Amicus Curiae Brief — Nazarian v. PPL Energyplus, LLC, 135 S. Ct. 1582 (2015) (No. 14-614)

Nos. 14-614, 14-623, 14-634, and 14-694

Jn the Supreme Court of the United States

DOUGLAS R.M. NAZARIAN, ET AL., PETITIONERS

U.

PPL ENERGYPLUS, LLC, ET AL.

CPV MARYLAND, LLC, PETITIONER

v.

PPL ENERGYPLUS, LLC, ET AL.

CPV POWER DEVELOPMENT, INC., ET AL., PETITIONERS

Vv.

PPL ENERGYPLUS, LLC, ET AL.

JOSEPH L. FIORDALISO, IN HIS OFFICIAL CAPACITY AS

COMMISSIONER OF THE NEW JERSEY BOARD OF PUBLIC

UTILITIES, ET AL., PETITIONERS

v.

PPL ENERGYPLUuS, LLC, ET AL.

ON PETITIONS FOR WRITS OF CERTIORARI

TO THE UNITED STATES COURTS OF APPEALS

FOR THE FOURTH AND THIRD CIRCUITS

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

DONALD B. VERRILLI, JR.

MAX MINZNER Solicitor General

General Counsel Counsel of Record

ROBERT H. SOLOMON EDWIN S. KNEEDLER

Solicitor Deputy Solicitor General

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Additional Counsel Listed on Inside Cover

lihsery of Conran’

| aw Liew

ANN O’CONNEL

Ross R. FULTON O'CONNELL

Assistant to the Solicitor

Lisa B. LUFTIG General

Attorneys | Department of Justice

Federal Energy Regulatory Washington, D.C. 20530-0001

Commission SupremeCtBriefs@usdoj.gov

Washington, D.C. 20426 (202) 514-2217 " ”

QUESTION PRESENTED

Whether the Federal Energy Regulatory Commis-

sion’s exclusive jurisdiction over rates for the whole-

sale supply of electricity under the Federal Power

Act, 16 U.S.C. 791a et seq., preempts New Jersey and

Maryland laws that require electric distribution com-

panies to pay subsidies to state-selected generators

that bid into and clear the wholesale electric capacity

auction conducted by PJM Interconnection, LLC and,

in doing so, distort the wholesale price for electricity.

(I)

—— a i a eo

-

——— ee

1

:

TABLE OF CONTENTS

Page

a oar erertigaettrltemnitentaalediedaeaindanedle 2

ean aialiimindiinnbanititainieciniitheablatindaidedtinidl 2

EES RES ree ret eee cn ce ee EE 13

A. The LCAPP and the generation order are

i ccarttenissntaniscnainiiteisiannetenienamnnianiiamseagesemetinscsees 14

B. The decisions below are narrow and allow

States to incentivize new generation of capacity

i nccciniissaiistciitltesistasipinniittasiinasinainvinicaniense 20

C. The decisions below do not conflict with any

decision of another court of appeals....................c0c0000+ 23

SETI IUITIIIITT sisi sinsenceesiletinneiicicianeaninbiiiinibiiinaieniatamnatneitecieintniaiabitel 25

TABLE OF AUTHORITIES

Cases:

Allco Fin. Ltd. v. Klee, No. 3:13¢cv1874, 2014 WL

7004024 (D. Conn. Dec. 10, 2014), appeal pending,

No. 15-20 (2d Cir. filed Jan. 5, 2015) ...0........ecccccesesees 22, 23

Arkansas La. Gas Co. v. Hall, 453 U.S. 571 (1981)............ 14

Atlantic City Elec. Co. v. FERC, 295 F.3d 1

Trias LUI ie iciaaiciehideiaelassipsiieneslnsinaiiiiadehiaiininaniantnemabiaiis 23

California v. ARC Am. Corp., 490 U.S. 93 (1989)............... 14

Connecticut Dep't of Pub. Util. Control v. FERC,

569 F.3d 477 (D.C. Cir. 2009), cert. denied, 558 U.S.

a et isl nestiispnsriisssiacnietiniiaaciteiidetaiadannaitiahiebamibiabanidieiets 4, 6, 24

Freightliner Corp. v. Myrick, 514 U.S. 280 (1995) ............. 14

Kurns v. Railroad Friction Prods. Corp.,

RSIS ORES ae ae 14

Maryland Pub. Serv. Comm’n v. FERC, 632 F.3d

I Ta ceased cietanitactmiiane 6, 15

Mississippi Power & Light Co. v. Mississippi,

Se a TIE siissascrresinaianicasiinitishnasiinianininiabemiipganmseeneess 18, 19

Cases—Continued: Page

Morgan Stanley Capital Grp. Inc. v. Public Util.

Dist. No. 1 of Snohomish Cnty., 554 U.S. 527

Sicherheit aa 4,5, 19

New Jersey Bd. of Pub. Utils. v. FERC, 744 F.3d 74

ECE EERIE RRR eee enn eC Tn ae i)

New York v. FERC, 535 U.S. 1 (2002) ............cccescesesseeseeees 2,3

Oneok, Inc. v. Learjet, Inc., 135 S. Ct. 1591 (2015).......14, 17

PJM Interconnection, LLC:

135 F.E.R.C. 1 61,022, order clarified on reh’g,

137 F.ER.C. 9 61,145 (2011), petitions denied

sub. nom. New Jersey Bd. of Pub. Utils. v.

FERC, 744 F.3d 74 (3d Cir. 2014) ..........ccccesecseeseseeeees y

137 F.E.R.C. 9 61,145 (2011), petitions denied

sub nom. New Jersey Bd. of Pub. Utils. v.

