PPL ENERGYPLUS, LLC; PPL BRUNNER ISLAND, LLC; PPL HOLTWOOD, LLC; PPL MARTINS CREEK, LLC; PPL MONTOUR, LLC; PPL SUSQUEHANNA, LLC; LOWER MOUNT BETHEL ENERGY, LLC; PPL NEW JERSEY SOLAR, LLC; PPL NEW JERSEY BIOGAS, LLC; PPL RENEWABLE ENERGY, LLC; PSEG POWER LLC; ESSENTIAL POWER, LLC, Plaintiffs - Appellees, v. DOUGLAS R.M. NAZARIAN; HAROLD WILLIAMS; LAWRENCE BRENNER; KELLY SPEAKES-BACKMAN; KEVIN HUGHES, Defendants - Appellants, and CPV MARYLAND, LLC, Defendant.
No. 13-2419, 13-2424
UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT
June 2, 2014
PUBLISHED. Argued: May 13, 2014. Appeals from the United States District Court for the District of Maryland, at Baltimore. Marvin J. Garbis, Senior District Judge. (1:12-cv-01286-MJG)
Amici Supporting Appellants,
PJM POWER PROVIDERS GROUP; ELECTRIC POWER SUPPLY ASSOCIATION; EDISON ELECTRIC INSTITUTE,
Amici Supporting Appellees.
Before WILKINSON, KEENAN, and DIAZ, Circuit Judges.
Affirmed by published opinion. Judge Wilkinson wrote the opinion, in which Judge Keenan and Judge Diaz joined.
WILKINSON, Circuit Judge:
At issue is a Maryland program to subsidize the participation of a new power plant in the federal wholesale energy market. Appellees are energy firms that compete with this new plant in interstate commerce. They contend that the Maryland scheme is preempted under the Federal Power Act‘s authorizing provisions, which grant exclusive authority over interstate rates to the Federal Energy Regulatory Commission. The district court agreed. For the reasons that follow, we affirm.
I.
A.
For much of the 20th century, the energy market was dominated by vertically integrated firms that produced, transmitted, and delivered power to end-use customers. New York v. FERC, 535 U.S. 1, 5 (2002); PPL EnergyPlus, LLC v. Nazarian, 974 F. Supp. 2d 790, 798 (D. Md. 2013) (opinion below). These firms were subject to extensive local regulation, though state power in this respect was limited by the strictures of the dormant Commerce Clause. See Pub. Utils. Comm‘n v. Attleboro Steam & Elec. Co., 273 U.S. 83, 89 (1927).
The Federal Power Act (FPA), passed in 1935, was designed in part to fill the regulatory gap created by the dormant Commerce Clause and cover the then-nascent field of interstate electricity sales. It vests the Federal Energy Regulatory
Rather than ensuring the reasonableness of interstate transactions by directly setting rates, FERC has chosen instead to achieve its regulatory aims indirectly by protecting the integrity of the interstate energy markets. N.J. Bd. of Pub. Utils. v. FERC, 744 F.3d 74, 81 (3d Cir. 2014). To this end, FERC has authorized the creation of regional transmission organizations to oversee certain multistate markets. PJM Interconnection, LLC (PJM), superintended by FERC, administers a large regional market that (as relevant here) includes Maryland and the District of Columbia.
PJM operates both energy and capacity markets. The energy market is essentially a real-time market that enables PJM to buy and sell electricity to distributors for delivery within the next hour or 24 hours.
The capacity market is a forward-looking market, which gives buyers the option to purchase electricity in the future. In the capacity market, PJM sets a quota based on how much
The highest-priced bid that PJM must accept to meet this quota establishes the market-clearing price. Every generator who bids at or below this level clears the market and is paid the clearing price, regardless of the price at which it actually bid. Existing generators are permitted to bid at zero as price takers, meaning they agree to sell at whatever the clearing price turns out to be.
