FERC Ruling Undermines Energy Federalism and Arbitrarily Targets Mid-Atlantic Region Renewables

Author:Philip Killeen
Position:J.D. Candidate, American University Washington College of Law 2021.
Spring 2019
feRc RulinG unDeRmineS eneRGy feDeRaliSm
anD aRbitRaRily taRGetS miD-atlantic ReGion
Philip Killeen*
Part II of the Federal Power Act (FPA) requires that
all prices set for the sale of electricity affecting inter-
state commerce between electrical utilities be “just and
reasonable.”1 Pursuant to this requirement, the FPA authorizes
the Federal Energy Regulatory Commission (FERC) to suspend
such electricity sales prices upon nding that they unduly dis-
advantage or discriminate between locations or types of power
plants.2 In assigning this limited jurisdiction to the federal gov-
ernment, and by explicitly reserving to the states the exclusive
jurisdiction over the mix of power plants supplying electricity
demand, the FPA mandates a cooperative federalism model of
electricity sector regulation.3
A recent FERC ruling in Calpine Corp. v. PJM
Interconnection, LLC4 expansively interprets federal regula-
tory authority under the FPA, asserting that state subsidies for
clean energy provide grounds for FERC to suspend electricity
price-setting activity.5 This Article argues that FERC’s ruling
in Calpine not only undermines the FPA’s federalist structure,
but also arbitrarily and capriciously penalizes state support for
renewable and nuclear energy while permitting historic and
ongoing state support for fossil-fuel based electricity. By reject-
ing states’ legitimate preferences for low emissions electricity,
FERC’s Calpine ruling limits states’ ability to mitigate climate
change by reducing greenhouse gas emissions from the electric-
ity sector. These efforts are particularly important at a time when
federal leadership on climate change is conspicuously absent.6
I. thE fEdEralIst BalancE In
ElEctrIcIty sEctor rEgulatIon
While founded as vertical monopolies, electric utilities
today exist in a nationally interconnected market.7 Utilities have
dramatically improved service reliability and reduced operating
costs by sharing power generation, transmission, and distribu-
tion infrastructure in regional electrical grids.8 FERC has exer-
cised its jurisdiction over the resulting interstate commerce by
mandating the formation of regional transmission organizations
(RTOs) to coordinate, control, and monitor regional electrical
grids.9 Among other roles, RTOs satisfy electricity demand
across their grid by operating auctions in which electricity
generation companies (GENCOs) compete to sell electricity to
utilities at the lowest price.10 RTOs set a at “clearing” price
received by all GENCOs at the lowest bidding price that satises
the demand for the entire network.11
Exercising their concurrent jurisdiction over in-state power
plants, the District of Columbia and ten of the thirteen states in
the Mid-Atlantic region RTO, PJM, implemented Renewable
Portfolio Standards (RPS).12 RPS programs require that utilities
serving the state source a specied percentage of their electricity
supply from specied renewable and nuclear energy resourc-
es.13 To meet RPS targets, state governments and utilities offer
a combination of subsidies to renewable and nuclear energy
GENCOs, including rebates, tax incentives, and credits.14 In
Calpine, a natural gas GENCO led a complaint with FERC
claiming PJM states’ RPS subsidies “articially suppress” PJM
electricity prices by allowing “uncompetitive” renewable and
nuclear energy GENCOs to submit bids that do not reect their
actual costs.15 FERC commissioners subsequently ordered PJM
to “mitigate” the effect of state renewable energy subsidies in
the interstate electricity market.16
II. fErc’s Calpine rulIng undErmInEs
statE jurIsdIctIon ovEr IntrastatE
ElEctrIcIty gEnEratIon
In Hughes v. Talen Energy Marketing, LLC,17 the Supreme
Court emphasized that, given the interconnected nature of the
modern electric grid, FERC’s interstate regulations and states’
intrastate regulations will inevitably affect each other.18 These
crossover impacts are not only permissible but intended under
the FPA’s federalist structure; the only limitation is that neither
sovereign may intentionally target the other’s jurisdiction.19 The
mere existence of crossover impacts is not sufcient to show
intentional targeting; instead, to show that a state overreached its
jurisdiction, a plaintiff GENCO must prove that the state directly
conditioned or “tethered” the GENCO’s subsidy eligibility on
supplying electricity through an RTO.20
The RPS subsidies at issue in Calpine do not satisfy the
Hughes intentional targeting test. The RPS subsidies are dis -
tinguished from other state energy policies rejected by FERC
and courts because they neither required subsidized GENCOs
to submit bids that clear PJM’s capacity market auction nor
guaranteed those GENCOs an electricity price distinct from
the interstate wholesale clearing price set by the RTO.21 In this
regard, the RPS subsidies are neither intentionally targeted at
RTO electricity markets under federal jurisdiction nor “tethered”
to GENCO participation in PJM’s capacity market, and thus
fall squarely within state jurisdiction. In ruling that RTOs may
frustrate state subsidies for in-state power plants not directly tied
*J.D. Candidate, American University Washington College of Law 2021.
