Hughes v. Talen Energy Mktg., LLC

• Decision Date: 19 April 2016
• Docket Number: s. 14–614,14–623.
• Citation: 136 S.Ct. 1288,578 U.S. 150,194 L.Ed.2d 414
• Parties: W. Kevin HUGHES, Chairman, Maryland Public Service Commission, et al., Petitioners v. TALEN ENERGY MARKETING, LLC, fka PPL Energyplus, LLC, et al. CPV Maryland, LLC, Petitioner v. Talen Energy Marketing, LLC, fka PPL Energyplus, LLC, et al.
• Court: U.S. Supreme Court

578 U.S. 150

136 S.Ct. 1288

194 L.Ed.2d 414

W. Kevin HUGHES, Chairman, Maryland Public Service Commission, et al., Petitioners

v.TALEN ENERGY MARKETING, LLC, fka PPL Energyplus, LLC, et al.

CPV Maryland, LLC, Petitioner

v.Talen Energy Marketing, LLC, fka PPL Energyplus, LLC, et al.

Nos. 14–614

14–623.

Supreme Court of the United States

Argued Feb. 24, 2016.

Decided April 19, 2016.

Scott H. Strauss, Washington, DC, for Petitioners in No. 14–614.

Clifton S. Elgarten, Washington, DC, for Petitioner in No. 14–623.

Paul D. Clement, Washington, DC, for Respondents.

Ann O'Connell, for the United States as amicus curiae, by special leave of the Court, supporting the respondents.

Paul D. Clement, Erin E. Murphy, Edmund G. LaCour Jr., Bancroft PLLC, Washington, DC, Tamara Linde, Executive Vice President and General Counsel, PSEG Services Corp., Newark, NJ, Shannen W. Coffin, Steptoe & Johnson LLP, Washington, DC, David Musselman, Associate General Counsel, Essential Power, LLC, Princeton, NJ, Jesse A. Dillon, Assistant General Counsel, Talen Energy Corp., Allentown, PA, David L. Meyer, Morrison & Foerster LLP, Washington, DC, for Respondents.

Clifton S. Elgarten, Larry F. Eisenstat, Richard Lehfeldt, Jennifer N. Waters, Crowell & Moring LLP, Washington, DC, for Petitioner CPV Maryland, LLC.

James A. Feldman, Washington, DC, Scott H. Strauss, Peter J. Hopkins, Jeffrey A. Schwarz, Spiegel & McDiarmid LLP, Washington, DC, for Petitioners in No. 14–614.

Justice GINSBURG delivered the opinion of the Court.

The Federal Power Act (FPA), 41 Stat. 1063, as amended, 16 U.S.C. § 791a et seq., vests in the Federal Energy Regulatory Commission (FERC) exclusive jurisdiction over wholesale sales of electricity in the interstate market. FERC's regulatory scheme includes an auction-based market mechanism to ensure wholesale rates that are just and reasonable. FERC's scheme, in Maryland's view, provided insufficient incentive for new electricity generation in the State. Maryland therefore enacted its own regulatory program. Maryland's program provides subsidies, through state-mandated contracts, to a new generator, but conditions receipt of those subsidies on the new generator selling capacity into a FERC-regulated wholesale auction. In a suit initiated by competitors of Maryland's new electricity generator, the Court of Appeals for the Fourth Circuit held that Maryland's scheme impermissibly intrudes upon the wholesale electricity market , a domain Congress reserved to FERC alone. We affirm the Fourth Circuit's judgment.

I

A

Under the FPA, FERC has exclusive authority to regulate "the sale of electric energy at wholesale in interstate commerce." § 824(b)(1). A wholesale sale is defined as a "sale of electric energy to any person for resale." § 824(d). The FPA assigns to FERC responsibility for ensuring that "[a]ll rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy subject to the jurisdiction of the Commission ... shall be just and reasonable." § 824d(a). See also § 824e(a) (if a rate or charge is found to be unjust or unreasonable, "the Commission shall determine the just and reasonable rate"). "But the law places beyond FERC's power, and leaves to the States alone, the regulation of ‘any other sale’—most notably, any retail sale—of electricity." FERC v. Electric Power Supply Assn., 577 U.S. ––––, ––––, 136 S.Ct. 760, 766, 193 L.Ed.2d 661 (2016) (EPSA ) (quoting § 824(b) ). The States' reserved authority includes control over in-state "facilities used for the generation of electric energy." § 824(b)(1) ; see Pacific Gas & Elec. Co. v. State Energy Resources Conservation and Development Comm'n, 461 U.S. 190, 205, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983) ("Need for new power facilities, their economic feasibility, and rates and services, are areas that have been characteristically governed by the States.").

