By Lisa Soronen
Some states will need to rethink how to encourage the building of electricity generating power plants—a nearly $1 billion endeavor—following the U.S. Supreme Court’s decision in Hughes v. Talen Energy Marketing.
In a unanimous opinion the Supreme Court held that Maryland’s program, which guarantees a power plant generator a contractual rate rather than the “clearing price” wholesale rate set at a federally approved capacity auction, is pre-empted by the Federal Power Act (FPA).
The State and Local Legal Center filed an amicus brief arguing that Maryland’s program should not be pre-empted. At least one other state, New Jersey, has implemented a similar program.
Per the FPA, the Federal Energy Regulatory Commission (FERC) has the authority to regulate interstate wholesale rates.
Throughout the electricity grid, through Regional Transmission Organizations (RTOs), FERC administers capacity auctions. Owners of capacity bid to sell their capacity on the auction for the next three years. The RTO accepts all bids, beginning with the lowest, until capacity is satisfied. All accepted capacity sellers receive the highest accepted bid rate, called the “clearing price.” The purpose of the capacity auction is to identify the need for new electric generation. A high clearing price encourages new generation.
Maryland electricity regulators were concerned that the capacity auction wasn’t encouraging sufficient development of new in-state generation. So it offered the successful bidder, CPV, a 20-year contract where it would receive a set contract price rather than the “clearing price.”
Discussing the relevant pre-emption principles in just one short paragraph, the court concluded that Maryland’s program amounts to wholesale rate setting and is pre-empted by the FPA:
“Exercising [its] authority [over wholesale rates], FERC has approved the . . . capacity auction as the sole rate setting mechanism for sales of capacity . . . and has deemed the clearing price per se just and reasonable. Doubting FERC’s judgment, Maryland . . . requires CPV to participate in the . . . capacity auction, but guarantees CPV a rate distinct from the clearing price. By adjusting an interstate wholesale rate, Maryland’s program invades FERC’s regulatory turf.”
The court, likely recognizing the difficulty of encouraging the building of power plants, emphasized that its opinion was narrow and did not address the permissibility of the various other measures states use to encourage development of power plants.
Bill Stein, Scott Christensen, Eric Parnes, and Elizabeth Solander, Hughes Hubbard & Reed wrote the SLLC amicus brief which the National Governors Association, National Conference of State Legislatures and Council of State Governments joined.
Lisa Soronen is the executive director of the State and Local Legal Center and writes frequently for the NCSL blog about the U.S. Supreme Court.