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

Nos. 14-614 and 14-623

In the Supreme Court of the Anited States

W. KEVIN HUGHES, CHAIRMAN, MARYLAND PUBLIC

SERVICE COMMISSION, ET AL., PETITIONERS

Vv.

TALEN ENERGY MARKET!) G, LLC, PKA

PPL ENERGYPLUS, LLC, ET AL.

CPV MARYLAND, LLC, PETITIONER

v.

TALEN ENERGY MARKETING, LLC, FKA

PPL ENERGYPLUS, LLC, ET AL.

ON WRITS OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

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

CAROL J. BANTA ANN O’CONNELL

KARIN L. LARSON Assistant to the Solicitor

LIsA B. LUFTIG General

Ross R. FULTON Department of Justice

Attorneys Washington, D.C. 20520-0001

Federal Energy Regulatory SupremeCtBriefs usdoj.gov

Commission (202) 514-2217

Washington, D.C. 20426

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 a Maryland law

that requires electric distribution companies to pay to

state-selected generators subsidies that are directly

tied to the clearing price of the wholesale electric

capacity auction conducted by PJM Interconnection,

LLC, if those generators bid into and clear the auc-

tion.

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TABLE OF CONTENTS

Page

ee 1

Statement:

A. Regulatory and technical background.....................00000+ 2

EE 9

| ce 14

I cri esererenersnsemnnsnnmenpeenntennenntentennninntanpinnnaien 16

Argument:

A. Maryland’s program is preempted ..................00s000 19

B. Preemption of Maryland’s program does not

eliminate States’ ability to incentivize new

ccriiinintinitsistsinetnsscntennmneneecemsnnnenuenns 32

i ices ditinnetiesinsireinnatenemnnniiapeisianiiinnmmneains 36

TABLE OF AUTHORITIES

Cases:

Allco Fin. Ltd. v. Klee, No. 13-cv-1874, 2014 WL

7004024 (D. Conn. Dec. 10, 2014), aff’d on other

grounds, 805 F.3d 89 (2d Cir. 2015) ...............s0000 34, 35

Arkansas La. Gas Co. v. Hall, 453 U.S. 571 (1981) ...... 20

California v. ARC Am. Corp., 490 U.S. 93 (1989)......... 19

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

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

eS Se cisinnieententcienionateamemeeeel 5, 8, 32, 33

Freightliner Corp. v. Myrick, 514 U.S. 280 (1995)....... 20

ISO New Eng., Inc., 135 F.E.R.C. 1 61,029 (2011),

order clarified on reh’g, 138 F.E.R.C. 9 61,027

EE See EE 33

Kurns v. Railroad Friction Prods. Corp.,

ee te Se Ce rencnnsersncsennnsennmnenmennnmmenenpenennes 20

Maryland v. Louisiana, 451 U.S. 725 (1981)................ 27

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

es Ct Se cennsescssscnscsnmecumnntinermientneneneen 8, 21

Cases—Continued: Page

Midwest Power Sys., Inc., 78 F.E.R.C. 1 61,067

ESE een ee ne ee 34

Mississippi Power & Light Co. v. Mississippi,

og | Tenn 23, 24

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

Dist. No. 1, 554 U.S. 527 (2008)..............cccccccceeeee 5, 6, 30

NRG Power Mktg., LLC v. Maine Pub. Utils.

Comm'n, 558 U.S. 165 (2010)..............c.cccccesscccecseeecereeees 5

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

lite 14

New York v. FERC, 535 U.S. 1 (2002)................. 2,3, 4,5

Northern Natural Gas Co. v. State Corp. Comm'n,

I i a 21, 27

Northwest Cent. Pipeline Corp. v. State Corp.

Comm ’n, 489 U.S. 493 (1989)..........cccccccceceeesseeeeeees 21, 27

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

REISS a eee come ee 17, 20, 21, 22

PJM Interconnection, LLC:

126 F.E.R.C. 9 61,275, order clarified,

127 F.E.R.C. 9 61,104, order clarified on

reh’g, 128 F.E.R.C. 9 61,157 (2009) ............cccccccceees ll

128 F.E.R.C. 9 61,157 (2009) .........cccccccecccescsccesesseeeees 9,11

PJM Interconnection, LLC:

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

137 F.E.R.C. 1 61,145 (2011), petitions denied

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

FERC, 744 F.3d 74 (3d Cir. 2014) ............ccccc0e0- 13, 27

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).....13, 14, 25, 26, 27

Cases—Continued: Page

PPL EnergyPlus, LLC v. Hanna, 977 F. Supp. 2d

372 (D.N.J. 2013), aff'd sub nom. PPL

EnergyPlus, LLC v. Solomon, 766 F.3d 241

(3d Cir. 2014), petitions for cert. pending,

No. 14-634 (filed Nov. 26, 2014), and No. 14-694

I St TEE vnsnscinsnteebemstnmennnnsinnnniineensn 9, 13, 33

PPL EnergyPlus, LLC v. Solomon, 766 F.3d 241

(3d Cir. 2014), petitions for cert. pending,

No. 14-634 (filed Nov. 26, 2014), and No. 14-694

(filed Dec. 10, 2014) ..............ccccceseseceeeeeeensees 10, 12, 32, 33

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

servation & Dev. Comm'n, 461 U.S. 190 (1983)...... 4, 24

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

ee Ce I ceeticeriirerecccsmnnstinititiibiniinmnnnncsnenn 2

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

STITT iieiaitntiicaeesiahdenialaiaheaitaiainiardaiadinnaiaaaaiataaitatiataae 21, 23

Transmission Access Policy Study Grp. v. FERC,

225 F.3d 667 (D.C. Cir. 2000), aff’d sub nom.

New York v. FERC, 535 U.S. 1 (2002).............ccccceeeeees 4

Constitution and statutes:

U.S. Const.:

Art. I, § 8, Cl. 3 (Commerce Clause) ..................cecesseseeees 2

Art. VI, Cl. 2 (Supremacy Clause).................cc0000 28, 29

Energy Policy Act of 1992, Pub. L. No. 102-486,

Tit. VII, §§ 721-726, 106 Stat. 2915-2921 ..................00 4

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

eee EEE 1,2

ee 2

TE ee 3, 20

TTT a rnieireteanietnteinncemieeenniaes 3, 20, 28, 32

Statutes—Continued: Page

| ee 3, 20, 28

TT icine sninitciiassinsnatinnienidiianiiemmidabdinnans 3, 20, 28

IIIT insitnsiccritecndenntetctnstcthinianniinnmentsienammmmaneeaatatiats 3, 5

ST iirccrnencmisiinineniiitnantanetnneiitinds 3, 20, 28

TTT isi csiccrencarictasinienieneapniuammetansnententecibiatineies 4

Natural Gas Act, 15 U.S.C. 717 et seq. .0.........ccccccceeeseees 20

eee ET 2

ey TINT hiciesisiensncisttindinieiaianaiinetiiniiiaiinibiaubicideiianiaiaiibaiti 3

Miscellaneous:

