Amicus Curiae Brief — Electric Power Supply Association, et al., Petitioners v. John B. Rhodes, et al.

Supreme Court briefFeb 8, 2019

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No. 18-879

IN THE

ELECTRIC POWER SUPPLY ASSOCIATION

AND NRG ENERGY, INC.,

Petitioners,

JOHN B. RHODES, ET AL.,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Second Circuit

BRIEF FOR AMICI CURIAE

AMERICAN PETROLEUM INSTITUTE AND

NATURAL GAS SUPPLY ASSOCIATION

IN SUPPORT OF PETITIONERS

Stacy Linden

Ben Norris

AMERICAN PETROLEUM

INSTITUTE

1220 L St. NW

Washington, DC 20005

Dena Wiggins

NATURAL GAS SUPPLY

ASSOCIATION

1620 I St. NW

Suite 700

Washington, DC 20006

Sarah E. Harrington

Counsel of Record

Erica Oleszczuk Evans

GOLDSTEIN & RUSSELL. P.C.

7475 Wisconsin Ave.

Suite 850

Bethesda, MD 20814

(202) 362-0636

sh@goldsteinrussell.com

TABLE OF CONTENTS

TABLE OF AUTHORITIES ........................................ ii

INTEREST OF AMICI CURIAE ................................. 1

SUMMARY OF ARGUMENT ..................................... 3

ARGUMENT ................................................................ 4

New York’s ZEC Program Is Incompatible

With Federal Energy Policy Governing

Wholesale Markets ................................................ 5

II. States Remain Free To Implement Their

Energy Policy Preferences Through

Regulation Of Generation And Retail Sales ...... 17

CONCLUSION .......................................................... 20

TABLE OF AUTHORITIES

Cases

Apache Corp. v. FERC,

627 F.3d 1220 (D.C. Cir. 2010) .............................. 13

Calpine Corp. v. PJM Interconnection, L.L.C.,

163 FERC ¶ 61,236 (2018) ............................. passim

FERC v. Elec. Power Supply Ass’n,

136 S. Ct. 760 (2016) ...................................... passim

Hughes v. Talen Energy Mktg., LLC,

136 S. Ct. 1288 (2016)..................................... passim

ISO New England Inc.,

162 FERC ¶ 61,205 (2018) ............................... 10, 12

Miss. Power & Light Co. v. Mississippi ex rel.

Moore,

487 U.S. 354 (1988) .......................................... 16, 17

Morgan Stanley Capital Grp., Inc. v. Pub. Util.

Dist. No. 1,

554 U.S. 527 (2008) .................................................. 6

N. Nat. Gas Co. v. State Corp. Comm’n of Kan.,

372 U.S. 84 (1963) .................................................. 19

Nantahala Power & Light Co. v. Thornburg,

476 U.S. 953 (1986) ................................................ 17

New York v. FERC,

535 U.S. 1 (2002) .................................................. 5, 6

Oneok, Inc. v. Learjet, Inc.,

135 S. Ct. 1591 (2015) ............................................ 14

PJM Power Providers Grp. v. PJM

Interconnection, L.L.C.,

137 FERC ¶ 61,145 (2011) ..................................... 11

S. Cal. Edison Co.,

71 FERC ¶ 61,269 (1995) ................................. 18, 19

iii

Constitutional Provisions

U.S. Const. art. VI, cl. 2 ............................................... 4

Statutes

Federal Power Act, 16 U.S.C. § 791a et seq. ..... passim

16 U.S.C. § 824(b)(1)................................................ 3

16 U.S.C. § 824e(a) ............................................ 3, 13

Natural Gas Act, 15 U.S.C. § 717 et seq............ 2, 5, 14

Rules

Sup. Ct. R. 37.2(a) ........................................................ 1

Sup. Ct. R. 37.6 ............................................................ 1

Other Authorities

U.S. Energy Info. Admin., FAQ: What is U.S.

electricity generation by energy source?