FERC, 744 F.3d 74 (3d Cir. 2014) ..0.......ccccccceseees 9, 16

Pacific Gas & Elec. Co. v. State Energy Res. Conser-

vation & Dev. Comm’n, 461 U.S. 190 (1983)................. 4,19

Public Utils. Comm’n v. Attlebero Steam & Elec.

8 ERR enone aeRO 2

Schneidewind v. ANR Pipeline Co., 485 U.S. 293

a seal 18

Constitution and statutes:

U.S. Const., Art. I, § 8, Cl. 3 (Commerce Clause)................. 2

Federal Power Act, ch. 687, Tit. II, 49 Stat. 847

es TT ciate neaaeietipendteninamnnanianents 2

TERE ene ne eve EOS 3

I ania ierestciaderanatitdliall 3, 13, 14

a lticcieenl 3, 4, 14, 19

a eneeielennel 3, 13

Fi es I cio ntceescemnsneemnecsesctenssstmensnesemsceneioniitte 15

Statutes—Continued: Page

I acl cata 3,15

itis scsiassibitatiainsitnciasansnaiaiiinaatiinitaa 3, 13

EEE ER Seen ee ae een 3, 15

Natural Gas Act, 15 U.S.C. 717 et 8€q.........cc.cecesseceseserensereees 14

I 3

I alicia escalate cialblaeeds 3

Miscellaneous:

Office of Enforcement, Fed. Energy Regulatory

Comm/’n, Energy Primer: A Handbook of Energy

Market Basics (July 2015), http://www. ferc.

gov/market-oversight/guide/energy-primer.pdf............ 2,5

In the Supreme Court of the Anited States

No. 14-614

DOUGLAS R.M. NAZARIAN, ET AL., PETITIONERS

Vv.

PPL ENERGYPLUS, LLC, ET AL.

No. 14-623

CPV MARYLAND, LLC, PETITIONER

Vv.

PPL ENERGYPLUS, LLC, ETAL.

No. 14-634

CPV POWER DEVELOPMENT, INC., ET AL., PETITIONERS

v.

PPL ENERGYPLUS, LLC, ET AL.

No. 14-694

JOSEPH L. FIORDALISO, IN HIS OFFICIAL CAPACITY AS

COMMISSIONER OF THE NEW JERSEY BOARD OF PUBLIC

UTILITIES, ET AL., PETITIONERS

v.

PPL ENERGYPLUS, LLC, ET AL.

ON PETITIONS FOR WRITS OF CERTIORARI

TO THE UNITED STATES COURTS OF APPEALS

FOR THE FOURTH AND THIRD CIRCUITS

(1)

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

INTEREST OF THE UNITED STATES

This brief is filed in response to the Court’s order

inviting the Solicitor General to express the views of

the United States. In the view of the United States,

the petitions for writs of certiorari should be denied.

STATEMENT

1. a. The electric power system consists of three

components: the generation of electricity at power

plants and other facilities; the transmission of electric-

ity over long distances on high-voltage lines; and the

distribution of electricity to end users by “load-

serving entities” on low-voltage lines. Office of En-

forcement, Fed. Energy Regulatory Comm’n, Energy

Primer: A Handbook of Energy Market Basics 47, 57

(July 2015) (Energy Primer).' Originally “most elec-

tricity 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), and its sale was regulated only by

state agencies. This Court held in 1927, however, that

the Commerce Clause bars the States from regulating

certain interstate electricity transactions, such as

wholesale sales of power (i.e., sales for resale) across

state lines. Jd. at 5-6 (citing Public Utils. Comm’n v.

Attleboro Steam & Elec. Co., 273 U.S. 83, 89-90

(1927)).

Congress responded to the Attleboro decision by

enacting the Federal Power Act (FPA or Act), ch. 687,

' http://www.ferc.gov/market-oversight/guide/energy-primer.pdf.

3

Tit. I1, 49 Stat. 847 (16 U.S.C. 791a et seq.). The FPA

authorized the Federal Power Commission, the prede-

cessor to the Federal Energy Regulatory Commission

(FERC or Commission), to regulate certain compo-

nents of the electric-power system. 16 U.S.C. 792; see

42 U.S.C. 7151(b), 7172(a)(1). Section 824(b) of the

FPA gives FERC jurisdiction over (i) “the sale of

electric energy at wholesale in interstate commerce,”

and (ii) “the transmission of electric energy in inter-

state commerce.” 16 U.S.C. 824(b)(1).

Sections 824d and 824e in turn set forth FERC’s

core regulatory duties. First, those sections provide

that “[a]ll rates and charges made, demanded, or re-

ceived by any public utility for or in connection with”

interstate transmissions or wholesale sales, and “all

rules and regulations affecting or pertaining to such

rates or charges,” shall be “just and reasonable.” 16

U.S.C. 824d(a); see 16 U.S.C. 824d(b), 824e(a). Sec-

ond, if FERC finds that “any rate, charge, or classifi-

cation,” or “any rule, regulation, practice, or contract

affecting such rate, charge, or classification,” is “un-

just, unreasonable, unduly discriminatory or preferen-

tial,” FERC shall determine and prescribe what is

just and reasonable. 16 U.S.C. 824e(a).

The FPA also establishes specific limits on FERC’s

authority that preserve exclusive state jurisdiction

over certain matters. With respect to sales, Section

824(b) provides that, apart from the sales specifically

identified in the FPA, the statute “shall not apply to

any other sale of electric energy.” 16 U.S.C. 824(b)(1).

For that reason, FERC lacks jurisdiction to regulate

retail sales (7.e., sales to users of electricity), which

have long been regulated by state utility commissions.

New York, 535 U.S. at 16-17, 23. Section 824(b) fur-

4

ther provides that FERC “shall not have jurisdiction

* * * over facilities used for the generation of elec-

tric energy[,] or over facilities used in local distribu-

tion or only for the transmission of electric energy in

intrastate commerce.” 16 U.S.C. 824(b)(1). Such

facilities are likewise subject to state regulation. See

Pacific Gas & Elec. Co. v. State Energy Res. Conser-

vation & Dev. Comm’n, 461 U.S. 190, 205-206 (1983).

