Supreme Court Hands FERC Win on Authority Over Capacity Markets


With its decision on Tuesday, April 20 in Hughes v. Talen Energy Marketing, the Supreme Court issued its second significant holding of the year on the reach of federal authority over interstate wholesale sales markets. The earlier case was FERC v. Electric Power Supply Ass'n, (EPSA), and with this week's decision the score is FERC – 2, States – 0.

At play in Hughes was a program sponsored by the Maryland Public Service Commission (MPSC) designed to bring more generation into the PJM Interconnection (PJM) capacity market overseen by FERC. The Maryland program guaranteed fixed compensation to generation developers winning bids in the Maryland-sponsored program. Informed by the compensation level settled by the MPSC, auction winners would then bid into the PJM capacity market, but be assured compensation reflecting the price agreed upon with Maryland through a "contract for differences," regardless of the level of compensation derived from the PJM auction. At least theoretically, generation developers could also owe refunds to Maryland, in the event compensation in the PJM market exceeded the price guaranteed by the state.

The Supreme Court did not consider the matter to be a close call, holding in an 8-0 decision penned by Justice Ginsburg that the Maryland program effectively set a rate for wholesale sales, a matter within FERC's exclusive and preemptive authority under the Federal Power Act (FPA). According to the Court, "[b]y adjusting an interstate wholesale rate, Maryland's program invades FERC's regulatory turf." The Court reached back to its earlier decisions in Mississippi Power & Light Co. v. Mississippi ex rel. Moore and Nantahala Power & Light Co. v. Thornburg, and further cited the EPSA decision.

In Mississippi Power & Light and Nantahala, the Court faulted state programs refusing to provide for full retail recovery of FERC-approved wholesale rates, holding that doing so second-guessed the presumptive reasonableness of the FERC-approved rate. In EPSA, the Court upheld FERC's authority over wholesale demand response programs administered by FERC-jurisdictional RTOs. The Court held those programs to be within FERC's authority to regulate matters "affecting wholesale rates," rejecting the challenge that they unlawfully impinged upon the retail market. In Hughes, the Court relies on this collected authority in concluding that the FPA "leaves no room" for direct or indirect regulation of wholesale sales by state authorities.

The decision will be disappointing to some advocates of state regulatory authority, as was the decision in EPSA. Both cases signify a substantial shift in authority to FERC with unbundling of the electric industry.

Still, the full reach of FERC authority over investor owned utility generation, and potential limitations, remains untested for now. The Court expressly refrained from addressing "the permissibility of various other measure states might 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."

If you have any questions about the court's ruling, please contact Jonathan Schneider, Craig Silverstein, Harvey Reiter or the Stinson Leonard Street attorney with whom you regularly work.

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