Monitoring Analytics, LLC, State of the Market

Report for PJM: January through September

(Nov. 12, 2015), http:/Awww.monitoring

analytics.com/reports/PJM _ State_ of the_

Office of Enforcement, Fed. Energy Regulatory

Comm’n, Energy Primer: A Handbook of Ener-

gy Market Basics (Nov. 2015), http://www.

ferc.gov/market-oversight/guide/energy-

TTI iiiiisrieencentemhinsenbintinngmrenenineniesteternmenes 2, 6, 7,8

PJM Interconnection, LLC:

PJM Markets (May 14, 2015), http://www.pjm.

com/~/media/about-pjm/newsroom/fact-

sheets/%20pjms-markets-fact-sheet.ashx ................ 7

PJM Open Access Transmission Tariff (Sept. 17,

2010), http://Awww.pjm.com/media/documents/

merged-tariffs/oatt. pdf ..............cccsceceseseseseeneereeseeeees 30

Reliability Assurance Agreement Among Load

Serving Entities in the PJM Region (Sept. 17,

2010), http:/Awww.pjm.com/media/documents/

merged-tariffs/raa.pdf................ccececceseecereneerees 7, 8, 31

In the Supreme Court of the Anited States

No. 14-614

W. KEVIN HUGHES, CHAIRMAN, MARYLAND PUBLIC

SERVICE COMMISSION, ET AL., PETITIONERS

Vv.

TALEN ENERGY MARKETING, LLC, FKA

PPL ENERGYPLUS, LLC, ET AL.

No. 14-623

CPV MARYLAND, LLC, PETITIONER

v.

TALEN ENERGY MARKETING, LLC FKA

PPL ENERGYPLUS, LLC, ET AL.

ON WRITS OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

BRIEF FOR THE UNITED STATES AS AMICUS CURIAE

INTEREST OF THE UNITED STATES

This case concerns whether the Federal Power Act

(FPA), 16 U.S.C. 79la et seg., preempts a Maryland

program that requires electric distribution companies

to pay subsidies to state-selected generators if those

generators bid into and clear the wholesale electric

capacity auction conducted by PJM Interconnection,

LLC (PJM), which operates within the regulatory

jurisdiction of the Federal Energy Regulatory Com-

mission (FERC or Commission). Because this case

(1)

2

directly implicates FERC’s regulatory responsibili-

ties, the United States has a substantial interest in the

Court’s resolution of the preemption issue. At the

Court’s invitation, the United States filed an amicus

brief at the petition stage of this case.

STATEMENT

A. Regulatory And Technical Background

1. 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, FERC, Energy Primer: A Handbook of

Energy Market Basics 47, 57 (Nov. 2015) (Energy

Primer).' Originally “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), and its sale was regulated only by the States.

This Court held in 1927, however, that the Commerce

Clause bars the States from regulating certain inter-

state electricity transactions, such as wholesale sales

of power (7.¢., sales for resale) across state lines. /d.

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 FPA, ch. 687, Tit. II, 49 Stat. 847. The

FPA authorized the Federal Power Commission,

FERC’s predecessor, to regulate certain components

of the electric-power system. 16 U.S.C. 792; see 42

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

pdf.

3

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

grants FERC jurisdiction over (i) “the sale of electric

energy at wholesale in interstate commerce,” and

(ii) “the transmission of electric energy in interstate

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 “[ajll rates and charges made, demanded, or

received 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).

Second, if FERC finds that “any rate, charge, or clas-

sification,” or “any rule, regulation, practice, or con-

tract affecting such rate, charge, or classification,” is

“unjust, unreasonable, unduly discriminatory or pref-

erential,” 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-

ther provides that FERC “shall not have jurisdiction,

except as specifically provided in this subchapter or

subchapter III of this chapter, over facilities used for

the generation of electric energy[,] or over facilities

used in local distribution or only for the transmission

4

of electric energy in intrastate commerce.” 16 U.S.C.

824(b)(1). Such facilities are subject to state regula-

tion. See Pacific Gas & Elec. Co. v. State Energy Res.

Conservation & Dev. Comm’n, 461 U.S. 190, 205-206

(1983).

2. Since the 1970s, a combination of technological

advances and policy reforms has given rise to market

competition in the Nation’s electricity system. Inde-

pendent power generators—that is, generators that

do not own transmission lines or distribution facilities

—have proliferated. See Transmission Access Policy

Study Grp. v. FERC, 225 F.3d 667, 681 (D.C. Cir.

2000) (per curiam), aff’d swh nom. New York, supra.

And “unlike the local power networks of the past,” the

electricity grid is now national in scope, such that “any

electricity that enters the grid immediately becomes a

part of a vast pool of energy that is constantly moving

in interstate commerce.” New York, 535 U.S. at 7. As

a consequence, “it is now possible for power compa-

nies to transmit electric energy over long distances at

a low cost.” Jd. at 7-8. But major utilities by and

large still own the high-voltage transmission lines.

That ownership could permit them “either to refuse to

deliver energy produced by competitors or to deliver

competitors’ power on terms and conditions less fa-

vorable than those they apply to their own transmis-

sions.” Jd. at 8-9.

To address that threat to competition, Congress

amended the FPA in Title VII of the Energy Policy

Act of 1992, Pub. L. No. 102-486, §§ 721-726, 106 Stat.

2915-2921. Those amendments authorize FERC to

order utilities that own transmission lines to transmit

power sold by competitors. See 16 U.S.C. 824j-824k.

In 1996, after issuing a series of utility-specific orders,

5

FERC invoked its powers under Sections 824d and

824e to promulgate a general rule addressing the

matter. See New York, 535 U.S. at 9-11. That rule

requires transmission-owning utilities to file tariffs

offering nondiscriminatory “open access” transmission

services to wholesale power suppliers on standard

terms. /d. at 11-12.

In the past two decades, FERC has continued 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, 554 U.S. 527, 536

(2008) (Morgan Stanley). Rather than directly ap-

proving or setting wholesale rates to ensure that they

are just and reasonable, the Commission increasingly

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) (Connect-

icut). Under market-based rate setting, generators

and load-serving local utilities generally have two

methods to buy and sell electricity in wholesale mar-

kets. 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;

see also NRG Power Mktg., LLC v. Maine Pub. Utils.

Comm'n, 558 U.S. 165, 167 (2010). They may also

purchase from, and sell to, a Commission-approved

nonprofit “Regional Transmission Organization[]” or

“Independent System Operator[].” Morgan Stanley,

554 U.S. at 536-537.

6

“To further pry open the wholesale-electricity

market and to reduce technical inefficiencies caused

when different utilities operate different portions of

the grid independently,” FERC issued a rule encour-

aging transmission-owning utilities to relinquish con-

trol of their transmission lines to the wholesale-

market operators, which are charged with operating

organized wholesale markets in a nondiscriminatory

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

Nation’s seven wholesale-market operators—New

England Independent System Operators (ISO), New

York ISO, PJM, Midcontinent ISO, Southwest Power

Pool, California ISO, and the Electric Reliability

Council of Texas—together now serve two-thirds of

the national electricity load. Energy Primer 40. They

are responsible for “[e]nsur[ing] the reliability of the

transmission grid,” “balanc[ing] supply and demand

instantaneously,” and “plan[ning] for transmission

expansion on a regional basis.” Jd. at 58.

