Three Circuit Court Cases Could Significantly Clarify “Bright Line” in Jurisdiction between Federal & State Government in Overseeing Power Sector

by William Yeatman on December 11, 2014

With the 1935 Federal Power Act, Congress sought to establish a “bright line” between federal and state jurisdiction over the electricity market. Generally, federal regulators (at the Federal Energy Regulatory Commission) have authority over the interstate transmission and sale of electricity, while States retain exclusive jurisdiction over the regulation of generation and also retail electric sales. See Federal Power Commission v. Southern California Edison Co., 376 U.S. 2015 (1964) at 215-216.

Of course, the electric industry has changed a great deal in the 80 years since Congress passed the Federal Power Act. Of particular note, FERC over the last 2 decades has sought to facilitate more robust interstate electricity markets. As a result of this and related dynamics, the “bright line” between state and federal jurisdiction has dimmed, such that it’s far less clear where lie the boundaries between these two co-sovereigns.

In a very smart segment during last Sunday’s Platts Energy Week with Bill Loveless, posted immediately below, Platts’s Bobby McMahon reports on a series of court cases that have the potential to dramatically clarify the limits of state and federal oversight of the electricity industry. After the break, I explain the matter further.

McMahon draws attention to two recent Circuit Court rulings that demarcate where the State cannot intrude on federal authority. Last June, the Fourth Circuit (in PPL EnergyPlus, LLC v. Douglas Nazarian, 13-2419) upheld a lower court ruling that invalidated a Maryland policy (authorized by the state Legislature and implemented by the Maryland Public Service Commission) to incent the construction of new generation capacity. The court determined that the state’s policy was preempted by the interstate capacity market overseen by FERC; that is, Maryland’s policy impermissibly regulated a field (interstate power sales) that is the exclusive preserve of the federal government. Similarly, the Third Circuit last September (in PPL EnergyPlus, LLC, et al v. Lee Solomon, et al.,13-4330) upheld a lower court ruling vacating a New Jersey policy (again, authorized by the state Legislature and implemented by the New Jersey Board of Public Utilities)  to incent the construction of new generation capacity. Like the Fourth Circuit, the Third Circuit reasoned that the New Jersey’s policy was preempted by the interstate capacity market overseen by FERC.

Those two cases pertain to the limits of state authority under the Federal Power Act. On the flip side of the coin, the D.C. Circuit in May (in Electric Power Supply Association v. FERC ) established limits on federal authority under the statute. To be precise, the court ruled that federal regulators violated the State’s exclusive jurisdiction over retail electricity markets by indirectly subsidizing the participation “energy efficiency aggregators” (ie, demand-side managers). This controversial case, about which I blogged here, sets a significant boundary on federal power vis a vis the States.

In sum, recent federal court rulings have the potential to significantly clarify the delineations of authority between state and federal governments in overseeing the electricity industry. On the one hand, the 3rd & 4th Circuits invalidated state policies to facilitate capacity additions, because they violated the federal government’s exclusive authority to oversee interstate electricity sales. On the other hand, the D.C. Circuit invalidated a FERC rule to incent demand side management, because doing so infringed on the states’ exclusive jurisdiction over their retail electricity markets.

According to McMahon, Maryland already has filed a petition for writ of certiorari seeking Supreme Court review of the Fourth Circuit’s decision, and New Jersey intends to do so regarding the Third Circuit’s ruling. Meanwhile, FERC last week won a 30 day extension to file a petition for writ of certiorari seeking Supreme Court review of Electric Power Supply Association v. FERC.

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