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Hughes v. Talen Energy Marketing, LLC

United States Supreme Court

April 19, 2016

W. KEVIN HUGHES, CHAIRMAN, MARYLAND PUBLIC SERVICE COMMISSION, ET AL., PETITIONERS
v.
TALEN ENERGY MARKETING, LLC, FKA PPL ENERGYPLUS, LLC, ET AL. CPV MARYLAND, LLC, PETITIONER
v.
TALEN ENERGY MARKETING, LLC, FKA PPL ENERGYPLUS, LLC, ET AL

         Argued: February 24, 2016

          ON WRITS OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

          SYLLABUS

         [136 S.Ct. 1289] [194 L.Ed.2d 417] The Federal Power Act (FPA) vests in the Federal Energy Regulatory Commission (FERC) exclusive jurisdiction over wholesale sales of electricity in the interstate market, but " leaves to the States alone, the regulation of [retail electricity sales]." FERC v. Electric Power Supply Assn., 577 U.S. ___, ___, 136 S.Ct. 760; 193 L.Ed.2d 661. In Maryland and other States that have deregulated their energy markets, " load serving entities" (LSEs) purchase electricity at wholesale from independent power generators for delivery to retail consumers. Interstate wholesale transactions in deregulated markets typically occur through (1) bilateral contracting, where LSEs agree to purchase [136 S.Ct. 1290] a certain amount of electricity from generators at a certain rate over a certain period of time; and (2) competitive wholesale auctions administered by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), nonprofit entities that manage certain segments of the electricity grid.

         PJM Interconnection (PJM), an RTO overseeing a multistate grid, operates a capacity auction. The capacity auction is designed to identify need for new generation and to accommodate long-term bilateral contracts for capacity. PJM predicts demand three years into the future and [194 L.Ed.2d 418] assigns a share of that demand to each participating LSE. Owners of capacity to produce electricity in three years' time then bid that capacity into the auction for sale to PJM at rates the sellers set in their bids. PJM accepts bids until it has purchased enough capacity to satisfy anticipated demand. All accepted capacity sellers receive the highest accepted rate, called the " clearing price." LSEs then must purchase, from PJM, enough electricity to satisfy their assigned share of overall projected demand. FERC extensively regulates the structure of the capacity auction to ensure that it efficiently balances supply and demand, producing a just and reasonable clearing price.

         Concerned that the PJM capacity auction was failing to encourage development of sufficient new in-state generation, Maryland enacted its own regulatory program. Maryland selected, through a proposal process, petitioner CPV Maryland, LLC (CPV), to construct a new power plant and required LSEs to enter into a 20-year pricing contract (called a contract for differences) with CPV at a rate CPV specified in its proposal. Under the terms of the contract, CPV sells its capacity to PJM through the auction, but--through mandated payments from or to LSEs--receives the contract price rather than the clearing price for these sales to PJM. In a suit filed by incumbent generators (respondents here) against members of the Maryland Public Service Commission--CPV intervened as a defendant--the District Court issued a declaratory judgment holding that Maryland's program improperly sets the rate CPV receives for interstate wholesale capacity sales to PJM. The Fourth Circuit affirmed.

          Held :

          Maryland's program is preempted because it disregards the interstate wholesale rate FERC requires. A state law is preempted where " Congress has legislated comprehensively to occupy an entire field of regulation," Northwest Central Pipeline Corp. v. State Corporation Comm'n of Kan., 489 U.S. 493, 509, 109 S.Ct. 1262, 103 L.Ed.2d 509, as well as " 'where, under the circumstances of [a] particular case, [the challenged state law] stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,'" Crosby v. National Foreign Trade Council, 530 U.S. 363, 373, 120 S.Ct. 2288, 147 L.Ed.2d 352. Exercising its exclusive authority over interstate wholesale sales, see 16 U.S.C. § 824(b)(1), FERC has approved PJM's capacity auction as the sole ratesetting mechanism for capacity sales to PJM, and has deemed the clearing price per se just and reasonable. However, Maryland--through the contract for differences--guarantees CPV a rate distinct from the clearing price for its interstate capacity sales to PJM. By adjusting an interstate wholesale rate, Maryland's program contravenes the FPA's division of authority between state and federal regulators.

         That Maryland was attempting to encourage construction of new in-state generation does not save its program. States may regulate within their assigned domain even when their laws incidentally affect areas within FERC's domain. But they [136 S.Ct. 1291] may not seek to achieve ends, however legitimate, through regulatory means that intrude on FERC's authority over interstate wholesale rates, as Maryland has done here. See Mississippi Power & Light Co. v. Mississippi [194 L.Ed.2d 419] ex rel. Moore, 487 U.S. 354, 373, 108 S.Ct. 2428, 101 L.Ed.2d 322; Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953, 966, 106 S.Ct. 2349, 90 L.Ed.2d 943. Maryland and CPV analogize the contract for differences to traditional bilateral contracts for capacity. Unlike traditional bilateral contracts, however, the contract for differences does not transfer ownership of capacity from one party to another outside the auction. Instead, Maryland's program operates within the auction, mandating LSEs and CPV to exchange money based on the cost of CPV's capacity sales to PJM.

         Maryland's program is rejected only because it disregards an interstate wholesale rate required by FERC. Neither Maryland nor other States are foreclosed from encouraging production of new or clean generation through measures that do not condition payment of funds on capacity clearing the auction. Pp. 11-15.

