Executive Insight, Generation

Listening to the Supremes: Impacts of Judicial Decisions on Power Markets

“You could have 50 different states having 50 different regulations . . . until they were all litigated out.”

– Late Supreme Court Justice Antonin Scalia

 

The power sector has had a significant amount of judicial air time the past year.  Four important cases made their way up to the Supreme Court and the decisions have economic consequences for those operating and investing in the electricity industry.

I’ll Set You Free

The Supreme Court’s January 2016 decision in FERC v. Electric Power Supply Association regarding FERC Order No. 745 (6-2), confirmed the Commission’s jurisdiction to regulate participation and prices paid for retail demand response in wholesale energy markets.  In addition to allowing demand response in wholesale markets, Order 745 also priced those negawatts at the same locational marginal market-clearing price as generators. Despite the Amici Curiae brief in which more than 20 economists and educators agreed that this pricing is “economically irrational” and establishes a “counterproductive demand response mechanism,” the Supreme Court upheld FERC’s pricing rule with the simple position that FERC provided sufficient explanation of the basis for that price. Critics continue to argue that end-users now can sell something they never bought, creating market distortions.

In response to the Supreme Court’s decision, expect greater demand-side participation in wholesale energy markets, moving the demand curve to the left and lowering energy prices in response to market signals, reducing short-term costs, and deferring capital investments in generation, transmission and distribution.

We Should Be Closer Together

In its second decision for the year concerning power markets, the Supreme Court issued a ruling against Maryland’s program to incentivize new power generation investment via contracts for differences between load serving entities and an independent power producer. The Court’s April 2016 decision on CPV Maryland, LLC v. Talen Energy Marketing (8-0) found that Maryland’s intervention in wholesale electricity market pricing through financial contracts was inappropriate because it disregarded interstate wholesale rates required by FERC. Despite the unanimity, the decision was narrowly drafted, arguably allowing for load serving entities to be able to serve their own retail customers with generation resources consistent with state policies. The Court thus deferred a ruling on whether physical bilateral contracts would be allowed under the same conditions.

The Court’s decision challenges states looking to intervene in competitive power markets to ensure adequate generation, potentially allowing power prices to rise to levels required to secure new entry. On the other hand, the narrow focus of the decision may simply modify the contractual approach to physical bilateral contracts versus financial contracts, allowing regulated utilities to obtain renewable power and reliability resources through long-term power purchase agreements with generators.

You Keep Me Hanging On

Two other decisions by the Supreme Court impacting power markets relate to air emissions: the Mercury and Air Toxics Standard (MATS) and the EPA’s Clean Power Plan (CPP). In February, the Court granted a stay of the CPP (5-4) while the lower courts decide the merit of challenges by 27 states regarding whether the EPA has the authority to regulate greenhouse gas emissions from power plants under section 111(d) of the Clean Air Act. The DC Circuit Court begins hearing oral arguments about the legality of the regulation in September, a decision which is sure to end up at the Supreme Court.

In contrast, the Supreme Court denied without comment an application for a stay of the MATS rule focused on the emissions of toxic air pollutants from existing and new coal and oil-fired power plants. Following the Court’s March 2015 ruling that the EPA did not properly take costs into account when initially deciding to regulate power plant emissions, the DC Circuit Court remanded the regulation back to the EPA to complete the required cost analysis and ruling that the defect did not require vacating the MATS. Twenty states requested a Supreme Court ruling on the DC Court’s decision as well as a stay while the Court reviewed the case. The stay was denied.

Thus both regulations carry on in the courts, creating ongoing uncertainty in the industry regarding their ultimate impacts on the industry.

You’re My Driving Wheel

The Supreme Court has been busy rendering decisions that impact the power sector. To date, demand response has achieved a clear victory. Competitive markets have achieved a partial victory against state intervention.  Final decisions on air emissions remain unclear.  As a result, total net impacts of the Court’s rulings on energy and power prices are mixed. Stay tuned for more hits by the Supremes.

About the author: Tanya Bodell is the Executive Director of Energyzt, a global collaboration of energy experts who create value for investors in energy through actionable insights. Visit www.energyzt.com. She can be reached at: [email protected] or 617-416-0651.