's decision.

Regardless of how the Court decides Hughes, we anticipate that state efforts to promote energy efficiency and demand response (customers reducing their energy use upon request) will continue forward without legal hurdles, and that states will be able to move forward with renewable energy programs in a manner that is consistent with the Court's ultimate decision. States can and should continue to take an active role in ensuring that the grid of the future offers reliable service in a clean and efficient manner.

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