April 19, 2016

Supreme Court Decides Hughes v. Talen Energy Marketing, LLC

On April 19, 2016, the United States Supreme Court decided Hughes v. Talen Energy Marketing, LLC, No. 14-614, holding that Maryland’s program that provided subsidies to a new electricity generator through state-mandated contracts, but conditioned receipts of those subsidies on the new generator selling capacity into a wholesale auction regulated by the Federal Energy Regulatory Commission (FERC), was preempted by the Federal Power Act (FPA) because the FPA gives FERC exclusive jurisdiction over wholesale electricity in the interstate market.

The FPA, 16 U.S.C. § 791a et seq., gives FERC exclusive jurisdiction over wholesale sales of electricity in the interstate market, but leaves to the states the regulation of retail electricity sales. Wholesale is defined as the “sale of electric energy to any person for resale.” FERC’s regulatory program includes an auction-based market mechanism to ensure wholesale rates that are just and reasonable. In states that have deregulated their energy markets, entities called “load serving entities” (LSEs) purchase electricity wholesale from independent power generators for delivery to retail consumers. One of the ways interstate wholesale transactions occur in deregulated markets is through competitive wholesale auctions administered by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), which are nonprofit entities that manage pieces of the electricity grid. This process is extensively regulated by FERC.

This case involved an auction administered by an RTO that oversees the electricity grid in all or part of 13 states. The RTO predicts the electricity demand three years ahead of time, and assigns a share of that demand to each participating LSE. Owners of capacity to produce electricity for that time period bid to sell that capacity to the RTO at proposed rates. The RTO accepts bids until it has purchases of enough capacity to satisfy the projected demand. All accepted capacity sellers receive the highest accepted rate, which is called the “clearing price.” The LSEs then must purchase from the RTO enough electricity to satisfy their assigned share of the projected demand.

Maryland enacted its own regulatory program that provided subsidies to a new generator through state-mandated contracts, but conditions receipts of those subsidies on the new generator selling capacity into a FERC-regulated wholesale auction. Maryland selected the petitioner to construct a new power plant and required LSEs to enter into a 20-year pricing contract at a rate specified by the petitioner, CPV. CPV would then sell its capacity to the RTO through the auction, but it would receive the contract price, not the clearing price.

The incumbent generators filed suit, and the District Court issued a declaratory judgment holding that Maryland’s program improperly set rates for interstate capacity sales. The U.S. Court of Appeals for the Fourth Circuit affirmed, observing that state laws are preempted when they deny full effect to the rates set by FERC, even though they do not seek to tamper with the actual terms of an interstate transaction. The Fourth Circuit reasoned that Maryland’s program functionally set the rate that CPV received for its sales in a FERC-approved market auction, impermissibly conflicting with FERC policies.

The Supreme Court affirmed. It determined that Maryland’s program is preempted because it disregards the interstate wholesale rate required by FERC. The Court noted that a state law is preempted when Congress has legislated so comprehensively as to occupy an entire field of regulation, as well as when the challenged state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. FERC has exercised its exclusive authority over interstate sales by approving the RTO’s capacity auction as the sole rate-setting mechanism for capacity sales to the RTO, and as such, has determined that the clearing price is per se just and reasonable. The Court concluded that Maryland’s program set an interstate wholesale rate, which contravened FPA’s division of authority between state and federal regulators. The fact that Maryland was attempting to encourage construction of new in-state generation does not save the program, because states may not seek to achieve ends through regulatory means that intrude on FERC’s authority over interstate wholesale rates.

The Court limited its holding, specifically stating that the opinion did not address whether various other means that states may use to encourage development of new or clean generation are permissible. The Court added that nothing in the opinion should be read to foreclose any state from encouraging production of new or clean generation through measures untethered to a generator’s wholesale market participation.

Justice Ginsburg delivered the opinion of the Court, in which Chief Justice Roberts and Justices Kennedy, Breyer, Alito, Sotomayor and Kagan joined. Justice Sotomayor wrote a concurring opinion. Justice Thomas wrote an opinion concurring in part and concurring in the judgment.

Download the Opinion of the Court

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