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IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

In re: §

§ Case No. 20-32631

Ultra Petroleum Corp., et al., §

§ Chapter 11

Debtors. §

Response by FERC to Court’s July 6 Order (Related to Doc. No. 382)

To the Honorable Marvin Isgur, United States Bankruptcy Judge:

The Federal Energy Regulatory Commission responds to the Court’s order entered July 6.

Summary

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Background

On May 14, 2020, Ultra Petroleum Corp., et al., filed voluntary petitions for relief under chapter 11 of the Bankruptcy Code. [Doc. No. 1].

That same day, the Debtors filed their motion to reject the Negotiated Rate Firm Transportation Agreement with Rockies Express Pipeline LLC. [Doc. No. 7]. The Debtors’ motion noted that the Court may need to consider “the impact of rejection on the public interest . . . .” [Doc. No. 7, p. 16, ¶ 36]; see In re Mirant Corp., 378 F.3d 511, 525 (5th Cir. 2001) (instructing lower court to consider scrutinizing “the impact of rejection upon the public interest . . . .”). Rockies Express Pipeline (“REX”) objected to the Debtors’ motion by arguing, among other things, that rejecting the Agreement would harm the public interest. [Doc. No. 325, p. 2]. The Debtors replied to the objection arguing, among other things, that rejection of the Agreement “would not harm the public interest. [Doc. No. 373, p. 6].

On June 15, 2020, the Court entered an order requesting that FERC “participate as a party-in-interest in these proceedings to argue and to comment on whether” the proposed rejection “would harm the public interest.”1 [Doc. No. 274]. On June 29, 2020, REX moved for relief from the automatic stay to pursue a petition for declaratory order with FERC. REX stated that it sought a determination from FERC as to whether rejection of the Agreement would harm “the public interest under the Natural Gas Act . . . .” [Doc. No. 349, p. 2].

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FERC replied in support of the motion for relief from stay to argue that FERC would benefit from someone filing a petition before it “that would enable FERC’s Commissioners to consider and vote on the public interest issues.” [Doc. No. 369, p. 1]. After making that vote, FERC would then be able to come to this Court and take a position on the public interest.

The Debtors responded in opposition to relief from stay. Their response cited a number of instances where FERC has participated as amicus and argued that FERC could “do the same with respect to the Rejection Motion”, but the Debtors missed an important distinction. This Court did not invite FERC to participate merely as amicus—this Court invited FERC to opine about the facts of this case and whether rejection of the Agreement would affect the public interest.

On July 6, 2020, the Court invited FERC to respond to the Debtors’ allegation that FERC sometimes participates in federal court “without having proceeded through an adjudicatory proceeding.” [Doc. No. 382].

Argument

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hear from both sides, take evidence, and hold a vote of its Commissioners before taking a position.

I. Authority Relevant to FERC’s Ability to Take a Position

FERC is a multi-member independent administrative agency that acts through its orders, thereby creating precedent and policies. See 42 U.S.C. § 7171(b)(1). FERC’s enabling statute requires that at least three Commissioners must be present to constitute a quorum to act and “[a]ctions of the Commission shall be determined by a majority vote of the members present.” 42 U.S.C. § 7171(e); Pub. Citizen Inc. v. FERC, 839 F.3d 1165, 1169 (D.C. Cir. 2016) (“These requirements comport with the ‘almost universally accepted common-law rule’ that only a ‘majority of a collective body is empowered to act for the body’” and “an agency’s authority runs to it as ‘an entity apart from its members, and it is its institutional decisions—none other—that bear legal significance.’”) (quoting Fed. Trade Comm’n v. Flotill Prods., Inc., 389 U.S. 179, 183 (1967) and Pub. Serv. Comm’n of N.Y. v. Fed. Power Comm’n, 543 F.2d 757, 776 (D.C. Cir. 1974)); see also 5 U.S.C. § 552b(a)(2) (defining an agency “meeting” as “the deliberations of at least the number of individual agency members required to take action on behalf of the agency”); 18 C.F.R. § 375.202(a)(1) (defining "[m]eeting" to be “the deliberations of at least a quorum of the Commission”).

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by, or contrary to, the public interest. FERC would not be complying with its enabling statute if it took a position about the public interest issues without providing both sides the opportunity to present their case, the appropriate vote, and an order. II. Cases Cited by the Debtors

The cases cited by the Debtors are each federal preemption cases examining whether state rate programs conflicted with the Commission’s jurisdiction. Those cases are distinguishable from this case because they presented straightforward questions of law and FERC was able to participate in each of them relying on its prior orders. Unlike a public interest inquiry into a specific contract or set of contracts, FERC did not need to receive additional evidence before taking a position.

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Power Supply dealt with issues of law—not fact—meaning FERC did not need to consider additional evidence in taking a position. Moreover, that amicus brief did not take its position about the law in a vacuum. It relied both on the U.S. Supreme Court’s decision in Hughes v. Talen Energy Marketing, L.L.C., 136 S. Ct. 1288 (2016), and a well-established body of orders FERC had issued in separate proceedings concerning state subsidies that the Commission had already issued, detailed in Part III of that brief.2 Exhibit A, pp. 28-33.

