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

Nos. 14-614 & 14-623

IN THE

OFFICE OF THE CLERK

Supreme Court of the United States

W. KEVIN HUGHES, ET AL.,

Petitioners,

PPL ENERGYPLUS, LLC, ET AL.,

Respondents.

CPV MARYLAND, LLC,

Petitioner,

Vv.

PPL ENERGYPLUuS, LLC, £7 AL.,

Respondents.

On Writs of Certiorari to the

United States Court of Appeals

for the Fourth Circuit

BRIEF OF NRG ENERGY, INC., AS AMICUS

CURIAE IN SUPPORT OF PETITIONERS

ABRAHAM SILVERMAN JEFFREY A. LAMKEN

CORTNEY MADEA Counsel of Record

NRG ENERGY, INC. JAMES A. BARTA

211 Carnegie Center MOLOLAMKEN LLP

Princeton, NJ 08540 The Watergate, Suite 660

600 New Hampshire Ave., NW

Washington, D.C. 20037

(202) 556-2000

jlamken@mololamken.com

Counsel for Amicus Curiae

SSS A

WiLSON-EPES PrinTING Co. INC. — (202) 789-0096 — WASHINGTON, D.C. 20002

QUESTIONS PRESENTED

1. Is a State’s effort to facilitate the construction and

operation of a needed power plant by directing a compet-

itive procurement and by directing its local utilities to

enter into a long-term contract with the winning develop-

er at the developer’s competitively bid price “field pre-

empted” by the Federal Power Act as a State’s attempt

to set interstate wholesale rates?

2. Is a state-directed, competitively procured contract

to support construction of a power plant “conflict pre-

empted” because its long-term pricing structure provides

incentives for that construction different from the “price

signals” generated by a FERC-supervised yearly for-

ward capacity auction?

(i)

TABLE OF CONTENTS

[mterent Of Asmetens Onsr tite ...ccccccccesecscocecesecccccssocsseseces

EE eee ene a ee

I. Statutory and Regulatory Background........

A. Early Energy Markets.....................000000+:

B. The Federal Power Act ..................cce0000

C. FERC’s Restructuring of

Wholesale Markets. ...................c:cccsceseseoees

1. The Development of Regional

Markets and Minimum-Offer-

Price Rules (MOPRs) ..............0.0:0+00++:

2. Bilateral Contracts and State

Se I cenne

A. The Maryland Generation Order............

B. District Court Proceedings.....................

C. The Fourth Circuit’s Decision..................

ee

I. The Courts Below Should Not Have

Entertained Tiris Sulit ...........ccecccocccoccessesssesee

A. This Action Should Have Proceeded

Before FERC—Not in Federal

Court—Because It Challenges the

Terms of Energy Contracts..................-+:

B. Judicial Intervention Produces III-

Tailored Remedies and Undermines

icine certian iaennaditamiaiiamnaitnn

II. The Generation Order Is Not

iv

TABLE OF CONTENTS—Continued

Page

A. The Generation Order Regulates

Within a Field of Traditional State

Se icsihictnenisinemininsiiiasitediaiaeannciinmeimmscies 28

B. State-Sponsored Contracts Do Not

Conflict With Federal Policy ................... 33

EERE SM Sateeeedar ante en eae eRe ne CE 35

Vv

TABLE OF AUTHORITIES

Page(s)

CASES

Ark. Elec. Coop. Corp. v. Ark. Pub. Serv.

Comm'n, 461 U.S. 375 (19838)........cccccccseeseeeees 32, 33

Ark. La. Gas Co. v. Hall, 453 U.S. 571

Sara tineessssabeitttesteebndiitineinmmmnsatiinasineeneemmaninntateneneneen 21

Armstrong v. Exceptional Child Ctr.,

Inc., 135 S. Ct. 1878 (2015)........cccsssssorerereseeees 23

Missouri ex rel. Barrett v. Kan. Nat. Gas

8 _ 5

Chevron, U.S.A., Inc. v. Nat. Res. Def.

Council, Inc., 467 U.S. 837 (1984)... eee 25

Conn. Dep't of Pub. Util. Control v.

FERC, 569 F.3d 477 (D.C. Cir. 2009).............. 8

Conn. Light & Power Co. v. Fed. Power

Comm'n, 324 U.S. 515 (1945).........ccccceeeeee 24, 28

Eccles v. Peoples Bank of Lakewood Vill.,

EE 26

Entergy Nuclear Vt. Yankee, LLC v.

Shumlin, 733 F.3d 393 (2d Cir. 2013) ............. 29

Fed. Power Comm'n v. Hope Nat. Gas

ae 25

FPC v. Sierra Pac. Power Co., 350 U.S.

STITT itinicichahiisiieilnneiariinliiaeaeiennernnsesesineimnase 6

Frost v. Corp. Comm’n, 278 U.S. 515

ne Ee 34

Medtronic, Inc. v. Lohr, 518 U.S. 470

STI cieisetiinisienibiasien ater iepriaieaaientinnseineetemmecnenetne 31

Midwest ISO Trans. Owners v. FERC,

373 F.3d 1361 (D.C. Cir. 2004) ...........cec00000: 7,8

vi

TABLE OF AUTHORITIES—Continued

Page(s)

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

Moore, 487 U.S. 354 (1988) ............... 11, 21, 23, 27

Montana-Dakota Util. Co. v. Nw. Pub.

Serv. Co., 341 U.S. 246 (1951) .........cccccssseeessesees 23

Morgan Stanley Capital Grp. Inc. v. Pub.

Util. Dist. No. 1,554 U.S. 527 (2008) ...... 7, 11, 35

N.J. Bd. of Pub. Utils. v. FERC, 744 F.3d

TI icetctciiacsiaientnitianiniiinininapmeetannens 19

New England Co. v. New Hampshire, 455

I nscinricinintiaicnnignasionnmneiinnmannenne 6

New England Power Generators Ass'n,

Inc. v. FERC, 757 F.3d 283 (D.C. Cir.

Ss ceesteenesieciteiitentigaeatieeibiiieninpininisibinienrieienieannin 9

New York v. FERC, 535 U.S. 1

Eee 6, 11, 29, 30

NRG Power Mktg., LLC v. Me. Pub.

Utils. Comm’n, 558 U.S. 165 (2010)............ 8, 19

Nw. Cent. Pipeline Corp. v. State Corp.

Comm'n, 489 U.S. 493 (1989).............002 28, 33, 34

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

IIIT icniciesiestitiisinimtilatitanilindiciitiiemsptemnenineneen 31

Pac. Gas & Elec. Co. v. State Energy Res.

Conservation & Dev. Comm’n, 461

oo 8 ee 6, 28, 30, 31, 34

People’s Nat. Gas Co. v. Pub. Serv.

Comm'n, 270 U.S. 550 (1926)..........ccccccccecseeseees 5

Pub. Util. Comm’n v. United Fuel Gas

Cg SS Crees Ge GD crencserenetenenennstnesseencenes 27

Pub. Util. Comm'n v. Attleboro Steam &

Elec. Co., 273 U.S. 83 (1927) ...........ccccc0c0. 5, 6, 27

vii

TABLE OF AUTHORITIES—Continued

Page(s)

Schneidewind v. ANR Pipeline Co., 485

Reece aaa 27, 30

United Gas Pipe Line Co. v. Mobile Gas

Serv. Corp., 350 U.S. 332 (1956) ........cccccececeees 6

United States v. Pub. Util. Comm’n, 345

I ciiinsinrinnniciceneatianeieneieaateannaninenn 27

United States v. W. Pac. R.R. Co., 352

aa icin 23, 27

STATUTES

Federal Power Act of 1935, Pub. L. No.

I ercccisesinniinehintinitsincininsasens passim

ne er 6

ee eee 6

|, ERE 6, 34

4 6, 18, 23, 24

ED crtetnencecencnnenimninns 6, 18

16 U.S.C. § 824d(e) ...........ccccceceseeees 6, 10, 18, 20

SL een passim

ATER 10, 20

ES ene 20

Administrative Procedure Act, Pub. L.

Pe Se BE ccceeicsicicnseeenteninientnenennnenee 20

| ELS cere ene TT 20

ainsi siete dieindilinaltaitabalas 20

Eero 20

fk ee 20

Md. Code. Pub. Utils. § 7-501, et seq. ..............0000+ 12

Md. Code. Pub. Utils. §7-510(¢)(4)(ii) .............000+ 12

TABLE OF AUTHORITIES—Continued

Page(s)

ADMINISTRATIVE MATERIALS

| EET ea 10

ISO New England, Inc., 131 FERC

ES a 10

ISO New England, Inc., 135 FERC

ET 9,24

ISO New England, Inc., 151 FERC

ist ininsindsersentiacietienimmnienienimeenieness 22

Market-Based Rates for Wholesale Sales

of Elec. Energy, Capacity & Ancillary

Servs. by Pub. Utils., 123 FERC

RIC EER ce nO 8

Midwest Indep. Trans. Sys. Operator,

Inc., 109 FERC 961,157 (2004)... eeeeeeee 11

Midwest Indep. Trans. Sys. Operator,

Inc., 158 FERC 161,229 (2015)............cccceseseees 25

New England States Comm. on Elec. v.