3. PJM is a wholesale-market operator that admin-

isters a large regional market in the Mid-Atlantic

region, which includes Maryland. PJM—named after

the first three States (Pennsylvania, New Jersey, and

Maryland) where it was developed, Energy Primer

93—operates both energy and capacity markets. The

energy market consists of real-time and day-ahead

auction markets that set the rates for wholesale elec-

tricity in the PJM region. See id. at 64. Using sophis-

ticated computerized systems, the wholesale-market

operators match up generators’ bids to supply elec-

tricity at specified prices with electricity demand from

load-serving entities, which then deliver power to

consumers in the state-regulated retail market. /bid.;

7

see, e.g., PJM, PJM Markets (May 14, 2015).* Each

accepted bid is paid the “locational marginal price,”

which represents the least-cost price of meeting a

marginal increase in demand at each of the many

geographic nodes within a region, and so reflects the

value of electricity at particular locations and times.

Energy Primer 73.

The capacity market—at issue here—is forward-

looking, providing the option to buy and sell capacity

to satisfy future demand and, where appropriate, spur

investment in additional infrastructure. 14-614 Pet.

App. (Pet. App.) lla. The capacity market “provide[s}

a means for [load-serving entities] to procure capacity

needed to meet forecast load and to allow generators

to recover a portion of their fixed costs.” Energy

Primer 96. To ensure that sufficient capacity will be

available, PJM holds an annual auction for energy

that will be available three years in the future. Pet.

App. lla. PJM determines how much capacity the

region will acquire for the relevant year based on

supply offers and a sloped demand curve that consid-

ers both reliability needs and price. /bid.; Energy

Primer 96. PJM also determines how much of the

region’s capacity each load-serving entity is responsi-

ble for acquiring. PJM, Reliability Assurance Agree-

ment Among Load Serving Entities in the PJM Re-

gion, Art. 7.2 (Sept. 17, 2010) (PJM Reliability Assur-

ance Agreement).°

Under PJM’s FERC-approved tariff, generators,

as well as utilities that have purchased capacity from

existing generators under long-term bilateral con-

® http://www.pjm.com/~/media/about-pjm/newsroom/fact-sheets/

%20pjms-markets-fact-sheet.ashx.

® http://www.pjm.com/media/documents/merged-tariffs/raa.pdf.

8

tracts, commit to sell—and PJM commits to purchase

—the amount of capacity that is selected in the auc-

tion for resale to load serving entities in three years’

time. Pet. App. 1la-12a. In order for capacity pur-

chased by a utility through a bilateral contract to

count toward the utility’s share of the capacity that

PJM determines the utility must procure, that re-

source must be bid into and “clear” the capacity auc-

tion. PJM Reliability Assurance Agreement, Art. 7.3.

PJM accepts bids from lowest to highest until it

has reached the requisite capacity. Pet. App. lla.

The highest bid selected becomes the “market-

clearing price.” bid. Any generator or other entity

that bids at or below the clearing price “clears” the

auction. Ibid. Those providers receive the clearing

price for their capacity, regardless of their bid price.

Ibid. PJM’s process for determining the appropriate

price per unit is known as the Reliability Pricing

Model. /bid.; Energy Primer 96; see Maryland Pub.

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

2011) (per curiam). The Commission oversees PJM’s

operation of its organized-capacity market, the terms

and conditions of participation in that market, and the

wholesale rates produced by that market. Maryland

Pub. Serv. Comm’n, 632 F.3d 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 when it is needed.

See ibid.; Pet. App. 1la-12a; cf. Connecticut, 569 F.3d

at 480 (“[U]sing competitive bidding for future capaci-

ty contracts * * * both incentivizes and accounts for

new entry by more efficient generators, while ensur-

ing a price both adequate to support reliability and

fair to consumers.”).

9

Existing generators and other existing providers of

capacity may bid zero as “price-takers,” meaning they

agree to sell at whatever the clearing price may be.

Pet. App. lla; see id. at 94a. New capacity, however,

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

FERC instituted in 2006. Jd. at 12a. That rule re-

quires new generators in certain circumstances to bid

at or above a default price specified by PJM, unless a

particular generator can demonstrate that its actual

costs are lower than the default price. /d. at 12a, 94a;

see PPL EnergyPlus, LLC v. Hanna, 977 F.. Supp. 2d

372, 400 (D.N.J. 2013), aff'd sub nom. PPL Ener-

gyPlus, LLC v. Solomon, 766 F.3d 241 (3d Cir. 2014),

petitions for cert. pending, No. 14-634 (filed Nov. 26,

2014), and No. 14-694 (filed Dec. 10, 2014). That rule

seeks to prevent the manipulation of clearing prices

by net purchasers of capacity—.e., entities that pur-

chase more capacity than they sell into the market

and that thus have an incentive to keep capacity prices

as low as possible. See Hanna, 977 F. Supp. 2d at

390-391. To support new entry in certain circum-

stances where price signals alone may be insufficient

to incentivize new generation, PJM also provides for a

new entry price adjustment (NEPA). In those specific

circumstances, the NEPA permits a new generator to

lock in a single price for its first three years in the

market. PJM, 128 F.E.R.C. 4% 61,157, at 9 101 (2009).

B. The Maryland Program

1. This case concerns a program instituted by the

State of Maryland to develop new generation re-

sources. In 1999, Maryland abandoned the vertical-

integration model it had historically overseen to pro-

vide electricity and enacted in its place a market-

based approach to electric-energy supply. Pet. App.

10

13a, 63a. The State decoupled entities that generate

electricity from those that supply it to end users.

Ibid. As a result, utilities in Maryland began to pur-

chase electricity in the PJM wholesale markets. /d. at

13a. Capacity is sold to PJM. PJM EnergyPlus, LLC

v. Solomon, 766 F.3d 241, 248 (3d Cir. 2014), petitions

for cert. pending, No. 14-634 (filed Nov. 26, 2014), and

No. 14-694 (filed Dec. 10, 2014). The load-serving

entities—local electric distribution companies and

competitive electric suppliers that sell electricity

directly to consumers—purchase capacity from PJM.

Ibid.; see pp. 7-8, supra; pp. 30-31 infra. When ener-

gy is later purchased or sold in PJM’s day-ahead and

real-time markets, the transmission system operated

by PJM is used to transfer energy from generators to

local distribution companies. Solomon, 766 F.3d at

248.

Approximately a decade after adopting this new

approach to electricity supply, Maryland officials

came to the view that PJM’s capacity auction was

failing to incentivize enough new generation. Pet.

