Did Maryland usurp the Federal Energy Regulation Commission’s authority to approve rates in federal energy markets by entering fixed-rate contracts with an energy provider?
The Federal Power Act (“FPA”) gives the Federal Energy Regulatory Commission (“FERC”) power to regulate interstate energy markets. If the FPA does not address a particular area of regulation, then states can regulate that area. One of FERC’s powers is approving wholesale energy rates. In Hughes, the Court will consider whether Maryland encroached on FERC’s rate-setting power by entering fixed-rate contracts with an energy producer. Petitioners W. Kevin Hughes, the chairman of the Maryland Public Service Commission, and CPV Maryland, LLC (“CPV”), the “energy producer” in this case, argue that Maryland is within its rights to secure new sources of energy through competitive bidding. Maryland does not usurp FERC’s authority unless it actually dictates what price producers sell at, which it did not, Hughes and CPV claim. But respondent Talen Energy Marketing, a CPV competitor, contends that Maryland overstepped its authority by offering fixed-rate contracts, which Talen claims essentially guarantee revenue, to entice bidders like CPV. The outcome of this case may implicate state and FERC regulation of energy markets, and the growth of renewable energy.
Questions as Framed for the Court by the Parties
When a seller offers to build generation and sell wholesale power on a fixed-rate contract basis, does the FPA field-preempt a state order directing retail utilities to enter into the contract?
Does FERC’s acceptance of an annual regional capacity auction preempt states from requiring retail utilities to contract at fixed rates with sellers who are willing to commit to sell into the auction on a long-term basis?
The Federal Energy Regulatory Commission (“FERC”) regulates interstate electricity markets. To that end, FERC “authorized the creation of ‘regional transmission organizations,’ to oversee  multistate markets.” See PPL EnergyPlus, LLC v. Nazarian,753 F.3d 467, 472 (2014). “FERC rules encourage the construction of new plants and sustain existing ones . . . , preclude state distortion of wholesale prices while preserving general state authority over generation sources . . . , [and] satisfy short-term demand and . . . long-term supply.” Seeid.at 473.
In 1999, Maryland moved from locally regulated, vertically integrated energy firms, towards federal interstate energy markets by passing the Electric Customer Choice and Competition Act (“ECCCA”). See Nazarian, 753 F.3dat 473. By participating in the federal market, Maryland gave up its regulatory authority over energy firms. See id. But Maryland soon believed that the Reliability Pricing Model (“RPM”) used in the federal market failed to effectively incentivize new energy generation in the Maryland area. See id.The RPM “determine[d] the appropriate price per unit” for energy three years in the future; firms could then bid on electricity to ensure they met their future needs. See id. at 472.
Responding to the perceived failure, the Maryland Public Service Commission (“MPSC”) issued a Generation Order, which solicited bids to build a new power plant covering part of Maryland and all of Washington, D.C. See Nazarian, 753 F.3dat 473.The MPSC sweetened the deal by offering “fixed, twenty-year revenue streamsecured by contracts for differences.” See id.Maryland would compel its local electric distribution companies (“EDCs”) to enter the contracts for differences (“CfDs”) with the successful bidder. See id.
PetitionerCPV Maryland, LLC (“CPV”) won the bid. See Nazarian, 753 F.3dat 473. After constructing the plant, CPV was supposed to buy and sell energy (for current electricity needs) and capacity (for future electricity needs) in the federal markets. See id. To sell capacity, CPV had to “clear” the market: CPV had to sell capacity below a certain price set by the regional transmission organization at an auction. See id. at 472. In its winning bid, CPV set its “revenue requirements per unit of energy and capacity sold.” See id.at 473. If CPV cleared the market, but missed its revenue requirements, the EDCs would reimburse CPV the difference between CPV’s revenue requirements and its actual sales. See id.at 473–74. And under its contract with the EDCs, if CPV’s sales exceeded its revenues, CPV reimbursed the EDCs the difference. See id.at 474.
CPV’s competitors, Talen Energy Marketing, LLC and others (collectively, “Talen”), sued CPV and MPSC. They alleged that “the Generation Order [was] unconstitutional,” because it lowered prices, reduced their revenue, and distorted “price signals that market participants rely on.” See Nazarian, 753 F.3dat 474.
The U.S. District Court for the District of Maryland ruled that the Generation Order was preempted. The district court explained that the CfD payments in effect “fixed” the prices CPV received at capacity auctions, but the FERC had “exclusive authority to set interstate wholesale rates.” See Nazarian, 753 F.3d at 474.On appeal, the U.S. Court of Appeals for the Fourth Circuitaffirmed the decision below. The court conceded that incidental effects of state regulation upon the federal markets may not cause preemption, but concluded that the Generation Order imposed “the state’s preferred incentive structure” over the FERC’s structure. See id.at 479.