ISO New England Inc., 142

FERC 961,108 (20193).................. 9, 23, 25, 32, 33

PJM Interconnection, L.L.C., 117 FERC

EERE Eo 19, 25

PJM Interconnection, L.L.C., 1385 FERC

TTT ctncnssanteneeuianaiusnaintamntite passim

PJM Interconnection, L.L.C., 1837 FERC

ee 8, 9, 19, 33

PJM Interconnection, L.L.C., 143 FERC

eR ss innicrrenniniuntianbiiteiinimeimenen 10

PJM Interconnection, L.L.C., 1538 FERC

TT icicinnrccdnnnemmnunmieiinaneenneimiinin 9

ix

TABLE OF AUTHORITIES—Continued

Page(s)

Reg Trans. Org., 89 FERC 961,285

MISCELLANEOUS

American Public Power Association,

Power Plants Are Not Built on Spec:

Se NE decactncinsenertsimtiatstsentemnnmecnses 10

Chadbourne, Renewables Face Daytime

Curtailment in California (Nov. 2014),

ici teiinineiactitieaiemnanees 30

K. Cory, et al., Innovations in Wind and

Solar PV Financing (Feb. 2008)................ 11, 12

Dozier A. DeVane, Highlights of

Legislative History of the Federal

Power Act of 1935 and the Natural Gas

Act of 1938, 14 Geo. Wash. L. Rev. 30

Electric Energy Market Competition

Task Force, Report to Congress on

Competition in Wholesale and Retail

Markets for Electric Energy

FERC, Energy Primer: A Handbook of

Energy Market Basics (July 2015)............. 5, 10

Steven Ferrey, Alternative Energy in a

Spaghetti Western: Clint Eastwood

Confronts State Renewable Energy

Policy, 32 Utah Envtl. L. Rev. 279

x

TABLE OF AUTHORITIES—Continued

Page(s)

Ezra Hausman, et al., Bilateral

Contracting in Deregulated Electricity

Markets: A Report to the American

Public Power Association

N.C. Clean Energy Technology Center,

Programs, DSIRE (2015),

http://goo.gV/tJHICP .........ccccscessseseeeeees 11, 12, 29

N.C. Clean Energy Technology Center,

Solar Policy Guide: A Resource for

State Policy Makers (Sept. 2012) ...............0000 29

PJM, 2018/2019 RPM Base Residual

Auction Results (2015).......scscesessssesersesesessees 13

PJM, PJM Markets (May 14, 2015),

https://goo.gVMVOBKL............ccccccecsseseseseseseeeee 8

Sidney A. Shapiro & Joseph P. Tomain,

Rethinking Reform of Electricity

Markets, 40 Wake Forest L. Rev. 497

Kathleen Spees, et al., Enhancing the

Efficiency of Resource Adequacy

Planning and Procurements in the

Midcontinent ISO Footprint (Nov. 2015)...... 7

Robert Swartwout, Current Utility

Regulatory Practice from a Historical

Perspective, 32 Nat. Res. J. 289 (1992).......... 4,6

Stephen L. Teichler & Ilia Levitine,

Long-Term Power Purchase

Agreements in a Restructured

Electricity Industry, 40 Wake

Forest L. Rev. 677 (2005)............... 4,5, 10, 11, 35

xi

TABLE OF AUTHORITIES—Continued

Page(s)

Jeremiah I. Williamson & Matthias L.

Sayer, Federalism in Renewable

Energy Policy, 27 Nat. Res. & Env’t 19

(EE eee 29

U.S. Energy Information Administration,

Status of Electricity Restructuring by

State (Sept. 2010),

IIIT cnenisiscnssinintsnnesmenannesetenenees 7

IN THE

Supreme Court of the Anited States

Nos. 14-614 & 14-623

W. KEVIN HUGHES, ET AL.,

Petitioners,

Vv.

PPL ENERGYPLUS, LLC, ET AL.,

Respondents.

CPV MARYLAND, LLC,

Petitioner,

Vv.

PPL ENERGYPLUS, LLC, £7 AL.,

Respondents.

On Writs of Certiorari

to the United States Court of Appeals

for the Fourth Circuit

BRIEF OF NRG ENERGY, INC., AS AMICUS

CURIAE IN SUPPORT OF PETITIONERS

INTEREST OF AMICUS CURIAE

NRG Energy, Inc. (“NRG”) is one of the largest

power generation and retail electricity businesses in the

United States.. NRG owns and operates over 50,000

' Pursuant to Supreme Court Rule 37.6, counsel for amicus curiae

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

part or made a monetary contribution to the preparation and

2

megawatts of generation capacity, including 16,000 mega-

watts of merchant generation in the 13-State region

overseen by PJM Interconnection, LLC (“PJM”). NRG

also purchases and markets energy and energy-related

products, including power, natural gas, and renewable

energy. And it provides electricity to 3 million retail

customers in Texas and nine northeastern States,

including six States within PJM’s footprint.

NRG and its affiliates have invested billions of dollars

in both conventional and renewable generation facilities.

Many of these investments are supported by state-

mandated contracts, while others are made on a

merchant basis (ie., without contracts or other recourse

to captive ratepayers). Because NRG often relies on

state contracts when it invests in generation facilities, it

has an interest in preserving their integrity and viability.

NRG also invests based on price signals sent by federally

regulated wholesale markets. Accordingly, it has an

interest in ensuring that market prices are not artificially

depressed or distorted—whether due to the exercise of

market power or state-sponsored contracts. NRG thus

has both an interest in and a balanced perspective on

these cases, which concern whether federal law preempts

state contracts that support the development of genera-

tion. In NRG’s view, these interests all can be harmon-

ized through the proper exercise of federal regulatory

authority. By contrast, a policy of preemption by judicial

decree harms all of them.

submission of this brief, and no person other than amicus or its

counsel made such a contribution. All parties consented to the filing

of this brief. ————

with the Clerk.

3

STATEMENT

Since 1935, the Federal Power Act (“FPA”) has

afforded the Federal Energy Regulatory Commission

(“FERC” or the “Commission”) and its predecessor

exclusive jurisdiction to regulate wholesale energy sales

in interstate commerce. But States retain the broad

authority they exercised before the FPA. That authority

encompasses a variety of state policies that affect or

require new power-plant construction and financing.

Such exercises of traditional state authority—including

the development of capacity for the benefit of local

utilities—may impact wholesale markets, where FERC

has exclusive jurisdiction. But FERC has ample authori-

ty to regulate wholesale markets—and conduct in those

markets—to prevent adverse impacts without preempt-

ing traditional state authority.

For example, FERC has exercised regulatory author-

ity over federal wholesale auctions to ensure prices are

not distorted by below-cost or other non-market bidding.

In particular, FERC has acted directly on the wholesale

auctions that are within its regulatory domain, approving

rules designed to preclude bids (regardless of source)

that might distort pricing. Such rules, properly

calibrated and applied, can harmonize the exercise of

state and federal authority: States act within their

domain to promote generation that benefits their citizens,

while FERC acts within its domain to ensure that state

or private action does not result in unjust or

unreasonable wholesale rates. Efforts to preempt state

action, by contrast, lack that harmonizing effect. Rather

than protect state and federal authority within their

respective zones, they elevate one set of interests above

the other. They intrude unnecessarily into traditional

state authority. They invite litigants to seek case-by-case

4

judicial preemption to remedy the effects of specific

contracts instead of pursuing more efficient and tailored

remedies before FERC. And they discourage FERC—

the expert body to which Congress delegated respon-

sibility for regulating federal markets—from fulfilling its

statutory mission by ensuring its market rules produce

just-and-reasonable rates.

I. STATUTORY AND REGULATORY BACKGROUND

A. Early Energy Markets

The first electric utilities formed shortly after Thomas

Edison invented a commercially viable lightbulb in 1879.

Stephen L. Teichler & Ilia Levitine, Long-Term Power

Purchase Agreements in a Restructured Electricity In-

dustry, 40 Wake Forest L. Rev. 677, 679-680 (2005).

Those utilities typically operated as vertically integrated

monopolies. For any given region, the same company

controlled electric generation (plants to create electri-

city), transmission (facilities and lines to transport it),

and retail or local distribution to customers. /d. at 679-

680 & n.9.

