Utility Project Urges Supreme Court to Reverse Decision Impeding State Electric Power Initiatives and Not to Endorse Deregulation

December 15, 2015 Old Blog Archive, Updates

On December 15, 2015, the Utility Project filed an amicus brief in the United States Supreme Court in Hughes v. PPL EneryPlus, LLC. Questions presented include:

Whether, when a seller offers to build generation and sell wholesale power on a fixed-rate contract basis, the Federal Power Act field-preempts a state order directing retail utilities to enter into the contract; and whether the Federal Energy Regulatory Commission’s (FERC’s) acceptance of an annual regional capacity auction preempts states from requiring retail utilities to contract at fixed rates with sellers who are willing to commit to sell into the auction on a long-term basis.

The Fourth Circuit decision under review by the Court quashed Maryland’s efforts to meet electric reliability needs and reduce prices to consumers through a bilateral capacity contract – needed to get state-desired generation built – instead of relying exclusively upon deregulated capacity markets of the private grid operator, PJM, the means favored by FERC. The lower court struck down a Maryland PSC order that directed utilities under state jurisdiction to seek contracts to alleviate high prices and reliability concerns. See Courts And FERC Consider Challenges To State Efforts To Determine Electric Capacity Resources And Prices, New York’s Utility Project, January 22, 2014; Robin Bravender, Supreme Court takes on another high-stakes FERC case, Greenwire, October 19, 2015.

Under the economic theory in vogue at FERC, the market “price signal” for building new plants is set by the capacity prices paid to incumbent owners of existing power plants. In reality, however, new electric generation capacity is rarely built in energy constrained areas without substantial long term contract commitments to assure the necessary revenue streams. For example, the Astoria power plant in New York City was built with a ten year capacity purchase commitment from Con Edison.

For years, customers in a capacity constrained area of Maryland, like customers in some of New York’s transmission constrained areas, paid billions of dollars for sky high deregulated prices for electric capacity set in the PJM mandatory capacity auction market, without seeing new capacity come on line. See Wholesale Electricity Capacity Market Results Attacked By PA, MD, DE And NJ Utility Commissions And Utility Consumer Advocates, NYUP, June 5, 2008. After FERC rebuffed the broad coalition seeking reform of the PJM markets, Maryland (and New Jersey) acted to get desired generating plants built using bilateral long term contracts between power project developers and state regulated utilities, under the theory that incentivizing and assuring the construction of generation in that manner would yield lower costs and eventually lower rates. Because PJM rules require all capacity to be sold and bought in its auction, the contract had to adjust the seller’s revenues from the PJM market auction and true them up with the agreed-upon price in the bilateral contract.

Power producers sued in federal District Court seeking to annul the state PSC order directing state utilities to address the capacity shortage problem with long term agreements, claiming the order and agreements interfere with the wholesale “market” under exclusive federal jurisdiction. Normally, such a lawsuit would have waited until full administrative process had been completed at the FERC, including rehearing at FERC before judicial review petitions in a Circuit Court. The District Court court found that the “filed rate” doctrine — which normally requires litigants to first present their grievances to FERC before any judicial review can occur — didn’t apply, and went on to annul the state PSC order on constitutional Supremacy Clause grounds.

On appeal from the District Court, the Court of Appeals for the Fourth Circuit also held that the state PSC order was preempted by the Constitution’s Supremacy Clause, because the contract provisions for truing up the seller’s revenues from sales into the mandatory PJM capacity auction with the bilaterally negotiated and agreed upon charges intruded upon FERC’s jurisdiction over wholesale rates. The Fourth Circuit decision, and a similar decision of the Third Circuit arising from an effort of New Jersey to get power plants built, is now being invoked by current owners of generation to frustrate or halt state development of new and environmentally desirable types of new power resources through the traditional bilateral contract process. Certiorai petitions in the New Jersey case have not been acted upon, presumably awaiting resolution of the Maryland cases.

