What Does Supreme Court FERC Decision Mean For State Renewables Programs?

Contributors
Written by Emma Fazio & Jennifer Mersing
on April 26, 2016 No Comments
Categories : Featured, Policy Watch

The U.S. Supreme Court has issued its second decision this term related to the Federal Energy Regulatory Commission’s (FERC) jurisdiction over wholesale energy markets, and renewable energy developers and advocates are pleased that the decision does not appear to affect state programs promoting renewable resources.

On April 19, in Hughes v. Talen Energy, the Supreme Court affirmed the Fourth Circuit Court of Appeals and, in a narrow ruling focused on the specific facts of the case, found that a Maryland regulatory program to promote in-state generation through a guaranteed capacity payment was preempted by the Federal Power Act and FERC’s exclusive jurisdiction over wholesale sales.

Rates for capacity, which are intended to send a market signal if additional generation supply is needed, in the PJM Interconnection LLC are established pursuant to a FERC-approved auction. Out of concern that the PJM capacity auction was failing to properly incentivize generation in the state and worries about a supply shortfall, Maryland decided to take action on its own to encourage new generation development in congested areas of the state.

After a competitive solicitation, Maryland chose independent power producer CPV Maryland to construct a natural gas generator in a specific location and then required load-serving entities (LSEs) in the state to enter into 20-year “contracts for differences” with CPV Maryland.

Under the contracts for differences, if CPV Maryland cleared the PJM auction, CPV Maryland was guaranteed a certain capacity price (with LSEs paying the difference if the PJM capacity auction price is lower than the guaranteed price and with CPV Maryland refunding the difference if the PJM capacity auction price is higher than the guaranteed price).

As the Supreme Court emphasized, unlike standard bilateral contracts, CPV Maryland (not the LSEs) retained ownership over the capacity and CPV Maryland faced strong incentives to bid as low as possible in order to clear the PJM auction (as that was a precondition for CPV Maryland to receive any capacity payment). According to the Supreme Court, through these contracts for differences, Maryland “guarantee[d] CPV a rate distinct from the clearing price for its interstate sales of capacity to PJM,” which was in contravention of FERC’s exclusive authority to set wholesale electricity rates.

In the lead-up to the decision, renewable energy developers and advocates had expressed concern that the Supreme Court might issue a broad opinion striking down Maryland’s program that could threaten states’ ability to incentivize particular types of generation. That outcome could have dealt a blow to solar and wind and other renewable energy development, because states, through programs such as renewable portfolio standards, have been a driving force in the growth of renewable generation.

But, in overturning Maryland’s program, the Supreme Court focused on the specific payment mechanisms found in the state-imposed contract for differences and emphasized the “limited” nature of its decision, affirming that “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.’” For the Supreme Court, the fatal flaw in Maryland’s program was the conditioning of payment of funds on capacity clearing the FERC-regulated PJM auction, which is impermissible since Maryland is “disregard[ing] an interstate wholesale rate required by FERC.”

States did not lose their ability to promote renewable resources because Maryland sought to change the specific capacity price established through a FERC-approved auction. The Supreme Court affirmed that “[t]he states’ reserved authority includes control over in-state facilities used for the generation of electric energy.”

Justice Sotomayor’s concurring opinion reiterates “the importance of protecting the states’ ability to contribute, within their regulatory domain, to the Federal Power Act’s goal of ensuring a sustainable supply of efficient and price-effective energy.” Only those state programs that “disregard an interstate wholesale rate required by FERC” are prohibited by this decision.

However, there may be some uncertainty about what exactly constitutes “disregard [for] an interstate wholesale rate required by FERC.” It appears clear that a renewable portfolio standard (which goes to resource portfolio supply mix and generally does not establish a price that renewable resources will receive) would not be seen as running afoul of that criterion, but there may be some question about programs that have more direct interaction with FERC-regulated markets. The PJM capacity auction produces a specific price result, so it is easy to determine if a state imposes a capacity price that is different than the auction result. But, what about state price-setting outside of the capacity auction context? What if a state mandates that a renewable energy facility receive a set payment amount above what it would receive in a FERC-regulated day-ahead or real-time energy market?

The examples of state programs the Supreme Court cites as not being addressed by the decision – “tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector” – are primarily non-market-based mechanisms. Thus, even as FERC has moved to a market-based approach for regulating wholesale sales, states, in deciding how to promote renewable energy, may be inclined to stay with more non-market-based approaches in an effort to avoid becoming entangled with FERC regulation.

Emma Fazio and Jennifer Mersing are attorneys in the energy development group at law firm Stoel Rives LLP.

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