Opinion analysis: U.S. energy regulators’ authority grows
For the second time in recent months, the Supreme Court on Tuesday reinforced the authority of the federal government’s energy regulators in the ongoing national-state competition to manage the markets for electricity. The Federal Power Act assures roles for both the Federal Energy Regulatory Commission and for the states, but major shifts in the energy markets are tending to favor FERC over the states.
That happened again as the Court decided the combined cases titled Hughes v. Talen Energy Marketing, curbing initiatives taken by Maryland and New Jersey when they were frustrated that federally regulated wholesale markets were not creating sufficient incentives to increase electricity generation. Those efforts, the Court declared by an eight-to-zero vote (with some disagreement among the Justices), have had an illegal influence over the prices at which power is sold at wholesale.
The new ruling illustrated the Court’s continued close attention to the federal-state division of energy regulation since the growth of giant regional auctions that seek to keep electricity flowing even during times of peak demand without pushing up too high the prices that are ultimately paid by the customers at the end of the power distribution chain.
Although FERC is supposed to be the sole manager of wholesale markets and the states the sole managers of retail markets, the rise of interstate combines of marketing have blurred those lines. Those markets are focused on what happens at the wholesale level, but they are having increased “downstream” impacts on the retail level, too.
In January, the Court did not hesitate to allow those “downstream” effects when it ruled, in the case of FERC v. Electric Power Supply Association, that the federal agency has clear authority to approve a scheme to pay electricity users — even some at the retail level — to cut their demand during peak loads, such as those seen on hot summer days. State regulators had protested against the retail effects of that scheme, but to no avail.
At issue on Monday were the two Atlantic Coast states’ plans to assure that sufficient supplies of energy would be available to the end-use customers in those states for periods of twenty years. They were not content with the assurances, provided by the FERC-regulated regional auction markets, of sufficient generation over three-year spans. So, the two states worked out a system to subsidize their in-state generating companies to build new capacity in return for the option of marketing their energy through the auctions.
The states felt certain that their scheme was legal under the Federal Power Act because the actual generation of electricity has long been within the states’ regulatory realm, under that act.
But it was the impact of that scheme on the auctions that the Court majority found did amount to an intrusion on FERC’s authority. The specifics of the Maryland and New Jersey plans, Justice Ruth Bader Ginsburg wrote in the main opinion, was to drive down the regional prices in the Atlantic market below what FERC had concluded was necessary to assure the continued supply of adequate generation.
“States,” the Ginsburg opinion said, “may not seek to achieve ends, however legitimate, through regulatory means that intrude on FERC’s authority over interstate wholesale rates, as Maryland [and New Jersey] has done here.” Past precedents, the Court added, made clear that “states interfere with FERC’s authority by disregarding wholesale rates FERC has deemed just and reasonable, even when states exercise their traditional authority over retail rates or, as here, in-state generation.”
The main opinion had the support of seven of the Justices. While Justice Sonia Sotomayor was one of the seven, she also wrote a separate concurring opinion. Justice Clarence Thomas wrote separately, joining part but not all of the Court’s reasoning, and joined in the judgment in favor of upholding a ruling by the U.S. Court of Appeals for the Fourth Circuit, in favor of FERC.