The U.S. Supreme Court blasts Maryland for distorting PJM’s capacity market, thus affirming the Fourth Circuit’s ruling that the Maryland Public Service Commission’s Generation Order is field preempted by FERC’s plenary authority to regulate “the sale of electric energy at wholesale in interstate commerce.” §824(b)(1). “[T]he law places beyond FERC’s power, and leaves to the States alone, the regulation of ‘any other sale’” FERC v. Electric Power Supply Assn., 577 U.S. , (2016), and the authority to site, permit and incentivize the construction of electric generating facilities. At issue is whether the State of Maryland exceeded its authority to incentivize the construction of electric generation when it caused a selected generator to bid into, clear and distort PJM Interconnection’s wholesale electric capacity market. In Hughes v. Talen Energy Marketing, LLC, Justice Ginsburg writing for a unanimous eight member court, turned against states and preserved federal authority and the integrity of FERC sanctioned wholesale capacity markets. To alleviate an in-state capacity shortage, Maryland sought to incentivize the construction of in-state electric power generating facilities, requiring such facilities to execute contracts for differences with “load serving entities”, i.e., electric distribution companies for the purchase and sale of electric capacity. The PSC’s approval of contracts was conditioned on the selected electric generators bidding the capacity “to-be-sold” into PJM’s capacity market and the successful clearing of such bids in the market. Competing electric generators filed suit against Maryland as a result. PPL EnergyPlus, LLC v. Nazarian, 753 F. 3d 467 (2014). Another program, established in the State of New Jersey was found preempted under federal law on similar grounds. PPL Energyplus, LLC v. Solomon, 766 F. 3d 241 (2014). However, the Court granted certiorari to cases arising in the Fourth Circuit only, consolidating them and captioning the consolidated matter as Hughes v. Talen Energy Marketing, LLC.
As part of the move toward “deregulation” (or restructuring) of the energy markets, FERC issued Order 2000 which fostered participation in Regional Transmission Organizations/Independent System Operators (RTOs/ISOs), with the expectation that the RTOs/ISOs would manage regional wholesale markets with increased efficiency. In deregulated markets, wholesale transactions “typically occur through two mechanisms.” Hughes v. Talen Energy Mktg., 578 U.S. , (slip op., at 3).
First is bilateral contracting–where a load serving entity (LSE) and an electric generator enter into an agreement for the purchase of a certain amount of electricity, at a certain rate, over a period of time. Id. Second is through a number of competitive wholesale auctions which are administered by an RTO–for example, a “same-day auction” is administered to purchase electricity for immediate delivery to face a sudden spike in demand. Id.
PJM Interconnection is a regional transmission organization (RTO) that (1) coordinates the movement of wholesale electricity; and (2) administers and monitors energy and capacity market auctions to serve electric load in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. PJM’s capacity market is memorialized in its Market Rules Tariff, which is filed, reviewed and eventually approved by the FERC. FERC regulates whether the terms of the PJM Tariff are just and reasonable, not unduly discriminatory or otherwise unlawful in accordance with Section 205 of the Federal Power Act (FPA). PJM’s capacity market is what is known as a Forward Capacity Market. Most RTOs and ISOs, including PJM forecast the control area’s requisite capacity, i.e, its installed capacity requirement, three years into the future and design the market accordingly in hopes of yielding that installed capacity requirement in the resulting auction. Electric generators that expect to be constructed, interconnected and operational three years into the future bid to sell capacity into PJM’s capacity market. PJM accepts the lowest generator bids first and continues to accept generator bids from lowest to highest until it reaches its installed capacity requirement. The highest bid that PJM accepts is known as the clearing price and that is the price that load serving entities pay to acquire the capacity. A high clearing price in the PJM market tends to incentivize the construction and market entry of new electric generating facilities. See id., at 4. Whereas, a low clearing price actually “discourages” the new entry of electric generation and causes uneconomic facilities to retire. Id.
Two FERC market rules are particularly relevant to the Hughes decision. First, the Minimum Offer Price Rule (MOPR) which requires “new generators to bid capacity into the auction at or above a price specified by PJM, unless those generators can prove that their actual costs fall below the MOPR price.” Id., at 6. Second, the New Entry Price Adjustment (NEPA) which “guarantees new generators, under certain circumstances, a stable capacity price for their first three years in the market.” Id.
