Energy Fact & Opinion: SCOTUS Slaps Maryland in Hughes v. Talen Energy Marketing
April 25, 2016
- On April 19, the Supreme Court ruled 8-0 that Maryland had overstepped its authority and interfered in an area that is reserved for the federal government when it contracted new electric power generation in Maryland.
- Under the Federal Power Act, wholesale and interstate transactions are the domain of the federal government, via the Federal Energy Regulatory Commission (FERC), while states have authority over retail transactions, including control over in-state generation facilities.
- Maryland is a participant in the PJM wholesale electricity market, which serves all or part of 13 mid-Atlantic and Midwestern states and the District of Columbia. The state sits at a particularly congested part of the grid and wants to incentivize new generation in the state to help bring down high local prices.
- PJM has a capacity market that is specifically designed to provide incentives to new generation. Maryland suggested changing the rules of the capacity market to address what it considered to be a generation shortfall. FERC rejected this suggestion.
- After its proposal was rejected by FERC, and in order to rectify a situation that it perceived as unsatisfactory, Maryland contracted for a new power plant under a “contract for difference.” Under this contract, the power would not be sold directly to a distribution utility, as under a traditional bilateral power contract, but would be sold directly into the PJM wholesale market.
- Despite being sold into the wholesale market, however, the generator would receive the contract price, not the auction clearing price. If the contract price is above the clearing price, Maryland ratepayers make up the difference; if it is below the clearing price, the generator passes the savings along to customers. If the generator does not clear the auction, it receives nothing at all.
- Challengers had argued that this was an improper subsidy to the generator and affected wholesale rates, the exclusive purview of the federal government. Maryland argued that the contract was similar to a traditional bilateral contract and that it had the authority to incentivize in-state generation.
- The Supreme Court, following both the District Court and the Circuit Court, ruled that the contract for difference constituted an improper interference into FERC’s jurisdiction.
The Supreme Court’s Hughes opinion was a rebuke to Maryland. Court watchers were expecting Maryland’s scheme to be struck down, but the real question was, struck down by how much? Would any attempt to incentivize new generation be disallowed, or was it the particular mechanics of Maryland’s scheme that were impermissible? The Court provided clarification that incentivizing new generation to be sold directly into wholesale markets is not allowed—while still maintaining that there are mechanisms for incentivizing new generation that would be acceptable. The Court does not specify the exact nature of what these acceptable mechanisms might be, but it does explicitly note that states could encourage the development of new generation through a variety of mechanisms, “including tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector.” The difference between these actions and Maryland’s is that they do not interfere with the functioning of wholesale auctions. Maryland’s problem, according to the Court, was that it conditioned payment on clearing the auction, thereby entering the federal government’s jurisdictional authority.
But the decision does not completely resolve the thorny jurisdictional issues arising in the power sector that could not have been anticipated at the time the 1935 Federal Power Act was written. As the president of the association of state regulators said in response to the ruling, “This narrow ruling… 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 nature of power markets has long been one in which the matter of determining jurisdiction is more complicated than a plain reading of the statute would allow; as one commentator noted, “one sovereign’s regulation of matters within its sphere frequently has a significant effect on matters subject to the other sovereign’s exclusive authority.” The Court’s decisions are necessarily a reflection of the particular facts of the case, and unless Congress acts, the Courts will not resolve the underlying issues: states are testing the boundaries of their jurisdictions because they believe that federal regulators have so far been unsuccessful in designing market mechanisms adequate to incentivize generation to the extent states desire. But in being unable to provide a firm answer about what might be allowed and what is prohibited, the Court is also encouraging states to experiment with new mechanisms, which will lead to further litigation. These mechanisms are by necessity going to be outside the wholesale power markets (otherwise they would be within FERC’s jurisdiction). But the real issue is this: is there a way to go around the markets without having the effect of undermining the markets? As it turns out, if states intend to impact market prices, they will impact the market. A state trying to have its cake (participate in markets) and eat it too (using its state authority to create a parallel, nonmarket energy market structure) may or may not solve the problem it intends to fix, but it will likely end up making power markets more byzantine and less effective.