Last week, the Supreme Court ruled in favor of the Federal Energy Regulatory Commission in a case focused on a Maryland incentive program initiated to encourage new natural gas generation. How does the court's decision impact a state's ability to obtain new generating capacity? During today's OnPoint, Joseph Hall, a partner at Dorsey & Whitney and co-chair of Dorsey's Energy Industry Group, explains how this ruling will shape the future of state decisions on new generation.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Joseph Hall, a partner at Dorsey & Whitney and co-chair of Dorsey's Energy Industry Group. Joe, it's nice to have you on the show.
Joseph Hall: Great to be here. Thanks Monica.
Monica Trauzzi: Joe, last week the Supreme Court upheld FERC's jurisdiction over wholesale electricity markets. It was a case focused on an incentive program in Maryland. They had put it in place to encourage new natural gas generation. How did the court believe the state had invaded FERC's authority?
Joseph Hall: Well, this is a really interesting case. To make a long story short, the FERC and the states are supposed to act in conjunction when regulating the power market.
In this case, FERC had set up a model to provide resource planning and generation on a long-term basis. The state didn't agree with the model in terms of its ability to insight generation to go into Maryland. So it, in effect, set up a program through a series of contractual arrangements that the court felt actually set wholesale rates. In other words, rates that are sales for resale. Under the law that governs the federal organization that sets up the auction, they are supposed to be the entity setting the wholesale sale subject to FERC review or setting up the terms of the condition of the auction itself.
Monica Trauzzi: The ruling is seen as narrow, but how does it affect a state's ability to obtain new generating capacity?
Joseph Hall: Well I think it's going to depend on the state and what they want to do. The interesting thing about this is the Supreme Court took the case, which means at least they are thinking about these issues generally for whatever reason. So they are by virtue of providing a ruling, sending a message to the industry and actually to FERC and the states that they're looking at this stuff very closely.
But at the same time they were very careful to make sure that they weren't taking away other tools that states may have in their toolbox to set up whatever programs they want. So what they said here in this particular case, Maryland through this particular program and these particular sets of contracts, they've setup an arrangement in a way that violates a particular provision in a very, very comprehensive set of rules and regulations governing the way auctions are done in the mid-Atlantic U.S.
Monica Trauzzi: But does this usher in a new phase of challenges that we could see down the line --
Joseph Hall: Oh absolutely --
Monica Trauzzi: -- that concern actions a state takes?
Joseph Hall: Absolutely. What you have here are 50 different states, 47 of them are basically required to work with FERC. Six or seven different markets. So even where you don't have markets you have very complex relationships between the different utilities.
The industry itself is really struggling to think about all types of issues: environmental issues, integration of renewables, new technology, distributed generation. Each state has a mandate to ensure its rate payers get the best, most cost-effective, reliable power possible. So they may have very different views from the FERCs as to how you achieve that goal within their borders.
So there will be a lot of programs coming up, particularly if the carbon plan goes forward. Each of those to the extent they interfere with any contract are subject to a pre-emption claim.
Monica Trauzzi: Let's talk about the Clean Power Plan. How does this decision affect a regulation like the CPP which will have a dramatic impact on the shape that electricity markets take and the energy sector in general?
Joseph Hall: It's interesting. For the energy Supreme Court policy wonks that may be tuning in now, if you look at the case decided by the Supreme Court on Tuesday, a lot of them were cited by those who were opposing the Clean Power Plan in their briefs.
Whatever happens with the Clean Power Plan, whether it goes forward or whether it stalls, the bell has been rung, for lack of a better term, and states are thinking about these issues and they're in particular thinking about the integration of renewables.
So again, as they're thinking about these programs, if they do anything that interferes with a FERC tariff or a FERC contract, whether it's in an organized market or not, they're subjecting themselves to pre-emption claim.
That's where this gets really, really complicated because, again, let's assume the CPP does go forward, you could have 50 different plans or 45 different plans, seven different organized markets. Then where you don't have the organized markets, you have dozens if not hundreds of contracts that all could be impacted by it. FERC ultimately is going to have say as to how those particular state programs impact the specific FERC contracts.
Monica Trauzzi: Ultimately does this ruling bolster FERC's power?
Joseph Hall: Yes, it does. Now the court was very specific in that it said it bolsters FERC's power with respect to this particular auction in PJM and quite frankly, the idea of FERC having authority over wholesale sales or wholesale auctions isn't new, but you have to look at this in the context of another Supreme Court case that came out about two months ago that also granted jurisdiction over something that arguably got closer to retail transactions.
So I think a lot of states are looking at this and saying, all right, well I think we can distinguish this particular incentive program in Maryland from what we want to do. There are lots of different ways you can provide incentives, tax credits, land grants, you name it.
At the same time, I think FERC probably very ... is feeling pretty happy about itself, but they did to think about this, too. As the industry is thinking about renewables and new technologies and all these different state plans arise, FERC really needs to think long and hard about putting itself in a position where by law it has to act in order to parachute in and arbitrate a dispute between parties contesting whatever state plan or state issue that could theoretically start to dip into FERC's jurisdiction and there are a lot of them.
Monica, actually I meant to bring a copy of the PJM tariff and put it on your table because it would have made a thud because it's about 3,000 pages. Traditionally these tariffs just govern sales and planning and transmission, but again, as these new technologies distribute generation and storage come in the market, you're seeing them getting pulled into these wholesale organizations. That's slowly pushing the line closer and closer and closer to that retail transaction that the states have traditionally had jurisdiction over.
Monica Trauzzi: The game is changing.
Joseph Hall: The game is certainly changing.
Monica Trauzzi: We'll end it right there. Thanks for coming on the show.
Joseph Hall: Thank you.
Monica Trauzzi: Thanks for watching. We'll see you back here tomorrow.
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