In the past two decades, FERC has sought to

“break down regulatory and economic barriers that

hinder a free market in wholesale electricity” and to

“promote competition in those areas of the industry

amenable to competition.” Morgan Stanley Capital

Grp. Inc. v. Public Util. Dist. No. 1 of Snohomish

Cnty., 554 U.S. 527, 5386 (2008) (Morgan Stanley).

Rather than ensuring the justness and reasonableness

of wholesale transactions by directly approving or

setting rates, the Commission has sought to achieve

its regulatory aims through market mechanisms. See

Connecticut Dep’t of Pub. Util. Control v. FERC, 569

F.3d 477, 482-485 (D.C. Cir. 2009), cert. denied, 558

U.S. 1110 (2010) (Connecticut). Under market-based

rate setting, generators and load-serving local utilities

generally have two methods to buy and sell electricity

in wholesale markets. They may enter into private

bilateral contracts for electricity, which, if the product

of good-faith, arm’s length negotiation, are presumed

to be just and reasonable. See Morgan Stanley, 554

U.S. at 545-546; 14-623 Pet. App. 52a-538a. They may

also sell to, and purchase from, a Commission-

approved nonprofit “Regional Transmission Organiza-

tion{]” or “Independent System Operator[].” Morgan

Stanley, 554 U.S. at 536-537.

5

“To further pry open the wholesale-electricity mar-

ket and to reduce technical inefficiencies caused when

different utilities operate different portions of the grid

independently,” FERC issued a rule encouraging

transmission-owning utilities to relinquish control of

their transmission lines to the wholesale-market oper-

ators, which are charged with operating organized

wholesale markets in a nondiscriminatory manner.

Morgan Stanley, 554 U.S. at 536-537. The wholesale-

market operators have the responsibilities of “[e]nsur-

[ing] the reliability of the transmission grid,” “{b]al-

ancling] supply and demand instantaneously,” and

“{p}lan[ning) for transmission expansion on a regional

basis.” Energy Primer 58.

b. PJM Interconnection, LLC (PJM), is a

wholesale-market operator that administers a large

regional market in the Mid-Atlantic region, which

includes New Jersey and Maryland. PJM operates

both energy and capacity markets. The capacity

market—at issue here—is forward-looking, providing

the option to buy and sell capacity to satisfy future

demand. See 14-623 Pet. App. 9a; 14-634 Pet. App.

13a. To ensure that sufficient capacity will be availa-

ble, PJM holds an annual auction for three years in

the future. 14-623 Pet. App. 9a. PJM determines how

much capacity the region will acquire for the relevant

year based on supply offers and a sloped demand

curve that considers both reliability needs and price.

Id. at 9a-10a; Energy Primer 96. Generators, as well

as utilities that have purchased capacity from genera-

tors under long-term bilateral contracts, commit to

sell—and PJM commits to purchase—the amount of

capacity that is selected in the auction for resale to

6

load serving entities in three years’ time. 14-623 Pet.

App. 9a-10a.

PJM accepts bids from lowest to highest until it

has the requisite capacity. 14-623 Pet. App. 9a. The

highest bid selected becomes the “clearing price.” /d.

at 10a. Any generator or other entity that bids at or

below the clearing price “clears” the auction. /bid.

Those providers receive the clearing price for their

capacity, regardless of their bid price. /bid. PJM’s

process for determining the appropriate price per unit

is known as the Reliability Pricing Model. Maryland

Pub. Serv. Comm’n v. FERC, 632 F.3d 1283, 1284

(D.C. Cir. 2011) (per curium). The Commission over-

sees PJM’s operation of its organized-capacity mar-

ket, the terms and conditions of participation in that

market, and the wholesale rates produced by that

market. /d. at 1284-1285 (detailing FERC’s approval

of PJM’s Reliability Pricing Model). A competitive

capacity market provides price signals to build new

generation capacity where it is needed. See ibid.;

Connecticut, 569 F.3d at 480.

Existing generators and other providers of capaci-

ty may bid zero as “pricetakers,” meaning they agree

to sell at whatever the clearing price may be. 14-623

Pet. App. 64a; 14-634 Pet. App. 68a. New capacity,

however, is subject to the “minimum offer price rule,”

which FERC instituted in 2006. That rule requires

new generators in certain circumstances to bid at or

above a default price specified by PJM, unless a par-

ticular generator can demonstrate that its actual costs

are lower than the default price. See 14-634 Pet. App.

65a-68a. The rule seeks to prevent the manipulation

of clearing prices by net purchasers of capacity (/.e.,

entities that purchase more capacity than they sell

7

into the market) and thus have an incentive to keep

capacity prices as low as possible. See id. at 66a-67a.

c. These eases concern substantively identical pro-

grams in New Jersey and Maryland to develop new

generation resources. Both States historically fol-

lowed a vertical integration model to provide electrici-

ty. 14-623 Pet. App. 34a-35a; 14-634 Pet. App. 48a-

49a. In 1999, however, New Jersey and Maryland

enacted market-based approaches to electric energy

supply. 14-623 Pet. App. lla; 14-634 Pet. App. 14a.

The States decoupled entities that generate electricity

from those that supply it to end users. /bid. As a re-

sult, utilities in New Jersey and Maryland began par-

ticipating in the PJM markets. /bid. Under New Jer-

sey and Maryland’s restructured frameworks, genera-

tors sell their capacity to PJM. 14-634 Pet. App. 14a.

The load-serving entities—local utilities that sell elec-

tricity to consumers—purchase capacity from PJM.