(Oct. 29, 2018), https://www.eia.gov/tools/faqs/

faq.php?id=427&t=3................................................. 1

INTEREST OF AMICI CURIAE1

The American Petroleum Institute (API) and Natural Gas Supply Association (NGSA) (collectively,

amici) are two of the largest national trade associations for the natural gas industry, representing members engaged in all aspects of supply and delivery of

natural gas to electricity generators nationwide.

Clean-burning natural gas is now the leading fuel

source for electricity generation in the United States,

with natural gas fired generators providing approximately one third of the Nation’s electricity supply in

2017.2 Amici are therefore uniquely situated to provide insight into the significant adverse effects the

Second Circuit’s erroneous decision will have on the

Nation’s organized wholesale energy markets.

API has more than 625 members, including natural gas producers, gathering and processing facility operators, intra- and inter-state pipeline companies, natural gas marketers, and operators of liquefied natural

gas import and export facilities in the United States

and around the world, as well as owners, operators,

In accordance with Supreme Court Rule 37.6, amici curiae

certify that no counsel for a party authored this brief in whole or

in part, and that no party or counsel other than the amici curiae

and its counsel made a monetary contribution intended to fund

the preparation or submission of this brief. As required by

Supreme Court Rule 37.2(a), counsel for all parties were notified

of an intent to file this brief at least ten days in advance its filing.

Counsel for petitioners and for respondents have filed with this

Court notices of blanket consent to the filing of amicus briefs.

U.S. Energy Info. Admin., FAQ: What is U.S. electricity generation by energy source? (Oct. 29, 2018), https://www.eia.gov/

tools/faqs/faq.php?id=427&t=3.

and manufacturers of essential technology and equipment used all along the natural gas value chain. Additionally, some API members also own and operate

gas-fired merchant power generation in wholesale

markets across the United States. API is charged

with, inter alia, representing its members’ interests in

all administrative and legal proceedings that affect

the natural gas supply and delivery chain, including

cases involving the exclusive authority of the Federal

Energy Regulatory Commission (FERC) to regulate

wholesale and interstate energy markets under the

Federal Power Act and its companion statute, the Natural Gas Act.

Founded in 1965, NGSA is the only national trade

association that solely focuses on producer-marketer

issues related to the downstream natural gas industry. NGSA maintains a narrow but deep focus on the

regulatory issues that affect natural gas producermarketers and has been involved in a substantive

manner in every one of FERC’s significant natural gas

rulemakings since FERC’s creation in 1977, including

the restructuring of the natural gas industry though

Order Nos. 436, 636, and 637. NGSA has consistently

advocated for well-functioning wholesale markets for

natural gas and electricity; policies that support market transparency, efficient nomination, and scheduling protocols; just and reasonable transportation

rates; non-preferential terms and conditions of transportation services; and the removal of barriers to developing needed natural gas infrastructure. NGSA

has a long-established commitment to ensuring a public policy environment that fosters a growing, competitive market for natural gas.

The United States is in the midst of an energy renaissance, which has transformed the country from a

projected major natural gas importer to a net natural

gas exporter, with abundant supplies of natural gas,

in the span of a few short years. Natural gas, when

used to fuel electricity generation, offers substantial

benefits over other fossil fuels, including lower greenhouse gas and other harmful air emissions, low cost,

and a reliable and integrated nationwide delivery system. Indeed, it is the overwhelming market advantages offered by natural gas that have spurred the

nuclear energy industry to seek unprecedented and

blatantly discriminatory subsidies from various States

in the form of direct intervention in the design and operation of the organized wholesale electricity markets.

The Nation’s suppliers, transporters, and purchasers

of low-cost natural gas used for electricity generation

should not be intentionally and unduly disadvantaged

in the organized wholesale electricity markets due to

such state policies that distort the market and imperil

the long-term stability of the Nation’s energy supply.

SUMMARY OF ARGUMENT

Congress could not have been clearer in assigning

to FERC exclusive authority over wholesale rates in

the energy market. The Federal Power Act authorizes

FERC to regulate “the sale of electric energy at wholesale in interstate commerce.” 16 U.S.C. § 824(b)(1).