Initially, state legislatures and municipalities regu-

lated utilities themselves. Robert Swartwout, Current

Utility Regulatory Practice from a Historical Perspec-

tive, 32 Nat. Res. J. 289, 298-301 (1992). Legislatures set

rates by statute, and municipalities issued franchises.

Ibid. By 1920, however, nearly every State had dele-

gated regulatory responsibility to state public utility

commissions, id. at 301, which exercised “authority to

franchise the utilities; to regulate their rates, financing,

* Utilities that provide power to customers in retail markets are

often called “Load-Serving Entities.” For ease, however, this brief

uses the term “utility.”

5

and service; and to establish utility accounting systems,”

Teichler & Levitine, supra, at 679 & n.8.

Wholesale transactions burgeoned. Municipalities and

utilities sometimes found it cheaper to buy electricity to

meet peak demand than to build more plants; conse-

quently, they entered into long-term requirements con-

tracts for bundled sales of generation and transmission.

Teichler & Levitine, supra, at 680. Most transactions

were intrastate. Dozier A. DeVane, Highlights of Legis-

lative History of the Federal Power Act of 1935 and the

Natural Gas Act of 1938, 14 Geo. Wash. L. Rev. 30, 31

(1945). However, in 1927, three east-coast utilities

formed a power pool—an arrangement for sharing

electricity—that eventually developed into the

Pennsylvania-New Jersey-Maryland Interconnection.

See FERC, Energy Primer: A Handbook of Energy

Market Basics 36-37 (July 2015); Teichler & Levitine,

supra, at 680 & n.11. Between 1928 and 1933, the share

of electricity for public consumption that moved inter-

state grew from 10.07% to 17.8%. DeVane, supra, at 31.

B. The Federal Power Act

As interstate electricity sales proliferated, so did state

attempts to regulate them.’ In Public Utilities Commis-

sion v. Attleboro Steam & Electric Co., 273 U.S. 83

(1927), this Court ended the regulatory efforts, over-

turning a state order that had modified a wholesale

contract for electricity between a Rhode Island generator

and a Massachusetts utility. See id. at 85-86. The Court

declared that the order placed a “direct burden upon

interstate commerce,” and ruled that the Commerce

* See, e.g., People’s Nat. Gas Co. v. Pub. Serv. Comm'n, 270 U.S. 550,

551-553 (1926); Missouri ex rel. Barrett v. Kan. Nat. Gas Co., 265

U.S. 298, 305-306 (1924).

6

Clause precluded the state commission from exercising

authority over the wholesale contract. /d. at 89-90.

In response, Congress enacted the Federal Power Act

of 1935, Pub. L. No. 74-333, 49 Stat. 847. New England

Co. v. New Hampshire, 455 U.S. 331, 340-341 (1982). The

Act created a federal regulator, the Federal Power

Commission (now FERC), with exclusive authority to

regulate the transmission or sale “of electric energy at

wholesale in interstate commerce.” 16 U.S.C. §824(b).

Under the Act, every public utility must file wholesale

rates with FERC, id. §824d(c), which must ensure that

they are “just and reasonable,” id. §824d(a); see also id.

§§ 824d(e), 824e(a).

The FPA, however, makes clear that federal authority

over electricity markets “extend[s] only to those matters

which are not subject to regulation by the States.” 16

U.S.C. §824(a). States thus continued to regulate power-

plant construction and siting, requiring utilities to apply

for certificates of public convenience and necessity before

building them. See Pac. Gas & Elec. Co. v. State Energy

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

207, 212 (1983). Through those processes, state commis-

sions could determine the mix of generation resources

(gas, coal, nuclear) utilities would build and how their

power would be distributed. See New York v. FERC, 535

USS. 1, 24 (2002). And States continued to regulate retail

rates, see 16 U.S.C. §824(b)(1), adjusting them to provide

appropriate compensation and incentives, Swartwout,

supra, at 304-305.

The FPA mandates respect for private contracts for

interstate sales of electricity. Under the Mobile-Sierra

doctrine—named for this Court’s decisions in United Gas

Pipe Line Co. v. Mobile Gas Service Corp., 350 U.S. 332

(1956), and FPC v. Sierra Pacific Power Co., 350 U.S. 348

7

(1956)—FERC must “presume that the rate set out in a

freely negotiated wholesale-energy contract meets the

‘just and reasonable’ requirement imposed by law.”

Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No.

1, 554 U.S. 527, 530 (2008). That “presumption may be

overcome only if FERC concludes that the contract seri-

ously harms the public interest,” a finding that cannot be

made absent “‘unequivocal public necessity’ or ‘extra-

ordinary circumstances.’” /d. at 550 (citation omitted).

C. FERC’s Restructuring of Wholesale Markets

In the 1990s, many States undertook reforms to make

utilities more efficient while maintaining them as

vertically integrated monopolies. See Kathleen Spees, et

al., Enhancing the Efficiency of Resource Adequacy

Planning and Procurements in the Midcontinent ISO

Footprint 21-22 (Nov. 2015). FERC and a minority of

States implemented market-based reforms. See U.S.

Energy Information Administration, Status of Electricity

Restructuring by State (Sept. 2010), http://goo.gl/3be-

GQT. This case has its origins in FERC’s efforts to

restructure wholesale energy markets and to increase

their efficiency—and ensure just-and-reasonable rates—

by promoting effective competition. Midwest ISO Trans-

mission Owners v. FERC, 373 F.3d 1361, 1363 (D.C. Cir.

2004).

1. The Development of Regional Markets and

Minimum-Offer-Price Rules (MOPRs)

A key element of FERC’s reforms was “the develop-

ment of multi-utility regional transmission organizations

(RTOs).” Midwest ISO, 373 F.3d at 1364. Before

FERC’s reforms, the electric grid was segmented among

different local utilities. bid. Now, in much of the

Nation, utilities may join an RTO that interconnects

“different segments” of the grid owned by member utili-

8

ties, offering “open access to the regional transmission

system” for “all electricity generators” under a non-

discriminatory, “‘unbundled, grid-wide tariff.” Ibid.

(quoting Order No. 888, at 31,731).

PJM Interconnection, LLC (“PJM”) is the largest

RTO. It spans 13 States (plus the District of Columbia)

and operates the world’s largest wholesale electricity

market. PJM, PJM Markets 1 (May 14, 2015), https://

goo.gl//MV05KI. Subject to FERC’s authority to ensure

just-and-reasonable rates, see Reg7 Transmission Org.,

89 FERC 961,285, at 5 (1999), PJM runs a spot market in

which energy is bought and sold on a minute-by-minute

basis for immediate consumption. PJM, supra, at 1.

PJM also operates a forward market for another

energy product, capacity. Capacity is the ability to

supply electricity when needed. Conn. Dep’t of Pub. Util.

Control v. FERC, 569 F.3d 477, 479 (D.C. Cir. 2009).

Utilities buy capacity—“an option to buy a quantity of

electricity’"—to ensure energy is available to meet

periods of peak demand. NRG Power Mktg., LLC v. Me.

Pub. Utils. Comm’n, 558 U.S. 165, 168 (2010); see also

Conn. Dep't of Pub. Util, 569 F.3d at 479. Because

generators need lead-time to build plants that will supply

capacity, PJM’s capacity auctions occur three years

ahead of scheduled delivery. PJM, supra, at 1-2.

By efficiently matching supply and demand, these

auctions seek to keep prices competitive while ensuring

investment in new capacity sufficient to meet future

needs. PJM Interconnection, L.L.C., 137 FERC

161,145, at 192, 96 (2011). Because demand is relatively

inelastic, market prices for capacity are highly sensitive

to changes in supply or demand. Market-Based Rates for

Wholesale Sales of Elec. Energy, Capacity & Ancillary

Servs. by Pub. Utils., 123 FERC 961,055, at 9937-38

9

(2008). FERC has therefore repeatedly addressed ca-

pacity market rules, and the possible exercise of buyer or

seller market power, to fulfill its obligation to secure just-

and-reasonable rates. See, e.g., PJM Interconnection,

L.L.C., 1538 FERC 961,066 (2015); PJM Interconnection,

L.L.C., 187 FERC 961,145; ISO New England, Inc., 135

FERC 161,029 (2011).

One issue has been “uneconomic entry”—the concern

that States or utilities may find it in their interest to

bring additional capacity into the market at below-

market rates. The combination of excess supply and

lower bids can significantly depress prices, interfering

with the auction’s ability to produce just-and-reasonable

rates. PJM Interconnection, L.L.C., 1837 FERC at 196;

see also New England Power Generators Ass’n, Inc. v.

