Supreme Court’s FERC opinion offers clues about next big case

Source: Robin Bravender, E&E reporter • Posted: Tuesday, February 2, 2016

Energy experts are mining a major Supreme Court decision issued yesterday for clues about what it could mean for another high-stakes energy market case pending before the justices.

Both cases hinge on federal versus state management of power markets.

In late February, the Supreme Court is slated to hear arguments involving a Maryland program that provides incentives for new power generation. A lower court threw out the state program after judges found the incentives infringed on the Federal Energy Regulatory Commission’s jurisdiction.

Some lawyers see that case as a flipped version of the one decided yesterday, where utilities argued that a FERC rule aimed at encouraging energy conservation illegally trod on states’ regulatory turf.

Now, attorneys and other experts with a stake in energy markets are poring over the high court’s opinion to determine what — if anything — can be gleaned about how the justices will define murky boundaries dictating when states, feds or some combination of the two have authority over energy markets.

While yesterday’s opinion in FERC v. Electric Power Supply Association and EnerNOC Inc. v. Electric Power Supply Association offers some clues about how the justices view the issues, experts say it doesn’t offer clear answers about how they’ll weigh in on the Maryland cases, Hughes v. Talen Energy Marketing and CPV Maryland LLC v. Talen Energy Marketing.

“I don’t think you can read too far into this decision in terms of where the Hughes case will come out,” said Allison Clements, director of the Natural Resources Defense Council’s Sustainable FERC Project.

But, she added, the court’s majority opinion, penned by Justice Elena Kagan, an Obama appointee, includes “a theme about the shared responsibility of the electric grid between states and FERC.”

Clements said the justices seemed to recognize that regulatory flexibility needs to reflect the evolving electric grid. The opinion shows that a regulatory “line has to get drawn somewhere in each instance,” she said. And while it doesn’t make clear where the line will be drawn in the Maryland cases, it does indicate that the court will use a sense of cooperative federalism to delineate the regulatory boundaries, Clements added.

FERC is authorized to regulate electricity sales at the “wholesale” level, meaning sales intended for resale, across state lines. States, meanwhile, are exclusively charged with regulating “retail” electricity sales, or those directly to consumers.

That division of authority is central to both cases, and Kagan recognized in her opinion that it’s often a source of contention.

“That statutory division generates a steady flow of jurisdictional disputes because — in point of fact if not of law — the wholesale and retail markets in electricity are inextricably linked,” she wrote.

The court ruled that FERC did indeed have the authority to issue its rule promoting the energy conservation practice known as “demand response.” FERC, the court reasoned, wasn’t wading into states’ territory simply because its regulation “affects” the quantity or terms of retail electricity sales.

Lawyers tracking the case saw the opinion as a recognition of FERC’s broad regulatory authority.

“One of the core issues” in the Maryland cases “is how expansive FERC’s authority is,” said Jim Rossi, a law professor at Vanderbilt University.

But although they recognized FERC’s broad authority in this case, Rossi said, the justices won’t necessarily determine that FERC’s authority eclipses that of the state in the Maryland cases.

“I think it’s entirely possible that this case could be decided in favor of FERC and that the CPV [Maryland] cases could still be decided in favor of the states,” he said. The opinion doesn’t endorse a “bright-line view” of regulatory authority under the law, he added. “The court could decide there’s no conflict between FERC’s regulation of markets and the state incentive programs.”

The Maryland program at the heart of the cases involves an effort to encourage energy generation by ensuring that new plants would have fixed contract rates and stable revenues from retail electricity purchasers.

The Obama administration has argued that the Maryland program and a similar program in New Jersey are illegal because they interfere with FERC’s authority to regulate wholesale electricity markets.

Joel Eisen, a law professor at the University of Richmond, said yesterday’s opinion pointed to “concurrent jurisdiction” shared by states and the federal government.

“Demand response is all about FERC taking initiative to improve the wholesale market,” Eisen said. The court said yesterday “there is room left for the states to operate in demand response.”

The Maryland and New Jersey programs to incentivize new power generation aren’t “necessarily pre-empted,” Eisen said. He added that the opinion “is not at all a final signal about how these next cases may go.”

In a report issued yesterday, ClearView Energy Partners analysts said they didn’t see a “clear read-through” on the Maryland cases. But they noted that in his dissent, Justice Antonin Scalia characterized the government’s position in the Hughes case regarding the Maryland program as “making an argument similar to ours.” Based on that, the ClearView report said, “we can only deduce that Justice Scalia may think FERC’s position on the jurisdictional divide in the [Maryland] case may be aligned with his general thinking.”

Scalia was joined by Justice Clarence Thomas in his dissent. Kagan penned the majority’s 6-2 opinion. Only eight justices heard the previous FERC case because Justice Samuel Alito recused himself.

The Maryland cases present important questions about “what actions can states take that would impact markets that FERC regulates,” said Joseph Hall, a partner at Dorsey & Whitney LLP and co-chairman of the firm’s energy industry group.

“From a resource planning standpoint, I think it’s going to be a very important decision,” he said, that will affect states’ ability to keep retail rates cost-effective and ensure reliability.

The Supreme Court is scheduled to hear the two Maryland cases, Hughes v. Talen Energy Marketing and CPV Maryland LLC v. Talen Energy Marketing, on Feb. 24.