The Nickel Report

Fifty years ago, the Supreme Court held that in the Federal Power Act (FPA), Congress had drawn a “bright line, easily ascertained, between federal and state jurisdiction…by making [federal] jurisdiction plenary and extending it to all wholesale sales in interstate commerce except those which Congress has made explicitly subject to regulation by the States.” FPC v. Southern California Edison Co. (Colton), 376 U.S. 205, 206-07 (1964). Several recent federal court decisions, including two decisions addressing the implementation of Zero Emissions Credits (ZECs) by New York and Illinois, highlight just how blurred that “bright line” has become in an era where Federal Energy Regulatory Commission (FERC) regulation relies primarily on markets, rather than cost-of-service ratemaking, to ensure just, reasonable and not unduly discriminatory electricity prices. For good measure, these decisions also break new ground on the justiciability of FPA preemption claims brought by private parties in federal court.

The Context

The court’s “bright line, easily ascertained” description seems quaint today, but it was a reasonably accurate characterization of the breakdown between federal and state authority when the electric industry was dominated by vertically-integrated load-serving utilities, and when the role of the federal regulator was generally limited to setting rates for wholesale transactions between them. However, changes in the electric industry over the last few decades resulting from deregulation, technological change, mandatory reliability standards and environmental concerns have resulted in an industry structure in which the once bright line has become increasingly difficult to discern.

Through the interplay of FPA Sections 201 and 205, FERC has the authority to regulate “the sale of electric energy at wholesale in interstate commerce,” including both wholesale electricity rates and any rule or practice “affecting” such rates. However, FPA Section 201 is equally clear that FERC has no jurisdiction over “any other sale of electric energy” and, with limited exceptions, has no jurisdiction “over facilities used for the generation of electric energy” or facilities used in local distribution.

These requirements have triggered a series of disputes over the last few years when applied in the context of modern electricity market structures. In FERC v. EPSA (2015), the issue was whether FERC has jurisdiction to regulate the compensation of demand response by the operators of organized wholesale electric markets. Rejecting a lower court holding that such regulation was prohibited by the FPA’s grant of authority over retail sales to states, the Supreme Court held that FERC regulation of demand-response compensation in organized wholesale markets did not constitute regulation of retail electric markets. Further, the Court held that the participation of demand response in such markets is a practice that directly affects rates of FERC-jurisdictional service, and thus is encompassed by FERC’s “affecting” jurisdiction.

In Hughes v. Talen Energy Marketing (2016), the Supreme Court held that a Maryland program that guaranteed certain in-state natural gas-fired generators a minimum price if they bid into, and cleared, the PJM Interconnection’s Reliability Pricing Model capacity market is preempted by the FPA’s grant of exclusive jurisdiction over wholesale sales to FERC. At the same time, the Court described its holding as “limited” and stated that “[w]e reject Maryland’s program only because it disregards an interstate wholesale rate required by FERC.” It emphasized further that “[n]othing in this opinion should be read to foreclose Maryland and other States from encouraging production of new or clean generation through measures ‘untethered to a generator’s wholesale market participation.’”

The Decisions

Three other recent cases are akin to Hughes in that they involve efforts by three separate states (Illinois, New York and Connecticut) to provide financial support for generation facilities favored by the state. They each raise the question whether the state’s efforts to support such generation are permissible or are preempted by the FPA’s grant of exclusive jurisdiction to FERC over wholesale prices because of their impacts on outcomes in FERC-jurisdictional markets.

Village of Old Mill Creek. v. Star (N.D. Ill. 2017)

This is the first of two federal district court decisions rejecting lawsuits challenging “Zero Emissions Credits” or “ZEC” programs established to provide support for nuclear generating facilities. Old Mill Creek involved the Illinois ZEC program, which is virtually indistinguishable from New York’s (below). Under both programs, qualifying nuclear facilities are awarded ZECs for electricity production and are compensated for them at a price set in relation to a “social cost of carbon” calculation, as well as estimates of future prices of wholesale energy and capacity in PJM and MISO auctions. Revenues to fund ZEC payments are derived from mandated purchases of ZECs by load-serving utilities. The plaintiffs challenged the ZEC program on FPA preemption and dormant commerce clause grounds. The court’s resolution included new precedent regarding the justiciability of FPA preemption claims.

• Justiciability Issue – The court held that there is no private cause of action in federal court under the FPA for injunctive relief on the basis of preemption. Relying on a 2015 Supreme Court decision, Armstrong v. Exceptional Child Center, Inc., the court held that the FPA should be read to foreclose preemptive injunctive relief that is usually allowed for alleged state violations of federal statutes because (1) the FPA provides an administrative remedy (complaints filed at FERC) for state intrusions on FERC jurisdiction, (2) the grant by the FPA of a limited private right of action in federal court for violations of the Public Utility Regulatory Policies Act of 1978 (PURPA) signaled an intention to foreclose all other private rights of action under the FPA, and (3) the preemption declaration sought by the plaintiffs involves a judicial administration of a complex legal standard that is uniquely within FERC’s purview.
• Preemption Claim – The court rejected the preemption claim on the ground that the ZEC program does not require nuclear generators to participate in FERC-regulated electricity markets, or tie compensation for ZECs to outcomes in those markets. The court clarified that subsidies directed to generators with desirable attributes are permissible, even if they have a material impact on wholesale market outcomes, so long as the programs are not aimed at impacting wholesale prices and they are not directly “tethered to” those markets. The court held that because the Illinois ZEC program does not require participation in the FERC-regulated electricity markets, it is not “tethered” to those markets in the manner described by Hughes, and thus is permissible under the FPA’s jurisdictional divide.
• Dormant Commerce Clause Claim – The court rejected the plaintiffs’ dormant commerce clause claims on the ground that the Illinois ZEC program is not facially discriminatory—it expressly allows out-of-state nuclear generators to apply for ZECs—and that the state benefits of the program, particularly environmental benefits, outweigh any incidental burdens on out-of-state ZEC providers.

