The U.S. Supreme Court heard oral arguments last month in the second high profile energy case it will decide this year, potentially laying clearer jurisdictional lines between states and the federal government.

Both cases were born out of complicated market questions which have arisen as new types of energy resources are integrated. And both seek to define where the boundary between markets and regulation stands against an energy landscape rapidly changing.

In January, the Court ruled 6-2 to uphold the Federal Energy Regulatory Commission's authority to regulate demand response programs in wholesale markets. The decision found FERC has jurisdiction over the wholesale market, even when it has indirect impacts on retail market conditions.

That decision, in FERC v. Electric Power Supply Association, upheld the commission's Order 745 and ensured demand response providers would be paid the full locational marginal price for their product — the same price as generation facilities recieve — helping to accelerate the integration of demand management resources.

Now, the court will consider Hughes v. Talen Energy Marketing, a consolidated case which asks a similar question from the opposite direction.

In 2011, Maryland regulators feared a generation shortfall resulting from the expected retirement of coal resources. The state solicited offers, and selected Competitive Power Ventures, or CPV Maryland, to construct a new 650-MW gas-fired plant.

At issue in the case is the underlying contract, in which the state guaranteed a rate for the generation from the CPV plant before it bid into PJM capacity markets. Maryland officials say they simply wanted to ensure the generation would clear later market auctions, but FERC said the move artificially suppressed power prices and stepped into its jurisdiction over interstate markets. 

The broader question, however, addresses the range of tools states have to determine their resource mix. 

States have a wide range of policies they can implement to alter their generation mix, said FERC, but the commission maintains Maryland's agreement was preempted by the Federal Power Act. But on the other side, Maryland and other states say they have jurisdiction over the resources in their state, and need all tools available to them to ensure more clean energy resources are constructed.

Though the contract in question involves natural gas generation, clean energy advocates have backed Maryland's position, saying states should have a wider array of options to support new generation resources.

“Usually court cases serve to make the dividing line a little bit brighter,” said Travis Kavulla, vice-chair of the Montana Public Service Commission. “Ironically, here the line may only be getting more hazy.”

Kavulla is also president of the National Association of Regulatory Utility Commissioners (NARUC), which represents state regulators and has an obvious interest in the case. But most observers expect a relatively narrow ruling in this case, and if oral arguments last month made one thing clear, it's that this is a complicated case.

The contract in question

Over at the SCOTUS blog, longtime court reporter Lyle Denniston points out that there was confusion on the bench as to how power auctions function, and two justices “openly confessing that they really do not understand how prices are set in the energy industry.”

Maryland's contract with CPV was a “contract for differences,” where the state guaranteed the plant a certain rate for its generation before it bid into the PJM market. 

Attorneys for Maryland told the court the state guaranteed income for the plant to ensure it would clear the later market auctions, and that the type of contract protected consumers from being charged twice for the power. 

"Maryland's concern was this: It wanted and needed the resource, but it was concerned that the resource clear so that it hedge against the cost and customers not pay twice for the same resource," Scott Strauss, counsel for Maryland, told the court during oral arguments. "So in order to do that, it entered into the contract for differences. And the way it did that was it did a competitive procurement and found a developer who was willing to undertake the risk of nonclearance."

The contract for differences works much the same as one between a distribution utility and a developer, Strauss said, but in this case the risk that the generation would not clear the market was left with the plant owners, rather than ratepayers. 

"The contract developer ... receives the contract price," Strauss told the court. "The utilities paid the contract price and no more than that, received the market price. That is exactly the way this would have worked if we had simply done it as a bilateral ..."

But Justice Samuel Alito interrupted Strauss, casting some doubt on that characterization.

“Well, there's another key difference,” he said. “If CPV had contracted directly with the distribution utilities [rather with the state], that would have been subject to regulation by FERC.”

On FERC's side, attorneys argued that Maryland's contract with the CPV plant "changed the incentive of people in the market," intruding on the agency's authority to regulate it. 

