The Supreme Court today decided its second major case this year addressing the scope of state and federal authority over the electric power sector. Once again, the opinion contains good news for clean energy.
Today’s ruling in Hughes v. Talen Energy Marketing, LLC, focused on a program the State of Maryland initiated to incentivize construction of a new natural gas plant. However, other states, wind and solar companies, and environmental advocates had been watching this case closely to understand any potential implications for states’ ability to promote and procure zero-carbon renewable energy.
There was some concern that the Supreme Court might issue a decision significantly restricting states’ ability to promote and procure clean energy, which stemmed from an understanding that states often direct and encourage utilities to procure renewable energy via long-term contracts some viewed as similar to Maryland’s program at issue in Hughes. A broad decision by the Court could have called into question the ability of states to carry out these programs even when they do not directly mirror Maryland’s program.
Fortunately, the Supreme Court’s eight justices put this fear to rest today in an opinion emphasizing that the very specific features of Maryland’s program (described below) were its critical flaw from a jurisdictional perspective. The Court’s opinion contains no legal showstoppers that would prohibit states from pursuing their own clean energy agendas. In fact, the Court specifically noted that its decision allows states to continue to use a wide range of tools to incentivize clean energy.
FERC, the lower courts considering this case, and now the U.S. Supreme Court have emphasized that they want to avoid interfering with state prerogatives, especially as pertains to clean energy. But Maryland’s specific programs to incentive fossil fuel power plants couldn’t survive on technical grounds.
Also, similar to its decision in FERC v. Electric Power Supply Association, the other major electricity case the Supreme Court decided this year, the high court recognized the complexity of the electric system and the integrated nature of state and federal authority over the electric grid. As our electric system continues the transformation to one driven by carbon-free wind, solar and other technologies, the reality that states and the federal government will need to work together to achieve common goals increases.
Maryland designed the program in question to incentivize construction of a new natural gas plant. The state intended to address perceived electric grid reliability-related needs through a structure known as a “contract for differences,” or “CfD.” This type of contract is where a power plant owner is guaranteed fixed revenues through the payment of a sum that depends on the reimbursement that the owner gets through the plant’s participation in wholesale energy and capacity markets overseen by the Federal Energy Regulatory Commission, or “FERC.”
Essentially, Maryland held a competitive proposal process for new natural gas plants and then required its electric utilities to guarantee the winning power plant’s developer, Competitive Power Ventures or “CPV,” with a fixed income stream, so long as CPV constructed the plant and successfully sold the plant’s energy and capacity into the organized wholesale markets.
Power plant developers that did not win in Maryland’s competitive process sued the state in the District Court, stating that Maryland was interfering with FERC’s jurisdiction. The district court, and the Fourth Circuit on appeal, agreed with the competing power plant developers and the Supreme Court agreed to review the case.
The legal issues
We’ll provide a more in-depth legal review in the coming days, but here’s the upshot:
The Supreme Court concluded that Maryland intruded on FERC’s authority to oversee the prices for wholesale electricity sales, but only because of a very particular feature of the Maryland program. As the Supreme Court put it, by requiring modification of the price CPV would receive based on CPV’s payment in wholesale markets overseen by FERC, rates which FERC had already approved, “Maryland’s program . . . disregard[ed] an interstate wholesale rate required by FERC.”
As noted in a prior blog, the basic issue in Hughes was 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. In addressing this question, the Court concluded that Maryland’s program crossed the line of what is permissible, but only because of the unique way in which it superseded FERC’s approved prices. Justice Ruth Ginsburg clarified that the “fatal defect” in Maryland’s program was that it conditioned payment to CPV on the generator first selling its resources into the organized wholesale markets overseen by FERC. Because payment was conditioned in this manner, Maryland’s program essentially “second-guessed” FERC’s determination that the prices arrived at through operation of those markets were reasonable. In other words, the Supreme Court’s decision is extremely narrow.
Although today’s decision will not entirely preclude future challenges that test the edges of state and federal authority, the Hughes decision avoided a broad ruling that would have jeopardized many state clean energy programs. States such as New York and California should continue to chart a bold vision for clean energy, using all the tools at their disposal. Where requiring long-term power purchase agreements is the least-cost and most effective solution for spurring new wind and solar power, states should draw upon this mechanism in addition to other policies that guarantee that desired clean energy outcomes are achieved.