CPV filed a petition for writ of certiorari with the U.S. Supreme Court, which the Court granted on October 19, 2015. See Brief for Petitioner, CPV Maryland, LLC at 3. Petitioner W. Kevin Hughes is the current Chairman of MPSC; his case was consolidated with CPV’s. See Brief for Petitioners, W. Kevin Hughes, et al. at ii.
The Federal Power Act (“FPA”) grants FERC regulatory authority over interstate electricity markets; its authority includes approving rates in wholesale markets. The Court will determine whether Maryland impermissibly interfered with FERC’s rate-setting power. See Brief for Petitioner, CPV Maryland, LLC at 1; Brief for Respondent, Talen Energy Marketing, LLC at 1.
Hughes and CPV concede FERC’s authority in wholesale markets, but argue that the FPA carefully reserved many aspects of energy regulation to the states. Maryland, they argue, had the authority secure new power plants through competitive bidding. And Maryland did not “set rates” in doing so. But Talen argues that Maryland unambiguously dictated wholesale energy rates by “guarantee[ing] CPV a dollar-per-megawatt-hour . . . rate” for energy sold in the federal market. See Brief for Respondent at 27–28.
DOES MARYLAND’S GENERAL ORDER FALL IN FERC’S JURISDICTION OVER WHOLESALE ENERGY SALES?
Hughes and CPV argue that the FPA “expressly preserves state authority over matters not assigned to FERC.” SeeBrief of Petitioner, CPV at 29. They explain that the FPA grants wholesalers the right to set rates, and FERC the authority to change those rates if the agency determines that they’re unreasonable. Meanwhile, the states retain the right to seek new sources of power generation to meet their needs. Seeid. at 30. Accordingly, Hughes and CPV contend that the correct test for preemption is whether Maryland required CPV to accept a certain price to win the bid. Otherwise, Maryland simply exercised its right to seek new energy sources. They conclude Maryland did not require a certain price, because CPV set its own price in the bid. See Brief for Petitioners, Hughes at 26–28; Brief of Petitioner, CPV at 28–29. Accordingly, there is no preemption. See Brief for Petitioner, CPV at 28–30.
Hughes adds that Congress made a clear distinction between regulation of wholesale sales and purchases. FERC has limited authority to regulate purchases, because states “are in the best position” to assess their citizens’ needs. See Brief for Petitioners, Hughes at 29–30 (internal citation omitted). Additionally, CPV argues that in Oneok, Inc. v. Learjet, Inc., the Court concluded that laws and programs “target[ing]” objectives within the state’s jurisdiction are not preempted even if they overlap with the federal regulation. See Brief for Petitioner, CPV at 32. And Hughes dismisses the Fourth Circuit’s reliance on the Court’s decisions in Mississippi Power & Light Co. v. Mississippi ex rel. Mooreand Nantahala Power & Light Co. v. Thornburg. Hughes says they do not apply, because they dealt with state regulation “after FERC accepted a wholesale rate.” See Brief for Petitioners, Hughes at 34.
Talen contends that any attempt to regulate the rates wholesalers receive falls in FERC’s jurisdiction. See Brief for Respondent at 30. Congress explicitly granted FERC power to regulate wholesale rates. See id.at 31. Talen contends that Oneok is inapplicable. In that case, Talen claims the Court upheld a state anti-trust law that affected wholesale rates because the law applied broadly, not just to energy retailers. See id.at 32. Talen argues that Mississippi Power and Nantahala illustrate that the states cannot “collaterally attack” FERC’s regulation of wholesale sales by using powers reserved to them. See id.at 33. And Talen rejects Hughes’ argument that Mississippi Power and Nantahala apply only after FERC accepts a wholesale rate; otherwise, a state could avoid preemption by disregarding federal law before the fact rather than after. See id.at 33–34. Talen argues that whatever process the state uses to choose a rate, competitive or otherwise, is preempted by the FERC-approved rate in every instance. See id.at54.
CAN MARYLAND’S ACTIONS COEXIST WITH FERC REGULATION?
Hughes and CPV argue that Maryland’s actions can stand alongside FERC regulation. See Brief for Petitioners, Hughes at 27–28; Brief for Petitioner, CPV at 45. They argue that the Court has warned against presuming that state and federal laws conflict when Congress explicitly allows, as it did in the FPA, states to regulate the same field as federal agencies. See Brief for Petitioner, CPV at 45. Rather, the conflict must be “extensive and disruptive.” See id. (internal quotation omitted). CPV maintains that Maryland’s actions are not disruptive because FERC’s ability to regulate wholesale prices at auction was not obstructed. See id.at 45–46.