While Maryland held that it simply offered up a contract for generators and "did not require CPV to bid into the auction," FERC's lawyers said that the state intentionally targeted the PJM market, telling the generator what it had to do to win hefty subsidies — the guaranteed income — from the state.   

The result, lawyer Paul Clement told the court, was that "in the first capacity auction that we had to deal with, the price was suppressed. In every energy auction since then, the price was suppressed."

"In the typical voluntary bilateral contract, you don't have state action," Clement said. "The parties make their agreement. They eventually submit it to FERC, or if it's a market­-based rate, somebody can object. ... But here you got the state action right up front, and the state action is preempted [by FERC's authority over interstate markets]."

FERC: States can still push development of clean energy

The case has shaped up as a clean energy battle because a broad ruling could impact how states develop  solar and wind projects. But in its brief, FERC argued that while Maryland's arrangement was preempted by the FPA, it and other states still has a wide range of options.

“A holding that the Maryland program is preempted would not disable states from taking any action that has an effect on supply or demand in the wholesale market,” attorneys for the commission wrote in their brief. “If the court holds that the specific Maryland program at issue here is preempted, the states will retain significant authority to promote new generation of clean energy within their reserved jurisdiction.”

FERC said states can incentivize the construction of new generation facilities, limit new construction to certain types of generation resources, and require the retirement of generation facilities, in ways that may have an indirect effect on the wholesale capacity market. They have tax-exempt bonding authority, for example, can grant property tax relief and favorable site lease agreements on public lands, and gift of environmentally damaged properties for brownfield development. 

“Indeed, states are free to require procurement of new generation resources, even if the price signals in the regional wholesale capacity market indicate that no new resources are needed,” FERC said.

But that's not what Maryland did in the CPV contract, Ann O'Connor, assistant to the U.S. Solicitor General, told the court on FERC's behalf. 

"[T]he state paid to build the power plant and turned it over to CPV, but then they said, okay, we want to get some money back for this power plant that we built, so you're going to bid the capacity of this plant into the auction," she said. "And unless you clear, we're taking the plant away from you, or something like that. That changes the incentives of the participants in FERC's auction."

That kind of behavior, she said, "conflicts with the market mechanism that FERC has set up. We think that shows both field and conflict preemption."

Renewables advocates worry

The American Wind Energy Association joined the proceeding with an amicus brief in support of the state's generation program. Solar and wind advocates see broad state authority as a boost to the development of renewable resources.

“The decision significantly undermines state authority to decide the resource type, quantity, and timing of new or existing generation facilities that will be constructed or maintained within the state,” AWEA said. “Thus, the state’s ability to ensure its electricity supply portfolio could be severely diminished, which would significantly impact renewable energy programs and other state environmental programs.”

On the Natural Resources Defense Council blog, the group said the facts of the case are so specific “it remains to be seen whether the Supreme Court's decision will provide any governing precedent one way or the other.” A very broad ruling could sweep away a wide range of policy tools states use, but a more narrow decision could have far more limited implications.

NRDC's John Moore, senior attorney on the Sustainable FERC Project, said “what is as issue is the potential scope and boundaries of state action to support clean energy resource development. That's why we're watching this case closely.”

“If the court were to rule broadly ... then there would be a lot of questions about a number of different state actions,” Moore said.

Moore watched the oral arguments, however, and said it appeared “less likely the court will make a broad preemption ruling in this case, but of course anything is just speculation at this point.” But that sentiment appears to be fairly widespread, with many media outlets reporting the Justices appeared skeptical of the power arrangement. 

Kavulla said a more moderate decision was likely.

“They're probably not going to declare the entire field preempted,” he said. “They're not going to say, 'under no circumstances can the Maryland PSC cause a natural gas generator to be constructed.”

But a more broad the ruling, he said, could lead to questions about whether “state environmental policies will withstand legal challenges.”