The Federal Power Act further mandates that FERC

“shall” preempt “any rule, regulation, practice, or contract affecting” a rate within the Commission’s jurisdiction that “is unjust, unreasonable, unduly discriminatory or preferential.” 16 U.S.C. § 824e(a). FERC

regulates wholesale rates using a market-based scheme

that encourages efficiencies in the production and sale

of power—including by signaling when new generators

should enter the market and when existing generators

should exit the market—and that sends reliable signals to investors about which generators (or types of

generators) are efficient operators in the market.

Although States remain free to regulate generation

facilities and retail sales of energy, they are precluded

by the Supremacy Clause, U.S. Const. art. VI, cl. 2,

from countermanding or otherwise effectively adjusting wholesale rates that FERC has deemed just and

reasonable. But state-subsidy programs like New

York’s so-called zero-emission credit program do exactly that. By directly tethering the amount of the

subsidy to the market wholesale rate, New York guarantees to three select generators (all owned by the

same corporation) an effective wholesale price that is

different from the wholesale price established through

FERC-approved wholesale auctions. New York may or

may not have valid reasons for wishing to prop up

these particular non-competitive electricity generators—but they cannot pursue those policy aims by substituting their judgment about the amount those generators should receive at wholesale for FERC’s assessment of what is just and reasonable.

ARGUMENT

The Second Circuit erred in holding that New

York’s zero-emission credit (ZEC) program is not

preempted by the Federal Power Act (FPA or Act),

16 U.S.C. § 791a et seq. The Act grants to FERC exclusive authority to regulate wholesale energy markets, including by setting or approving wholesale rates

that the Commission determines are just and reason-

able. FERC employs a market-based approach to setting and approving such rates, in pursuit of the related

goals of increasing the efficiency of the market and decreasing energy costs for consumers. When a State

subsidizes a favored generator (or type of generator)

by guaranteeing an effective wholesale price that is

different from the price approved by FERC, it distorts

the wholesale market and undermines federal energy

policy in an area exclusively within the purview of federal regulators. This Court should grant the petition

for a writ of certiorari to correct the Second Circuit’s

error.3

New York’s ZEC Program Is Incompatible

With Federal Energy Policy Governing

Wholesale Markets.

In the decades since the Federal Power Act (and

its companion statute, the Natural Gas Act, 15 U.S.C.

§ 717 et seq.) was enacted, the energy market in the

United States has undergone a transformation—and

so has federal energy policy. Because New York’s ZEC

program significantly undermines modern federal energy policy, it should be preempted, and the United

States’ support for it and similar programs should be

rejected.

A. When the FPA was enacted in 1935, “most

electricity was sold by vertically integrated utilities

that had constructed their own power plants, transmission lines, and local delivery systems.” New York

v. FERC, 535 U.S. 1, 5 (2002). Not surprisingly, under

Amici also support the cert. petition filed in Electric Power

Supply Ass’n v. Star, No. 18-868 (filed Jan. 7, 2019), which seeks

review of a similar decision from the Seventh Circuit, upholding

a similar ZEC program operated by Illinois.

that monopolist regime, “[c]ompetition among utilities

was not prevalent.” Ibid. Since that time, “the number of electricity suppliers has increased dramatically”

as “[t]echnological advances have made it possible to

generate electricity efficiently in different ways and in

smaller plants.” Id. at 7.

In the early decades of regulation under the FPA,

FERC “reviewed and set tariff rates” (i.e., rate schedules) “under the ‘cost-of-service’ method, which ensures that a seller of electricity recovers its costs plus

a rate of return sufficient to attract necessary capital.”

Morgan Stanley Capital Grp., Inc. v. Pub. Util. Dist.

No. 1, 554 U.S. 527, 530, 532 (2008). “In recent decades,” in contrast, “the Commission has attempted to

break down regulatory and economic barriers that hinder a free market in wholesale electricity” by “promot[ing] competition in those areas of the industry

amenable to competition, such as the segment that

generates electric power.”

Id. at 535-536.

