SCOTUS hears third energy policy case: Federalism vs. states’ rights

The U.S. Supreme Court held oral arguments this week in Hughes v. Talen Energy Marketing, et al., the third federal energy policy case to be decided this term, a rare trio of cases in which the balance of power between the federal government and states’ rights in electric and natural gas policy and regulation is being decided for the modern era.

The Talen Energy case argued this week involved efforts by Maryland and New Jersey to incentivize wholesale power generating plants to be built in their states with the help of guaranteed long-term contracts.

The plants were required to bid the plants’ wholesale capacity into the regional power markets run by PJM. Other generators in the markets sued the states, arguing that states were improperly subsidizing competitors and interfering in the markets regulated by the Federal Energy Regulatory Commission (FERC) pursuant to the Federal Power Act (FPA). The lower courts agreed with the challengers and the states appealed.

During oral arguments Wednesday, the panel of justices peppered counsel for the state of Maryland with questions, seeking an explanation for how the court could rationalize the states’ actions in light of the FPA’s reservation to FERC jurisdiction over wholesale power sales in interstate commerce. When counsel for the challenging generators had his turn to argue in defense of the lower court rulings, Associate Justice Sonja Sotomayor essentially asked him to orally outline how he thinks the court should write the opinion. 

Observers concluded the “writing is on the wall” – a ruling affirming the 4th Circuit and 3rd Circuit decisions is expected. The key question remaining is whether the court will find the states’ action “field preempted” – in that FERC is entitled to broad jurisdiction to occupy the entire field of wholesale power plant compensation – or “conflict preempted” – in which the court would reach a narrower ruling focused on the facts and circumstances of the particular case.

Just last month, the court issued a decision in the other electricity case this term, Federal Energy Regulatory Commission v. Electric Power Supply Association et al., wherein the court considered what is essentially the mirror-image of the Talen Energy cases. That case dealt with whether FERC went too far and infringed on states’ rights when it issued a 2010 rule, called Order No. 745, that requires wholesale power market operators to pay electric consumers for commitments not to use power at certain key times. Order No. 745 also requires that these payments be equal to the same amount that wholesale power generators were to be paid for generating electricity. In this way, FERC was essentially ordering that “negawatts” equal megawatts.

The third case that illustrates the Supreme Court’s current view of cooperative federalism and energy law involves states’ efforts, under state antitrust laws, to investigate wholesale natural gas sellers’ direct sales to large industrial customers. In Oneok, Inc. v. Learjet, Inc. et al, the court held that the Natural Gas Act (NGA) – a statute similar to the FPA in many respects – did not preempt a state antitrust investigation of sales of natural gas but nonetheless observed that “Congress occupied the field of matters relating to wholesale sales and transportation of natural gas in interstate commerce.” The key difference for purposes of natural gas preemption under the NGA is the distinction between “measures aimed directly at interstate purchasers and wholesale for resale, and those aimed at” subjects left to the states. 

The Learjet case teaches that where a state law can be applied to nonjurisdictional (i.e., state’s realm) as well as jurisdictional sales (i.e., FERC’s realm), the court will only find preemption where the matter falls within the preempted field.  Antitrust laws, the court said, like blue sky laws, are not aimed at natural gas companies in particular, but rather all businesses in the marketplace. This broad applicability, not aimed at wholesale natural gas sellers, convinced the court to find no preemption. 

In the Talen Energy cases, the court’s questioning seems to reveal the opposite conclusion – that the states went too far into FERC’s jurisdictional realm by incentivizing development of new wholesale power generation. A decision in the Talen Energy case is expected by June 2016.

Author: Stephen J. Humes is a partner in the New York City office of Holland & Knight LLP, where he practices energy regulatory, project development, transactional and environmental law.  

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