753 F.3d 467, affirmed.

         Scott H. Strauss argued the cause for petitioners.

         Clifton S. Elgarten argued the cause for petitioner.

         Paul D. Clement argued the cause for respondents.

         Ann O'Connell argued the cause for petitioner as amicus curiae, by special leave of court.

         GINSBURG, J., delivered the opinion of the Court, in which ROBERTS, C. J., and KENNEDY, BREYER, ALITO, SOTOMAYOR, and KAGAN, JJ., joined. SOTOMAYOR, J., filed a concurring opinion. THOMAS, J., filed an opinion concurring in part and concurring in the judgment.

          OPINION

         GINSBURG, JUSTICE

          The Federal Power Act (FPA), 41 Stat. 1063, as amended, 16 U.S.C. § 791a et seq., vests in the Federal Energy Regulatory Commission (FERC) exclusive jurisdiction over wholesale sales of electricity in the interstate market. FERC's regulatory scheme includes an auction-based market [136 S.Ct. 1292] mechanism to ensure wholesale rates that are just and reasonable. FERC's scheme, in Maryland's view, provided insufficient incentive for new electricity generation in the State. Maryland therefore enacted its own regulatory program. Maryland's program provides subsidies, through state-mandated contracts, to a new generator, but conditions receipt of those subsidies on the new generator selling capacity into a FERC-regulated wholesale auction. In a suit initiated by competitors of Maryland's new electricity generator, the Court of Appeals for the Fourth Circuit held that Maryland's scheme impermissibly intrudes upon the wholesale electricity market, a domain Congress reserved to FERC alone. We affirm the Fourth Circuit's judgment.

         I

         A

          Under the FPA, FERC has exclusive authority to regulate " the sale of electric energy at wholesale in interstate commerce." § 824(b)(1). A wholesale sale is defined as a " sale of electric energy to any person for resale." § 824(d). The FPA assigns to FERC responsibility for ensuring that " [a]ll rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy subject to the jurisdiction of the Commission . . . shall be just and reasonable." § 824d(a). See also § 824e(a) (if a rate or charge is found to be unjust or [194 L.Ed.2d 420] unreasonable, " the Commission shall determine the just and reasonable rate" ). " But the law places beyond FERC's power, and leaves to the States alone, the regulation of 'any other sale'--most notably, any retail sale--of electricity." FERC v. Electric Power Supply Assn., 577 U.S. ___, ___, 136 S.Ct. 760, 193 L.Ed.2d 661, 667 (2016) ( EPSA ) (quoting § 824(b)). The States' reserved authority includes control over in-state " facilities used for the generation of electric energy." § 824(b)(1); see Pacific Gas & Elec. Co. v. State Energy Resources Conservation and Development Comm'n, 461 U.S. 190, 205, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983) (" Need for new power facilities, their economic feasibility, and rates and services, are areas that have been characteristically governed by the States." ).

         " Since the FPA's passage, electricity has increasingly become a competitive interstate business, and FERC's role has evolved accordingly." EPSA, 577 U.S. at ___, 136 S.Ct. 760, 193 L.Ed.2d 661, 670. Until relatively recently, most state energy markets were vertically integrated monopolies-- i.e., one entity, often a state utility, controlled electricity generation, transmission, and sale to retail consumers. Over the past few decades, many States, including Maryland, have deregulated their energy markets. In deregulated markets, the organizations that deliver electricity to retail consumers--often called " load serving entities" (LSEs)--purchase that electricity at wholesale from independent power generators. To ensure reliable transmission of electricity from independent generators to LSEs, FERC has charged nonprofit entities, called Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), with managing certain segments of the electricity grid.

         Interstate wholesale transactions in deregulated markets typically occur through two mechanisms. 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. After the parties have agreed to contract terms, FERC may review the rate for reasonableness. See Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U.S. 527, 546-548, 128 S.Ct. 2733, 171 L.Ed.2d 607 (2008) (Because rates set [136 S.Ct. 1293] through good-faith arm's-length negotiation are presumed reasonable, " FERC may abrogate a valid contract only if it harms the public interest." ). Second, RTOs and ISOs administer a number of competitive wholesale auctions: for example, a " same-day auction" for immediate delivery of electricity to LSEs facing a sudden spike in demand; a " next-day auction" to satisfy LSEs' anticipated near-term demand; and a " capacity auction" to ensure the availability of an adequate supply of power at some point far in the future.

         These cases involve the capacity auction administered by PJM Interconnection (PJM), an RTO that oversees the electricity grid in all or parts of 13 mid-Atlantic and Midwestern States and the District of Columbia. The PJM capacity auction functions as follows. PJM predicts electricity demand three years ahead of time, and assigns a share of that demand to each participating LSE. Owners of capacity to produce electricity in three years' time bid to sell that capacity to PJM at proposed rates. PJM [194 L.Ed.2d 421] accepts bids, beginning with the lowest proposed rate, until it has purchased enough capacity to satisfy projected demand. No matter what rate they listed in their original bids, all accepted capacity sellers receive the highest accepted rate, which is called the " clearing price." [1] LSEs then must purchase from PJM, at the clearing price, enough electricity to satisfy their PJM-assigned share of overall projected demand. The capacity auction serves to identify need for new generation: A high clearing price in the capacity auction ...


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