The Debtors next cite PPL EnergyPlus, LLC v. Solomon, 766 F.3d 241 (3d Cir. 2014). In this case also, utilities filed suit seeking declaratory judgment that the Federal Power Act preempted a New Jersey state statute. FERC submitted a brief on a legal question—whether FERC had exclusive jurisdiction to set the rates for electricity capacity in a certain context. The Commission’s amicus brief is attached as Exhibit B. FERC was able to take a position about the scope of its jurisdiction by relying on prior orders it had issued. Indeed, the Commission’s orders eliminating the state mandate exemption upon which New Jersey’s subsidy program had relied were being simultaneously litigated before the Third Circuit itself in a parallel petition for review. See N.J. Bd. of Pub. Utils. v. FERC, 744 F.3d 74 (3rd Cir. 2014) (affirming the Commission’s orders).3

2 It also bears noting that the Second Circuit was simultaneously considering a preemption case

addressing a New York ZEC program akin to the one adopted in Illinois. See Coal. for Competitive Elec. v. Zibelman, 906 F.3d 41 (2d Cir. 2018). FERC did not participate in that case; nor was it invited to do so.

3 Moreover, like the ZEC preemption cases that were simultaneously before the Seventh and Second

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Third, the Debtors point to Allco Renewable Energy Ltd. v. MA ELEC. CO., 208 F. Supp. 3d 390 (D. Mass. 2016). This was a case where a solar generation developer filed suit to challenge state regulations. As with the previous two cases, FERC submitted a brief on a question of law. FERC provided legal authority about (a) whether regulations by the Massachusetts Department of Public Utilities conflicted with FERC regulations implementing the Public Utility Regulatory Policies Act, (b) the structure of contracts between facilities and utilities, and (c) whether obligations under federal law create private rights of action. FERC’s brief was explanatory in nature limited to educating the court about how PUPRA regulation works in response to the Court’s specific questions. The brief is attached as Exhibit C.

Conclusion

FERC is not saying that it can never take a position in court without conducting a prior administrative proceeding, but fairness requires limits. On a question that is purely legal in nature or on a question where FERC has previously issued an order, FERC can present its position to a court. However, where FERC must consider evidence and hear from competing parties, FERC cannot take a position without completing its own administrative process.

It would not be fair to either the Debtors or to REX for FERC to take sides before hearing the parties out. Until and unless both sides present their evidence and arguments to FERC, and until and unless the Commissioners vote, FERC cannot

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tell this Court whether or how it believes the public interest would be affected by rejection of the Agreement.

Dated: July 20, 2020.

Respectfully submitted, RYAN K. PATRICK, United States Attorney By: s/ Richard A. Kincheloe

Richard A. Kincheloe

Assistant United States Attorney United States Attorney’s Office Southern District of Texas Texas Bar No. 24068107 S.D. Tex. ID No. 1132346 1000 Louisiana St., Suite 2300 Houston, Texas 77002 Telephone: (713) 567-9422 Facsimile: (713) 718-3033 Email: Richard.Kincheloe@usdoj.gov Attorney for the Federal Energy Regulatory Commission

Certificate of Service

The undersigned certifies that he served a true and correct copy of the foregoing Brief on the parties receiving ECF notification in this case on July 20, 2020, by ECF notice.

s/ Richard A. Kincheloe Richard A. Kincheloe

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I

N THE

U

NITED

S

TATES

C

OURT OF

A

PPEALS FOR THE

S

EVENTH

C

IRCUIT

__________

VILLAGE OF OLD MILL CREEK, ET AL.,

Plaintiffs-Appellants, v.

ANTHONY M.STAR, ET AL.,

Defendants-Respondents. __________

ON APPEALS FROM THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS, NOS.1:17-CV-01163&1:17-CV

-01164,HON. MANISH S.SHAH,DISTRICT JUDGE

__________

BRIEF FOR THE UNITED STATES AND THE FEDERAL ENERGY REGULATORY COMMISSION AS AMICI CURIAE IN SUPPORT OF

DEFENDANTS-RESPONDENTS AND AFFIRMANCE __________

JAMES P. DANLY JEFFREY H. WOOD

General Counsel Acting Assistant Attorney General

DAVID L. MORENOFF

Deputy General Counsel

ROBERT H. SOLOMON

ERIC GRANT

Deputy Assistant Attorney General

JENNIFER S. NEUMANN

Solicitor MATTHEW R. OAKES ROBERT J. LUNDMAN ANAND R. VISWANATHAN

Attorney

Environment & Natural Resources Div. Federal Energy Regulatory

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TABLE OF CONTENTS

INTEREST OF THE AMICI CURIAE ... 1

BACKGROUND… ... 2

SUMMARY OF ARGUMENT ... 7

ARGUMENT…… ... 9

I. The District Court Decision Not To Preempt The Illinois Statute Is Correct As A Matter Of Law ... 9

A. The Illinois Program Does Not Suffer From the “Fatal Defect” That Rendered the Maryland Program Unacceptable In Hughes. ... 9

B. Hughes Recognizes the Ability of States To Craft Policy Initiatives In Ways That Will Avoid Federal Preemption ... 16

II. The Illinois Statute Does Not Impede The Commission’s Statutory Ability To Regulate The Wholesale Markets. ... 19

III. The Commission Has Previously Found That Certain State Progams Supporting Clean Power Are Not Within Its Jurisdiction Over Wholesale Rates……… ... 22