App. 13a, 64a. They regarded the auction’s three-year

time horizon as inadequate for generators to assess

whether additional resources were warranted. /d. at

122a-123a. They contended that the auction was not

encouraging sufficient new generation in Maryland,

which “sits in a highly congested portion of the re-

gional electric transmission system,” and that the lack

of new generation caused Maryland consumers to pay

too high a price for electricity. J.A. 160; see J.A. 281-

286; Pet. App. 13a-14a.‘ Petitioner CPV Maryland,

‘ PJM divides its capacity market into several locational deliver-

ability areas (LDAs). Part of Maryland falls within an LDA called

the Southwest Mid-Atlantic Area Council. See Monitoring Ana-

11

LLC (CPV) asked FERC to revise PJM’s rules to

expand the NEPA three-year price guarantee to ten

years. Pet. App. 26a.

FERC rejected that proposal. PJM, 126 F.E.R.C.

9 61,275, at 9 146, order clarified, 127 F.E.R.C.

7 61,104, order clarified on reh’g, 128 F.E.R.C.

1 61,157 (2009); see PJM, 128 F.E.R.C. 9 61,157, at

171 103-104. The Commission concluded that “giving

new suppliers longer payments and assurances una-

vailable to existing suppliers” would upset the auc-

tion’s balance between new and existing generation.

PJM, 126 F.E.R.C. 4 61,275, at 1 149; see id. 1 150;

see also 128 F.E.R.C. 9 61,157, at 1 103 (extending the

NEPA would guarantee the new entrant its price

“while the extra capacity introduced by the new en-

trant reduces the market prices that can be earned by

all other suppliers”).

After FERC rejected Maryland’s proposal, the

State instituted its own program to incentivize devel-

opment of new natural-gas fired electric generation

within Maryland’s borders. The Maryland Public

Service Commission adopted Maryland’s final plan—

the Generation Order—in 2012. Pet. App. 13a-14a,

117a-118a. The program compels electric distribution

companies to enter into long-term (20-year) contracts

with a generator selected by the State. Jd. at 14a.

Under the state-mandated contracts, the electric

distribution companies must make payments to the

generator at a specified rate and amount tied to the

generator’s wholesale sales of capacity. But the elec-

lyties, LLC, State of the Market Report for PJM: January

through September 201, fig. 5-3 (Nov. 12, 2015), http://www.

monitoringanalytics.com/reports/PJM_State_of_the_Market/2015/

2015q3-som-pjm.pdf.

12

tric distribution companies do not actually purchase

capacity (or electricity) from the generator under

those contracts. Instead, the generator must bid its

capacity directly into and clear the PJM capacity

auction. If the generator clears, it sells its capacity to

PJM at the clearing price. If the auction clearing

price is below the price set in the state-mandated

contracts between the generator and the electric dis-

tribution companies, the electric distribution compa-

nies must pay the generator the difference between

the clearing price and the state-mandated contract

price, thereby providing a long-term guaranteed rev-

enue stream to the state-selected generator. If the

auction clearing price is above the contract price, the

generator must pay the difference to the electric dis-

tribution companies. /bid. The result is that the

ultimate price for the generator’s capacity, after com-

bining the PJM auction clearing price with any addi-

tional payments made to the generators by the elec-

tric distribution companies (or vice versa), is locked in

at a fixed rate set by the state-mandated contracts.

2. The enactment of the Maryland program and a

similar program in New Jersey’ precipitated a change

® In 2011, New Jersey adopted a substantively similar program

called the Long Term Capacity Pilot Program Act. Solomon, 766

F.3d at 246, 248. The New Jersey program compels electric distri-

bution companies to enter into similar contracts with generators

selected by the State that require the distribution companies to

pay the difference between the contract price and the auction

clearing price for 15 years. Jd. at 248-249. The Third Circuit held

that the New Jersey program is preempted by the FPA. /d. at

250-254. Two pending petitions for writs of certiorari seek review

of that decision. See CPV Power Holdings, LP v. PPL Ener-

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

(No. 14-694).

13

in PJM’s minimum-offer-price rule. The PJM auc-

tion’s original rule included multiple exemptions,

including one for offers submitted by state-mandated

resources. Pet. App. 12a; Hanna, 977 F. Supp. 2d at

390-391. That exemption would have enabled a new

generator selected by Maryland to bid zero in every

auction, ensuring that the generator cleared the auc-

tion and received the state-guaranteed subsidies. See

Hanna, 977 F.. Supp. 2d at 390.

In response to a complaint filed by certain power

providers operating in the PJM region, the Commis-

sion accepted PJM’s proposal to eliminate the exemp-

tion from the minimum-offer-price rule for state-

mandated resources. See PJM, 185 F.E.R.C.

1 61,022, at 11 1-3, 139-143, order clarified on reh’g,

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); see also PJM, 137 F.E.R.C. 9 61,145,

at 11 78, 87-88 (2011), petitions denied sub nom. New

Jersey Bd. of Pub. Utils., supra. The Commission

recognized that States “have their own policies and

objectives that they wish to carry out, and the benefits

of some of these policies and objectives may not be

recognized in the [Reliability Pricing Model] construct

generally or the [minimum-offer-price rule] in particu-

lar.” PJM, 137 F.E.R.C. 9 61,145, at 1 3. The Com-

mission stated that its “intent [wa]s not to pass judg-

ment on state and local policies and objectives with

regard to the development of new capacity resources,

or unreasonably interfere with those objectives.”

Ibid. The Commission concluded, however, that re-

moval of the exemption was necessary to prevent

“subsidized entry supported by one state’s or locality’s

policies” from “disrupting the competitive price sig-

14

nals that [the auction] is designed to produce, and that

PJM as a whole, including other states, rely on to

attract sufficient capacity.” Jbid. The Third Circuit

upheld the Commission’s order in all respects, includ-

ing its elimination of the exemption for state-

mandated resources, against challenges brought by

Maryland and others. See New Jersey Bd. of Pub.

Utils. v. FERC, 744 F.3d 74, 79-80 (2014).

C. Procedural History

Petitioners are the generator (CPV) selected by

Maryland under its Generation Order, and the Com-

missioners of the Maryland Public Service Commis-

sion. Respondents are incumbent power generators.

Pet. App. 65a n.4. Respondents filed suit in federal

district court, seeking a declaration that the FPA

preempts the Generation Order. /d. at 65a-66a. After

a bench trial, the district court held that Maryland’s

program is field preempted. /d. at 62a-194a.

1. The district court agreed with petitioners that

States have the authority to “(1) take regulatory ac-

tion to require existing generation facilities to retire;

(2) limit the type or amount of generation facilities

constructed in the state; (3) promote certain environ-

mentally desired types of generation facilities; and

(4) determine the siting or location of a new genera-

tion facility within the state.” Pet. App. 138a. The

court concluded, however, that “after a generator

physically comes into existence and operation and

participates in the wholesale electric energy market,

the prices or rates received by that generator in ex-

change for wholesale energy and capacity sales are

within the sole purview of the federal government.”

Ibid. The court explained that the Generation Order

is preempted because it seeks to secure new genera-

15

tion by setting the prices to be received by the state-

selected generator for its capacity sales in the whole-

sale market. /d. at 16la-163a.

Because the district court concluded that the

Generation Order is field preempted, it did not ad-

dress whether Maryland’s program is invalid under a

conflict-preemption theory. Pet. App. 163a-164a.

