The Perils of Second-Guessing FERC

It’s axiomatic that state governments believe they can manage their own affairs better than the federal government. But our system reserves certain bailiwicks for federal oversight, and one of those is the interstate power markets. While the lack of state influence over those markets—which unquestionably affect state economies and the local quality of life—may chafe, the federal government has made clear that there are lines it will not allow the states to cross. Two cases that reached the Supreme Court this term threw one of those lines into sharp relief.

As I wrote about in the March 2014 issue (see “When States Try to Manipulate Wholesale Power Markets”), these cases stemmed from efforts by Maryland and New Jersey to incentivize new generation outside of PJM capacity auctions. In Maryland, the Public Service Commission in April 2012 ordered several regional utilities to execute power purchase agreements (PPAs) with a company, CPV, that wanted to build a new combined cycle plant in the state but was unable to clear the capacity auctions. In New Jersey, the Board of Public Utilities, acting under the state’s 2011 Long-Term Capacity Pilot Project, conducted a separate selection process for new generation and likewise ordered the state’s utilities to sign PPAs with the winning companies.

Stay in Your Own Lane

In both cases, the utilities sued to block the plans, arguing that the states were invading Federal Energy Regulatory Commission (FERC) authority over interstate power markets, and in both cases, the lower federal courts agreed. The crux of the dispute was that the PPAs guaranteed a return for the plant owner even if the plant bid into PJM auctions at prices too low to make a profit. Essentially, they were guaranteeing the plants a wholesale price different from that produced by participation in the market. That, the utilities and FERC argued, distorted the auctions by changing the plant’s incentives to participate, and the effect was to artificially suppress power prices in PJM. In doing so, the programs invaded exclusive FERC authority granted by the Federal Power Act (FPA).

The states appealed to the Supreme Court, and the court agreed to hear Maryland’s appeal, putting the New Jersey case on hold until it reached a decision, because the cases turned on the same issue. At oral argument, the justices seemed to struggle with understanding how the wholesale power markets worked and how the Maryland PPA would affect them—in large part because there was substantial disagreement between the parties on the provisions in the PPA and what they did.

Yet whatever confusion might have existed did not stop the court from issuing an emphatic endorsement of FERC’s prerogatives. In a unanimous ruling authored by Justice Ginsberg, the court upheld both lower court decisions that barred the Maryland incentives.

“We agree with the Fourth Circuit’s judgment that Maryland’s program sets an interstate wholesale rate, contravening the FPA’s division of authority between state and federal regulators,” the court said. “Doubting FERC’s judgment, Maryland… requires CPV to participate in the PJM capacity auction, but guarantees CPV a rate distinct from the clearing price for its interstate sales of capacity to PJM. By adjusting an interstate wholesale rate, Maryland’s program invades FERC’s regulatory turf…. That Maryland was attempting to encourage construction of new in-state generation does not save its program.”

A week later, the court declined to hear New Jersey’s appeal, leaving that decision intact.

No Sweeping Mandate

Together, these cases make clear that whatever states may think about the operation of the interstate power markets, they lack any authority to change things to their liking. What was notable about the Maryland opinion, however, was what the court did not do. Justice Ginsberg took pains to stress that the holding was limited and that the court did not intend to foreclose per se all state programs to incentivize generation.

“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,” the court said. “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.”

Why does this matter? Some court observers were nervously watching this case because of its potential to affect state renewable portfolio standards (RPSs). RPS opponents have argued unsuccessfully for years that these programs are unconstitutional in that they constitute state programs that interfere with interstate power markets and economies in other states (see “The Lurking Threat to State RPSs” in the August 2013 issue). For example, an RPS bias against coal in one state can render a coal plant in another state uneconomic, leading to its shutdown even if the other state would prefer it to remain operating (something that, indeed, has happened).

That question was not before the court, and thus it would not have decided it here. But when a decision implicates other issues that the Supreme Court knows are percolating through the lower courts, it will sometimes take the opportunity to telegraph its thinking. While the constitutional questions remain for another day (the 10th Circuit last year turned aside the challenge I wrote about in 2013, and the Supreme Court declined to hear the case), Justice Ginsberg’s disclaimer strongly suggests the court is not waiting for an opportunity to strike down all RPSs. ■

— Thomas W. Overton, JD is a POWER associate editor.