Ibid. Electric distribution companies then use their

power line network to transfer energy from genera-

tors to consumers. /d. at 14a-15a.

Approximately a decade after adopting their new

approach to energy supply, New Jersey and Maryland

officials came to the view that PJM’s capacity auction

was failing to incentivize enough new generation. 14-

623 Pet. App. 12a; 14-634 Pet. App. 15a. They regard-

ed the auction’s three-year time horizon as inadequate

for generators to assess whether additional resources

were warranted. 14-623 Pet. App. 91a-92a; 14-634 Pet.

App. 15a. In response, both States adopted similar

programs to incentivize new natural-gas-fired electric

generators. New Jersey’s statute—the Long Term

Capacity Pilot Program Act (LCAPP)—was enacted

in 2011. 14-634 Pet. App. 10a, 15a-l6a. The Maryland

8

Public Service Commission adopted Maryland’s final

plan—the Generation Order—in 2012. 14-623 Pet.

App. 12a.

Both programs compel electric distribution compa-

nies to enter into long-term contracts—15 years for

New Jersey, 20 years for Maryland—with generators

selected by the State. 14-623 Pet. App. 12a; 14-634

Pet. App. 74a. The programs operate as follows: Un-

der the state-mandated contracts, the electric distri-

bution companies must make payments to generators

at a specified rate and amount tied to the generators’

wholesale sales of capacity, but the electric distribu-

tion companies do not actually purchase electricity or

capacity from the generators under those contracts.

14-623 Pet. App. 12a-132; 14-634 Pet. App. 22a-23a.

Instead, the generators must bid directly into and

clear the PJM capacity auction. 14-623 Pet. App. 12a;

14-634 Pet. App. 22a-23a. If the generator clears, it

sells its capacity to PJM. 14-634 Pet. App. 22a-23a. If

the auction clearing price is below the price set in the

state-mandated contracts between the generator and

the electric distribution companies, the electric distri-

bution companies must pay the generator the differ-

ence between the clearing price and the contract

price, thereby providing long-term guaranteed reve-

nue streams to the state-selected generators. 14-623

Pet. App. 12a; 14-634 Pet. App. 23a. If the auction

clearing price is above the contract price, the genera-

tors must pay the difference to the electric distribu-

tion companies. 14-623 Pet. App. 12a-13a; 14-634 Pet.

App. 23a.

d. The enactment of the New Jersey and Maryland

programs precipitated a change in PJM’s minimum-

offer-price rule. The PJM auction’s original rule in-

9

cluded multiple exemptions, including one for offers

submitted by state-mandated resources. 14-623 Pet.

App. 10a; 14-634 Pet. App. 67a. This would have ena-

bled the new generators selected by New Jersey and

Maryland to bid zero in every auction, ensuring that

the generators cleared the auction and received the

state-guaranteed subsidies. /bid.

In response to a complaint filed by certain power

providers operating in the PJM region, the Commis-

sion directed PJM to modify its tariff to eliminate the

exemption for state-mandated resources. See PJM,

135 F.E.R.C. 9 61,022, at 9% 1-3, order clarified on

reh’g, 137 F.E.R.C. 9 61,145 (2011). The Commission

found that removal of the exemption was necessary to

prevent “subsidized entry supported by one [S]tate’s

or locality’s policies” from “disrupting the competitive

price signals that [the auction] is designed to pro-

duce.” PJM, 137 F.E.R.C. 9 61,145, at 13 (2011). The

Third Circuit upheld the Commission’s order. See

New Jersey Bd. of Pub. Utils. v. FERC, 744 F.3d 74,

79-80 (2014).

2. This brief addresses four certiorari petitions,

two that seek review of a decision of the Third Circuit

finding New Jersey’s program preempted by the FPA

(CPV Power Dev., Inc. v. PPL EnergyPlus, LLC, No.

14-634; Fiordaliso v. PPL EnergyPlus, LLC, No. 14-

694), and two that seek review of a decision of the

Fourth Circuit finding Maryland’s program preempt-

ed by the FPA (Nazarian v. PPL EnergyPlus, LLC,

No. 14-614; CPV Maryland, LLC v. PPL EnergyPlus,

LLC, No. 14-623).

a. Petitioners in the New Jersey cases are the

generators selected by the State under the LCAPP,

along with the commissioners of the New Jersey

10

Board of Public Utilities. Respondents are incumbent

power plants and electric distribution companies in

the PJM region. 14-634 Pet. App. 36a-39a. Respond-

ents filed suit in the District of New Jersey, seeking a

declaration that the FPA preempts the LCAPP. /d. at

34a-35a. After a bench trial, the district court held

that New Jersey’s program is preempted by the FPA

under both field- and conflict-preemption theories. /d.

at 34a-llla.

b. The Third Circuit affirmed. 14-634 Pet. App. 1la-

30a.’ The court held that the LCAPP is preempted by

the FPA under a field-preemption theory. /d. at 19a-

28a. The court explained that FERC “has approved

PJM’s Reliability Pricing Model as the means to set

* Before oral argument, the Third Circuit invited the Attorney

General of the United States to file an amicus brief. 13-4330 Order

1. The government took the position that the LCAPP is preempt-

ed. See 13-4330 U.S. & FERC Amicus Br. 11-17 (U.S. Br.). The

government reasoned that, because a state-selected generator

receives a guaranteed supplement, it can submit a below-cost bid

to ensure that it clears the capacity auction, and that “state-

sponsored uneconomic entry into PJM’s capacity auction directly

affects (suppresses) the auction’s resulting wholesale capacity rate,

to the detriment of generation resources in every other PJM

state.” Jd. at 13-14. The government concluded that “New Jer-

sey’s directive that selected generators bid into and clear PJM’s

capacity auction directly affects wholesale rates and, to that ex-

tent, is a preempted intrusion upon the Commission’s exclusive

jurisdiction to regulate wholesale rates and practices ‘affecting’

rates.” Id. at 14. The government relied as well on the fact that

the subsidy provided by the state-mandated supplement “is direct-

ly and explicitly tied to the wholesale rate.” Jd. at 16. The gov-

ernment’s brief emphasized that its position on preemption was

limited to the circumstances of New Jersey’s program and that

many avenues remain open for States to promote particular gen-

eration resources and incentivize generation construction. /d. at

17-20.