2. The court of appeals affirmed, Pet. App. 1a-28a,

concluding that the Generation Order is preempted

under both field- and conflict-preemption theories, id.

at 19a-28a. The court explained that the Generation

Order is field preempted because, by requiring the

state-selected generator to bid into and clear the

federally-approved PJM auction—and then providing

that generator a fixed payment in addition to what the

generator receives from PJM—Maryland “effectively

supplant(s] the rate generated by the auction with an

alternative rate preferred by the state.” Jd. at 19a.

The court of appeals stressed that its field-

preemption holding was of “limited scope” and was

“addressed to the specific program at issue.” Pet.

App. 23a. The court thus stated that it was not ex-

pressing any opinion on “other state efforts to encour-

age new generation, such as direct subsidies or tax

rebates, that may or may not differ in important ways

from the Maryland initiative,” and it made clear that

“not every state statute that has some indirect effect

on wholesale rates is preempted.” Jbid. (citation and

internal quotation marks omitted). But it concluded

that here “the effect of the Generation Order on mat-

ters within FERC’s exclusive jurisdiction is neither

indirect nor incidental.” Jd. at 23a-24a.

The court of appeals further concluded that the

Generation Order is preempted due to a conflict with

16

the FERC-approved program. Pet. App. 24a-28a.

The court explained that “the Generation Order has

the potential to seriously distort the PJM auction’s

price signals,” which are intended to incentivize new

generation, by “substituting the state’s preferred

incentive structure for that approved by FERC.” /d.

at 25a. The court further explained that the Genera-

tion Order conflicts with FERC’s three-year NEPA

for new generators, “which represents an exception to

PJM’s otherwise steadfast commitment to a uniform

market clearing price” for generators. Jd. at 26a.

The court of appeals rejected petitioners’ argument

that the Generation Order is not preempted because

the Commission’s 2011 revision to the minimum-offer-

price rule explicitly accommodated the participation of

state-subsidized plants in the auction. Pet. App. 27a.

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 exist-

ence of a conflict.” Jbid. The court again emphasized

that “not every state regulation that incidentally af-

fects federal markets is preempted,” but concluded

that the Generation Order is “a direct and transparent

impediment to the functioning of the PJM markets.”

Id. at 27a-28a.

SUMMARY OF ARGUMENT

A. The Maryland program is preempted. By re-

quiring a state-selected generator to bid into and clear

the PJM capacity auction before receiving a subsidy

that is directly tied to the auction’s clearing price, the

program directly targets the PJM market mechanism

for setting the wholesale capacity rate. This Court

has made clear that “measures aimed directly at in-

terstate purchasers and wholesales for resale” are

17

preempted. Oneok, Inc. v. Learjet, Inc., 135 S. Ct.

1591, 1600 (2015) (emphasis and citation omitted); see

id. at 1599. The Generation Order takes direct aim at

the PJM capacity market by attempting to implement

its own regulatory framework for incentivizing new

generation as a direct overlay on the PJM auction.

The Maryland program also directly interferes

with the operation of the wholesale capacity market

and the setting of the federally-regulated wholesale

rate. The state program’s requirement that its select-

ed generator receives payments if it bids into and

clears the PJM auction distorts the auction’s price

signals and displaces economically efficient bids. Ifa

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. The lower market-clearing

price that results from the state-supported genera-

tor’s mandated participation and clearing affects all

participants in the PJM region and distorts the price

signals that would otherwise indicate a need for new

capacity.

State subsidization, combined with state-mandated

bidding and clearing, can suppress the price set by

federally-regulated capacity markets even where the

generators comply with the FERC-adopted minimum-

price-offer rule. That rule is a default mechanism.

But Maryland’s program would allow a state-selected

generator to bid the minimum-offer default price—

even if its 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 uneconomic entry suppresses

the price signals that would otherwise notify other

18

generators in States throughout the PJM region that

new capacity is needed. By enabling a state-selected

generator to clear the PJM auction aided by a subsidy

when it otherwise would not, Maryland’s program

displaces more efficient capacity that would have

otherwise cleared, which undermines the Commis-

sion’s goal to ensure an economically efficient PJM

market. And even if the modification of the minimum-

offer-price rule prevented any distortive effect, the

need for the Commission to take corrective measures

indicates the existence of a jurisdictional intrusion by

the State.

Petitioners analogize the contracts required by the

Maryland program to traditional bilateral contracts.

But the contracts do not provide for the purchase of

capacity in exchange for a fixed payment. Rather,

they are simply mechanisms to guarantee additional

compensation to CPV for wholesale capacity that it

sells to PJM. If Maryland had instead ordered its

utilities to enter into bilateral contracts with the state-

selected generator to build new capacity, the utilities

may have tried to sell that capacity into the PJM auc-

tion, but they would not have been required to do so.

And a bilateral contracting requirement that occurred

outside the PJM auction might also be more in line

with Maryland’s purported goal to increase the

amount of capacity in the region. Under Maryland’s

program, the state-selected generator bids its capaci-

ty into the auction, which displaces other resources

but does not necessarily increase the amount of capac-

ity in PJM.

B. Affirmance of the court of appeals’ decision will

not stifle the States’ ability to encourage new genera-

tion of clean energy. States can incentivize new con-

19

struction directly, limit new construction to certain

types of generation resources, and require the retire-

ment of generation facilities in ways that have an

indirect effect on the wholesale capacity market.

Indirect methods of incentivizing new generation may

also include the use of tax-exempt bonding authority,

property tax relief, favorable site-lease agreements on

public lands, the gifting of environmentally damaged

property for brownfield development, and the relaxing

or accelerating of permit approvals. States may also

create programs that require loca! utilities to pur-

chase a percentage of electricity from a particular

generator or from renewable resources, or to use

renewable energy certificates.

A State’s regulatory choices may come with costs.

Here such costs are the result of Maryland’s partici-

pation in an interstate energy market that uses a

market mechanism to set the price for wholesale ca-

pacity in the entire region. If a generation facility is

constructed without clearing the capacity auction, it

may still offer electricity into the energy market, but

the capacity market will not enable that resource to

recover a portion of its fixed costs from load-serving

entities throughout the PJM region.

ARGUMENT

A. Maryland’s Program Is 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)

(citations omitted). Federal law must also prevail

20

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)). This 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 Maryland program is 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

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 approach that

FERC employs in the wholesale capacity market for

electricity, wholesale rates are determined through

Commission-approved and regulated regional markets

* 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).

21

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 Maryland program is preempted because,

by requiring the state-selected generator to bid into

and clear the PJM capacity auction as a prerequisite

to receiving state-mandated subsidies for its new

capacity in addition to the clearing price that it re-

ceives from PJM, it directly targets the PJM market

mechanism for determining wholesale capacity rates.

Within that exclusive federal field, the Generation

Order partially displaces the market mechanism for

setting wholesale price signals for new generators.

In decisions addressing both the FPA and the Nat-

ural Gas Act, this Court has made clear that, at a

minimum, state-law “measures aimed directly at in-

terstate purchasers and wholesales for resale” are

preempted. Oneok, 135 S. Ct. at 1600 (emphasis omit-

ted) (quoting Northern Natural Gas Co. v. State Corp.