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TABLE OF AUTHORITIES

COURT CASES:

Allco Fin. Ltd. v. Klee,

861 F.3d 82 (2d Cir. 2017) ... 14, 18, 20

Coal. For Competitive Elec. v. Zibelman,

272 F. Supp. 3d 554 (S.D.N.Y. 2017) ... 12, 13

FERC v. Elec. Power Supply Ass’n,

136 S. Ct. 760 (2016) ... 13, 19, 24

Hughes v. Talen Energy Marketing, L.L.C.,

136 S. Ct. 1288 (2016) ...5, 7, 8, 9, 12, 13, 14, 15, 16, 20

Illinois ex rel. Greenblatt v. Commonwealth Edison Co.,

No. 11 C 2009, 2011 WL 2550834 (N.D. Ill. June 27, 2011)... 25

N.J. Bd. of Pub. Utils. v. FERC,

744 F.3d 74 (3d Cir. 2014) ... 17

Nw. Cent. Pipeline Corp. v. State Corp. Comm’n of Kan.,

489 U.S. 493 (1989) ... 18

Oneok, Inc. v. Learjet, Inc.,

135 S. Ct. 1591 (2015) ... 7, 18

Planned Parenthood of Ind., Inc. v. Comm’r of Ind. Dep’t of Mental Health,

699 F.3d 962 (7th Cir. 2012) ... 2

PPL Energyplus, LLC v. Solomon,

766 F.3d 241 (3rd Cir. 2014) ... 17

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TABLE OF AUTHORITIES COURT CASES:

Union Pac. R.R. Co. v. Chi. Transit Auth.,

647 F.3d 675 (7th Cir. 2011) ... 13

Wheelabrator Lisbon, Inc. v. Conn. Dep’t of Pub. Util. Control,

531 F.3d 183 (2d Cir. 2008) ... 23 ADMINISTRATIVE CASES:

Cal. Indep. Sys. Operator Corp.,

119 FERC ¶ 61,061 (2007) ... 26

Cal. Pub. Utils. Comm’n,

132 FERC ¶ 61,047 (2010) ... 25

Cal. Pub. Utils. Comm’n,

133 FERC ¶ 61,059 (2010) ... 26

Conn. Light & Power Co.,

70 FERC ¶ 61,012 (1995) ... 25

Edison Elec. Inst.,

69 FERC ¶ 61,344 (1994) ... 24

ISO New England Inc.,

162 FERC ¶ 61,205 (2018) ... 5-6, 21

ISO New England Inc.,

158 FERC ¶ 61,138 (2017) ... 21

Midwest Power Sys., Inc.,

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TABLE OF AUTHORITIES ADMINISTRATIVE CASES:

So. Cal. Edison,

71 FERC ¶ 61,269 (1995) ... 26

WSPP Inc.,

139 FERC ¶ 61,011 (2012) ... 10, 23, 24, 25 STATUTES:

Federal Power Act:

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GLOSSARY

A. Cites to Appellants’ Joint Appendix

Appellants Br. Brief of Appellants Electric Power Supply

Association, et al., No. 17-2445

Calpine Compl. Calpine Corp. v. PJM Interconnection,

L.L.C., FERC Docket No. EL16-49

(Amended Complaint filed Jan. 9, 2017)

Commission or FERC Federal Energy Regulatory Commission

New England Order ISO New England Inc., 162 FERC ¶ 61,205

(Mar. 9, 2018)

Op. July 14, 2017 opinion of the Northern

District of Illinois granting motions to dismiss

P The internal paragraph number within a

FERC order

PJM PJM Interconnection, L.L.C., operator of the

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INTEREST OF THE AMICI CURIAE

These consolidated cases concern whether the Federal Power Act, 16 U.S.C. § 791a et seq., preempts an Illinois law that requires electric-distribution companies to pay subsidies to state-selected “zero emission facilities” based on the amount of electricity these facilities generate. The United States and the Federal Energy Regulatory Commission (“Commission” or “FERC”) submit this brief as amici curiae in response to this Court’s February 21, 2018 order inviting the United States to

express the views of the government in these consolidated cases. See,

e.g., Oral Argument at 3:01-3:07 (7th Cir. Jan. 3, 2018) (No. 17-2433 et

al.) (asking appellants’ counsel whether FERC believes the Illinois

program interferes with FERC procedures); id. at 13:35-13:39 (“[Y]ou’re

asking us, effectively, to predict that the FERC will do something.”). Because these cases directly implicate the Commission’s

regulatory responsibilities, the United States has a substantial interest in the Court’s resolution of the preemption issue. Amici take no

position on whether Appellants have an equitable or statutory cause of action, or on the dormant commerce clause issue presented by the

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address the cause-of-action issue if it concludes that the Federal Power

Act does not preempt the Illinois program. See Planned Parenthood of

Ind., Inc v. Comm’r of Ind. Dep’t of Mental Health, 699 F.3d 962, 983-84 (7th Cir. 2012) (assuming without deciding that a right of action exists and deciding that preemption claims fails on the merits).