1]

the interstate wholesale price for electric capacity in

the PJM region,” id. at 20a, and that the LCAPP

attempts to regulate the same subject matter by

guaranteeing the state-selected generators a multi-

year pricing supplement to “raise the prevailing ca-

pacity price to an amount of New Jersey’s liking,” id.

at 24a. The LCAPP therefore “essentially sets a price

for wholesale energy sales for LCAPP generators”

and regulates the same field occupied by FERC. /bid.

(citation and internal quotation marks omitted). The

court declined to address whether the LCAPP is also

preempted under a conflict-preemption theory. /d. at

28a.

The court of appeals emphasized that its decision

was narrow. 14-634 Pet. App. 28a-30a. The court

noted that “[wJhen a state regulates within its sphere

of authority, the regulation’s incidental effect on in-

terstate commerce does not render the regulation

invalid.” Jd. at 29a. The court suggested that various

avenues to encourage new generation remain open to

the State, including the use of tax-exempt bonding

authority, property tax relief, favorable site-lease

agreements on public lands, donation of environmen-

tally damaged properties for brownfield development,

and relaxing or accelerating permit approvals. /d. at

26a & n.4. The court also suggested that New Jersey

could “directly subsidize generators so long as the

subsidies do not essentially set wholesale prices.” /d.

at 26a n.4.

3. a. Petitioners in the Maryland cases are the

generator selected by the State under the Generation

Order and the commissioners of the Maryland Public

Service Commission. Respondents are incumbent

power plants and electric distribution companies. 14-

12

623 Pet. App. 37a n.4. Respondents filed suit in the

District of Maryland, seeking a declaration that the

FPA preempts the Generation Order. /d. at 37a.

After a bench trial, the district court held that Mary-

land’s program is field preempted. /d. at 34a-161a.

b. The Fourth Circuit affirmed, 14-623 Pet. App.

la-25a, concluding that the Generation Order is

preempted under both field- and conflict-preemption

theories. Jd. at 17a-25a. The court explained that, by

requiring the state-selected generators to bid into and

clear the PJM auction—and then providing those

generators a fixed payment in addition to what the

generator receives from PJ M—Maryland “effectively

supplant[ed] the rate generated by the auction with an

alternative rate preferred by the [S]tate.” J/d. at 17a.

The court made clear that “not every state statute

that has some indirect effect on wholesale rates is

preempted.” Jd. at 21a (citation and internal quota-

tion marks omitted). But it concluded that “the effect

of the Generation Order on matters within FERC’s

exclusive jurisdiction is neither indirect nor inci-

dental.” /bid.

The court of appeals further concluded that the

Generation Order is preempted due to a conflict with

the FERC-approved program. 14-623 Pet. App. 21la-

25a. The court explained that the Generation Order

“has the potential to seriously distort the PJM auc-

tion’s price signals,” which are intended to incentivize

new generation, by “substituting the [S]tate’s pre-

ferred incentive structure for that approved by

FERC.” Id. at 22a-23a. The court rejected petition-

ers’ argument that the Commission’s 2011 revision to

the minimum-offer-price rule explicitly accommodated

the participation of state-subsidized plants in the

13

auction. /d. at 24a. In the court’s view, “[t)he fact

that FERC was forced to mitigate the Generation

Order’s distorting effects * * * tends to confirm

rather than refute the existence of a conflict.” Jbid.

The court again emphasized that “not every state

regulation that incidentally affects federal markets is

preempted,” but it concluded that the Generation

Order is “a direct and transparent impediment to the

functioning of the PJM markets.” /d. at 24a-25a.

DISCUSSION

Under the FPA, the Commission has exclusive au-

thority over rates, and practices directly affecting

rates, charged or received for or in connection with

the wholesale sale of electricity. 16 U.S.C. 824(b),

824d, 824e. The Commission fulfills that role by ap-

proving and overseeing competitive market mecha-

nisms such as PJM’s capacity auction. The New Jer-

sey and Maryland programs tie guaranteed payments

under state law to the wholesale rate under the PJM

auction and to the generators’ participating in and

clearing the PJM auction. State-selected generators

can then bid into the auction market at a price that

does not accurately reflect their costs, thereby dis-

rupting the auction’s price signals that are designed to

incentivize new generation. The Third and Fourth

Circuits correctly held that those initiatives are

preempted. Both courts explicitly limited their

preemption holdings to the specific circumstances of

the programs at issue and noted non-preempted ways

(both economic and non-economic) in which States can

support particular forms of generation. The decisions

do not conflict with any decision of this Court or an-

other court of appeals. Further review is therefore

unwarranted.

14

A. The LCAPP And The Generation Order Are Preempted

Where, as here, Congress has not expressly

preempted state law, preemption will nevertheless

occur where “compliance with both state and federal

law is impossible,” or where “the state law ‘stands as

an obstacle to the accomplishment and execution of

the full purposes and objectives of Congress.’” Cali-

fornia v. ARC Am. Corp., 490 U.S. 93, 100-101 (1989)

(citation omitted). Federal law must also prevail

where “the scope of a [federal] statute indicates that

Congress intended federal law to occupy a field exclu-

sively.” Kurns v. Railroad Friction Prods. Corp., 132

S. Ct. 1261, 1266 (2012) (brackets in original) (quoting

Freightliner Corp. v. Myrick, 514 U.S. 280, 287

(1995)). The Court recently explained in Oneok, Inc.

v. Learjet, Inc., 185 S. Ct. 1591 (2015), that whether

state regulation operates within a preempted field

under the analogous Natural Gas Act, 15 U.S.C. 717

et seq.,° may depend on “the target at which the state

law aims.” 135 S. Ct. at 1599 (emphasis omitted).