Shortly after FERC rejected Maryland’s request that FERC extend the duration of the NEPA from three years to ten in 2009, the Maryland PSC promulgated the Generation Order at issue here. Id., at 6-7. Pursuant to the order, the PSC solicited proposals from companies for the construction of a new gas-fired electric generating facility and accepted the proposal of petitioner CPV Maryland, LLC. It then required that LSEs enter into a 20-year contract (which the parties refer to as a “contract for differences”) with CPV at a rate CPV specified in its accepted proposal. Id., at 7. Notably, under this contract for differences (CfD) ownership of capacity is not transferred from CPV to the LSEs. Rather, CPV sells this capacity on the PJM market, however Maryland’s program guarantees CPV the contract price rather than the auction clearing price.
As CPV sells its capacity exclusively into the PJM capacity market, it receives no payment if its capacity fails to clear the auction under the terms of its CfDs. On the other hand, CPV is guaranteed a certain rate if its capacity does so clear, and thus the Court found that “the contract’s terms encourage CPV to bid its capacity into the auction at the lowest possible price.” Id., at 7-8.
The first year, CPV bid capacity from its proposed generating facility into the PJM capacity auction, which cleared at the MOPR rate, and therefore CPV was eligible to have its capacity purchased but receive a rate different from what would have been its wholesale rate in the market.
Justice Ginsburg likens Maryland’s program to the State determinations that the Court abrogated in Mississippi Power & Light v. Mississippi, 487 U.S. 354 (1988), and Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953 (1986), where the states of Mississippi and North Carolina each “determined that FERC had failed to ensure the reasonableness of a wholesale rate” and refused to allow the local utilities retail cost recovery on their FERC approved wholesale rates. Id., at 13. It is clear that Maryland did not interfere with a utility’s right to retail cost recovery of its wholesale rate; however, it did interfere with and distort the outcome of the FERC approved PJM capacity auction by requiring the program selected electric generator to bid into the PJM capacity auction, clear that auction, and receive a portion of its contract payment as plus or minus the difference between its auction clearing price and the contract price. The program selected generator had the benefit to bid into the auction lower than other electric generators because its marginal costs were guaranteed to be paid by the LSE in the out-of-market contract. All that was important is that the generator’s bid cleared the auction and it did so at the MOPR rate, and thusly suppressed the capacity clearing price, distorting the auction results and wholesale rate. Justice Ginsburg reasons that “Mississippi Power & Light and Nantahala make clear that States interfere with FERC’s authority by disregarding interstate wholesale rates FERC has deemed just and reasonable, even when States exercise their traditional authority over retail rates or, as here, in state generation.” Hughes at 14.
Again, out-of-market bilateral contracts are lawful under the Federal Power Act. Because FERC had approved the PJM capacity auction as the sole rate-setting mechanism for sales of capacity to PJM, and has deemed the clearing price per se just and reasonable, the Court found that Maryland’s program sets an interstate wholesale rate (the rate guaranteed under its CfD), and it did so in contravention of the FPA’s division of authority between state and federal regulators. By requiring CPV to participate in the PJM capacity auction, but guaranteeing a rate distinct from the clearing price for its capacity sales, the Court found that through this CfD arrangement Maryland was “[d]oubting FERC’s judgment.” Id., at 12.
Finally, the Court presented states with a guiding dichotomy–tethered v. untethered–and quoted from the Respondent’s Brief: “Nothing in this opinion should be read to foreclose . . . States from encouraging production of new or clean generation through measures ‘untethered to a generator’s wholesale market participation.’” Id. (citing Brief for Respondents 40).
The Court explicitly states “Our holding is limited: We reject Maryland’s program only because it disregards an interstate wholesale rate required by FERC.” Id., at 15. Accordingly, the Court found it need not and did not address the permissibility of various other state measures that may be employed to encourage development of new and/or clean generation; examples of such measures include “tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector.” Id. “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.” Id., at 15.