BACKGROUND

The subsidy at issue here is a creature of an Illinois statute, the “Future Energy Jobs Act.” That law requires utilities to buy “zero emission credits” or “ZECs” from certain qualifying electricity

generators. See Op. 1-2, 7-8. ZECs represent the environmental

attributes of one megawatt hour of electricity produced from a zero-emission facility. Id. 7.

The price for each ZEC is the Social Cost of Carbon, $16.50 per megawatt-hour, as determined by a federal interagency working group.

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average energy prices for a 12-month period ending May 31, 2016 at a

single location in the PJM regional market1 and average capacity

market prices in the two Illinois regional markets. See Op. 9 n.13;

A.195. The price adjustment provision was intended “to ensure that the procurement remains affordable to retail customers in this State if

electricity prices increase.” Op. 9 (quoting 20 ILCS 3855/1-75(d-5)(1)(B)).

The Illinois Power Agency confers ZECs on facilities “‘reasonably capable of generating cost-effective zero emission credits in an amount approximately equal to 16 [percent] of the actual amount of electricity delivered by each electric utility to retail customers in the State during calendar year 2014.’” Id. 7-8 (quoting 20 ILCS 3855/1-75(d-5)(1)); see

also id. 2, 6-7 (noting that two nuclear power plants owned by Exelon in

Illinois, Clinton and Quad Cities, are likely to qualify for ZECs).

1 PJM Interconnection, L.L.C. (“PJM”) is a non-profit entity that

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The district court recognized, and the parties do not appear to dispute, that the Illinois statute does not require participation in FERC-jurisdictional wholesale auctions as a prerequisite to receive

ZECs. See Op. 30; Appellants Br. 44, No. 17-2445 (Illinois statute “does

not expressly mandate participation in the auctions as a condition of receiving the ZEC.”); see also Exelon Br. 3; State Appellees Br. 15, 45; Rather, ZECs are available to generators regardless of whether they clear the wholesale auctions. Op. 30-31; see also id. 10, 32 (generators receive ZECs “for each megawatt hour of electricity they produce” and “the credits are not directly conditioned on clearing wholesale

auctions”); Calpine Corp. v. PJM Interconnection, L.L.C., FERC Docket

No. EL16-49, Amended Compl. at 12 (filed Jan. 9, 2017) (“Calpine

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for approval as part of the Commission’s “extensive[]” regulation of auctions of “capacity” administered by the various regional grid

operators. See Hughes v. Talen Energy Marketing, L.L.C., 136 S. Ct.

1288, 1293 (2016) (capacity auctions administered by regional market operators “ensure the availability of an adequate supply of power at some point far in the future”). It is intended to prevent inappropriate suppression of market clearing prices and requires generators meeting specified criteria to submit bids above a price specified by the regional operator (also referred to as an “offer floor”). See id. at 1294.

In complainants’ view, PJM’s minimum-offer-price rule failed to address the “price suppressive” effect of resources that benefit from subsidies awarded by state retail regulators, one of which was the

Illinois ZEC program. See Calpine Compl. at 6, 18. To correct that

effect on wholesale capacity prices, they sought expansion of the rule to cover recipients of state subsidies (including ZECs). See id. at 2-3; see

also id. at 13 (“State-approved subsidies that, by design, interfere with

economic signals for entry and exit represent an existential threat to organized wholesale markets that are the centerpiece of the

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England Inc., 162 FERC ¶ 61,205, at PP 4, 6, 9, 22 (2018) (“New England Order”) (approving New England Independent System

Operator’s proposal to allow certain state-supported resources to obtain wholesale capacity supply obligations so long as the resources’ market entry is coordinated with the market exit of an equal quantity of

retiring capacity).

Though the Calpine Complaint contended that the Illinois law was preempted, it stated that “[a]ny preemption claims related to the ZECs Legislation . . . would be properly adjudicated in federal district court, and the Commission need not and, indeed, should not, address

preemption questions in this proceeding.” See Calpine Compl. at 11

n.46 (internal citations omitted).

This administrative proceeding is still ongoing. After the

Commission issues an order, any aggrieved party may seek rehearing

before the agency, 16 U.S.C. § 825l(a). The Commission, accordingly,

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addressed by the district court,2 and to describe FERC’s past treatment

of various forms of state support for renewable resources. SUMMARY OF ARGUMENT

The Illinois program is not preempted. It does not require participation in FERC-jurisdictional wholesale auctions as a

precondition to receive ZECs. Rather, the Illinois ZEC is “targeted” at an attribute of generation resources over which Illinois has regulatory authority; any spillover, indirect effect on wholesale electricity markets over which the Commission has authority does not warrant preemption.

See, e.g., Oneok, Inc. v. Learjet, Inc., 135 S. Ct. 1591, 1599 (2015). Thus

it lacks the “fatal defect” that undid the Maryland program in Hughes

v. Talen Energy Marketing, L.L.C., 136 S. Ct. 1288 (2016), and the district court’s decision was correct as a matter of law.

The Commission’s existing statutory authority ensures its ability to ameliorate, as needed, detrimental effects on markets within its jurisdiction. The Federal Power Act assigns the Commission

responsibility over interstate wholesale electricity sales, while it

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preserves the traditional authority of States over “any other sale,” e.g., retail sales, and over “facilities used for the generation” of electricity.