Both the capacity and energy markets are designed to efficiently allocate supply and demand, a function which has the collateral benefit of incentivizing the construction of new power plants when necessary. Clearing prices occasionally differ based on geographical subdivisions designed by FERC to stimulate new construction by signaling that certain regions are prone to supply shortages. Such price signals are not the sole mechanism for incentivizing generation, however. PJM‘s new entry price adjustment (NEPA) guarantees certain new producers a fixed price for three years to support . . . the new entrant until sufficient load growth i.e., increased demand would be expected to do so. PJM Interconnection, LLC, 128 FERC ¶ 61,157, at ¶ 101 (2009).
In 2006, FERC instituted a requirement (the minimum offer price rule, or MOPR) that new generators in certain circumstances bid at or above a specified price, fixed according to the agency‘s estimation of a generic energy project‘s cost. This rule was designed to prevent the manipulation of clearing prices through the exercise of buyer market power. The MOPR originally exempted certain state-supported generators, however, and permitted them to bid at zero.
Following a complaint lodged by several competitors, FERC eliminated the exemption for state-sanctioned plants. The new rule required such plants to bid initially at the agency-specified minimum price unless they could demonstrate that their actual costs were lower than this default price. FERC held that this adjustment was necessary to protect the integrity of its markets against below-cost bids by subsidized plants that might artificially suppress clearing prices. See PJM Interconnection, LLC, 137 FERC ¶ 61,145, at ¶ 96 (2011).
As these features suggest, the federal markets are the product of a finely-wrought scheme that attempts to achieve a variety of different aims. FERC rules encourage the construction of new plants and sustain existing ones. They seek to preclude
B.
In 1999, Maryland decided to abandon the vertical integration model and throw in its lot with the federal interstate markets. Deregulation was accomplished by the
Intervenor-appellant Commercial Power Ventures Maryland, LLC (CPV) submitted the winning bid and was awarded the promised CfDs. The CfDs required CPV to build a plant and sell its energy and capacity on the federal interstate wholesale markets. If CPV successfully cleared the market, it would be eligible for payments from the EDCs amounting to the difference between CPV‘s revenue requirements per unit of energy and capacity sold (set forth in its winning bid) and its actual sales receipts. These costs would in turn be passed on to the EDCs’ retail ratepayers. If CPV‘s receipts exceeded its approved revenue requirements, it
Plaintiffs-appellees are existing power plants in competition with CPV who allege that the Generation Order is unconstitutional and has resulted in the suppression of PJM prices, a reduction in their revenue from the PJM market, and a distortion of the price signals that market participants rely on in determining whether to construct new capacity. After a six-day bench trial, the district court found the Generation Order field preempted. It reasoned that the CfD payments had the effect of setting the ultimate price that CPV receives for its sales in the PJM auction, thus intruding on FERC‘s exclusive authority to set interstate wholesale rates. It did not reach appellees’ conflict preemption claim and rejected their dormant Commerce Clause claim. This appeal followed.
II.
Plaintiffs argue that the Generation Order and the resulting CfDs are preempted by federal law under the Supremacy Clause.
A.
Preemption of all varieties is ultimately a question of congressional intent. Nw. Cent. Pipeline Corp. v. State Corp. Comm‘n, 489 U.S. 493, 509 (1989). Here, the district court found the Generation Order invalid under the doctrine of field preemption, which applies when Congress has legislated comprehensively to occupy an entire field of regulation, leaving no room for the States to supplement federal law. Id. Actual conflict between a challenged state enactment and relevant federal law is unnecessary to a finding of field preemption; instead, it is the mere fact of intrusion that offends the Supremacy Clause. See N. Natural Gas Co. v. State Corp. Comm‘n, 372 U.S. 84, 97-98 (1963). If Congress evidences an intent to occupy a given field, any state law falling within that field is pre-empted. Silkwood v. Kerr-McGee Corp., 464 U.S. 238, 248 (1984).