“forego[ing] the cost-based rate-setting traditionally

used to prevent monopolistic pricing,” FERC “instead

undertakes to ensure ‘just and reasonable’ wholesale

rates by enhancing competition.” FERC v. Elec. Power

Supply Ass’n, 136 S. Ct. 760, 768 (2016) (EPSA). In its

mandated role as the arbiter of which wholesale rates

are just and reasonable, FERC has thus shifted its focus from “the costs that each market participant incurs” to the value to the market of the service each

participant provides. Id. at 772.

One of the vital tools FERC uses to maximize efficiency in the market is competitive wholesale auctions. Hughes v. Talen Energy Mktg., LLC, 136 S. Ct.

1288, 1293 (2016); see Pet. App. 7a. In FERC-approved

wholesale auctions, generators bid to sell their electricity at the lowest price they would be willing to accept either immediately (in same-day or next-day auctions) or at a future date (in capacity auctions, which

ensure the availability of electricity at a specified point

in the future). The auction administrator stacks the

bids from lowest to highest until it can cover the required amount of electricity—and then every generator in that stack receives the highest bid in the stack

(the “clearing price”). Hughes, 136 S. Ct. at 1293.

Some generators—like the generators that benefit

from New York’s ZEC program—offer their entire supply at whatever the clearing price is determined to be

(or offer it at zero dollars, the functional equivalent).

Those generators are known as “price takers.” Id. at

1293-1294. Wholesale auctions serve important functions, including establishing a market-based rate that

is fair and ensuring stability in the supply of electricity. Just as important, capacity auctions “identify

[the] need for new generation.” Id. at 1293. “A high

clearing price in the capacity auction encourages new

generators to enter the market, increasing supply and

thereby lowering the clearing price in same-day and

next-day auctions three years’ hence; a low clearing

price discourages new entry and encourages retirement of existing high-cost generators.” Ibid.

When a state program, including a subsidy program, “has the effect of disrupting the competitive

price signals that [a FERC-approved wholesale auction] is designed to produce”—signals that investors,

generators, wholesale purchasers, and other States together rely on ensure sufficient capacity—that program is preempted. Hughes, 136 S. Ct. at 1296 (citation omitted). In Hughes, Maryland’s program was

preempted because it had the effect of “adjusting an

interstate wholesale rate” to ensure that a newentrant generator received a specified level of compensation for its wholesale contributions. Id. at 1297. The

same is true of New York’s ZEC program, which effectively adjusts the wholesale rates set at FERCapproved auctions to ensure that favored nuclear generators receive more than the clearing price for the

electricity they sell in those auctions. The court of appeals held that New York’s program walked right up

to the preemption line without crossing it because New

York (unlike Maryland) does not require the subsidized generators to sell their electricity in FERCapproved wholesale auctions. Pet. App. 22a. But that

is a distinction without a difference in this context.

First, the amount of the subsidy is directly tied to

wholesale market prices, thereby making crystal clear

that the subsidy is intended to make up for any shortfall in covering costs that would result from ordinary

participation in the wholesale auctions. Second, as a

practical matter, the favored generators have no choice

but to participate in FERC-approved wholesale auctions in order to sell their electricity. See Pet. 4, 11-12.

The effect of New York’s program on wholesale

markets is the same as the improper effect of Maryland’s program: it encourages a subsidized generator

to “bid its capacity into the auction at the lowest possible price” when doing so would not make economic

sense in the absence of the auction-linked subsidy.

Hughes, 136 S. Ct. at 1295. The artificially low bids

that result from (indeed, are intended by) New York’s

program “throw[] the auction’s market-based pricesetting mechanism out of balance.” Id. at 1294. Like

Maryland’s program, it must therefore be preempted.

B. In the Seventh Circuit, the United States and

FERC filed an invited amicus brief defending the validity (and lack of preemption) of Illinois’ comparable

ZEC program. Gov’t Br., Village of Old Mill Creek v.

Star, 904 F.3d 518 (7th Cir. 2018) (Nos. 17-2433, 172445), petition for cert. pending, No. 18-868 (filed Jan.