16 U.S.C. § 824(b)(1); Hughes, 136 S. Ct. at 1292. The Commission is

familiar with the challenge of regulating the wholesale markets while respecting that statutory division of federal/state authority and

addressing, as necessary, effects of state initiatives on those markets. If the Illinois program, in fact, impairs the functioning of the wholesale markets subject to FERC jurisdiction, the Commission thus has the means and the authority to confront those effects. The

Commission is now considering the impacts on wholesale markets of these sorts of programs. Once it issues a final order in the above-noted administrative proceeding, any aggrieved parties will have the

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ARGUMENT

I. The District Court Decision Not To Preempt The Illinois Statute

Is Correct As A Matter Of Law.

A. The Illinois Program Does Not Suffer From the “Fatal

Defect” That Rendered the Maryland Program Unacceptable In Hughes.

In Hughes, the Supreme Court concluded that a Maryland subsidy program was preempted because it impermissibly “set[] an interstate wholesale rate, contravening the [Federal Power Act’s] division of authority between state and federal regulators.” 136 S. Ct. at 1297. The Maryland program obligated load-serving entities to enter into “contracts for differences” with certain generators. And the program required generators to participate in the PJM wholesale capacity

auction and guaranteed a subsidy representing the difference between the contract price and market price—so long as the generators bid into

and cleared the auction. See id. at 1295. Because the program

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Here, the district court correctly found that Illinois imposed no

such condition on ZECs. See Op. 30. Generators may receive ZECs

even if they do not clear the capacity auctions conducted by the two FERC-jurisdictional market operators in Illinois, PJM and

Midcontinent Independent System Operator, Inc. See id. 30-31. The

ZECs are separate commodities that represent the environmental attributes of a particular form of power generation; they are not

payments for, or otherwise bundled with, sales of energy or capacity at wholesale, and thereby fall outside of FERC’s exclusive jurisdiction over

wholesale transactions. See, e.g., WSPP Inc., 139 FERC ¶ 61,011, at PP

23-24 (2012) (state-created “renewable energy credits” that were

“unbundled” from and independent of a wholesale energy transaction do not fall within the Commission’s statutory jurisdiction). In these

circumstances, the object of the subsidy is the “participant,” not the “actual wholesale transaction.” See Op. 32. The district court thus properly concluded that the ZEC program “falls within Illinois’s reserved authority over generation facilities,” and that Illinois “has sufficiently separated ZECs from wholesale transactions such that the

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Critically, the parties do not appear to dispute the statute’s lack of

an auction-clearing requirement. See Appellants Br. 44, No. 17-2445

(Illinois statute “does not expressly mandate participation in the auctions as a condition of receiving the ZEC.”); see also Exelon Br. 3; State Appellees Br. 15, 45. As one of the complaints filed in the district court admitted, the Clinton and Quad Cities plants have sold electricity

outside the auctions through bilateral contracts, see Exelon Br. 41

(citing A.142 ¶ 54),3 while the other noted that Quad Cities failed to

clear the PJM wholesale auction for three consecutive years. See id. 36,

38-40 (citing A.25 ¶ 55); State Appellees Br. 46 n.17. Under the Illinois program, the state provides ZECs for generation of electric that is then sold outside of the auction, not just for generation sold at the wholesale auction.

3 See also Oral Argument at 41:41-41:46 (Exelon counsel noting

that many nuclear plants in the region “sell largely to retail

customers”); id. at 45:06-45:15 (State counsel noting that the Exelon

plants can bypass the wholesale auctions by selling through bilateral contracts); id. at 58:15-58:22 (Plaintiffs-Appellants’ counsel

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The generator Appellants (No. 17-2445), however, maintain that this “formal legal requirement”—i.e., the State requiring auction

participation as a condition of receiving ZECs—does not settle the

preemption question. See Appellants Br. 14, 44. In their view, the

Federal Power Act preempts the ZEC program because the practical

effect of the program amounts to a condition of payment on clearing the wholesale auction, making it effectively “no different” than the

Maryland program preempted in Hughes. See id. 17-18, 45. They

allege that Clinton and Quad Cities have no alternative to bidding into the auctions, “such that the ZEC subsidy ‘will not occur unless the ‘winning’ nuclear generators sell their energy into the wholesale markets.’” See id. 43 (quoting A.30 (Compl. ¶ 64)); Op. 29.

But Hughes does not go so far. Business realities and market forces cannot be so easily equated with requirements imposed by force of law—a generator’s “business decision” to sell at the auction “is

irrelevant from a preemption perspective” and is not equivalent to a

“state directive.” Coal. For Competitive Elec. v. Zibelman, 272 F. Supp.

3d 554, 570 (S.D.N.Y. 2017), on appeal, 2d Cir. No. 17-925. This Court

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agreement,” where “there is no issue of federal preemption,” and state action “by regulation,” where “the possibility of federal preemption may

arise.” Union Pac. R.R. Co. v. Chi. Transit Auth., 647 F.3d 675, 682

(7th Cir. 2011); cf. FERC v. Elec. Power Supply Ass’n, 136 S. Ct. 760, 777 (2016) (“EPSA’s primary argument that FERC has usurped state power . . . maintains that the Rule ‘effectively,’ even though not

‘nominal[ly],’ regulates retail prices. . . . The modifier ‘effective’ is doing quite a lot of work in that argument—more work than any conventional understanding of rate-setting allows.”) (internal citations omitted,

modifications in original).