It is declared that the business of transmitting and selling electric energy for ultimate distribution to the public is affected with a public interest, and that Federal regulation of matters relating to generation to the extent provided in this subchapter and subchapter III of this chapter and of that part of such business which consists of the transmission of electric energy in interstate commerce and the sale of such energy at wholesale in interstate commerce is necessary in the public interest, such Federal regulation, however, to extend only to those matters which are not subject to regulation by the States.
The breadth of this grant of authority is confirmed by the FPA‘s similarly capacious substantive and remedial provisions. For example,
All rates and charges made, demanded, or received by any public utility for or in connection with the transmission or sale of electric energy subject to the jurisdiction of the Commission, and all rules and regulations affecting or pertaining to such rates or charges shall be just and reasonable, and any such rate or charge that is not just and reasonable is hereby declared to be unlawful.
A wealth of case law confirms FERC‘s exclusive power to regulate wholesale sales of energy in interstate commerce, including the justness and reasonableness of the rates charged.
Indeed, the Supreme Court has expressly rejected the proposition that the scope of FERC‘s jurisdiction . . . is to be determined by a case-by-case analysis of the impact of state regulation upon the national interest. Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953, 966 (1986) (quoting FPC v. S. Cal. Edison Co., 376 U.S. 205, 215 (1964)) (internal quotation marks omitted). Instead, Congress meant to draw a bright line
The federal scheme thus leaves no room either for direct state regulation of the prices of interstate wholesales of energy, or for state regulations which would indirectly achieve the same result. N. Natural Gas Co., 372 U.S. at 91 (citation omitted). Even where state regulation operates within its own field, it may not intrude indirectly on areas of exclusive federal authority. Pub. Utils. Comm‘n v. FERC, 900 F.2d 269, 274 n.2 (D.C. Cir. 1990) (internal quotation marks omitted). As a result, states are barred from relying on mere formal distinctions in an attempt to evade preemption and regulate matters within FERC‘s exclusive jurisdiction. Schneidewind, 485 U.S. at 308.
B.
Applying these principles, we conclude that the Generation Order is field preempted because it functionally sets the rate that CPV receives for its sales in the PJM auction.
Maryland and CPV argue that the Generation Order does not actually set a rate because it does not directly affect the terms of any transaction in the federal market. Relevantly, appellants contend, the Order does not fix the rate that PJM pays to CPV for its sales in the auction; instead, it merely fixes the rate that CPV receives for such sales. On the basis of this asymmetry, appellants contend that the CfD payments represent a separate supply-side subsidy implemented entirely outside the federal market.
As the district court recognized, see PPL EnergyPlus, LLC, 974 F. Supp. 2d at 831, the principles articulated in Mississippi Power & Light Co. apply with equal force to this dispute. If states are required to give full effect to FERC-mandated wholesale rates on the demand side of the equation, it
Our conclusion that the Generation Order seeks to regulate a field that the FPA has occupied also is supported by the imminent possibility of collision between the state and federal regimes. Schneidewind, 485 U.S. at 310. While the potential for collision between the two schemes is discussed in detail in Part D, a high probability of conflict tends to suggest that Congress intended federal authority in a particular field to be uniform and exclusive. See id. Even if collision between the state and federal regulation in this case is not an inevitable consequence, it is sufficiently likely to warrant invalidating the Maryland program in order to assure the effectuation of the comprehensive federal regulation ordained by Congress. N. Natural Gas Co., 372 U.S. at 92.
C.
Appellants argue that this court should apply a robust version of the presumption against preemption to save the Maryland scheme. See, e.g., Intervenor-Appellant‘s Br. at 14. As its name suggests, this presumption militates against findings of federal preemption, especially in areas of traditional state authority. See Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947). However, the presumption is not triggered when the State regulates in an area where there has been a history of significant federal presence. United States v. Locke, 529 U.S. 89, 108 (2000). The presumption is almost certainly not applicable here because the federal government has long regulated wholesale electricity rates. IDACORP Inc., 379 F.3d at 648 n.7. Nevertheless, even were we to apply the presumption, we would find it overcome by the text and structure of the FPA, which unambiguously apportions control over wholesale rates to FERC.