FERC, 757 F.3d 283, 287 (D.C. Cir. 2014).*

To prevent that, PJM applies a rule, called the

“minimum-offer-price rule.” Under it, PJM will adjust a

new entrant’s offer to a market-rate if PJM finds the

offer to be uneconomic. PJM Interconnection, L.L.C.,

135 FERC 961,022, at 61,088 (2011). By focusing on

conduct within federally regulated markets, those rules

foster efficient markets while “accommodat{ing] * * *

legitimate state policy objectives.” New England States

Comm. on Elec. v. ISO New England Inc., 142 FERC

‘ Capacity suppliers offer their capacity into PJM’s auction. PJM

builds a “supply curve” of all offers and determines where that curve

crosses an administratively-determined demand curve to establish

the auction clearing price, which is paid to all suppliers that “clear”

the auction. Buyers can actually profit by selling into the auctions

below cost if the resulting price decrease, multiplied by the buyer’s

total purchase obligation, exceeds losses from the below-cost bid.

PJM’s minimum-offer-price rule is intended to correct that problem

by requiring that bids reflect the actual costs of building capacity

and entering the market.

10

161,108, at 61,488 (2013); see also PJM Interconnection,

L.L.C., 143 FERC 961,090, at 154 (2013).

Market participants and affected entities regularly

challenge PJM rules they consider imperfect. See, e.g.,

PJM Interconnection, L.L.C., 185 FERC 961,022, at

798-12 (2011); JSO New England, Inc., 131 FERC

161,065, at 1710-12 (2010). When PJM proposes a rule,

interested parties may file a protest objecting to the rule

or any other element of auction design. See 16 U.S.C.

§§ 824d(e), 824e(a), 825e; 18 C.F.R. §385.211.

2. Bilateral Contracts and State Initiatives

Alongside those organized markets, utilities and

States still procure capacity and energy directly from

generators—ie., through bilateral contracts. FERC,

supra, at 56-57. Energy and capacity markets depend

heavily on bilateral contracts, which provide developers a

low-cost means of attracting capital for new power

plants, and allowing existing generators to sell power at

predictable prices. American Public Power Association,

Power Plants Are Not Built on Spec: 2014 Update 1

(2014); Teichler & Levitine, supra, at 690-691. Building a

power plant requires extensive capital outlays—in the

hundreds of millions of dollars—that take years to

recoup. Sidney A. Shapiro & Joseph P. Tomain,

Rethinking Reform of Electricity Markets, 40 Wake

Forest L. Rev. 497, 505 (2005). To offset costs and

minimize risks, developers sell energy and capacity

under long-term bilateral contracts, “guaranteeing that

*** sufficient revenues will be forthcoming regardless

of market conditions.” Ezra Hausman, et al, Bilateral

Contracting in Deregulated Electricity Markets: A

Report to the American Public Power Association 16

(Apr. 18, 2008). In the majority of States that have not

restructured their energy markets, long-term bilateral

1]

contracts remain “the single most essential requirement”

for procuring new capacity. Midwest Indep. Trans. Sys.

Operator, Inc., 109 FERC 961,157, at 61,714 (2004).

Existing generators also use bilateral contracts to

hedge against volatility. Because supply and demand are

highly inelastic in wholesale markets (at least in the short

term), spot-market prices can move “dramatically,”

jumping “more than fifteenfold” in a single summer.

Morgan Stanley, 554 U.S. at 539. Most utilities and

generators therefore apportion price-risk using a mix of

bilateral contracts. Teichler & Levitine, supra, at 690-

691. Basic contracts often call for delivery of power at

fixed prices; more complex agreements resemble finan-

cial derivatives to provide “hedges” against volatility.

See K. Cory, et al, Innovations in Wind and Solar PV

Financing 10 (Feb. 2008).

Even in restructured regions, States heavily influence

the development of new generating capacity. State regu-

lators can impose a variety of approval requirements on

firms building new generation facilities. See, e.g., Miss.

Power & Light Co. v. Miss. ex rel. Moore, 487 U.S. 354,

358 (1988). Regulators can decide whether to authorize

their construction, where they should be built, and even

the fuel-type they use. See New York, 535 U.S. at 24.

States also provide direct incentives for energy de-

velopment. The States offer at least 435 incentive pro-

grams for renewable energy alone. See N.C. Clean

Energy Technology Center, Programs, DSIRE (2015),

http://goo.g/tJHJCP. California, for instance, has 14

different incentive programs: One requires utilities to

source a certain amount of electricity from renewable

generation; another provides state financing for

renewable-energy projects; and a third awards

renewable-energy generators favorable contracts with

12

utilities. See ibid Most States have similar initiatives.

See ibid. The costs of such programs are recovered

through rates collected from retail customers.

II. PROCEEDINGS BELOW

A. The Maryland Generation Order

For most of the 20th century, Maryland utilities were

vertically integrated monopolies. Pet. App. lla. In 1999,

however, Maryland deregulated its electricity market,

requiring utilities to divest their generation resources.

See Md. Code. Pub. Utils. §7-501, et seg. Maryland

utilities now purchase electricity on federal wholesale

markets or through bilateral contracts. Pet. App. lla;

Md. Code. Pub. Utils. §7-510(c)(4)(ii).

In 2008, the Maryland Public Service Commission

(“MPSC”) expressed concern that not enough capacity

was being built in Maryland. Pet. App. 12a, 80a. The

MPSC solicited proposals for the construction of up to

1,500 MW of new capacity. /d. at 12a, 87a To mitigate

the risks involved in that sort of commitment, the MPSC

offered the winning bidder 20-year contracts for

differences—a common type of financial instrument that

transfers the risk of low prices (or the benefits of high

ones) in spot markets from the generator to its counter-

party, Cory, supra, at 10—with three Maryland utilities.

Pet. App. 12a The MPSC finalized its plan in the so-

called Generation Order. /bid.

Petitioner CPV submitted the winning bid. Pet. App.

12a. The resulting contracts required CPV to build a

power plant that can provide capacity to Maryland utili-

ties through wholesale capacity auctions. Jbid.® The

* PJM requires capacity suppliers in its region to “bid” their capacity

into the market. Starting with the lowest bid, PJM matches the

offers to forecasted demand. If a generator (such as CPV) has

13

contract-for-differences component provided protection

from the sometimes volatile prices that come out of those

auctions and made it easier for CPV to secure financing

at competitive rates. CPV was required to submit a bid

that “cleared” (ie, was accepted) at auction. If the

auction price fell below a specified threshold, the

Maryland utilities would pay CPV the difference. /d. at

12a-13a. That shielded CPV from the risk of low capacity

prices. Conversely, if the market price exceeded the

contract price, CPV would pay the utilities the difference,

protecting the utilities from the effects of higher capacity

prices with respect to CPV-supplied capacity. J.A. 392,

396-397

B. District Court Proceedings

Respondents—participants in PJM’s auctions—filed

this lawsuit. Pet. App. 13a. They alleged that the Gener-

ation Order intruded into FERC’s authority to regulate

wholesale markets. /bid. They expressed concern that

state-sponsored contracts would depress prices in federal

capacity auctions. Dist. Ct. Compl. 1967, 70, 73, 77-78.

The district court held that federal law preempted the

Generation Order. Pet. App. 129a. The court reasoned

that CPV’s contracts for differences “established” whole-

sale rates and thereby invaded FERC’s exclusive do-

main. /d at 113a. The court also “note[d]” that the

agreed to supply energy to a utility in a bilateral contract, the

generator and utility still participate in the auction, selling and

buying through PJM. They settle the bilateral contract financially,

so it acts as a hedge against auction prices for the amount of capacity

covered by the contract.

® Over the last decade, capacity prices in the main PJM auction (the

Base Residual Auction) have ranged from $110.06 per unit to $237.33

per unit—a difference of over 115%. See PJM, 2018/2019 RPM Base

Residual Auction Results 17 (2015).

14

Generation Order might be preempted under the doc-

trine of conflict preemption. Jd. at 130a.

C. The Fourth Circuit’s Decision

The Fourth Circuit affirmed. The Generation Order,

it held, improperly supplanted FERC’s exclusive power

to regulate wholesale energy sales. Pet. App. 17a. The

order intruded into that field as a “functional” matter,

the court stated, because the rate CPV received under its

contracts for differences replaced the “rates established

through a FERC-approved” auction. /d. at 17a-19a. The

court recognized that States might have authority to

encourage generation through “direct subsidies or tax

rebates, that may or may not differ in important ways

from the Maryland initiative.” Jd. at 2la But the court

held the Generation Order preempted nonetheless be-

cause its “effect” on wholesale rates was “neither indirect

nor incidental.” /bid.