Equating private action with state regulation would take preemption doctrine down a path not contemplated by the Supreme Court’s “limited” holding: “So long as a State does not condition payment of funds on capacity clearing the [wholesale] auction, the State’s program would not suffer from the fatal defect that renders

Maryland’s program unacceptable.” Hughes, 136 S. Ct. at 1299; see

also Zibelman, 272 F. Supp. 3d at 571 (“The law of preemption

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on this distinction in finding the ZEC program not preempted because it “does not mandate auction clearing . . . and the state . . . is not imposing a condition directly on wholesale transactions.” Op. 31 (emphasis in original); see also Allco Fin. Ltd. v. Klee, 861 F.3d 82, 102 (2d Cir. 2017) (holding that appellant failed to allege that the Connecticut program at issue was “likely to produce contracts that violate the bright line laid out in Hughes: the [requests for proposals] do not, for instance, require bids that are ‘[ ]tethered to a generator’s wholesale market

participation’ or that ‘condition[ ] payment of funds on capacity clearing the auction.’”) (quoting Hughes, 136 S. Ct. at 1299).

Nor does the price adjustment feature of the Illinois statute (see

supra pp. 2-3) raise the sort of concerns as did the Maryland “contract

for differences” in Hughes. Unlike the payment under the Maryland

program, the Illinois statute does not link ZECs to a particular

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adjustment reduces ZEC payments by a combination of forecasted energy prices and capacity prices averaged over two different regional markets. See Op. 31 (“[T]he ‘tether’ in this case is not to wholesale participation or transactional pricing; the tether is to broader, indirect wholesale market forces.”). This provision is not directed at wholesale markets, but instead ensures that ZECs remain affordable “to retail customers” in Illinois should electricity prices rise. See Op. 9 (quoting 20 ILCS 3855/1-75(d-5)(1)(B)).

And unlike the Maryland generator in Hughes, the Clinton and

Quad Cities plants here are not limited to selling their output through

the PJM auction. See Hughes, 136 S. Ct. at 1295 (“Because CPV sells

its capacity exclusively in the PJM auction market, CPV receives no payment . . . if its capacity fails to clear the auction.”); A.142 ¶ 54 (complaint by plaintiff Village of Old Mill Creek, et al.) (“Exelon

Generation sells electric energy and capacity from the Quad Cities and Clinton nuclear plants . . . pursuant to wholesale bilateral

transactions,” and in regional wholesale auctions); see also Oral

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ZECs for production of zero-emission power, regardless of whether they opt to sell that power via wholesale auction, bilateral contracts, or directly to retail customers. See Op. 7-8, 30-31; see also A.25 ¶ 55 (complaint by plaintiff Electric Power Supply Association, et al.)

(acknowledging that Quad Cities failed to clear recent PJM wholesale

capacity auction); Hughes, 136 S. Ct. at 1298 (“States, of course, may

regulate within the domain Congress assigned to them even when their laws incidentally affect areas within FERC’s domain.”).

B. Hughes Recognizes the Ability of States To Craft Policy

Initiatives In Ways That Will Avoid Federal Preemption.

The Court in Hughes found that it need not address an

assortment of state actions to “encourag[e] production of new or clean generation through measures ‘untethered to a generator’s wholesale market participation.’” Hughes, 136 S. Ct. at 1299; see also id. at 1292 (noting reserved authority of the States over retail sales and in-state generation facilities) (citing 16 U.S.C. § 824(b)). Such actions may include “tax incentives, land grants, direct subsidies, construction of state-owned generation facilities, or re-regulation of the energy sector.”

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retain regulatory control over generation and state regulation can

impact interstate rates without falling within FERC’s exclusive control. The states may select the type of generation to be built —

wind or solar, gas or coal — and where to build the facility. Or states may elect to build no electric generation facilities at all. The states’ regulatory choices accumulate into the available supply transacted through the interstate market. The Federal Power Act grants FERC exclusive control over whether rates are ‘just and reasonable,’ but FERC’s authority over interstate rates does not carry with it exclusive control over any and every force that influences interstate rates.

PPL Energyplus, LLC v. Solomon, 766 F.3d 241, 255 (3d Cir. 2014),

cert. denied, 136 S. Ct. 1728 (2016); see also N.J. Bd. of Pub. Utils. v.

FERC, 744 F.3d 74, 98 (3d Cir. 2014) (“[W]hat FERC has actually done

here is permit states to develop whatever capacity resources they wish, and to use those resources to any extent that they wish, while

approving rules that prevent the state’s choices from adversely affecting wholesale capacity rates.”). The district court here correctly reached the same conclusion: “States may influence, through regulation, which generators participate in FERC’s market, even though the end result may affect the wholesale market. Plaintiffs do not dispute that