"Since the FPA's passage, electricity has increasingly become a competitive interstate business, and FERC's role has evolved accordingly." EPSA, 577 U.S., at ––––, 136 S.Ct., at 768. Until relatively recently, most state energy markets were vertically integrated monopolies—i.e., one entity, often a state utility, controlled electricity generation, transmission, and sale to retail consumers. Over the past few decades, many States, including Maryland, have deregulated their energy markets.

In deregulated markets, the organizations that deliver electricity to retail consumers—often called "load serving entities" (LSEs)—purchase that electricity at wholesale from independent power generators. To ensure reliable transmission of electricity from independent generators to LSEs, FERC has charged nonprofit entities, called Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), with managing certain segments of the electricity grid.

Interstate wholesale transactions in deregulated markets typically occur through two mechanisms. The first is bilateral contracting: LSEs sign agreements with generators to purchase a certain amount of electricity at a certain rate over a certain period of time. After the parties have agreed to contract terms, FERC may review the rate for reasonableness. See Morgan Stanley Capital Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U.S. 527, 546–548, 128 S.Ct. 2733, 171 L.Ed.2d 607 (2008) (Because rates set through good-faith arm's-length negotiation are presumed reasonable, "FERC may abrogate a valid contract only if it harms the public interest."). Second, RTOs and ISOs administer a number of competitive wholesale auctions: for example, a "same-day auction" for immediate delivery of electricity to LSEs facing a sudden spike in demand; a "next-day auction" to satisfy LSEs' anticipated near-term demand; and a "capacity auction" to ensure the availability of an adequate supply of power at some point far in the future.

These cases involve the capacity auction administered by PJM Interconnection (PJM), an RTO that oversees the electricity grid in all or parts of 13 mid-Atlantic and Midwestern States and the District of Columbia. The PJM capacity auction functions as follows. PJM predicts electricity demand three years ahead of time, and assigns a share of that demand to each participating LSE. Owners of capacity to produce electricity in three years' time bid to sell that capacity to PJM at proposed rates. PJM accepts bids, beginning with the lowest proposed rate, until it has purchased enough capacity to satisfy projected demand. No matter what rate they listed in their original bids, all accepted capacity sellers receive the highest accepted rate, which is called the "clearing price."¹ LSEs then must purchase from PJM, at the clearing price, enough electricity to satisfy their PJM-assigned share of overall projected demand. The capacity auction serves to identify need for new generation: A high clearing price in the capacity auction encourages new generators to enter the market, increasing supply and thereby lowering the clearing price in same-day and next-day auctions three years' hence; a low clearing price discourages new entry and encourages retirement of existing high-cost generators.²

The auction is designed to accommodate long-term bilateral contracts for capacity. If an LSE has acquired a certain amount of capacity through a long-term bilateral contract with a generator, the LSE—not the generator—is considered the owner of that capacity for purposes of the auction. The LSE sells that capacity into the auction, where it counts toward the LSE's assigned share of PJM-projected demand, thereby reducing the net costs of the LSE's required capacity purchases from PJM.³ LSEs generally bid their capacity into the auction at a price of $0, thus guaranteeing that the capacity will clear at any price. Such bidders are called "price takers." Because the fixed costs of building generating facilities often vastly exceed the variable costs of producing electricity, many generators also function as price takers.

FERC extensively regulates the structure of the PJM capacity auction to ensure that it efficiently balances supply and demand, producing a just and reasonable clearing price. See EPSA, 577 U.S., at ––––, 136 S.Ct., at 769 (the clearing price is "the price an efficient market would produce"). Two FERC rules are particularly relevant to these cases. First, the Minimum Offer Price Rule (MOPR) 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. Once a new generator clears the auction at the MOPR price, PJM deems that generator an efficient entrant and exempts it from the MOPR going forward, allowing it to bid its capacity into the auction at any price it elects, including $0. Second, the New Entry Price Adjustment (NEPA) guarantees new generators, under certain circumstances, a stable capacity price for their first three years in the market. The NEPA's guarantee eliminates, for three years, the risk that the new generator's entry into the auction might so decrease the clearing price as to prevent that generator from recovering its costs.

B

Around 2009, Maryland electricity regulators became concerned that the PJM capacity auction was failing to encourage development of sufficient new in-state generation. Because Maryland sits in a particularly congested part of the PJM grid, importing electricity from other parts of the grid into the State is often difficult. To address this perceived supply shortfall, Maryland regulators proposed that FERC extend the duration of the NEPA from three years to ten. FERC rejected the proposal. PJM, 126 FERC ¶ 61,275 (2009). "[G]iving new suppliers longer payments and assurances unavailable to existing suppliers," FERC reasoned, would improperly favor new generation over existing generation, throwing the auction's market-based price-setting mechanism out of...