In a landmark decision, Hughes v. Talen Energy Marketing, LLC, 136 S.Ct. 1288 (2016) ("Hughes"), the U.S. Supreme Court invalidated a Maryland program aimed at incentivizing new in-state power generation as preempted by federal law. Hughes found that Maryland's scheme, which centered around the capacity auction administered by PJM Interconnection ("PJM"), the regional transmission operator overseeing the grid, inappropriately intruded on the Federal Energy Regulatory Commission's ("FERC") exclusive authority to regulate interstate wholesale electricity sales.
In the capacity auction, PJM predicts electricity demand three
years ahead of time and assigns a share of that demand to each
participating load serving entity ("LSE"). Owners of
capacity available to produce electricity in three years bid that
capacity into the auction at proposed rates. PJM accepts bids,
beginning with the lowest proposed rate, until it has purchased
enough capacity to satisfy expected demand. Id. at 1293. However,
all accepted bidders receive what is known as the "clearing
price," which is the price paid for the highest bid accepted,
no matter each bidder's proposed price. Id.
Maryland electricity regulators had grown concerned that the prices
set in the PJM capacity auction were insufficient to attract
development of new in-state generation to enter the market. To
remedy this, Maryland regulators implemented a program in which
Maryland solicited proposals from various companies for
construction of a new gas-fired power plant at a particular
location. Maryland accepted a proposal by CPV Maryland, LLC
("CPV"), after which Maryland required its LSEs to enter
into a 20-year "contract for differences" with CPV at a
rate that CPV had specified in its accepted proposal. Id. at
1294-95.
Under the contract for differences, CPV would sell its capacity in
the PJM market and would, through the contract for differences,
receive the contract price, rather than the clearing price
established in the auction. If CPV's capacity cleared the
auction, and the clearing price was below the price guaranteed in
the contract for differences, Maryland LSEs would be required to
pay CPV the difference between the contract price and the clearing
price. If CPV's capacity cleared the auction and the clearing
price exceeded the price specified in the contract for differences,
CPV would be required to pay the LSEs the difference between the
two prices. LSEs would pass either the higher costs or savings on
to their retail electricity customers. Because CPV could receive
the difference between the clearing price and the price set forth
in the contract, CPV would be incentivized to bid its capacity at
the lowest possible price. Id. at 1295. If the capacity failed to
clear the market, CPV would receive no payment from Maryland
LSEs.
The Supreme Court struck down Maryland's program, finding that
it effectively set an interstate wholesale rate, contrary to the
Federal Power Act's ("FPA") division of jurisdiction
between state and federal regulators, and impermissibly guaranteed
CPV a rate distinct from the auction clearing price for interstate
sales of capacity to PJM. Id. at 1297. The Court determined that
the FPA allocates to FERC exclusive jurisdiction over rates and
charges received for or in connection with interstate wholesale
electricity sales. Id. (citing 16 U.S.C. § 824d(a)). Through
the contract for differences program, Maryland inappropriately
undermined FERC's approval of the PJM capacity auction as the
exclusive rate-setting mechanism for sales of capacity to PJM. The
Court noted that "[b]y adjusting an interstate wholesale rate,
Maryland's program invades FERC's regulatory turf[,]"
as it violates the Supremacy Clause. Id. (citing FERC v. Electric
Power Supply Ass'n, 136 S.Ct. 760, 780 (2016) ("The FPA
leaves no room either for direct state regulation of the prices of
interstate wholesales or for regulation that would indirectly
achieve the same result.") (internal quotations omitted in
original)).
Further, the Court found that Maryland's motivation behind
implementing the program—encouraging construction of new
in-state generation—could not save its program. States may
not seek to achieve ends, however legitimate, through regulatory
means that impinge on FERC's authority over interstate
wholesale electricity rates. Id. at 1298-99 (citing Mississippi
Power & Light v. Mississippi ex rel. Moore, 487 U.S. 354 (1988)
and Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953
(1986)).
The Court, however, made clear that the decision is to be construed
narrowly, as the Court's only concern with Maryland's
program was that it "disregard[ed] an interstate wholesale
rate required by FERC." Id. at 1299. Hughes does not rule on
the merits or permissibility of various other measures that states
could employ to encourage development of new or clean generation,
"including tax incentives, land grants, direct subsidies,
construction of state-owned generation facilities, or re-regulation
of the energy sector." Id. The Court continued: "Nothing
in this opinion should be read to foreclose Maryland and other
States from encouraging production of new or clean generation
through measures 'untethered to a generator's wholesale
market participation.' 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. (internal citation
omitted). Thus, Hughes permits states to implement programs aimed
at promoting new clean or renewable in-state generation, as long as they
do not supplant FERC's regulation over wholesale interstate
electricity markets.
However, questions regarding whether other types of similar
arrangements—e.g., power purchase agreements entered into by
FirstEnergy Solutions Corporation and American Electric Power,
which guarantee income associated with a number of generators for
purposes of reliability and cost stabilization—still
remain.
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