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Hughes joins a line of prior Court decisions that, in the context of energy regulation, interpret the law on preemption with some measure of modesty. In those cases, the Court found that incidental effects of state regulation on matters of federal concern do not rise to the level of preempting those state laws—what matters, in terms of the

constitutional preemption concern, is whether the challenged state laws

target those areas reserved by Congress for federal regulation. See, e.g., Oneok, 135 S. Ct. at 1599 (finding that the Court’s precedents on preemption of state laws “emphasize the importance of considering the

target at which the state law aims in determining whether that law is

pre-empted”) (emphasis in original); Nw. Cent. Pipeline Corp. v. State

Corp. Comm’n of Kan., 489 U.S. 493, 514 (1989) (“To find field pre-emption of Kansas’ regulation merely because purchasers’ costs and hence rates might be affected would be largely to nullify that part of [Natural Gas Act] § 1(b) that leaves to the States control over

production, for there can be little if any regulation of production that might not have at least an incremental effect on the costs of purchasers

in some market and contractual situations.”); see also Allco, 861 F.3d at

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to a regulation of the interstate wholesale electricity market that

infringes on FERC’s jurisdiction.”). State laws that so target, or have a direct effect on, areas reserved for federal regulation raise the specter of preemption, even if not identical to the Maryland program at issue in

Hughes.

But, as the Supreme Court recently explained in FERC v. Electric

Power Supply Association, wholesale and retail electricity markets, subject to federal (wholesale) and state (retail) regulation, cannot be “hermetically sealed” from one another. 136 S. Ct. at 776; see also Op. 27. In this context, a subsidy like the ZEC that affects (in some way)

wholesale rates should not be conflated with a state law that targets the

wholesale market. See Op. 26. As discussed in more detail

immediately below, if FERC were to determine that such an effect renders wholesale rates unjust and unreasonable, then FERC could address that concern under its statutory authority, rather than as a matter of constitutional preemption.

II. The Illinois Statute Does Not Impede The Commission’s Statutory Ability To Regulate The Wholesale Markets.

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not preempted. See Allco, 861 F.3d at 101 (no violation of “bright line

laid out in Hughes” because Connecticut program at issue did not

require bids tethered to a generator’s wholesale market participation or condition payment of funds on capacity clearing the auction). If such programs, in fact, impair FERC-jurisdictional wholesale capacity

markets, the solution lies with the Commission, not with courts. See

Op. 34 (“The market distortion caused by subsidizing nuclear power can be addressed by FERC and the interplay between state and federal regulation can continue to exist.”).

The Commission can exercise its responsibility under the Federal Power Act to ensure just and reasonable prices in the wholesale

markets subject to its jurisdiction. The Court thus need not, and should not, resort here to the extraordinary and blunt remedy of preemption.

Indeed, the interplay of state policies and wholesale markets— specifically how, and subject to what restrictions, generators that receive state support may participate in wholesale markets—is very much a live issue at the Commission. The Commission recently

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capacity supply obligations. New England Order P 1, 25; see supra pp. 5-6. Such resources may do so if their market entry is coordinated with the market exit of an equal quantity of retiring capacity. See New England Order PP 4, 6, 9. The approved proposal would phase out the existing rule that exempted up to 200 megawatts of certain

state-supported renewable resources from the minimum-offer-price rule. See

id. PP 3, 24-25, 99; see also ISO New England Inc., 158 FERC ¶ 61,138,

at PP 2, 4 (2017). Several FERC Commissioners attached separate statements to the Commission’s orders, elaborating on their views as to

the interplay of state policies and wholesale markets. See New England

Order, concurrence in part (LaFleur, Comm’r); id., dissent (Powelson,

Comm’r); id., dissent in part and concurrence in part (Glick, Comm’r).

The Commission also is now considering whether PJM should revise its wholesale market rules to deal with the effects of state

subsidies, including ZECs.4 See Calpine Compl. at 1-3; supra pp. 4-5.

After the Commission issues an order in that proceeding, aggrieved

4 The Commission declined the district court’s April 24, 2017

invitation to submit an amicus brief because of the pending Calpine

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parties will have the opportunity to request rehearing of that order, see

16 U.S.C. § 825l(a). On rehearing, the Commission may change its

mind or modify its initial order. And ultimately, after it issues a final order, the Commission will need to defend its decisionmaking in federal court should an aggrieved party petition a court of appeals for review.

See 16 U.S.C. § 825l(b). The Commission might have the opportunity to

consider the issue in other proceedings as well.

Congress chose this particular path for the agency to regulate and for courts to review such regulation. The Illinois law poses no obstacle to the Commission exercising its regulatory authority under the Federal Power Act. The statutory framework thus does not support preemption here.

III. The Commission Has Previously Found That Certain State Programs Supporting Clean Power Are Not Within Its Jurisdiction Over Wholesale Rates.

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Renewable energy credits. In WSPP Inc., 139 FERC ¶ 61,011 (2012), the Commission considered state programs that provide

renewable energy credits (or “RECs”) to particular generators. RECs are “state-created and state-issued instruments certifying that electric energy was generated pursuant to certain requirements and standards.”

Id. P 21; see also Wheelabrator Lisbon, Inc. v. Conn. Dep’t of Pub. Util. Control, 531 F.3d 183, 186 (2d Cir. 2008) (“Generally speaking, RECs are inventions of state property law, whereby the renewable energy attributes are ‘unbundled’ from the energy itself and sold separately.”).

The existence of federal authority over RECs depended, in the Commission’s view, on the relationship between the REC and the sale at wholesale (or transmission of) of electric energy in interstate

commerce. So, if the wholesale energy sale and REC sale take place as part of the same transaction, then the REC is a charge “in connection with” a FERC-jurisdictional service that directly affects the rates for

wholesale energy. WSPP, 139 FERC ¶ 61,011, at P 24.