State regulation thus will be preempted if it is “aimed

directly at * * * wholesales for resale.” Jd. at 1600

(emphasis and citation omitted). Under those prece-

dents, the New Jersey and Maryland programs are

preempted.

1. Section 824(b) of the FPA grants FERC juris-

diction over “the sale of electric energy at wholesale in

interstate commerce.” 16 U.S.C. 824(b)(1). One of

FERC’s core regulatory duties within that grant of

* Because the relevant provisions of the FPA and the Natural

Gas Act “are in all material respects substantially identical,” this

Court “cit{es] interchangeably decisions interpreting the pertinent

sections of the two statutes.” Arkansas La. Gas Co. v. Hall, 453

U.S. 571, 577 n.7 (1981) (citation omitted).

15

exclusive jurisdiction is to ensure that “[aJll rates and

charges” that are “made, demanded, or received by

any public utility for or in connection with” wholesale

sales, and “all rules and regulations affecting or per-

taining to such rates or charges,” are “just and rea-

sonable,” 16 U.S.C. 824d(a); see 16 U.S.C. 824d(b),

824e(a). Under the market-based rate setting that

FERC employs in the wholesale capacity market for

electricity, wholesale rates are determined through

Commission-approved and regulated regional markets

like the one operated by PJM. See Maryland Pub.

Serv. Comm'n v. FERC, 632 F.3d 1283, 1284 (D.C. Cir.

2011) (per curiam).

a. The New Jersey and Maryland programs are

preempted because they directly distort the PJM

auction’s clearing price in the manner described be-

low. Under both programs, the State conducts its own

bidding process to identify generators that will con-

struct facilities for new generation, requires electric

distribution companies to enter into contracts that

guarantee that the selected generators will receive a

set price for their new capacity, and requires the se-

lected generators to bid that capacity into and clear

the PJM auction. 14-623 Pet. App. 12a-13a; 14-634

Pet. App. 22a-23a, 74a. The electric distribution com-

panies must pay the difference between the auction

clearing price and the price of new generation set

through the state programs, but do not actually pur-

chase capacity under those contracts. 14-623 Pet.

App. 12a-13a; 14-634 Pet. App. 23a.

The state requirements that the generators receive

payments tied to the PJM auction price and partici-

pate in and clear the PJM auction can distort the

clearing price received by all auction participants.

16

See PJM, 137 F.E.R.C. 4 61,145, at 13 (2011) (“[S]ub-

sidized entry supported by one [S]tate’s or locality’s

policies” may “disrupt{] the competitive price signals

that [the auction] is designed to produce.”), petitions

denied sub nom. New Jersey Bd. of Pub. Utils. v.

FERC, 744 F.3d 74 (3d Cir. 2014). If a state-

supported bid clears the auction market when it would

not have done so without the state support, another

unsupported bid (which otherwise would have cleared)

may not clear. And lower market-clearing prices that

result from the state-supported generators’ participa-

tion affect all participants in the PJM market and

suppress the price signals that would otherwise indi-

cate a need for new capacity. 14-623 Pet. App. 65a-

68a, 94a.

b. The Maryland petitioners claim (14-614 Pet. 16-

18; 14-623 Pet. 29-30) that the Commission’s 2011

amendment to the minimum-offer-price rule, which

eliminated the exemption for state-sponsored entry

into the PJM capacity market, minimizes any price-

skewing effects of state-subsidized entry. Petitioners,

however, cannot escape the factual findings of the

courts below, which credited evidence that the state

programs have a price-suppressive effect on the ca-

pacity) markets—even after the Commission’s 2011

amendment to the minimum-offer-price rule. See 14-

623 Pet. App. 22a-23a; 14-634 Pet App. 87a-92a, 108a-

109a. That is because a state-selected generator can

bid the minimum-offer default price—even if the gen-

erator’s actual costs are higher than the default

price—once the generator accounts for the offset to

its costs from the state-mandated supplemental pay-

ments it receives. That suppression of price signals,

which are an important aspect of PJM’s Reliability

17

Pricing Model, could cause other generators in all

States throughout the PJM market to become hesitant

to expand generation capacity. See ibid. Thus, by

requiring the selected generators to bid their capacity

into and clear the Commission-approved PJM auction,

the programs directly interfere with the competitive

market mechanisms that the auction uses to set

wholesale capacity rates.

2. The Court’s recent decision in Oneok confirms

that the LCAPP and the Generation Order are

preempted, because, beyond their direct price-

suppressive pressure on the wholesale capacity mar-

ket, the programs directly target the PJM market

mechanism for determining wholesale capacity rates.

In Oneok, the Court considered whether FERC’s

jurisdiction over practices affecting wholesale rates

for natural gas preempted the application of state

antitrust laws to a practice that affected both whole-

sale and retail rates. 135 S. Ct. at 1599. The Court

explained that whether a state regulation falls within

the preempted field depends on “the target at which

the state law aims.” Jbid. (emphasis omitted). The

Court concluded that, unlike state regulations that are

“aimed directly at * * * wholesales for resale,” id. at

1600 (citation omitted), the plaintiffs’ state antitrust

claims were not preempted because antitrust laws

“are not aimed at natural-gas companies in particular,

but rather all businesses in the marketplace,” id. at

1601.