Appellants emphasize the FPA‘s decree that
Although states plainly retain substantial latitude in directly regulating generation facilities, they may not exercise this authority in a way that impinges on FERC‘s exclusive power to specify wholesale rates. As the Supreme Court noted in a similar context:
[T]he problem of this case is not as to the existence or even the scope of a State‘s power to [regulate generation facilities]; the problem is only whether the Constitution sanctions the particular means chosen by [the state] to exercise the conceded power if those means threaten effectuation of the federal regulatory scheme.
N. Natural Gas Co., 372 U.S. at 93. Here, Maryland has chosen to incentivize generation by setting interstate wholesale rates. This particular choice of means is impermissible. Wholesale energy prices fixed by FERC must be given binding effect by state authorities even in areas subject to state jurisdiction. California ex rel. Lockyer v. Dynegy, Inc., 375 F.3d 831, 851 (9th Cir. 2004) (internal quotation marks omitted).
Nonetheless, it is important to note the limited scope of our holding, which is addressed to the specific program at issue. We need not express an opinion on other state efforts to encourage new generation, such as direct subsidies or tax
D.
Appellants’ position is further complicated by the fact that the principles of field and conflict preemption in this case are mutually reinforcing. As relevant here, conflict preemption applies where under the circumstances of a particular case, the challenged state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress. Crosby v. Nat‘l Foreign Trade Council, 530 U.S. 363, 373 (2000) (internal quotation marks and alterations omitted). What is a sufficient obstacle is a matter
In a system of interlocking jurisdiction, such as that created by the FPA, [i]t is inevitable that jurisdictional tensions will arise -- even if each sovereign formally remains within the confines of its assigned sphere. Nw. Cent. Pipeline Corp., 489 U.S. at 506, 515 & n.12 (internal quotation marks and alteration omitted). Thus, conflict-pre-emption analysis must be applied sensitively in this area, so as to prevent the diminution of the role Congress reserved to the States while at the same time preserving the federal role. Id. at 515. Here, the impact of state regulation of production on matters within federal control is so extensive and disruptive of the PJM markets that preemption is appropriate. Id. at 517-18.
As an initial matter, the Generation Order has the potential to seriously distort the PJM auction‘s price signals, thus interfering with the method by which the federal statute was designed to reach its goals. IDACORP Inc., 379 F.3d at 650.
Maryland‘s initiative disrupts this scheme by substituting the state‘s preferred incentive structure for that approved by FERC. See PPL EnergyPlus, LLC v. Hanna, No. 11-745, 2013 WL 5603896, at *36 (D.N.J. Oct. 11, 2013) (describing the distorting impact of a similar New Jersey program on the business decisions of private participants in the PJM auction). Two features of the Order render its likely effect on federal markets particularly problematic. First, as noted, the CfDs are structured to actually set the price received at wholesale. They therefore directly conflict with the auction rates approved by FERC. Second, the duration of the subsidy -- twenty years -- is substantial.
The Generation Order represents an effort by the state to directly override this explicit policy choice. As a functional matter, the CfDs extend the NEPA period for CPV to twenty years, a duration vastly exceeding the current NEPA term and double the term that CPV unsuccessfully requested FERC to institute. Maryland has sought to achieve through the backdoor of its own regulatory process what it could not achieve through the front door of FERC proceedings. Circumventing and displacing federal rules in this fashion is not permissible.
As was the case with our field preemption holding, our conflict preemption ruling is narrow and focused upon the program before us. Obviously, not every state regulation that incidentally affects federal markets is preempted. Such an outcome would thoroughly undermine precisely the division of the regulatory field that Congress went to so much trouble to establish . . . , and would render Congress’ specific grant of power to the States to regulate production virtually meaningless. Nw. Cent. Pipeline Corp., 489 U.S. at 515. The Generation Order, however, is simply a bridge too far. It
III.
For the foregoing reasons, we hold the Generation Order preempted under federal law and affirm the judgment of the district court.
AFFIRMED