The court stated that conflict-preemption principles

reinforced its holding because the Generation Order “has

the potential to seriously distort * * * price signals” in

federal capacity markets. Pet. App. 2la-22a. At the

time, FERC applied a minimum-offer-price rule to miti-

gate any distortion from state activities. Jd. at 24a. But

the court asserted that the rule’s existence “confirm[ed]

rather than refute[d] the existence of a conflict.” Jbid.

Finally, the court held that the Generation Order—which

guaranteed CPV fixed rates for 20 years through bi-

lateral contracts—amounted to a collateral attack on a

FERC rule guaranteeing new generators fixed rates for

three years. Jd. at 23a-24a.

SUMMARY OF ARGUMENT

The Federal Power Act of 1935 created a new federal

agency—vesting it with exclusive jurisdiction over whole-

15

sale sales of energy in interstate commerce—but other-

wise left intact traditional State authority to regulate and

promote the development of new generation resources.

No observer in 1935 would have thought, as the courts

below ruled, that States had been denied the ability to

create incentives for the development of additional gen-

eration resources. To the contrary, both the States and

the federal government retained critical roles. Harmon-

izing state and federal authority here requires calibrated

federal regulation, not the blunt and often random impact

of case-by-case federal preemption.

I. FERC has exclusive regulatory authority to

ensure wholesale rates are just and reasonable. To fulfill

that obligation, FERC reviews wholesale market designs

to ensure they produce just-and-reasonable rates. With

respect to federal auctions, moreover, FERC adopts

targeted solutions to ensure uneconomic bids do not

distort auction outcomes. Here, for example, FERC has

approved a minimum-offer-price rule that, rather than

attempt to prohibit States from promoting the develop-

ment of generation resources, regulates how those

efforts interface with federal auctions. In particular, by

requiring bids to reflect costs, and foreclosing below-cost

offers, the rule can ensure that uneconomic entry does

not distort auction outcomes—without intruding into or

invalidating state policies.

If that rule fails to work as intended, the answer is for

FERC to alter its rules. Here, however, respondents—

now joined by FERC’s lawyers—instead defend a

judicial decree voiding specific state-supported contracts.

That reliance on federal preemption is troubling. It

intrudes unnecessarily into state authority. It elevates

one set of interests (efficient auction outcomes) over

other equally important ones (state authority) despite the

16

availability of other solutions (such as more effective

minimum-offer-price rules) that accommodate ll

interests. And it encourages complainants and FERC

itself to address ongoing problems through case-by-case

litigation rather than efficient and effective use of

FERC’s own authority.

Il. In any event, the state order challenged here is

not preempted. Under the FPA, States may not set

wholesale rates; ensuring just-and-reasonable rates is

FERC’s obligation. States, however, have always en-

gaged in activities that can influence wholesale rates.

States can regulate the construction of new power plants;

regulate financing; and provide incentives for new gen-

eration (including renewable resources). This Court has

never held that States lack such authority simply because

it has the potential to impact federal markets.

The feature of the state-sponsored contracts faulted

below—the contract for differences—does not “set”

federal wholesale rates. It functions as a hedge,

insulating CPV against price volatility. Nor does its

putative impact on federal auctivns necessitate pre-

emption. That is an impact FERC can (and should)

address by better regulating its own wholesale markets.

This case calls for thoughtful exercise of that authority,

not the blunt instrument of federal preemption.

ARGUMENT

This case involves important interests on all sides.

State regulation and state-sponsored contracts play a

critical role in today’s energy markets. States rely on

contracts to ensure energy security for their citizens,

promoting the development of new generation resources.

Generators—competitive power suppliers and public util-

ities alike—rely on those contracts to make enormous,

multi-year investments in new generation facilities, in-

17

cluding renewable resources and next-generation tech-

nologies like battery storage. The need for just-and-rea-

sonable rates in federally regulated wholesale markets is

no less imperative. An approach that abrogates any of

those interests, even for the purpose of pursing others,

invites energy-market anarchy that serves no interest

well—not those of consumers, ind: stry, or regulators.

Experience has taught amicus the importance of each

of these interests. NRG understands first-hand the

importance of state-sponsored generation contracts: It

has invested billions of dollars in developing generation

resources, including renewable resources, in reliance on

state contracting authority. NRG likewise has experi-

enced first-hand the necessity of properly functioning

wholesale markets. NRG invests enormous sums in

developing conventional and renewable resources where

those markets are the only source of cost recovery. A

seller of capacity and other energy products, NRG suf-

fers when those markets—because of influences unre-

dressed by market rules—fail to produce just-and-

reasonable rates.

This case calls for the harmonization of those critical

interests—not preemption that elevates one set of

interests over the others. The FPA affords FERC ample

authority to condition how the contracts here interact

with federal markets. For example, FERC has approved

the use of a “minimum-offer-price rule” designed to

prevent uneconomic bids (whatever their source) from

entering wholesale capacity auctions. Properly adminis-

tered, that approach accommodates both state and

federal authority: States may pursue their regulatory

goals while FERC, by directly regulating the wholesale

markets at the core of its authority, ensures that neither

18

those state policies nor other actions render wholesale-

auction results unjust or unreasonable.

The judicial decree below preempting state authority

substitutes a blunt remedy for that calibrated approach.

It discourages FERC from fulfilling its duty of ensuring

just-and-reasonable rates through its own regulatory

efforts. And it cuts deeply and unnecessarily into an area

of traditional—and important—-state authority. It is also

mistaken. No one at the time of the FPA’s enactment in

1935 would have thought it deprived States of authority

to create incentives for the development of new power

plants. Nor does that theory make sense today.

I. THE COURTS BELOW SHOULD Not HAVE ENTER-

TAINED THIS SUIT

Congress granted FERC the authority and duty to

superintend wholesale electricity sales to ensure that

wholesale rates remain “just and reasonable.” 16 U.S.C.

§824d(a). This case calls for the appropriate exercise of

that authority to ensure the integrity of federal markets,

without resort to preemptive decrees that intrude into

the traditional state domain of promoting the develop-

ment of generation resources.

A. This Action Should Have Proceeded Before

FERC—Not in Federal Court—Because It

Challenges the Terms of Energy Contracts

FERC has broad authority to ensure that wholesale

rates are “just and reasonable.” 16 U.S.C. §824d(a); see

also id. §824e(a). Federal law requires every public util-

ity to file its wholesale rates with FERC. Jd. §824d(c). If

FERC determines the rates are “unjust, unreasonable,

unduly discriminatory or preferential,” FERC may set

them aside and modify them. /d. §824e(a); see also id.

§824d(e). Similarly, FERC may review for unreason-

19

ableness “any rule, regulation, practice, or contract

affecting” rates. Jd. §824e(a). The Act thus gives FERC

authority to modify published tariffs and, in exceptional

circumstances, bilateral contracts. NRG Power Mktg.,

LIC v. Me. Pub. Util. Comm'n, 558 U.S. 165, 171-172

(2010).

FERC also exercises authority over the real-time

energy markets and forward-looking capacity auctions

operated by RTOs like PJM. Among other things,

FERC must review and approve the rules governing

those markets to ensure they produce just-and-

reasonable rates. See, e.g., PJM Interconnection, L.L.C.,

117 FERC 961,331, at 62,652 (2006). To that end, PJIM—

like other RTOs—imposes a minimum-offer-price rule

(or “MOPR”) to ensure that uneconomic bidding does not

distort auction results. PJM Interconnection, L.L.C.,

135 FERC 161,022, at 61,088 (2011). FERC has ad-

dressed whether PJM’s minimum-offer-price rule applies

where state policies can distort auctions. Pet. App. 10a-

lla. Initially, FERC determined that the rule was

designed solely to prevent large electricity buyers from

manipulating auctions. PJM Interconnection, L.L.C.,

137 FERC 961,145, at 1205 (2011). As a result, it initially

exempted certain state-supported generators. PJM

Interconnection, L.L.C., 117 FERC at 62,671 n.75. But

FERC later revised the rule to require state-supported

generators to bid above a certain price floor. PJM

Interconnection, 135 FERC at 61,106. FERC deter-

mined that the amendment was necessary to ensure that

“wholesale capacity market prices remain at just and

reasonable levels.” Jbid.; see N.J. Bd. of Pub. Utils. v.

FERC, 744 F.3d 74, 86, 91, 98-101 (3d Cir. 2014).

