SUPREME COURT

Court ruling sets stage for more conflict with states

The Supreme Court's unanimous decision yesterday upholding federal regulators' exclusive jurisdiction over wholesale electricity markets may be just the beginning of a string of cases testing how far a state can go in providing incentives for power generation.

The 8-0 ruling is a victory for the Obama administration and the companies that challenged Maryland's incentives and a defeat for states that wanted the justices to uphold the program encouraging new natural gas generation.

"This court decision today says the states went too far in essentially fiddling with the wholesale power markets," said Stephen Humes, a partner with Holland & Knight in New York.

"The states have limits as to what they can do, but they still enjoy a cooperative role with the federal government in helping consumers obtain access to energy at reasonable prices. That's really the theme of the decision," he said.

The Supreme Court's decision in Hughes v. Talen Energy Marketing and CPV Maryland LLC v. Talen Energy Marketing rested on whether Maryland's incentive program for new gas-fired generation strayed into the Federal Energy Regulatory Commission's territory. The court's short answer: It did.

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Under the Maryland scheme, generator CPV Maryland would sell capacity on the wholesale market in the PJM Interconnection. If CPV doesn't clear a certain price at auction, utilities cover the difference, guaranteeing a rate for CPV. But that price guarantee -- effectively a subsidy -- takes the program too far, the justices ruled, because the Federal Power Act gives FERC exclusive jurisdiction over wholesale power rates.

"By adjusting an interstate wholesale rate, Maryland's program invades FERC's regulatory turf," Justice Ruth Bader Ginsburg wrote.

Travis Kavulla, president of the National Association of Regulatory Utility Commissioners, reacted to the "narrow ruling" by saying in a statement that "following the Supreme Court's logic, it seems possible that the State of Maryland could have accomplished substantially the same result of obtaining new generating capacity in the state, just so long as it did not condition the generator's compensation on the wholesale market's clearing price for capacity."

As a result, "[t]he line between the federal and state jurisdictions appears largely unaltered," Kavulla said.

But he predicted that it "inevitably will result in further litigation of these issues by leaving many open questions. Someday soon, consumers, utilities, power generators, and regulators alike will need greater certainty about what is and is not permissible on the part of federal and state regulators. But today is not that day."

The win for FERC doesn't shut out states from proactive planning -- a point Ginsburg emphasized in the opinion.

"We reject Maryland's program only because it disregards an interstate wholesale rate required by FERC," she wrote, adding that the decision should not keep states from "encouraging production of new or clean generation" through other measures.

"So long as a State does not condition payment of funds on capacity clearing the auction, the State's program would not suffer from the fatal defect that renders Maryland's program unacceptable," the justice wrote.

Justice Sonia Sotomayor echoed that point in her concurring opinion, noting that "pre-emption inquiries related to such collaborative programs are particularly delicate." The court's ruling, she wrote, should be viewed as a clear rebuke to state interference in wholesale rates but not as a general order against state action.

"The Court, however, also rightly recognizes the importance of protecting the States' ability to contribute, within their regulatory domain, to the Federal Power Act's goal of ensuring a sustainable supply of efficiency and price-effective energy," Sotomayor said. Justice Clarence Thomas also wrote a concurring opinion that joins in the decision of the case but clarifies his views on pre-emption.

The court's decision further defines the fuzzy line between federal and state jurisdiction over electricity markets, an area the court has waded into several times in recent cases.

In January, the court found in favor of a controversial FERC rule aimed at encouraging energy conservation in wholesale power markets (EnergyWire, Jan. 26).

The FERC rule was alleged to have strayed into state jurisdiction over retail electric rates. But the agency's involvement in state-regulated retail rates was merely incidental, the court said. This week's opinion suggests that similar "incidental" state involvement in FERC's domain would not be prohibited, so long as the states don't actively interfere with wholesale rates.

"I think the case is an important one in what is likely to be a series -- and I presume they won't all reach the Supreme Court -- that are kind of working out the contours of the edges of state federal jurisdiction around resource procurement," said Allison Clements, director of the Sustainable FERC Project at the Natural Resources Defense Council.

The ruling "provides some clear parameters on the Federal Power Act so that states have flexibility to work within those parameters," she said.

"States, of course, may regulate within the domain Congress assigned to them even when their laws incidentally affect areas within FERC's domain," Ginsburg wrote. "But states 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."

Kevin Hughes, chairman of the Maryland Public Service Commission, expressed disappointment but said he was "pleased the decision reaffirms the right of states to procure new generation. We think the Court's opinion provides some clarity for how states can encourage new, clean and renewable generation going forward."

John Shelk, president of the Electric Power Supply Association, some of whose members brought the case, said the ruling "strengthens FERC's hand at a critical time when it comes to properly defining the appropriate roles for federal and state actions impacting wholesale power markets."

John Hanger, former secretary of policy and planning for Pennsylvania and former chairman of the state's Public Utility Commission, asserted that the court's ruling "makes it clear" that states and the federal government can provide incentives to build cleaner generation. But, he said, where the pricing of a new power plant or a subsidy for an existing plant "is directly affecting the wholesale price, then you are crossing a line."

Hanger cited the recent approval in Ohio of customer payments into the billions of dollars to prop up struggling coal and nuclear plants owned by American Electric Power Co. Inc. and FirstEnergy Corp. (EnergyWire, April 1).

Calling the action by the Public Utilities Commission of Ohio a "travesty," Hanger said he hopes it is challenged before FERC and makes it way to the Supreme Court.

"It's virtually certain that we're going to see future disputes attempting to find new ground where the court left the door open as it did at the end of the opinion," Holland & Knight's Humes said.

"You can be sure that there will continue to be cases percolating through the courts, whether it's a disgruntled bidder or a competitive company that simply feels a state program has gone too far," he said.

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