Unlike the state antitrust claims in Oneok, the

LCAPP and the Generation Order take direct aim at

the PJM capacity market by attempting to implement

their own regulatory frameworks for incentivizing

new generation as a direct overlay on the PJM auc-

18

tion. Both programs mandate that state-selected gen-

erators receive the amounts set forth in their state-

mandated contracts with electric distribution compa-

nies, which are directly tied to the generators’ sales of

capacity into the PJM market. Indeed, the programs

grew out of the view expressed by New Jersey and

Maryland officials that PJM’s wholesale capacity

auction was failing to adequately incentivize new gen-

eration in the PJM region. 14-623 Pet. App. 12a; 14-

634 Pet. App. 15a-16a.

The States’ programs are therefore similar to state

regulations that the Court has previously found pre-

empted by FERC’s exclusive jurisdiction. In Schnei-

dewind v. ANR Pipeline Co., 485 U.S. 293 (1988), for

example, the Court concluded that a Michigan law

that sought to regulate securities issued by interstate

natural gas companies was preempted because it

would have permitted the State to prevent a natural-

gas company from raising its equity levels above a

certain point, thus “ensur[ing] that the company

w{[ould] charge only what Michigan consider[ed] to be

a ‘reasonable rate.’” Jd. at 308; see id. at 296-297, 310.

The New Jersey and Maryland programs similarly

target the wholesale market by guaranteeing a level of

compensation that the state-selected generators will

receive based on their wholesale sales of capacity if

they clear the PJM auction, thereby distorting the op-

eration of the PJM market.

In Mississippi Power & Light Co. v. Mississippi,

487 U.S. 354 (1988), the Court held that the FPA

preempted a state proceeding to determine the rea-

sonableness of FERC-mandated payments for the sale

of nuclear power to wholesalers of electricity, which

led to higher retail electricity rates. Jd. at 373-377.

19

The Court explained that, even where a State acts

within the scope of its authority to set retail rates and

conduct prudence reviews, “FERC-mandated alloca-

tions of power are binding on the States, and States

must treat those allocations as fair and reasonable

when determining retail rates.” /d. at 371. Here too,

even where the State is invoking its authority to regu-

late generation facilities, 16 U.S.C. 824(b)(1); see

Pacific Gas & Elec. Co. v. State Energy Res. Conser-

vation & Dev. Comm’n, 461 U.S. 190, 205-206 (1983), it

may not do so in a way that directly undermines the

wholesale capacity rates produced by the Commission-

approved PJM auction.

Petitioners attempt (14-623 Pet. 22) to characterize

the contracts required by the two state programs as

bilateral contracts for the sale of capacity at whole-

sale, which can establish just and reasonable rates

that are subject to review by FERC. See Morgan

Stanley Capital Grp., Inc. v. Public Util. Dist. No. 1

of Snohomish Cnty., 554 U.S. 527, 545-546 (2008). But

the contracts required by the state programs here are

not bilateral contracts for the actual purchase and sale

of capacity. The programs instead require the gener-

ators’ promised capacity to be bid into the PJM auc-

tion and sold to PJM for the clearing price. 14-623

Pet. App. 12a-13a; 14-634 Pet. App. 22a-23a, 100a.

The additional payments made to the generators by

the electric distribution companies are not to purchase

capacity, but rather are mechanisms to guarantee that

generators will receive a specified price based on their

wholesale sales and thereby subsidize the generators

for clearing the auction and selling their capacity to

PJM. That arrangement is aimed directly at and

distorts the Commission-approved market mechanism

20

for setting wholesale rates and is preempted for that

reason. Contrary to petitioners’ assertions (e.g., 14-

623 Pet. 22, 30-34; 14-634 Pet. 29-31), the decisions

below do not call into question true bilateral contracts

for the purchase of capacity or state requirements

that utilities enter into such contracts with particular

types of generators.

B. The Decisions Below Are Narrow And Allow States To

Incentivize New Generation Of Capacity In A Variety

Of Ways

Petitioners contend (14-614 Pet. 30-31; 14-623 Pet.

30-35; 14-634 Pet. 27-31) that the decisions of the

courts of appeals will stifle the States’ ability to en-

courage new generation of clean energy. But both

courts went out of their way to emphasize that their

preemption decisions were limited to the specific cir-

cumstances of the New Jersey and Maryland pro-

grams.

1. In finding the New Jersey and Maryland pro-

grams preempted, the courts of appeals focused, at

least in part, on the States’ attempt to “functionally”

(14-623 Pet. App. 17a) or “effectively” (14-634 Pet.

App. 20a) set the price that state-selected generators

receive for wholesale capacity. Taken in isolation,

those statements could perhaps suggest an unduly

broad rule of preemption—that whenever a State sub-

sidizes or otherwise supports in-state generation, it

is in some measure effectively “supplant{ing]” the

Commission-approved wholesale-capacity rate deter-

mined through the PJM auction. 14-623 Pet. App.

17a; see 14-634 Pet. App. 26a.

Both courts of appeals, however, specifically ex-

plained that their preemption holdings were narrow.

The Fourth Circuit stressed that “not every state

21

statute that has some indirect effect on wholesale

rates is preempted,” but that the effect of the Mary-

land program “on matters within FERC’s exclusive

jurisdiction is neither indirect nor incidental.” 14-623

Pet. App. 21a (citation and internal quotation marks

omitted). The court declined to express an opinion on

“other state efforts to encourage new generation, such

as direct subsidies or tax rebates, that may or may not

differ in important ways from the Maryland initia-

tive.” Ibid.

The Third Circuit likewise explained that “[wJhen a

state regulates within its sphere of authority, the

regulation’s incidental effect on interstate commerce

does not render the regulation invalid.” 14-634 Pet.

App. 29a.‘ The court also noted that “states may se-

lect the type of generation to be built—wind or solar,

gas or coal—and where to build the facility,” ibid., and

it stressed that New Jersey has other means available

to achieve its clean-energy goals, id. at 26a. We

agree.

