WASHINGTON (Legal Newsline) – In a decision that outlines the boundaries between federal and state energy jurisdictions, the U.S. Supreme Court recently ruled that states may not attempt to get around certain federal regulations while providing energy to their residents.

In Hughes v Talen Energy Marketing, LLC, released April 19, the court invalidated a Maryland program that offered incentives to a power plant built specifically with the intent of increasing energy resources for Maryland residents.

“The ruling shows us how the Supreme Court will evaluate some states’ incentivizing energy generation.” Todd J. Griset, a partner with Preti Flaherty's Energy and Telecommunications practice group, told Legal Newsline.

The Federal Power Act gives the Federal Energy Regulatory Commission (FERC) the power to control the wholesale electricity market to utility companies. States have the power to regulate retail electricity sales to residents.

Regional Transmission Organizations (RTOs) operate capacity auctions within multi-state jurisdictions to provide electricity to “load serving entities” (LSEs).

The RTO predicts the demand that will be required in the future and assigns a share of energy to each LSE.

The LSE purchases the electricity from the RTO to provide to its customers. The price is set through the auction bidding.

PJM Interconnection is the RTO for Maryland. Maryland became concerned that PJM was not encouraging development of in-state generation.

The state enacted its own program to build a power company that would generate electricity and sell it to PJM to ensure that Maryland residents would have enough electricity in the future. Heavily populated areas in Maryland often have difficulty importing power from other parts of the grid.

To encourage development of a power plant, Maryland set a contract price for the electricity generated by the new plant. Under the state program, the company would receive extra money to make up any difference between the PJM price set through the auction bidding practice and the contract price.

The program was challenged by incumbent generators, who filed suit in federal court and prevailed. The case was appealed to the U.S. Court of Appeals for the Fourth Circuit, which affirmed the decision of the lower court, ruling “Maryland’s program is preempted because it disregards the interstate wholesale rate FERC requires.”

Maryland took the case to the U.S. Supreme Court, which upheld the Fourth Circuit’s decision. The court was careful to note in the decision that the ruling is limited to the specifics of this case.

“Maryland’s program is rejected only because it disregards an interstate wholesale rate required by FERC," the court ruling said.

"Neither Maryland nor other States are foreclosed from encouraging production of new or clean generation through measures that do not condition payment of funds on capacity clearing the auction.”

The Maryland “program resulted in the selection of one company to develop one power plant,” Griset said. It was never designed to encourage more growth in the industry, thus it did not create any added construction for the state. 

The court’s decision in the Hughes case leaves the door open for other states to continue to find ways to generate electricity more efficiently for residents, but now states cannot offer monetary incentives that bypass federal price-setting guidelines.

Justice Ruth Bader Ginsberg delivered the opinion of the court, which had an 8-0 vote.

Griset agreed with the ruling.

“Every regulation involves a delicate balance between state and federal rights," he said.


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