7, 2019). In its brief, the government seized on the fact

that the Illinois program (like the New York program

at issue here) does not require subsidized generators

to bid their electricity in FERC-approved auctions to

explain why it is not preempted. Because “the object

of the subsidy is the ‘participant,’ not the ‘actual

wholesale transaction,’ ” the government explained, id.

at 10, it fell outside FERC’s exclusive domain. That

argument is wrong and should be rejected—both because it defies common sense and because it is contrary to decades of established federal energy policy.

FERC has clearly articulated the importance of using a market-based approach to setting wholesale

rates. The Commission’s approach to regulation in

this area has been “guided by the first principles of capacity markets”:

A capacity market should facilitate the robust

competition for capacity supply obligations,

provide price signals that guide the orderly

entry and exit of capacity resources, result in

the selection of the least-cost set of resources

that possess the attributes sought by the markets, provide price transparency, shift risk as

appropriate from customers to private capital, and mitigate market power. Ultimately,

the purpose of basing capacity market constructs on these principles is to produce a

level of investor confidence that is sufficient

to ensure resource adequacy at just and reasonable rates.

ISO New England Inc., 162 FERC ¶ 61,205, at ¶ 21

(2018) (footnote omitted). And, as this Court has explained, the clearing price established through a capacity auction directly affects the clearing prices established in same-day and next-day auctions. Hughes,

136 S. Ct. 1293. Because New York’s ZEC program

(and programs like it) undermine FERC’s guiding

market-based principles in significant ways, they are

preempted.

Out-of-market support that is tied to auction

clearing prices disrupts efficient market signals about

when new generators should enter the market and

when existing generators should leave. Because a program such as New York’s artificially boosts the effective auction price for favored generators, it has the effect of artificially deflating auction clearing prices—

because those favored generators can bid their electricity at zero dollars regardless of their costs of production. When a clearing price is low because less efficient generators are subsidized through out-of-market payments, more efficient generators may be encouraged to leave the market, leaving consumers to ultimately pay higher prices than the market would otherwise support. As the Commission has explained as

recently as six months ago, a final clearing price that

reflects such subsidized payments to generators that

would not otherwise clear the market “fail[s] to provide a useful signal to market participants regarding

whether a resource will clear the market or whether

new entry or retirement is needed.” Calpine Corp. v.

PJM Interconnection, L.L.C., 163 FERC ¶ 61,236, at

¶ 65 (2018). Such a disruption to ordinary market signals can “jeopardiz[e]” a “capacity market’s ability to

ensure resource adequacy going forward.” Ibid. In

other words, the “price distortions” that result from

this type of out-of-market state support “compromise

the capacity market’s integrity.” Id. at ¶ 150; see id.

at ¶ 156 (“[O]ut-of-market payments by certain . . .

states have reached a level sufficient to significantly

impact the capacity market clearing prices and the integrity of the resulting price signals on which investors and consumers rely to guide the orderly entry and

exit of capacity resources.”).

Just as important, FERC has explained that the

market distortions caused by programs like New

York’s erode investor confidence, thereby imperiling

the long-term stability of energy markets. The “price

distortions” created by out-of-market state support

“create significant uncertainty, which may further

compromise the market, because investors cannot predict whether their capital will be competing against

resources that are offering into the market based on

actual costs or state subsidies.” Calpine, 163 FERC

¶ 61,236, at ¶ 150. When price signals suggest that

the market would “buy capacity from higher cost resources than actually clear the market,” it is “more difficult for investors to gauge whether new entry is

needed, or at what price that new entry will clear [a]

capacity market and receive a capacity commitment.”

Id. at ¶ 65. As the Commission has explained, “[t]he

long-term viability of [wholesale] market[s] demands

an assurance of competitive offers from new entrants.”

PJM Power Providers Grp. v. PJM Interconnection,

L.L.C., 137 FERC ¶ 61,145, at ¶ 2 (2011). Investing in

new electricity generators is a significant undertaking, dependent on long-term revenue projections.