1. This case reflects precisely the sort of concerns

the FPA directs to FERC in the first instance. Accord-

20

ing to the court of appeals, respondents are aggrieved by

the contract between CPV and the Maryland utilities

mandated by the MPSC. Pet. App. 17a-19a. (Indeed, the

court specifically refused to address whether direct

subsidies, not in the form of a contract for differences,

would be problematic. /d at 21a.) And respondents

complained about the same thing. They asserted that the

“Contracts”—by requiring the utilities to pay CPV a

certain rate even if auction rates drop below that

threshold—will depress CPV’s bids and “suppress

market clearing prices” as a result. Dist. Ct. Compl. 170;

see id. 1967, 73, 77-78; Pet. App. 22a-23a (expressing

concern that “the CfDs,” because of their duration, might

“seriously distort the PJM auction’s price signals”). It is

thus the contracts and their interaction with federally

regulated markets—not a state commission order itself—

that aggrieves respondents.’

Because the contracts here are wholesale agreements

within FERC’s jurisdiction, the FPA required respon-

dents to seek review at FERC, not in federal court.

Congress gave FERC authority to act on unreasonable

rates or practices, including in response to a complaint

filed by an aggrieved party. 16 U.S.C. §§824d(e),

824e(a), 825e. If a party is dissatisfied with FERC’s deci-

sion, it may seek rehearing and ultimately judicial re-

view. Jd. §825l.° The statute thus gives “exclusive

" Respondents could not claim injury if, for example, the MPSC had

issued the Generation Order but nobody had responded with bids, or

had all bids been rejected. Respondents are affected, not because

the MPSC seeks to regulate wholesale rates, but because of the

effect the contracts have on federal markets.

* Alternatively, if FERC promulgates a regulation that affects rates,

a party may seek review under the Administrative Procedure Act.

See 5 U.S.C. §§ 702-704, 706.

21

authority over rate regulation to the Commission.” Ark.

La. Gas Co. v. Hall, 453 U.S. 571, 580 (1981). Conse-

quently, “[tJhe reasonableness of rates and agreements

regulated by FERC may not be collaterally attacked in

state or federal courts.” Miss. Power & Light Co. v.

Miss. ex rel. Moore, 487 U.S. 354, 375 (1988) (emphasis

added). “The only appropriate forum for such a

challenge is before the Commission or a court reviewing

the Commission’s order.” Jbid. (emphasis added). By

challenging the agreements in federal court instead,

respondents bypassed the mandatory remedies Congress

established.’

2. Respondents, moreover, do not merely challenge

the contracts as inconsistent with federal law. They also

seek to collaterally attack the efficacy of PJM’s

minimum-offer-price rule. Respondents’ suit—and the

government’s position here—rests entirely on the prem-

ise that the rule is not adequate to prevent these con-

tracts from distorting federal auctions. Dist. Ct. Compl.

174; Govt Br. Pet. Stage at 15, 18. But a proper

minimum-offer-price rule would protect PJM’s auctions

by excluding or “mitigating” all below-cost bids. See pp.

9 & n.4, 19, supra. Indeed, FERC specifically amended

the minimum-offer-price rule for the purpose of ad-

dressing uneconomic entry and bidding by state-

supported entities. See p. 19, supra.

The premise that PJM’s minimum-offer-price rule is

ineffective underscores why this action belongs before

FERC.” If FERC is failing to ensure that PJM’s auction

* Some may argue that the CPV-utility contracts are not within

FERC’s jurisdiction to address. But if that is so, it is hard to see

how federal law could preempt them. See p. 33, infra.

© NRG too has serious doubts that PJM’s minimum-offer-price rule

is adequate to ensure just-and-reasonable rates. See Request for

22

rules produce just-and-reasonable rates—ze., if the

minimum-offer-price rule is failing to screen out un-

economic bids—FERC should change the rule. Parties

should demand that change and seek judicial review if it

is not forthcoming. See, e.g., SO New England, Inc., 151

FERC 961,226 (2015) (challenging auction results); PJM

Interconnection, L.L.C., 185 FERC 161,022 (2011)

(challenging auction rules). Indeed, that would be the

only available course of action if the claimed distortions

here resulted from purely private contracts for differ-

ences or other private agreements. As explained below,

respondents’ failure to follow that course here—and to

seek a federal-court declaration of preemption instead—

leads to problematic results.

B. Judicial Intervention Produces _Ill-Tailored

Remedies and Undermines Incentives

Despite FERC’s powers, respondents sought a pre-

emption ruling from a federal court. Obliging that

request, the court of appeals held that preemption was

appropriate to protect the “rates established through a

FERC-approved market mechanism.” Pet. App. 19a.

Such a judicial (rather than regulatory) remedy,

however, is both under- and over-inclusive. It leaves

defective federal regulations on the books, while cutting

deeply and unnecessarily into traditional areas of state

authority. And it encourages parties and FERC itself to

use case-by-case judicial preemption—rather than

calibrated action by the expert agency—as the means of

fulfilling the FPA’s mandates.

1. The core of FERC’s mission is the obligation to

ensure that wholesale rates remain “just and reason-

Rehearing of the NRG Companies in PJM Interconnection, L.L.C.,

Nos. ER13-535-000, ER13-535-001 (FERC).

23

able.” 16 U.S.C. §824d(a); see also id. §824e(a).

FERC—not the Judiciary—bears that responsibility.

This Court thus requires utilities wishing to challenge a

tariff to seek an initial hearing from FERC. See Miss.

Power & Light, 487 U.S. at 375; Montana-Dakota Util.

Co. v. Nw. Pub. Serv. Co., 341 U.S. 246, 251-252 (1951).

Federal courts are limited to reviewing FERC’s deter-

mination. Miss. Power & Light, 487 U.S. at 375;

Montana-Dakota Util., 341 U.S. at 251-252 Although

parties may ultimately obtain judicial review, that

process allows FERC to apply its “expert and specialized

knowledge” to ratemaking, United States v. W. Pac. R.R.

Co., 352 U.S. 59, 64 (1956)—a task that “administrative

agencies” often handle “far better *** than judges,”

Armstrong v. Exceptional Child Ctr., Inc., 135 S. Ct.

1378, 1388 (2015) (Breyer, J., concurring).

The minimum-offer-price rule illustrates how regula-

tory expertise can calibrate federal-market protections

while limiting intrusion into state authority. The rule is

not a blunderbuss remedy—it neither forbids state

support for generation nor bans state-supported gener-

ators from bidding in federal auctions. It does not

purport to preclude any exercise of state authority.

Instead, the rule addresses conduct in PJM wholesale

capacity auctions, an area that is FERC’s to regulate. In

particular, it uses a price floor to “promote economically

efficient markets” (ie., markets that produce reasonable

rates) but otherwise allows “(States to pursue * * *

legitimate state policy objectives.” New England States

Comm. on Elec. v. ISO New England Inc., 142 FERC

161,108, at 61,488 (2013). If a bid is below-cost, it is

mitigated to eliminate any adverse effect. The rule is the

type of nuanced remedy one expects under a federal

scheme “conceived entirely as a supplement to * * * State

24

regulation.” Conn. Light & Power Co. v. Fed. Power

Comm'n, 324 U.S. 515, 525 (1945). FERC operates in its

domain, ensuring reasonable wholesale rates through

rules governing wholesale auctions. States operate in

theirs, promoting their choice of generation resources for

the benefit of their residents.

If the minimum-offer-price rule works as intended, it

should keep auction rates reasonable—fulfilling FERC’s

statutory obligation—whether or not state-supported

generators bid. See JSO New England, Inc. v. New

England Power Pool Participants Comm., 135 FERC

161,029, at 19157, 170-171 (2011); PJM Interconnection,

135 FERC at 61,106. Federal courts need not prohibit an

array of state-sponsored contracts to solve a problem

that FERC has already addressed. Conversely, if

FERC’s auction rules are flawed, FERC should revise

them; parties should petition for those revisions; and

aggrieved parties should seek judicial review if FERC

fails to do so. See 16 U.S.C. §824d(a) (“[AJll rules and

regulations affecting or pertaining to *** rates or

charges shall be just and reasonable.” (emphasis added)).

Either way, the initial solution to state actions that

produce distorted—zie., unjust or unreasonable—prices

lies with FERC.

2. Bypassing FERC in favor of a judicial declaration

of preemption produces remedies that are simultaneously

under- and over-inclusive. A declaration is under-

inclusive because it leaves in place an inadequate federal

minimum-offer-price rule. It thus leaves wholesale auc-

tions vulnerable to the distorting effect of below-cost bids

from any other source. At the same time, a preemption

decree is over-broad, reaching into an area of traditional

authority that FERC sought to preserve. When it

developed minimum-offer-price rules and allowed for

25

their application to state-sponsored generation, FERC

did not attempt to prohibit the underlying state

regulatory actions or contracts. Instead, it decided to

remedy any effect on federal auctions by establishing

rules for the auctions’ operation.

That choice was deliberate. Like other agencies,

FERC acts on policy considerations. See Chevron,

U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837,

865 (1984). They inform what rates FERC allows, see,

e.g., Fed. Power Comm'n v. Hope Nat. Gas Co., 320 U.S.