Coalition for Competitive Electricity v. Zibelman (S.D.N.Y. 2017)

Zibelman involves a challenge to the New York ZEC program, also on preemption and dormant commerce clause grounds. Like Old Mill Creek, it holds that private suits for preemption claims under the FPA may not be brought in federal court.

• Justiciability Issue – Relying on a similar analysis to Old Mill Creek, the court found that Congress had implicitly precluded private suits in federal court for preemptive relief under the FPA. The court concluded that the FPA implicitly provides a “sole remedy” for state intrusions into FERC-jurisdictional matters (e., a complaint at FERC), and that the only private right of action allowed by the FPA is an action for certain PURPA violations. The court did not agree with Old Mill Creek that the standard to be applied in an FPA preemption case is not judicially administrable (the Zibelman court held that the standard is within the competence of the judiciary to apply), but it held that such a finding is not necessary to conclude that the FPA does not permit private suits in federal court for injunctive relief.
• Preemption Claim – Like the Old Mill Creek court, the court found there was no preemption because the New York ZEC program does not require wholesale market participation and therefore does not present the impermissible “tether” to the FERC-regulated markets that was present in Hughes. Without such a “tether,” and given that the ZEC program addresses a matter that is otherwise squarely within the state’s purview under the FPA, the court refused to find that the New York ZEC program was preempted by the FPA, even if it otherwise impacts the FERC-regulated New York Independent System Operator wholesale markets.
• Dormant Commerce Clause Claims – The court held that the New York ZEC program does not violate the dormant commerce clause because New York acts as a market participant and not as a regulator when it pays nuclear power plants for their production in recognition of their zero-emission attributes.

Allco Finance Unlimited v. Klee (2^nd Cir. 2017)

 Allco involved an FPA preemption challenge to a Connecticut program under which Connecticut utilities were required to purchase power from renewable energy providers through a state-sanctioned request for proposals (RFP). It also involved a separate challenge, under the dormant commerce clause, to Connecticut’s implementation of its renewable portfolio standard (RPS) requirement.

• Preemption Claim – The Second Circuit rejected the argument that the Connecticut RFP is preempted by the FPA’s grant of exclusive jurisdiction over wholesale sales to FERC. Most significantly, the court found that, unlike in Hughes, the Connecticut program did not require generators to participate in, or clear, any organized market in order to be accepted by the RFP. Furthermore, the court found that the preemption claim was undermined by the fact that the agreements resulting from the RFP would have to be filed at FERC under FPA Section 205. Finally, the court dismissed the argument that any impacts on FERC-jurisdictional markets resulting from the RFP triggered FPA preemption of the Connecticut program, emphasizing the Hughes statement that states “may regulate within the domain Congress assigned to them even when their laws incidentally affect areas within FERC’s domain.”
• Dormant Commerce Clause Claim – The court rejected the argument that the Connecticut RPS discriminated against renewable energy credits (RECs) produced by the plaintiff’s Georgia and New York plants in violation of the dormant commerce clause. With respect to the Georgia RECs, the court found that those RECs are not similarly situated to the RECs produced by plants in Connecticut, and rejected the dormant commerce clause claim on the ground that the disparate treatment of the Connecticut RECs is justified by the local benefits provided by those RECs. With respect to the New York RECs, the court held that Allco had pleaded only that such RECs are subject to certain transmission importation charges, and that such allegations, without additional detail regarding the burden of the charges and any lack of local benefit to Connecticut, were insufficient to establish a dormant commerce clause claim.

Conclusions

Both the Old Mill Creek and Zibelman cases are on appeal, and we expect decisions in both cases some time during 2018. It is uncertain whether the justiciability rulings in the two cases will survive appellate review. Both rulings depart significantly from long-standing federal court practice, which has traditionally recognized that private parties may bring suit in federal court to enjoin alleged state intrusions onto FERC jurisdiction under the FPA. (The Supreme Court’s decision in Hughes assumed, without deciding, that the plaintiffs in that case were permitted to seek injunctive relief under the Supremacy Clause; the Court did not address the issue because no party had raised it). Furthermore, both rulings are based on a relatively recent Supreme Court decision, Armstrong, the scope of which remains subject to debate. Indeed, the Old Mill Creek court read the Armstrong decision slightly differently than did the Zibelman court, even though both courts ultimately came to the same conclusion with respect to the justiciability of privately-filed FPA preemption claims.

With respect to preemption itself, all three decisions adopt a narrow interpretation of the prohibition in Hughes on the “tethering” of state-level initiatives to FERC-regulated organized electricity markets. All three courts attempt to reconcile the internal tension in the FPA—that is, the tension between the grant to FERC of exclusive jurisdiction over interstate wholesale transactions and practices “affecting” such transactions, and the grant of jurisdiction to the states over all other transactions, as well as over generation and local distribution—by holding that as long as a state does not expressly reference or incorporate the FERC-jurisdictional wholesale markets into its subsidy program, that program is properly within state jurisdiction, even if it has substantial impacts on FERC-jurisdictional markets. Time, and additional litigation, will tell whether this reconciliation of competing FPA provisions will ultimately prevail.