Comm’n, 372 U.S. 84, 94 (1963)). The Court thus has

recognized a “significant distinction” for purposes of

preemption “between measures aimed directly at

interstate purchasers and wholesales for resale, and

those aimed at subjects left to the States to regulate.”

Ibid. (citation and internal quotation marks omitted);

see, e.g., Schneidewind v. ANR Pipeline Co., 485 U.S.

293, 306-308 (1988) (holding preempted a state law

capping a natural gas company’s equity levels that

was “directed at” suppressing wholesale rates);

Northwest Cent. Pipeline Corp. v. State Corp.

Comm'n, 489 U.S. 493, 514 (1989) (finding no preemp-

tion of a state regulation concerning the timing of gas

production, even though the regulation might affect

the costs and prices of wholesale sales, because the

22

state regulation was aimed at protecting natural gas

producers—‘“a matter firmly on the States’ side” of

the jurisdictional dividing line).

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 (emphasis and citation omitted), the plaintiffs’

state antitrust claims were not preempted because

antitrust laws “are not aimed at natural-gas compa-

nies in particular, but rather all businesses in the

marketplace,” id. at 1601. The claims in Oneok sought

“to challenge the background marketplace conditions

that affected both jurisdictional and nonjurisdictiona!

rates,” rather than “to regulate in areas where FERC

has properly exercised its jurisdiction to determine

just and reasonable wholesale rates.” Jd. at 1602

(citation and internal quotation marks omitted).

Unlike the state antitrust claims in Oneok, the

Generation Order takes direct aim at the PJM capaci-

ty market by attempting to implement Maryland’s

own regulatory framework for incentivizing new gen-

eration through the mechanism of the PJM auction.

The program mandates that the state-selected gener-

ator receive the amount set forth in its state-

mandated contracts with electric distribution compa-

nies, which are directly tied to the generator’s sales of

capacity into the PJM market. See pp. 11-12, supra.

23

Indeed, Maryland adopted the program because state

officials believed that the price signals produced by

PJM’s wholesale capacity auction were not incentiviz-

ing sufficient new generation in the PJM region. Pet.

App. 13a.

The Generation Order, by providing long-term

supplemental payments in addition to the PJM clear-

ing price, makes it possible for new generation in

Maryland to enter a FERC-regulated market that

would otherwise not provide price signals sufficient to

attract that entry. The program therefore supplants

the Commission-approved market-based mechanism

for ensuring the most efficient supply of capacity with

the State’s own view of what wholesale price is needed

to incentivize new generation.

In this respect, the Maryland program is like state

regulations that the Court has previously found

preempted by FERC’s exclusive jurisdiction. In

Schneidewind, 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.’” 485 U.S. at

308; see id. at 296-298, 310. The Maryland program

similarly targets the wholesale market by guarantee-

ing a level of compensation—different from the com-

pensation provided by the PJM auction—that a state-

selected generator will receive in connection with its

wholesale sales of capacity to PJM.

Similarly, in Mississippi Power & Light Co. v.

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

24

the FPA preempted a state determination of the rea-

sonableness of FERC-mandated payments for the sale

of nuclear power to wholesale suppliers of electricity,

which led to higher retail electricity rates. Id. at 372-

377. 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

allocations of power are binding on the States, and

States must treat those allocations as fair and reason-

able when determining retail rates.” Jd. at 371. Here

too, even though the State purports to invoke its au-

thority to regulate generation facilities, 16 U.S.C.

824(b)(1); see Pacific Gas & Elec. Co. v. State Energy

Res. Conservation & Dev. Comm’n, 461 U.S. 190, 205-

206 (1983), it may not do so in a way that directly aims

at and undermines the wholesale capacity rates pro-

duced by the PJM auction mechanism that the Com-

mission approved in the exercise of its exclusive au-

thority over wholesale rates and practices affecting

those rates. As the court of appeals concluded, the

effect of the Maryland program “on matters within

FERC’s exclusive jurisdiction is neither indirect nor

incidental.” Pet. App. 23a-24a.

b. The Maryland program is also preempted be-

cause it directly interferes with, and thus conflicts

with, the operation of the wholesale capacity market

and the setting of the federally-regulated wholesale

rate. Under its program, 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 arrangements

that guarantee that the selected generators will re-

ceive a set price for their new capacity, and requires

the selected generators to bid that capacity into and

25

clear the PJM auction. Pet. App. 13a-14a. And the

electric distribution companies must pay the differ-

ence between the clearing price and the price of new

generation set through the Maryland program even

though they do not actually purchase capacity under

those contracts. /d. at 14a.

The state program’s requirement that its selected

generator receive payments if it bids into and clears

the PJM auction distorts the auction’s price signals

and displaces economically efficient bids. See PJM,

137 F.E.R.C. 9% 61,145, at 1 3 (2011) (“(Sjubsidized

entry supported by one state’s or locality’s policies”

may “disrupt{] the competitive price signals that [the

auction] is designed to produce.”), petitions denied swb

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 with-

out the state support, another unsupported bid (which

otherwise would have cleared) may not clear. And

lower market-clearing prices that result from a state-

supported generator’s mandated participation and

clearing affect all participants in the multi-state PJM

market and distort the price signals that indicate a

need for new capacity. See Pet. App. 95a-98a, 125a-

126a.

Petitioners and amici claim (Md. Br. 44-48; CPV

Br. 55-58; Nat’l Ass’n of Regulatory Util. Comm’rs

Amicus Br. 15; NRG Energy, Inc. (NRG) Amicus Br.

25-26) that the Commission’s 2011 amendment to the

minimum-offer-price rule, which eliminated the ex-

emption for state-sponsored entry into the PJM ca-

pacity market that permitted such resources to bid

zero as “pricetakers,” minimizes any price-skewing

effects of state-subsidized entry. But state subsidiza-

26

tion, combined with state-mandated bidding and clear-

ing, can have a price-suppressive effect on federally-

regulated capacity markets even where the generators

comply with the FERC-adopted minimum-offer-price

rule. See Pet. App. 25a-26a. That rule is a default

mechanism. See id. at 95a-97a. Under Maryland’s

program, a state-selected generator can bid the

minimum-offer default price—even if the generator’s

actual costs are higher than the default price—once

the generator accounts for the offset to its costs from

the state-mandated supplemental payments it re-

ceives.

Such an uneconomic entry would suppress price

signals resulting from the Reliability Pricing Model,

which could in turn cause generators in all States

throughout the PJM region to become hesitant to

expand generation capacity. Pet. App. 95a-97a. Thus,

by requiring selected generators to bid their capacity

into and clear the Commission-approved PJM auction

and guaranteeing a level of compensation for that

capacity, the program directly interferes with the

market mechanisms that the auction uses to set

wholesale capacity rates. And in enabling a state-

selected and state-subsidized generator to clear the

PJM auction when it otherwise would not, Maryland’s

program displaces more efficient capacity that would

have otherwise cleared. That result undermines the

Commission’s goal to ensure an economically efficient

PJM market. See PJM, 137 F.E.R.C. 1 61,145, at 12

(“The long-term viability of the PJM market demands

an assurance of competitive offers.”).