18 Sustainable Development Law & Policy
to RTO market participation, FERC’s Calpine ruling implies
an unlimited federal jurisdiction over GENCOs, which was not
contemplated by FPA’s statutory structure.
III. fErc’s Calpine rulIng arBItrarIly
targEts rEnEWaBlE and nuclEar EnErgy.
Regardless of its exercise of jurisdiction, FERC’s applica-
tion of the FPA’s “just and reasonable” provision in Calpine to
overturn PJM states’ RPS subsidies for renewable and nuclear
energy is arbitrary and capricious.22 FERC’s mandate to ensure
RTO electricity wholesale rates are “just and reasonable” is, in
essence, an obligation to reect the price that an efcient market
would produce.23 FERC’s Calpine ruling emphasized that state
RPS subsidies threaten the integrity of PJM’s capacity market
because they allow certain GENCOs to submit suppressed
bids in PJM capacity market without competing on a compa-
rable basis with “competitive” resources.24 However, FERC’s
Calpine ruling arbitrarily ignores the market distorting effects
of longstanding state and federal subsidies for fossil fuel-based
electricity generation.25 These subsidies have propped up uneco-
nomical and aging fossil fuel power plants by allowing fossil
fuel GENCOs to submit suppressed bids into RTO capacity mar-
kets.26 A reasonable and historically consistent application of
FERC’s Calpine standard, therefore, would require PJM to miti-
gate states’ longstanding subsidy support for fossil fuel-based
electricity, not just its newer subsidy support for renewable and
nuclear energy.
More fundamentally, however, FERC’s Calpine ruling arbi-
trarily ignores that government subsidies reecting the relative
environmental benets of low-emissions electricity generation
are essential to reaching the efcient market outcome mandated
by the FPA.27 Without subsidy programs encouraging low-
emissions electricity generation, RTO markets will continue to
produce inefcient outcomes for the U.S. electrical grid and
the public.28 Furthermore, emissions credits for renewable and
nuclear energy GENCOs, like those at issue in Calpine, are
awarded based on the positive environmental attributes of the
electricity eligible GENCOs produce, rather than based on the
value of that electricity in a RTO market.29 Since these credits are
traded in secondary markets wholly separate from RTO electric-
ity auctions and reect the environmental, rather than economic,
value of electricity generation, they are effectively untethered to
wholesale electricity markets under federal jurisdiction.30
Iv. conclusIon
Consistent with the federalist design of the FPA and its
interpretation of “just and reasonable” electricity prices in RTO
markets, FERC should permit PJM states’ legitimate pursuit of
a cleaner and more economically efcient electricity resource
mix. By failing to do so, FERC’s Calpine ruling curtails essen-
tial state leadership on climate change.
1 16 U.S.C. § 824d(a) (2012).
2 See 16 U.S.C. § 824d(b) (distinguishi ng federal jurisdic tion over prices for
electricity s ales across state lin es between utilities (interstate wholesa le rat es)
from state ju risdiction over prices for ele ctricity sales with in a state between
a utility and c ustomer (intrastate retail rates)).