Talen maintains that the contract Maryland entered into directly challenges at FERC’s control of wholesale rates. See Brief for Respondents at 35. Indeed, Talen argues that the Supremacy Clause is the be all, end all of the argument: In any event in which state law conflicts with federal law, the latter must ultimately prevail without any accommodation to the former. See id.at 45. Hughes and CPV contend that FERC took steps to reconcile perceived tension between the General Order and its regulatory scheme, but Talen insists that the reconiliation does not legitimatize Maryland’s actions. See id.at 43–44.
Are Maryland’s actions bilateral contracts?
Hughes argues that the CfDs served essentially the same purpose as a bilateral contract, which is permissible under the FPA. This exception allows states to adapt to various needs and circumstances. See Brief for Petitioners, Hughes at 40–41. But Talen asserts that Maryland’s contract was not a bilateral contract since it was merely a means through which the state reimbursed the seller for the sale via a third-party payment. See Brief for Respondentat 48.
The Court’s decision in this case could affect states’ ability to expand energy markets, FERC’s control over private energy contracts, and the growth of renewable energy.
BALANCING STATES’ ABILITY TO ENCOURAGE ENERGY GROWTH WITH CONCERNS ABOUT MARKET FAIRNESS
The American Public Power Association (“APPA”) and the National Rural Electric Cooperative Association (“NRECA”) argue that the Fourth Circuit’s decision “threatens the operation of wholesale energy markets,” by preventing “buyers and sellers” of energy from “negotiat[ing] custom agreements” to address their “commercial needs.” See Brief of Amici Curiae American Public Power Association and National Rural Electric Cooperative Association (“APPA & NRECA”), in Support of Petitioner at 11–12. Energy firms will not be able to obtain “the right resources in terms of energy, fuel diversity, grid support and [a] host of other considerations,” and investors will not want to start energy projects “for the payoff of  one-year contract[s] at  uncertain price[s] three years in the future.” See id.at 12–14. Private contracts, like the CfDs, reasonably protect energy firms from the fluctuations inherent in the energy market. See id.at 22–23.
And the Fourth Circuit’s decision could detrimentally affect the renewable energy market. The American Wind Energy Association (“AWEA”) explains that states use private contracts to support renewable energy programs, a practice which may be stymied by wasteful and costly litigation over whether a particular program interferes with the FERC’s jurisdiction. See Amicus Curiae American Wind Energy Association (“AWEA”), in Support of Petitioners at 9–10.
But Talen contends that FERC’s policies foster a market with equal playing fields for new and old energy competitors. See Brief for Respondents, Talen Energy Marketing, LLCat 37. The Fourth Circuit’s decision ensures that energy firms that are not sufficiently competitive either innovate or exit the market, which lowers prices for consumers and increases efficiency in the industry. See id.Some leading economists argue that the Generation Order insulates CPV from price fluctuations in the market by guaranteeing its revenue through CfDs. This undermines the market, because CPV has no incentive to consider “whether the market-clearing price would cover its economic costs.” See Amici Curiae Leading Economists, in Support of Respondent 8–9. Allco Renewable Energy Limited (“Allco”) argues that if states can compel energy utility firms to enter into preferable transactions, they will undercut FERC’s control over the federal energy markets. See Amicus Curiae Allco Renewable Energy Limited, in Support of Respondent at 29. States could then compel utilities to contract at any price and for any reason, which would defeat FERC’s goal of creating competitive markets. See id.
Hughes will determine the extent to which Maryland can promote the construction of new energy generators without encroaching on FERC’s jurisdiction over wholesale rate setting. See Brief for Petitioner, CPV Maryland, LLC at i. Hughes and CPV contend that Maryland’s Generation Order is within the powers reserved to the states under the FPA, and compatible with the FERC regulatory scheme. See id.at 28, 37; Brief for Petitioners, W. Kevin Hughes, et al. at 27–29. But Talen Energy Marketing claims that Maryland’s Generation Order works to set wholesale rates and cannot be reconciled with FERC’s authority. See Brief for Respondents, Talen Energy Marketing, LLC at 27–28. The Court’s ruling will impact how states manage their energy utilities and help define the scope of state and federal authority in divvying up the energy markets.
Robin Bravender, No News May Be Good News for FERC in Grid Case, E&E Publishing, LLC (Jan. 13, 2016).
Robert Walton, Supreme Court Takes Up New Federal-State Power Authority Case, Utility Dive (Oct. 21, 2015).