Argument analysis: Will the new FERC case turn out to be easy?
on Feb 24, 2016 at 12:52 pm
With two Justices openly confessing that they really do not understand how prices are set in the energy industry, and with one of them asking for help in writing an opinion to decide a complex new case on national vs. state authority over that industry, the Supreme Court on Wednesday actually found itself confronting what could be a quite easy way to make up its mind.
In the combined cases of Hughes v. Talen Energy Marketing and CPV Maryland v. Talen Energy Marketing, the Justices — and their law clerks — need only to find out exactly what the specific terms of contracts to build new generating plants in Maryland actually say, and then find out what position the Federal Energy Regulatory Commission actually took when it reviewed those terms. It might not require an extended exploration of where, as a more general matter, federal law places the dividing line between federal and state authority over this industry, a line that always seems elusive.
The Court in the two cases is dealing with the potentially very complex issue of what drives prices up or down in the regional market in the mid-Atlantic states that sorts out future energy supplies and settles the wholesale prices that are to be paid in order to assure that those supplies do become available. This is technically called the PJM auction market, named for the giant regional operator that runs the auction under the oversight of the Federal Energy Regulatory Commission, since it is FERC’s primary duty to make sure that wholesale prices are “just and reasonable.”
But the new cases focus directly on what Maryland (New Jersey did much the same thing) had in mind when it decided that the auction market’s operation on a three-year energy supply cycle was not dealing with the problem of capacity for a considerably longer period, so the state worked out contracts that would last twenty years to entice generating companies to build new plants to replace the coal-fired plants likely to come off-line in coming years.
Although the Court spent an often-labored hour on the potential implications of those contracts, it appeared quite clear by the end of the hour that if the state included in those contracts a specific mandate that the generating companies enter the regional wholesale market to bid supply offerings with the specific aim of bidding very low (“clearing the auction,” in industry parlance), then the Court would feel compelled to strike down such a maneuver as conflicting with federal energy policy and rules.
But if the Court, on examining the contracts’ terms, finds that they contain no such mandate, the Court might well be inclined to allow states to encourage new generating plant expansion even though it might have an incidental effect on the prices that get set in the wholesale auction, because the states then would be operating essentially only in intrastate energy policy.
Indeed, the Court heard directly conflicting accounts of what is actually in those contracts. Lawyers for state regulators in Maryland and a company based in that state, CPV Maryland, argued that the contracts do not contain any such mandate, and leave it up to the generating companies to make their own decision about when to enter the auction and what to bid. In full contrast, lawyers for energy firms that oppose the Maryland (and New Jersey) maneuvers, and a lawyer speaking for FERC, insisted just as firmly that the contracts dictate that the generators go into the market and bid low, thus suppressing the prices set there.
Scott D. Strauss, a Washington, D.C., lawyer representing the Maryland Public Service Commission, argued simply that the state “did not require CPV to bid into the auction,” the state did not and could not regulate the auction price, and generators made their own decision to enter the auction.” CPV’s attorney in the case, Washington lawyer Clifton S. Elgarten, contended that FERC was well aware of the Maryland contracts and that the commission found the bids from that source to be entirely acceptable within the mechanisms of the auction.
However, Washington lawyer Paul D. Clement, speaking for the challengers, argued that “in every energy market” since the Maryland generating firms entered it, “the price was suppressed.” And, he said, what requires that the Maryland initiative be struck down as “preempted” is that it involves direct action by the state of Maryland, telling the local generators what they were to do in order to earn substantial subsidies from the state for signing the twenty-year contracts. The state, he said, had mandated that the generators “bid and clear” the auctions. Speaking for FERC, Ann O’Connell, an assistant to the U.S. Solicitor General, contended that Maryland “had specifically targeted the PJM auction.” What resulted from that, she said, was that “it changed the incentive of people in the market,” intruding on FERC’s authority there.
In addition, the Justices heard conflicting accounts about where FERC stands on the Maryland (and New Jersey) contracts. FERC is directly involved in both cases, and it sent attorney O’Connell to the Court to argue that the Maryland (and New Jersey) initiatives could not survive either “field preemption” or “conflict preemption” analysis.
And yet, the Maryland Public Service Commission sent lawyer Strauss to the Court to argue that FERC had signed off on these very contracts, and actually modified the rules for the auction in order to accommodate the bids of the generators from those states.
If the contracts’ actual terms do not allow the Court to sort out whether the state was directly mandating the conduct of the state generators in the auction, then the Justices and their law clerks will have to pore over the documents of FERC’s reaction to those contracts — a reaction that should be fairly easy to find in the record now before the Court.
Among the Justices, Stephen G. Breyer and Sonia Sotomayor were most candid about their confessedly weak grasp of the details of the auction market, and Sotomayor made a notable effort to get the lawyers involved to help here in composing at least the first paragraph of a decision resolving these cases. And, among the lawyers, attorney Clement appeared to have the most success in trying to make that market’s arcane operation seem at least somewhat understandable.
The Court is holding two cases from New Jersey that clearly will depend on the outcome of the Maryland cases.