Furthermore, even if the modification of the

minimum-offer-price rule did actually prevent the

distortive effect, the Maryland program would still be

27

preempted. That the Commission was compelled to

take steps to address Maryland’s direct interference

does not vitiate the jurisdictional intrusion. To the

contrary, “(t]he fact that FERC was forced to miti-

gate the Generation Order’s distorting effects * * *

tends to confirm rather than refute the existence of a

conflict.” Pet. App. 27a; cf. Northwest Cent. Pipeline,

489 U.S. at 518 (“The [Natural Gas Act] does not re-

quire FERC to regulate around a state rule the only

purpose of which is to influence purchasing decisions

of interstate pipelines, however that rule is labeled.

Such a rule creates a conflict rather than demands an

accommodation.”); Northern Natural Gas, 372 U.S. at

92-93 (“It may be true * * * that accommodation on

the part of the [Commission] could avoid direct

collision—but this argument misses the point. Not the

federal but the state regulation must be subordinat-

ed.”); Maryland v. Louisiana, 451 U.S. 725, 751

(1981).

Maryland contends (Br. 46-48) that the Commis-

sion has foreclosed the conclusion that the Generation

Order distorts the wholesale capacity market because

the Commission found that capacity resources clear-

ing the auction are competitive and that eliminating

the exemption for state-mandated resources resolved

any tension between state policies and wholesale

ratemaking. See PJM, 135 F.E.R.C. 9 61,022, at

1 177, order clarified on reh’g, 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 (8d Cir. 2014); see

also PJM, 137 F.E.R.C. 9 61,145, at 919 3-4. In its

ruling, however, the Commission made no determina-

tion as to preemption of the State’s program itself.

The Commission addressed only the legally distinct

28

question of the reasonableness of the ultimate rates

produced by the auction after FERC’s modification of

the minimum-offer-price rule.

ec. Contrary to petitioners’ contention (Md. Br. 28-

32; CPV Br. 29-31), the fact that Maryland’s program

may affect generation and retail rates does not call for

a different result. The respective powers of FERC

and the States under the FPA are not symmetrical.

The FPA expressly grants FERC jurisdiction over

“fajll rates and charges made, demanded, or received

* * * in connection with” wholesale sales, but the

FPA also requires FERC to ensure that “any rule,

regulation, practice, or contract affecting [a whole-

sale] rate” is “just and reasonable” and not “unduly

discriminatory or preferential.” 16 U.S.C. 824d(a),

824e(a); see 16 U.S.C. 824d(b). By the same token, the

FPA generally reserves to the States the power to

regulate generation and retail sales of electricity. 16

U.S.C. 824(b)(1). But the FPA does not provide that

the States shall have authority—to the exclusion of

FERC—over all practices “affecting” generation or

rates for retail sales. And under the Supremacy

Clause, federal regulation within the scope of FERC’s

jurisdiction must prevail over state regulation. State

programs that directly target rates charged for

wholesale sales—like Maryland’s program here—are

therefore preempted.

This absence of symmetry is illustrated as well by

FERC v. Electric Power Supply Association, No. 14-

840 (argued Oct. 14, 2015) (EPSA). There, the re-

spondents argue that FERC’s regulation of the pay-

ments made for demand-response bid into wholesale

energy markets operated by Regional Transmission

Organizations like PJM exceeds FERC’s authority.

29

In EPSA, on the one hand, the rates paid for demand

response in wholesale markets directly “affect{]” the

rates paid for actual sales of energy into those same

markets and therefore are subject to the express

grant of jurisdiction to FERC over such rates and

practices. And on the other hand, EPSA does not

involve any regulation by FERC of actual retail sales

or the rates charged in such sales. The respondents in

EPSA argue that FERC’s order prescribing rates

paid for demand response bid into wholesale markets

nevertheless exceeds FERC’s jurisdiction because it

affects the retails market by creating an “effective”

price for retail transactions that consists of the price

the retail customer would pay if it actually engaged in

such a transaction plus the incentive forgone if the

customer did so. As the government explains in

EPSA (Reply Br. at 10-12, No. 14-840 (Sept. 30,

2015)), however, while FERC’s regulation of demand

response in wholesale markets may indirectly affect

retail prices, a financial incentive not to engage in an

economic transaction is not the legal or functional

equivalent of actual regulation by FERC of the terms

of an actual retail sale.

In any event, in this case Maryland can choose to

have a system for supplying electricity to its citizens

that does not depend on its utilities’ participation in

wholesale markets operated by PJM under FERC’s

jurisdiction. So too in EPSA, a State can prohibit its

retail customers from bidding demand response into

(or from purchasing power in) wholesale markets that

are subject to FERC’s jurisdiction. But in either case,

if the entity does participate in a FERC-regulated

wholesale market, it must, under the Supremacy

Clause, do so under FERC’s rules.

30

2. Petitioners and amici attempt (Md. Br. 40-43;

CPV Br. 34-35; Am. Pub. Power Ass’n et al. Amicus

Br. 8-9) to characterize the contracts required by the

Maryland program as equivalent to traditional bilat-

eral contracts, producing “the same incentives and

same outcomes as would a sale of CPV’s capacity to

the distribution utilities, who then would resell it to

PJM.” Md. Br. 41. But the contracts required by the

Maryland program are not bilateral contracts for the

actual purchase and sale of capacity. See Morgan

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

554 U.S. 527, 545-546 (2008) (bilateral contracts be-

tween willing buyer and seller, negotiated in good

faith, can be presumed to be just and reasonable).

The program instead requires the generator’s prom-

ised capacity to be bid into the PJM auction and sold

to PJM for the clearing price. See Pet. App. 21a. As a

result, the additional guaranteed compensation paid to

the generator by the electric distribution companies is

not for capacity, but rather is simply the means of

imposing the state-mandated guarantee of additional

compensation for wholesale capacity that is sold to

PJM.

PJM, for its part, does not require new capacity—

whether supplied by a generator or acquired by a

utility in a bilateral contract—to be bid into the PJM

capacity auction. Cf. PJM, PJM Open Access Trans-

mission Tariff, Attach. DD § 6.6 (Sept. 17, 2010) (cre-

ating a “must-offer” requirement for existing capacity

resources).’ A state requirement that utilities pur-

chase new capacity in a true bilateral contract with a

state-selected generator therefore would not, in and of

’ http://www.pjm.com/media/documents/merged-tariffs/oatt.pdf.

31

itself, distort the auction’s price signals or displace

existing capacity in the auction. PJM does, however,

require a utility to bid and clear any new capacity it

purchases into the PJM market in order for that ca-

pacity to be credited toward that utility’s share of

PJM’s purchase of total capacity needs. See Reliabil-

ity Assurance Agreement, Art. 7.3. An electric distri-

bution company may therefore desire to bid new ca-

pacity that it purchases through a bilateral contract

into the PJM auction. But the utility’s decision to bid

its purchased capacity into the auction is different

from a state mandate to do so—at least if (as is true

for a new generator under the Maryland program) the

State mandates different compensation than the

FERC-approved mechanism provides.