When traditional market signals are distorted or disrupted by out-of-market payments, the resulting

“[e]rosion of investor confidence can prevent” a region

“from attracting investment in new and existing nonstate-supported resources when investment is needed,

or can lead to excessive costs for consumers as capacity

sellers include significant risk premiums in their offers.” ISO New England, 162 FERC ¶ 61,205, at ¶ 24.

Programs like New York’s have an adverse effect

on consumers. The Commission has lamented that

some out-of-market subsidy programs like New York’s

are “significant enough to affect the price in the market.” Calpine, 163 FERC ¶ 61,236, at ¶ 151. In particular, FERC has explained that the comparable ZEC

subsidies in Illinois are high enough to allow favored

high-cost generators—generators that would be “uncompetitive resources” without the subsidy—to bid

their electricity at zero dollars when “a competitive offer would be significantly higher than zero.” Ibid. Although the short-term effect of such subsidies will be

a suppression of wholesale prices, id. at ¶ 154, even

that benefit may not carry through to consumers, who

are required to pay for the subsidy that causes the

price suppression, Pet. App. 8a. The long-term effect,

however, will be an increase in wholesale and retail

prices—because the subsidies’ distortion of the wholesale market will permit favored “uneconomic” “resources, which should consider retiring, based on their

costs” to “displace resources that can meet” the necessary “capacity needs at a lower overall cost.” Calpine,

163 FERC ¶ 61,236, at ¶ 154. Permitting programs

like New York’s ZEC program to continue therefore

undermines FERC’s fundamental goals of “promot[ing] competition and help[ing] American consumers gain access to reliable and affordable energy.”

Apache Corp. v. FERC, 627 F.3d 1220, 1221 (D.C. Cir.

2010) (Kavanaugh, J.).

Congress has also mandated that the Commission

“shall” intervene to countermand any state practice

that is “unduly discriminatory or preferential.” 16

U.S.C. § 824e(a). And the Commission has explained

that an out-of-market subsidy is in fact “unjust and

unreasonable, and unduly discriminatory or preferential” when “a resource receiving out-of-market payments” “benefit[s] from its participation in [a wholesale] market, by not competing on a comparable basis

with competitive resources.” Calpine, 163 FERC

¶ 61,236, at ¶ 66. The Commission further explained

that such subsidies are “unjust and unreasonable and

unduly discriminatory” because they cause “unreasonable price distortions and cost shifts” by “keep[ing] existing uneconomic resources in operation, or . . . support[ing] uneconomic entry of new resources, regardless of the generation type or quantity of the resources

supported by such out-of-market support.” Id. at ¶ 150.

Finally, FERC has warned that out-of-market subsidies like New York’s will create a vicious cycle that

over time will fully erode the Commission’s regulatory

scheme. As subsidies artificially suppress auction

prices, FERC has explained, “more generation resources lose needed revenues, increasing pressure on

states to provide out-of-market support to yet more

generation resources that states prefer, for policy reasons, to enter the market or remain in operation.” Calpine, 163 FERC ¶ 61,236, at ¶ 2. And “[w]ith each sub-

sidy, the market becomes less grounded in fundamental principles of supply and demand.” Ibid. That consequence directly conflicts with FERC’s exclusive jurisdiction over wholesale electricity markets.

In short, FERC has consistently concluded that

out-of-market support for uneconomic generators conflicts with FERC’s authority over wholesale rate-setting when that support effectively increases the wholesale compensation of power from preferred generators,

thereby distorting market prices and market signals.

That view of federal energy policy is consistent with

this Court’s decisions addressing preemption in this

area. The primary mechanism FERC uses “for keeping wholesale natural-gas [and electricity] rates at a

reasonable level” is “the competitive marketplace.”

Oneok, Inc. v. Learjet, Inc., 135 S. Ct. 1591, 1597

(2015).4 When a state law “target[s]” that regulatory

mechanism by intentionally distorting normal market

competition in a wholesale auction, id. at 1599, it is

preempted. The Court recently explained in EPSA—

in the course of upholding FERC’s use of a tool to stabilize capacity during high-demand times—that it

would “conflict with the Act’s core purposes” to “prevent[] all use of a tool that no one . . . disputes will curb

prices and enhance reliability in the wholesale electricity market.” 136 S. Ct. at 773. Surely, then, it

must conflict with the Act’s core purposes to permit

use of a tool that has and will continue to predictably

increase prices and erode reliability in the wholesale

electricity market.