591, 614 (1944), and as here, what rules FERC approves

for federal auctions. FERC designs rules to ensure that

prices will spark sufficient investment in capacity—which

is one component of what FERC deems a reasonable

rate. See PJM Interconnection, 117 FERC at 62,652.

FERC also tries to “accommodat/e] the ability of [S}tates

to pursue * * * legitimate state policy objectives.” New

England States Comm. on Elec., 142 FERC at 161,488;

see also Midwest Indep. Transmission Sys. Operator,

Inc., 153 FERC 961,229 at 146 (2015). Here, FERC

adopted a surgical solution for price distortions caused by

state-supported generation: the minimum-offer-price

rule. FERC acted on prices in federal auctions and those

prices alone—without specifically prohibiting state

policies or certain contracts. By contrast, the preemption

ruling below sweeps broadly, invalidating state regu-

latory initiatives.

Allowing federal courts rather than FERC to take the

lead in addressing this issue, moreover, undermines

FERC’s incentive to undertake the often sensitive task of

regulating with due respect for state interests. When

acting in agency proceedings, FERC itself opted to

accommodate state contracts that support generation.

FERC did not proscribe such contracts, but instead

26

regulated their potential effect on federal markets.

Before this Court, however, FERC’s lawyers now sup-

port a decree that goes further. But that improperly

relieves FERC of its obligation to ensure just-and-

reasonable pricing in federal markets. And, by placing

the matter before courts rather than regulators, it

forecloses the sort of tailored approach that can accom-

modate multiple interests. If FERC must go beyond

pricing rules to ensure wholesale rates remain just and

reasonable—instead proscribing a category of state-

sponsored contracts—the Commission itself rather than

its lawyers should be responsible for announcing that

undertaking.

3. Those impacts could all be easily avoided. Federal

law provides a path to challenge the CPV-utility con-

tracts, and the minimum-offer-price rule if it does not

sufficiently protect PJM auction rates. See pp. 10, 20,

supra. Respondents could challenge the reasonableness

of any agreement and the adequacy of PJM’s rules. The

courts below should not have allowed respondents to

pursue this action instead. Because respondents

challenge the reasonableness of energy contracts, they

were obligated to pursue the complaint process before

FERC. See pp. 20-22, supra. And claims that the CPV-

utility contracts undermine federal ratemaking should

have been raised before FERC as well.

Respondents seek declaratory and injunctive relief,

which is inherently discretionary and equitable. See

Eccles v. Peoples Bank of Lakewood Vill., 333 U.S. 426,

431 (1948). Courts ought not contemplate such relief

where a federal agency, with expertise, may be able to

craft a regulatory solution that better harmonizes the

relevant interests—and where judicial relief may dis-

courage regulatory solutions. Even in damages cases,

27

courts often refer disputes to federal agencies in view of

their “special competence.” W. Pac. R.R. Co., 352 U.S. at

63-64 (primary jurisdiction). Here, moreover, respon-

dents are injured not by a state order but by the effect of

contracts on FERC-supervised markets. For that

reason, too, the courts should have demurred in favor of

FERC-initiated resolutions.

This Court has sometimes held state actions pre-

empted in cases where the litigants did not proceed

before FERC. See, e.g., Miss. Power & Light, 487 U.S.

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

(1988); Pub. Util. Comm’n v. United Fuel Gas Co., 317

U.S. 456 (1943). That course might be appropriate where

there is no mechanism for challenges before FERC and

no potential claim that FERC might accommodate state

policies through calibrated regulation. But where

Congress has authorized FERC to address the contracts

that allegedly affect federal markets, and FERC has in

place means for addressing the impact of such contracts,

the remedy in the first instance should be an action

before FERC—not a federal lawsuit seeking to preempt

state policies.

Il. THE GENERATION ORDER IS NOT PREEMPTED

When Congress passed the Federal Power Act in

1935, no one would have thought the States had lost their

authority to provide incentives for the development of

generation facilities. Congress passed the Act with a

limited purpose: to “fill the gap” left by Public Utilities

Commission v. Attleboro Steam & Electric Co., 273 U.S.

83 (1927). See United States v. Pub. Util. Comm'n, 345

U.S. 295, 308 (1953). In Attleboro, the Court had held

that States lacked authority to regulate energy sold at

wholesale or transmitted in interstate commerce. 345

U.S. at 89-90. The FPA was enacted to allow federal

28

regulation of wholesale energy markets as a

“supplement,” not a “substitut{e] for,” state regulation.

Conn. Light & Power, 324 U.S. at 525-526.

States thus continue to exercise extensive regulatory

and contracting authority. That their actions can impact

federal markets, or provide incentives beyond those

provided by federal law, is an insufficient basis for

preemption. The sheer range of what States can do

means that their actions “inevitabl[y]” affect wholesale

markets. Nw. Cent. Pipeline Corp. v. State Corp.

Comm'n, 489 U.S. 498, 515 (1989).

A. The Generation Order Regulates Within a

Field of Traditional State Concern

1. “{Cyharacteristically,” States determine whether

there is a “[nJeed for new power facilities.” Pac. Gas &

Elec., 461 U.S. at 205. In States with vertically inte-

grated utilities, the State (together with the regulated

utility) determine plant size and siting. See id. at 205-

206, 213-216. Even in regions with restructured markets,

the States still control permitting, siting, and compliance

with land-use restrictions. NRG operates many power

plants—including its Marsh Landing Generating Station

and E] Segundo Energy Center, as well as many renew-

able resources—under state-approved contracts. Those

contracts allow firms to arrange more attractive

financing by mitigating market risk, and also aid States

in meeting their public policy goals. Ezra Hausman, et

al., Bilateral Contracting in Deregulated Electricity

Markets: A Report to the American Public Power

Association 15-16 (Apr. 18, 2008).

Concomitantly, many States regulate the type of

generation resources that are developed. Numerous

States have long required utilities to own a certain

portfolio of conventional generation resources, such as

29

coal, nuclear, or gas power plants. See New York v.

FERC, 535 U.S. 1, 24 (2002). More recently, some States

have sought to encourage the use of renewable energy.

Entergy Nuclear Vt. Yankee, LLC v. Shumlin, 733 F.3d

393, 417 (2d Cir. 2013). And still others seek to drive

technological innovation in the energy sector by directing

contracts in battery storage, fuel cells, and other cutting-

edge energy investments. Often, that is achieved

through a variety of incentives—or directly through long-

term contracts.

For example, since the 1970s, many States have

granted tax incentives for investments in renewable

energy. Jeremiah I. Williamson & Matthias L. Sayer,

Federalism in Renewable Energy Policy, 27 Nat. Res. &

Env't 19, 19-20 (2012). More than 20 States offer tax

credits for investment in solar power. See N.C. Clean

Energy Technology Center, Solar Policy Guide: A

Resource for State Policy Makers 18 (Sept. 2012). A

third of all States and the District of Columbia now

operate taxpayer-funded trusts that invest directly in

renewable energy projects. Steven Ferrey, Alternative

Energy in a Spaghetti Western: Clint Eastwood Con-

fronts State Renewable Energy Policy, 32 Utah Envtl. L.

Rev. 279, 293 (2012). Most States and the District of

Columbia have renewable portfolio standards, which

require utilities to obtain a portion of their energy from

renewable sources. N.C. Clean Energy Technology

Center, Programs, DSIRE (2015), http://goo.gl/tJHJCP.

And nearly every State has a net-metering program that

allows customers producing renewable energy to receive

a kilowatt-for-kilowatt credit on their utility bills for the

excess energy delivered to the utility. Jbid; Ferrey,

supra, at 297.

30

By increasing supply in the short-term, and affecting

development incentives in the long-run, such state-driven

programs inevitably impact wholesale markets." Yet

States have traditionally regulated “these aspects of

electrical generation * * * in great detail.” Pac. Gas &

Elec., 461 U.S. at 206; see also New York, 535 U.S. at 24.

2. Consistent with that, the court of appeals

observed that “not ‘every state statute that has some

indirect effect’ on wholesale rates is preempted.” Pet.

App. 2la (quoting Schneidewind, 485 U.S. at 308).

Accordingly, the court focused on the contracts for

differences, holding that such contracts intrude on

FERC’s authority to “set” wholesale rates. The court

recognized that such contracts did not “formally” set

wholesale rates, Pet. App. 19a, and properly so. Neither

the contracts nor the Generation Order purport to set

federal-auction prices. They transfer risk—protecting

CPV from the impact of low wholesale capacity prices,

while helping shield the Maryland utilities from the

impact of higher prices.

The court of appeals characterized the contracts for

differences as “functionally” setting wholesale rates. Pet.

