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

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0312%3A17

## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 2015

## Text

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.

(I)

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0312%3A17. Public record. Not legal advice.