Oneok was a case about the Natural Gas Act—but this Court

routinely relies on Natural Gas Act cases in determining the

scope of the FPA, and vice versa. Hughes, 136 S. Ct. at 1298 n.10.

The United States’ recent argument to the contrary

is inconsistent with its long-established approach to

wholesale markets and with federal energy policy

more generally. And its explanation of that reversal

in position—without rulemaking or agency adjudication—does not hold water. The government insists

that, because programs like New York’s do not require

the favored generators to participate in wholesale auctions, they do not fall within the preemption sphere

identified in Hughes. It is true that the Court stated

in Hughes that the “fatal defect” of the Maryland program was its “condition[ing] payment of funds on capacity clearing the auction.” 136 S. Ct. at 1299. But

that is not the same as saying that a similar subsidy

that does not expressly require participation in wholesale auctions—but applies to generators whose only

option is to participate in wholesale auctions—would

not be preempted. In fact, the Court expressly declined to resolve whether Maryland’s program was

preempted “because it interferes with the [FERCapproved wholesale] auction’s price signals.” Id. at

1299 n.13. In his concurring opinion, Justice Thomas

explained that (like New York’s ZEC program),

“[u]nder Maryland’s program, [a favored generator] is

entitled to receive, for its wholesale sales into [a

FERC-approved wholesale] auction, something other

than what FERC has decided that generators should

receive.” Id. at 1301. That type of subsidy is preempted,

he explained, because it “is a regulation of wholesale

sales: By ‘fiddling with the effective . . . price’ that [the

favored generator] receives for its wholesale sales,

Maryland has ‘regulate[d]’ wholesale sales ‘no less

than does direct ratesetting.’ ” Ibid. (quoting EPSA,

136 S. Ct. at 787) (ellipses and second set of brackets

in original); accord id. at 1300 (Sotomayor, J., concurring) (“Maryland, however, has acted to guarantee

[the favored generator] a rate different from FERC’s

‘just and reasonable’ rate and has thus contravened

the goals of the Federal Power Act. Such actions must

be preempted.”) (internal citation omitted).

New York’s ZEC program closely tracks the Maryland program found to be preempted in Hughes. It

also operates as the flip side of the preempted coin at

issue in Mississippi Power & Light Co. v. Mississippi

ex rel. Moore, 487 U.S. 354 (1988). There, the Mississippi Supreme Court ordered the state regulator to use

its authority to set retail prices that would implement

its own assessment of what constituted a just and reasonable wholesale rate—including by capping the

amount of wholesale costs a wholesaler-as-seller could

recover at retail. Id. at 365-369. In other words, the

state court held that the State could use its authority

to effectively impose a lower wholesale rate by preventing wholesalers from recovering the full amount

of the actual wholesale rate approved by FERC. This

Court reversed. That exercise of authority was

preempted, the Court explained, because “[w]hen

FERC sets a rate between a seller of power and a

wholesaler-as-buyer, a State may not exercise its undoubted jurisdiction over retail sales to prevent the

wholesaler-as-seller from recovering costs of paying

the FERC-approved rate.” Id. at 372 (citation omitted). The flip side is true here—a State is using its

authority to effectively impose a higher wholesale rate

by granting a subsidy in an amount tied to the actual

wholesale rate approved by FERC. That exercise of

authority is just as impermissible: “A State must . . .

give effect to Congress’ desire to give FERC plenary

authority over interstate wholesale rates, and to ensure that States do not interfere with this authority.”

Id. at 373 (quoting Nantahala Power & Light Co. v.

Thornburg, 476 U.S. 953, 966 (1986)).