App. 17a-19a. But contracts for differences do no such

thing. Consider, for example, a capacity supplier that

hedges using such a contract. The supplier might sell off

the right to receive any increased revenues if auction

prices exceed a certain price, and buy insurance that will

pay it additional sums if auction prices fall below that

price. No one would say the capacity supplier has “set”

" California, the State with the most renewable-energy mandates,

predicts that its solar generation will drive energy prices negative

during the day, forcing generators to pay utilities to take energy.

Chadbourne, Renewables Face Daytime Curtailment in California

(Nov. 2014), http://goo.g/S2etpG.

31

the wholesale rate. It has simply shifted the benefits and

burdens of market changes to contractual counterparties.

A contract-for-differences is no different. Nor does it

matter that these contracts are the product of state

regulation. FERC has not found it necessary to pro-

scribe the use of contracts for differences by private par-

ties to meet private needs. See pp. 33, 35, infra. A

fortiori there is no basis for precluding their use to sup-

port important state policies.”

The contracts required by the Generation Order

undoubtedly affect capacity auctions. That is why the

application of an effective minimum-offer-price rule

should be employed. For the same reason, however,

preemption is inappropriate. very state decision to

authorize a power plant, to mandate the purchase of

renewable energy, or to raise retail rates also affects

supply and demand and, as a result, wholesale prices as

well. In making those decisions, States often have the

same goal that Maryland did here: to spur new

generation. Federal law simply does not itself displace

state actions “target{ing]” the development of generation

even when those actions “affect[]” wholesale prices.

Oneok, Inc. v. Learjet, Inc., 135 S. Ct. 1591, 1599 (2015)

(emphasis omitted).

Precisely because States so often pursue policies that

promote the development of generation, the court of

appeals exempted from its holding “direct subsidies” and

“tax rebates,” which it said “may or may not differ in

® That conclusion is reinforced by the presumption that Congress

did not preempt “the historic police powers of the States” absent

“clear and manifest” indications to the contrary. Medtronic, Inc. v.

Lohr, 518 U.S. 470, 485 (1996). Regulation of electric utilities is

within the States’ traditional police powers. See Pac. Gas & Elec.,

461 U.S. at 205-206.

32

important ways from the Maryland initiative.” Pet. App.

2la But the necessity of that exemption underscores the

flaw in the court’s holding. Traditional state measures to

promote generation are permissible. They do not become

impermissible simply because the State employs con-

tracts for differences instead of some other mechanism.

If a particular contract within FERC’s jurisdiction

amounts to an unreasonable practice (state-sponsored or

not), FERC may of course review it under traditional

standards. And FERC has ample authority to approve

market rules that prevent uneconomic bidding in federal

markets regardless of cause. But Congress afforded that

authority to FERC. Federal courts should not substitute

their authority by invalidating state policies under the

rubric of preemption.

3. Longstanding federal policy buttresses that con-

clusion. The minimum-offer-price rule gives FERC

control over wholesale auction rates without impinging

on States’ abilities to support new generation. See New

England States Comm. on Elec., 142 FERC at 161,488.

That specific accommodation for state-supported

generation demonstrates that federal law does not

preempt state actions that—like the Generation Order—

may affect wholesale prices. See Ark. Elec. Coop. Corp.

v. Ark. Pub. Serv. Comm'n, 461 U.S. 375, 387-388 (1983).

Instead, FERC’s decision to act on price alone spotlights

the line between preempted and permissible state

actions: States may regulate in ways that affect

wholesale prices; they simply cannot purport to regulate

federal markets. FERC, in turn, regulates bidding

behavior in federal markets to ensure federal rates

remain just-and-reasonable nonetheless. FERC’s long-

standing approach is therefore “wholly inconsistent with

33

pre-emption of state regulatory jurisdiction.” Ark. Elec.

Coop., 461 U.S. at 387-388.

Indeed, FERC has steered clear of regulating con-

tracts, like swap agreements, that allow generators to

hedge against fluctuating prices. There is a multi-billion

market for such swaps. Many of those contracts promise

generators a fixed price, transferring the risks (and

benefits) of wholesale price changes to others. Yet

FERC has never suggested that such contracts under-

mine federal markets, much less impro erly “set” whole-

sale rates. It is hard to see why contracts for differences,

which likewise protect generators from price risk, should

be categorically different.

B. State-Sponsored Contracts Do Not Conflict

With Federal Policy

The court below also relied on conflict-preemption

principles. But those principles “must be applied sensi-

tively” to preserve the role that the Federal Power Act

expressly reserves for the States. Nw. Cent. Pipeline,

489 U.S. at 515. Here, that required sensitivity of

application was lacking.

To secure just-and-reasonable wholesale energy

pricing, FERC has imposed market rules designed to

ensure that various forces—including market manip-

ulations and_ state-sponsored contracts—do not

artificially depress prices in federal capacity auctions.

See PJM Interconnection, 137 FERC at 992, 96. But

FERC did not ban state-sponsored contracts. Instead,

recognizing the role of state authority in energy markets,

FERC accommodated the States’ “legitimate * * * policy

objectives.” New England States Comm. on Elec., 142

FERC at 161,488. It did so by directly addressing only

the conduct of—and effects within—federal markets.

See pp. 23-25, supra.

34

The Generation Order does not conflict with that

policy. It is not “impossible” for a generator to comply

with both the Generation Order and participate in

FERC’s auction process. Nw. Cent. Pipeline, 489 U.S. at

516. Rather, the Generation Order contemplates that

parties to the contracts it authorized would participate in

federal auctions. FERC is capable of crafting a policy

that ensures just-and-reasonable rates. State-sponsored

bidders may participate in federal auctions, but only

subject to a minimum-offer-price rule designed to

mitigate the ill-effects of below-cost bids. It defies

common sense to say that federal policy is thwarted by

what it specifically accommodates."

The court below, however, held that the Generation

Order conflicts with federal policy because the resulting

contract provides different incentives than those

provided by federal auctions. Pet. App. 22a-23a. To the

extent the court was concerned that the order might

affect how much new capacity is actually built, the court

overreached. Since the electric energy industry’s advent,

States have “granted or withheld” permission to build

power plants “at the[ir] pleasure.” Pac. Gas & Elec., 461

US. at 205 (quoting Frost v. Corp. Comm’n, 278 U.S. 515,

534 (1929) (Brandeis, J., dissenting)). States can order

utilities to build more power plants. See id. at 205-206.

It cannot be that preemption arises where States follow a

lesser course, using incentives rather than command-

and-control mandates.

Besides, the FPA expressly reserved to the States the

power to set retail rates. See 16 U.S.C. §824(b)(1).

8 An effective minimum-offer-price rule might also deter contracts

that seek to depress auction prices below just-and-reasonable levels.

But that too ensures the integrity of federal markets and fulfills

FERC’s obligation to ensure just-and-reasonable rates.

35

Those rates too send price signals that affect gene ation

development and wholesale markets. See Electric

Energy Market Competition Task Force, Report to

Congress on Competition in Wholesale and Retail

Markets for Electric Energy 45-46 (Apr. 5, 2007). But

States did not lose their traditional power to send price

signals through contracts rather than retail rates.

The court of appeals’ analysis also ignores the critical

role of bilateral contracts. In 2006, 92.8% of energy sales

in PJM’s spot markets reflected, or were conducted to

meet obligations under, bilateral contracts. Hausman,

supra, at 14. Those contract rates are set outside the

federal-auction process—and are often fixed for lengthy

periods. American Public Power Association, supra, at 1;

Teichler & Levitine, supra, at 690-691. Bilateral

contracts thus exhibit the very features (length and fixed

rates) that led the Fourth Circuit to invalidate CPV’s

contracts. Under the Mobile-Sierra doctrine, however,

federal law generally precludes FERC from revising

bilateral contracts absent compelling public need. See

Morgan Stanley Capital Grp. Inc. v. Pub. Util. Dist. No.

1, 554 U.S. 527, 550 (2008). The fact that federal law

allows for a market with price signals set independently

of FERC’s auctions—by private negotiation—belies the

court of appeals’ one-price-to-rule-them-all philosophy.

CONCLUSION

The judgment of the court of appeals should be

reversed.

Respectfully submitted.

ABRAHAM SILVERMAN JEFFREY A. LAMKEN

CORTNEY MADEA Counsel of Record

NRG ENERGY, INC. JAMES A. BARTA

211 Carnegie Center MOLOLAMKEN LLP

Princeton, NJ 08540 The Watergate, Suite 660

600 New Hampshire Ave., NW

Washington, D.C. 20037

(202) 556-2000

jlamken@mololamken.com

Counsel for Amicus Curiae

DECEMBER 2015