The Utility Project amicus brief supports the positions in the briefs for Maryland and for the Developer seeking reversal of the Fourth Circuit’s decision. The Utility Project’s rationale for intervening in this federal proceeding is simple — many New Yorkers are suffering economic hardship from high electric rates, many are threatened with shutoff, or are actually shut off, and under a current New York PSC Staff proposal, many needy customers will see their low-income rate benefits reduced. Intervention as an amicus curiae was therefore in support of the Utility Project’s core mission to advocate on behalf of New York’s low-income consumers. Additionally, most of the new capacity needed in constrained areas of New York in the past 15 years has been built either by the state or under state PSC approved purchases by local utilities like Con Edison, because “price signals” from the NYISO capacity market have not been enough to get the job done. Thus, unless reversed by the Supreme Court, the impact of the lower court decision could make matters worse for New York’s low-income customers; another reason it was important for the Utility Project to intervene.

The amicus brief observes that the case involves a clash between an unfiled “market-based rate” contract, and the unfiled “market-based rates” set in the PJM capacity market auctions — neither of which are envisioned in the Federal Power Act, which creates a system of publicly filed rate regulation in which all rates are publicly filed and subject to FERC review whether they are just and reasonable before they take effect. Under the Federal Power Act, 16 USC 824d(d), all contracts for sales, and contracts affecting rates or related to them must be filed. The contract rate at issue is a “contract for differences” financially engineered to be the equivalent of a bilateral contract for the purchase of electricity. A primary purpose of the Federal Power Act is the protection of consumers. See May the FERC Rely on Markets to Set Rates? Accordingly, because the rates and contract involved were under FERC’s primary jurisdiction, the filed rate doctrine should have been followed by the lower courts, and the complainants should have been required to exhaust remedies first with FERC. Then, FERC could have reconciled any claimed conflicts between the disputed bilateral contract and federal wholesale rates without reaching constitutional issues. In other words, the law provides for an open and transparent public process for electricity rate setting at the wholesale level, which FERC’s actions side-stepped, and the lower court did not enforce. Allowing either or both of those behaviors to stand unchallenged undermines the consumer protections provided by the Federal Power Act, which another reason for the Utility Project’s submission of an amicus brief.

Finally, the Utility Project brief urges the Supreme Court, regardless of its rulings on the merits, not to endorse FERC’s deregulatory system of “market-based rates.” Several years ago, the Supreme Court pointedly refrained from ruling on legality of FERC’s effort to deregulate federal electricity prices with its “market based rates” regime. At oral argument of another pending case in October 2015, the Court questioned whether FERC, like the FCC in MCI v AT&T, lacks any authority to dispense with the statutory filed rate regulation system and replace it with deregulated prices and unfiled price increases. The Solicitor General contended in that case that FERC’s deregulatory “market-based rates” regime is authorized by the Supreme Court’s decision in New York v FERC. That case, however, did not involve or address the specific requirements of the Federal Power Act for filing of all rates and contracts affecting or relating to rates, and advance filing of wholesale electric rate increases and contract changes, 16 U.S.C. § 824d(d).

Oral argument in the case is scheduled for February 24, 2016.

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Dec 8 2015 Brief of petitioners W. Kevin Hughes, Chairman, MD PSC, et al..

Dec 8 2015 Brief of petitioner CPV Maryland, LLC

Dec 15 2015 Brief amicus curiae of NARUC

Dec 15 2015 Brief amici curiae of American Public Power Association, et al.

Dec 15 2015 Brief amicus curiae of NRG Energy, Inc.

Dec 15 2015 Brief amicus curiae of Public Utility Law Project of New York, Inc.

Dec 15 2015 Brief amicus curiae of American Wind Energy Association

Dec 15 2015 Brief amici curiae of National Governors Association, et al.

Dec 15 2015 Brief amici curiae of The States of Connecticut, et al.

Dec. 15, 2015 Brief amici curiae of Public Service Commission of the State of New York, et al.