3 See 16 U.S.C. § 824(b)(1); Hughes v. Talen Energy Ma rketing, LLC, 136
S. Ct. 1288, 1299-1300 (2016) (Sotomayor, J. concurring) (emphasiz ing the
importa nce of preserving st ates’ regulatory role to mee ting the Federal Power
Act’s goal of ensuring a su stainable supply of efcient an d cost-effective
4 163 F.E.R.C. 61,236, 2018 WL 3360507 (2018).
5 See id. at *35-37 (holding that s ubsidies provided by states t o support the
entry and c ontinued operation of rene wable and nuclear energy gene ration
facilities in t he wholesale market threa tens the integrit y and effectiveness of
the PJM interst ate electricity capac ity market).
6 Shortly afte r being inaugurat ed, President Trump in itiated U.S.
withdrawal f rom the Paris Climat e Agreement and is in the pr ocess of
rolling back fede ral rules key to its impleme ntation, including th e Obama
admini stration’s Clean Power Plan, a regulator y program target ing electricity
sector gree nhouse gas emissions. US A Climate Action Tracker Assess ment,
climate action tRackeR (2017), https://climatea ctiontracker.org/media /docu-
ments/2018/4/CAT_2017-11-06_Countr yAssessment_USA_8fXxI rP.pdf.
7 See Cong. Resear ch Serv., R44783, The Federal Power Act (FPA) and
Electricity Markets 3 (2017).
8 Id. at 5-6.
9 While FERC’s power to regul ate interstate tr ansmission and sales of elec-
tricity der ives from passage of the Publ ic Utility Act in 1935, FERC neither
comprehensively nor con sistently exercised this p ower until it introduce d
RTOs in a series of issu ed orders starti ng in 1996. Id. at 2-5.
10 PJM, the RTO affected by t he Calpine ruling, operat es a capacity auction,
where GENCOs subm it bids to supply predicted elect ricity demand th ree
years in adva nce. PJM Markets Fact Sheet, pJm int eRconnection,
1 (2017), https://learn.pjm.com/-/media/about-pjm/newsroom /fact-sheets/
pjms-markets -fact-sheet.ashx.
11 Id.
12 Miles Farmer, Clea n Energy Groups Urge FERC to Rec onsider PJM
Order, nat. ReSouRceS Def. council (Aug. 2, 2018), https://www.nrdc.org/
13 State Renewa ble Portfolio Standards a nd Goals, natl confeRence of
State leGiSlatuReS (Feb. 1, 2019), http://www.ncsl.org/rese arch/energy/
renewable-portfolio-standards.as px.
14 Id.
15 See Calpine Cor p. v. PJM Interc onnection, LLC, 163 F.E.R.C. ¶ 61,236,
2018 WL 3360507, at *5 (2018).
16 Id. at 36. FERC ordered PJM to us e its Minimum Offer P rice Rule
(MOPR) to mitigate stat e RPS subsidies. MOPR places a pr ice oor on
GENCO’s RTO auction bids and was origi nally developed by FERC to pre-
vent holding compan ies owning distr ibution utilities and nat ural gas power
plants from offer ing articially low c apacity bids (thereby suppre ssing prices)
to secure cont racts knowing the y can recoup losses by buying ch eap capacity.
Farm er, supra note 12.
17 136 S. Ct. 1288 (2016).
18 See id. at 1298 (noting t hat states may regulat e within the domain Con -
gress assign ed to them even when their laws i ncidentally affect are as within
FERC’s domain).
19 Id.
20 See id. at 1299 (noting tha t state energy subsidy pay ments “untethere d,”
or not conditioned on r ecipients clearing RTO market a uctions, would fall
outside federal ju risdiction); Fed. Energy Regu latory Comm’n v. Elec. Power
Supply Ass’n, 136 S. Ct. 760, 776 (2016) (holding that FERC regulation d oes
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