Moreover, at the government’s urging (U.S. Br. 18-

19), the Third Circuit stated that permissible means of

advancing those goals may include using the State’s

tax-exempt bonding authority, offering property tax

relief or favorable site-lease agreements, or easing

* In emphasizing the limited nature of its holding, the Third Cir-

cuit stated that it would not “endorse the argument that LCAPP

has been field preempted because it affects the market clearing

price by increasing the supply of electric capacity.” 14-634 Pet.

App. 29a. The court apparently attributed that argument to the

federal government. /bid. (citing U.S. Br. 11-17). As noted above

(note 2, supra), however, the government argued in its amicus

brief that the LCAPP was preempted because of the program’s

direct intrusion on the Commission-approved PJM auction and its

tying of subsidies directly to the auction price.

22

permit approvals. 14-634 Pet. App. 26a n.4. Permissi-

ble state programs might also involve contracts be-

tween generators and utilities that are not directly

tied to participation in and clearing the PJM auction,

a requirement that local utilities purchase a percent-

age of electricity from a particular generator or re-

newable resources, or the creation of renewable ener-

gy certificates to be independently used by utilities in

compliance with state requirements. The decisions

below cannot fairly be read to broadly foreclose such

state programs that incentivize new generation

through economic or non-economic subsidies, provided

those incentives do not directly interfere with the

Commission-approved market mechanism for deter-

mining wholesale capacity rates. See U.S. Br. 9-10.

2. No court has relied upon the Third or Fourth

Circuit’s decision to find a state program preempted.

Indeed, a district court in Connecticut recently reject-

ed a challenge to that State’s renewable-energy pro-

gram, where the challenge was based on the decisions

below.

In Allco Finance Ltd. v. Klee, No. 3:13cv1874, 2014

WL 7004024 (Dec. 10, 2014), appeal pending, No. 15-20

(2d Cir. filed Jan. 5, 2015), the district court consid-

ered a Connecticut program that compelled electric

distribution companies to enter into bilateral con-

tracts to purchase up to four percent of Connecticut’s

electricity needs for a term of up to 20 years from in-

state, state-selected renewable projects. Jd. at *1.

The court rejected a claim that the program was

preempted by FERC’s authority over wholesale rates

for electricity. Jd. at *6-*10. The court explained

that, unlike the New Jersey and Maryland programs,

the Connecticut program was “devoid of any * * *

23

market-distorting features that encroach [upon]

FERC’s exclusive jurisdiction over setting wholesale

rates.” Jd. at *10. The Connecticut law did not direct-

ly distort the wholesale market because Connecticut

required the electric distribution companies to pur-

chase renewable energy directly from the selected

generators, rather than requiring the generators to

sell their capacity to a FERC-approved wholesale

market operator through its auction. /bid.

Petitioners thus have not shown that the Third and

Fourth Circuit’s decisions will prevent States from

implementing such renewable-energy programs.

C. The Decisions Below Do Not Conflict With Any Deci-

sion Of Another Court Of Appeals

Both courts of appeals—and all eight federal

judges—to have considered the New Jersey and Mar-

yland programs have concluded that the programs are

preempted. The lack of any disagreement in the

courts of appeals further counsels against review by

this Court.

Petitioner Maryland Public Service Commission

contends (14-614 Pet. App. 15-16) that the Fourth

Circuit’s decision conflicts with Atlantic City Electric

Co. v. FERC, 295 F.3d 1 (D.C. Cir. 2002) (Atlantic

City), which holds that utilities cannot be forced to

cede to PJM their ability to change their rates once

they allow PJM to use their transmission lines. /d. at

10-11. According to petitioner (14-614 Pet. 16), Atlan-

tic City “compels the conclusion that PJM’s tariff

could not displace [the selected generator’s] right to

set its own rate for wholesale sales, subject to FERC

review.” The state-selected generators in these cases,

however, voluntarily gave up their right to set their

own rate for wholesale sales (subject to review by

24

FERC) when they entered the PJM auction and

agreed to receive the clearing price. The decisions

below therefore do not conflict with Atlantic City.

Petitioner CPV Maryland asserts (14-623 Pet. 21-

24) that the Fourth Circuit’s decision has blurred the

line that divides the respective spheres of authority

between the States and the Commission outlined in

the D.C. Circuit’s decision in Connecticut Department

of Public Utility Control v. FERC, 569 F.3d 477

(2009), cert. denied, 558 U.S. 110 (2010): the Commis-

sion approves the procedure for arriving at the esti-

mated amount of capacity that a wholesale-market

operator determines is necessary, even though doing

so may incentivize construction of more generation

facilities, but the States retain the authority to regu-

late generation facilities. See id. at 481-482. That

dividing line remains intact. Both courts of appeals

expressly recognized that States retain their authority

to regulate generation facilities. 14-623 Pet. App. 20a-

21a; 14-634 Pet. App. 29a-30a (“The states may select

the type of generation to be built—wind or solar, gas

or coal—and where to build the facility.”). That au-

thority cannot be exercised, however, in a manner that

directly interferes with the Commission-approved

market mechanism for determining wholesale capacity

rates. The lack of any conflict in the lower courts

counsels against this Court’s review.

25

CONCLUSION

The petitions for writs of certiorari should be denied.

Respectfully submitted.

DONALD B. VERRILLI, JR.

MAX MINZNER Solicitor General

General Counsel EDWIN S. KNEEDLER

ROBERT H. SOLOMON Deputy Solicitor General

Solicitor 7 » tne ey -

Ross R. FULTON ssistant to t olicitor

LISA B. LUFTIG General

Attorneys

Federal Energy Regulatory

Commission

SEPTEMBER 2015