In sum, this Court should reject the United States’

new-found embrace of out-of-market subsidies that

grant effective wholesale rates to particular generators that are different from the clearing price established at a FERC-approved wholesale auction. Congress has not granted FERC any discretion to permit

States to intrude to some degree on the Commission’s

sphere of exclusive authority. Congress has imposed

a duty—not the discretion—to step in when a State intrudes on the arena of wholesale rate-setting. EPSA,

136 S. Ct. at 774.

II. States Remain Free To Implement Their Energy Policy Preferences Through Regulation

Of Generation And Retail Sales.

If this Court holds, as it should, that New York’s

ZEC program is preempted, the State will still have a

host of means through which to implement its energy

policy preferences, including its preference that certain nuclear generators remain in the market. As was

true in Hughes, a finding of preemption here should

not “be read to foreclose” “States from encouraging

production of new or clean generation through

measures untethered to a generator’s wholesale market participation.” 136 S. Ct. at 1299 (internal quotation marks omitted). Where, as here, that encouragement comes in the form of a subsidy that is directly

tied to wholesale auction rates—and that applies only

to generators that have no choice but to sell their electricity in such auctions—it is preempted. But the

Commission has elsewhere made clear that many

other avenues remain open to States that wish to prop

up favored types of generators, whether they be renewable forms of energy like wind and solar or more

traditional forms like nuclear or coal. E.g., Calpine,

163 FERC ¶ 61,236, at ¶ 158 (“States may continue to

support their preferred types of resources in pursuit of

state policy goals.”). In particular, the Commission

has explained that States “may seek to encourage renewable or other types of resources through their tax

structure, or by giving direct subsidies.” S. Cal. Edison Co., 71 FERC ¶ 61,269, ¶ 62,080 (1995). For example, a State “may impose a tax or other charge on

all generation produced by a particular fuel, and thus

increase the costs which would be incurred by utilities

in building and operating plants that use that fuel.”

Ibid. “Conversely, a state may also subsidize certain

types of generation” through “tax credits.” Ibid. (emphasis omitted). A State may use its taxing and spending powers to influence which generators enter or retire from the market—by, e.g., incentivizing the construction of new facilities, limiting new construction to

certain types of energy resources, and requiring the retirement of particular generators or types of generators. And, where circumstances permit, a State may

influence retail customers’ buying decisions by offering tax incentives to purchase electricity from certain

types of providers.

The Commission has acknowledged that a State’s

“[u]se of the tax structure” in those ways “may allow

states to affect the price of renewables or other alternatives”: “By imposing a tax on fossil generators or by

giving a tax incentive to alternative generation, states

may allow the alternative generation to be more com-

petitive in a cost comparison with fossil-fueled generation.” S. Cal. Edison, 71 FERC at ¶ 62,080. But the

Commission’s explanation illustrates why those

means of support are different in kind from the subsidy at issue here. Although “[a] state may, through

state action, influence what costs are incurred by the

utility,” a State “may not” employ means that have the

effect of “adjust[ing] the bids of potential suppliers by

imposing environmental adders or subtractors that

are not based on real costs that would be incurred by

utilities.” Ibid.

To be sure, those permissible forms of stateprovided assistance to particular kinds of generators

will have an effect on the wholesale market because

they will reduce the net operating costs and/or the

amount of capital investment a new or existing generator needs to recover in order to be profitable. But that

type of assistance is within the State’s traditional

sphere of regulation because it is directed to generation (or possibly to retail prices), not to wholesale

prices or to the wholesale market more generally.

Once a generator bids its electricity at a wholesale auction, a State may not take the further step of propping

up a preferred generator with a program that effectively adjusts the wholesale price that generator will

receive. When a generator chooses to participate in a

wholesale auction, it must abide by FERC’s rules.

A State may not adopt a policy that either directly

regulates wholesale prices or “would indirectly achieve

the same result.” EPSA, 136 S. Ct. at 776 (quoting

N. Nat. Gas Co. v. State Corp. Comm’n of Kan., 372

U.S. 84, 91 (1963)). Because New York’s ZEC program

does exactly that, the Second Circuit erred in holding

that it is not preempted.

CONCLUSION

For the foregoing reasons, the Petition for a Writ

of Certiorari should be granted and the decision below

reversed.

Respectfully submitted,