A bilateral contracting requirement that occurred

outside the PJM auction might also be potentially

more in line with Maryland’s purported goal in adopt-

ing the Generation Order to increase the amount of

capacity in the region. See Pet. App. 13a-14a (finding

that Maryland wanted to incentivize generation in the

Mid-Atlantic region, where the State believed there

was a heightened risk of reliability problems due to

lack of capacity); id. at 109a. Under Maryland’s cur-

rent program, in contrast, the state-selected and

state-subsidized generator is required to bid its new

capacity into and clear the auction, which displaces

other, more efficient resources but does not necessari-

ly increase the amount of capacity in PJM. See p. 7,

supra.

32

B. Preemption Of Maryland’s Program Does Not Elimi-

nate States’ Ability To Incentivize New Generation

Resources

Petitioners and amici contend (Md. Br. 31-32; CPV

Br. 30; States’ et al. Amicus Br. 16-21; Nat’l Gover-

nors Ass’n et al. Amicus Br. 29; NRG Amicus Br. 18)

that an affirmance by this Court of the decision below

will stifle the States’ ability to encourage new genera-

tion of clean energy. But if the Court holds that the

specific Maryland program at issue here is preempted,

the States will retain significant authority to promote

new generation of clean energy within their reserved

jurisdiction over the facilities used for generation of

electric energy. See 16 U.S.C. 824(b)(1).

1. A holding that the Maryland program is pre-

empted would not disable States from taking any

action that has an effect on supply or demand in the

wholesale market. Under the FPA, States retain

jurisdiction over facilities used for the generation of

electric energy. 16 U.S.C. 824(b)(1). States can incen-

tivize the construction of new generation facilities,

limit new construction to certain types of generation

resources, and require the retirement of generation

facilities, in ways that may have an indirect effect on

the wholesale capacity market. See, e.g., Connecticut

Dep’t of Pub. Util. Control v. FERC, 569 F.3d 477, 481

(D.C. Cir. 2009), cert. denied, 558 U.S. 1110 (2010); see

also PPL EnergyPlus, LLC v. Solomon, 766 F.3d 241,

255 (3d Cir. 2014) (finding New Jersey program

preempted but stating that “states may select the type

of generation to be built—wind or solar, gas or coal—

and where to build the facility[,] [o}]r states may elect

to build no electric generation facilities at all”) (citing

Connecticut, 569 F.3d at 481), petitions for cert. pend-

33

ing, No. 14-634 (filed Nov. 26, 2014), and No. 14-694

(filed Dec. 10, 2014). Such choices “affect the pool of

bidders” in the capacity auction, “which in turn affects

the market clearing price for capacity.” Connecticut,

569 F.3d at 481. But when a State “regulates within

its sphere of authority, the regulation’s incidental

effect on interstate commerce does not render the

regulation invalid.” Solomon, 766 F.3d at 255; see

Pet. App. 27a (“[N]Jot every state regulation that inci-

dentally affects federal markets is preempted.”).

Indirect methods of incentivizing the construction

of new generation facilities may include, for example,

the “utilization of tax exempt bonding authority, the

granting of property tax relief, the ability to enter into

favorable site lease agreements on public lands, the

gifting of environmentally damaged properties for

brownfield development, and the relaxing or accelera-

tion of permit approvals.” Solomon, 766 F.3d at 253

n.4 (quoting PPL EnergyPlus, LLC v. Hanna, 977 F.

Supp. 2d 372, 404 (D.N.J. 2013), aff’d sub nom. Solo-

mon, supra) (citing record evidence of such methods);

see Pet. App. 170a (noting State’s ability to finance

construction of a power plant, issue bonds to fund

such construction, or build (and/or operate) a genera-

tion facility). Indeed, States are free to require pro-

curement of new generation resources, even if the

price signals in the regional wholesale capacity mar-

ket indicate that no new resources are needed. See

ISO New Eng., Inc., 185 F.E.R.C. 7 61,029, at 1 171

(2011), order clarified on reh’g, 138 F.E.R.C. 9 61,027

(2012). None of those methods would be directly

aimed at the Commission-approved wholesale auction

by providing a subsidy tied to the auction price for

sales made to PJM.

34

2. Petitioners’ amici contend (see, e.g., States’ et al.

Amicus Br. 16-21) that the decision below calls into

question bilateral contracts for the purchase of capaci-

ty or state requirements that utilities enter into such

contracts with particular types of generators. But

that is not the case. Permissible state programs may

include a requirement that local utilities purchase a

percentage of electricity from a particular generator

or from renewable resources, or the creation of re-

newable energy certificates to be independently used

by utilities in compliance with state requirements.

See, ¢g., Midwest Power Sys., Inc., 78 F.E.R.C.

1 61,067, at 61,246 (1997) (lowa statute not preempted

“to the extent that [it] require[s] [state] utilities

* * * to purchase from certain types of generating

facilities”).

In Allco Finance Ltd. v. Klee, No. 13-cv-1874, 2014

WL 7004024 (D. Conn. Dec. 10, 2014), aff’d on other

grounds, 805 F.3d 89 (2d Cir. 2015), for example, a

district court considered a Connecticut program that

compelled electric distribution companies to enter into

bilateral contracts 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.

Id. at *1. The court rejected a claim that the program

was preempted by FERC’s authority over wholesale

sales of electricity. Jd. at *6-*10. The court explained

that, unlike the Maryland program, the Connecticut

program was “devoid of any * * * market-distorting

features that encroach [upon] FERC’s exclusive juris-

diction over setting wholesale rates.” Jd. at *10. The

Connecticut law did not directly distort the wholesale

market because Connecticut required the electric

distribution companies to purchase renewable energy

35

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.

3. States’ regulatory choices may come with costs.

But those costs here are the result of Maryland’s

decision to require participation in an interstate ener-

gy market that uses a market mechanism to set the

price for wholesale electric capacity in the entire re-

gion. A generation facility that is constructed without

clearing the capacity auction may offer electricity into

the energy market without taking on the obligations

or receiving the payments that come with clearing the

capacity market. But in that event, the capacity mar-

ket will not enable that resource to recover a portion

of its fixed costs through capacity payments from

load-serving entities throughout the PJM region.

Although Maryland retains authority over generation

facilities, it may not promote its own policies by tar-

geting a generator’s actual sales to PJM that occur

through a FERC-approved mechanism for setting

capacity rates in a multistate region.

36

CONCLUSION

The judgment of the court of appeals should be

affirmed.

Respectfully submitted.

DONALD B. VERRILLI, JR.

MAX MINZNER Solicitor General

General Counsel EDWIN S. KNEEDLER

ROBERT H. SOLOMON Deputy Solicitor General

Solicitor ANN O’CONNELL

CAROL J. BANTA Assistant to the Solicitor

KARIN L. LARSON General

Lisa B. LUFTIG

Ross R. FULTON

Attorneys

Federal Energy Regulatory

Commission

JANUARY 2016