The Commission has jurisdiction over both portions of this

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cost of allowances in connection with the sale are treated as directly “affecting” FERC-jurisdictional rates or services, and are subject to Commission review under section 205 of the Federal Power Act, 16 U.S.C. § 824d. See id. P 23 (citing Edison Elec. Inst., 69 FERC ¶ 61,344, at 62,289 (1994)). FERC’s jurisdiction applies in such circumstances regardless of the form of the bundled transaction, so contracting parties cannot avoid it simply “by splitting a unified agreement into separate agreements, one for the sale of unbundled RECs and one for the sale of energy.” See id. P 26.

But RECs “unbundled” from and independent of a wholesale energy transaction would not fall within the Commission’s statutory jurisdiction. Such instruments—be they in the form of credits or

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non-hyperliteral reading is needed to prevent the statute from assuming near-infinite breadth.”) (internal citations omitted). Nor do such unbundled transactions constitute the transmission of energy, or the sale of energy at wholesale, in interstate commerce. Id. P 21. As such, they are not within the Commission’s statutory reach. See id.

Requirements to purchase renewable energy. State laws that obligate utilities to purchase electricity from certain types of generating facilities do not intrude on the Public Utility Regulatory Policies Act of 1978 (“PURPA”), so long as they neither set rates for wholesale sales of electric energy by public utilities nor set payment of rates to “qualifying facilities” in excess of the purchasing utilities’ avoided costs. See, e.g.,

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have paid for equivalent service had it purchased the energy elsewhere.”).

In so holding, the Commission has recognized that States may—in exercising their traditional authority over electricity generation and retail operations—encourage renewable resources and direct the

planning decisions of electric utilities within their jurisdiction. States may do so by requiring such utilities to purchase renewable generation, or by providing loans, subsidies, or tax credits to particular facilities on environmental or policy grounds. See, e.g., Cal. Pub. Utils. Comm’n,

133 FERC ¶ 61,059, at P 31 n.62 (2010); Midwest Power Sys., 78 FERC

¶ 61,067, at 61,248; So. Cal. Edison, 71 FERC ¶ 61,269, at 62,080

(1995). And while PURPA would preempt state laws that granted rates in excess of the purchasing utilities’ avoided costs, States still may

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interconnection facilities to connect wind, geothermal, and solar

resources to the transmission grid, finding the proposal to be consistent with state, federal, and regional policies that encouraged clean,

renewable generation).

CONCLUSION

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Respectfully submitted,

JAMES P. DANLY JEFFREY H. WOOD

General Counsel Acting Assistant Attorney General

DAVID L. MORENOFF

Deputy General Counsel

ROBERT H. SOLOMON

ERIC GRANT

Deputy Assistant Attorney General

JENNIFER S. NEUMANN

Solicitor MATTHEW R. OAKES

/s/ Anand R. Viswanathan ROBERT J. LUNDMAN

ANAND R. VISWANATHAN

Attorney

Environment & Natural Resources Div. Federal Energy Regulatory

Commission

888 First Street, NE Washington, DC 20426 (202) 502-8236

Anand.Viswanathan@ferc.gov

U.S. Department of Justice P.O. Box 7415

Washington, DC 20044 (202) 514-2496

robert.lundman@usdoj.gov

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CERTIFICATE OF COMPLIANCE

Pursuant to Fed. R. App. P. 32(g), I certify that this amicus brief complies with the type-volume limitation of Circuit Rule 29 because it contains 5,200 words, excluding the parts exempted by Fed. R. App. P. 32(f).

I further certify that this brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the type style

requirements of Fed. R. App. P. 32(a)(6) because this brief has been prepared in Century 14-point font using Microsoft Word 2013.

/s/ Anand R. Viswanathan

Anand R. Viswanathan Attorney

Federal Energy Regulatory Commission

888 First Street, N.E. Washington, D.C. 20426 Phone: 202-502-6537 Fax: 202-273-0901

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CERTIFICATE OF SERVICE

I hereby certify that on May 29, 2018, I caused the foregoing to be filed electronically with the Clerk of the Court using the CM/ECF

system, which will send a Notice of Electronic Filing to all counsel of record.

/s/ Anand R. Viswanathan

Anand R. Viswanathan Attorney

Federal Energy Regulatory Commission

888 First Street, N.E. Washington, D.C. 20426 Phone: 202-502-6537 Fax: 202-273-0901

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IN THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

____________________

PPL ENERGYPLUS, LLC, et al.,

v.

LEE A. SOLOMON, in his official capacity as

President of the New Jersey Board of Public Utilities, et al.,

v.

CPV POWER DEVELOPMENT, INC.; HESS NEWARK, LLC. CPV POWER DEVELOPMENT, INC., Appellant in No. 13-4330

LEE A. SOLOMON, et al., Appellants in No. 13-4501

____________________

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY

Honorable Peter G. Sheridan, District Court No. 3:11-cv-00745

____________________

BRIEF FOR THE UNITED STATES AND THE FEDERAL ENERGY REGULATORY COMMISSION AS AMICI CURIAE

____________________

DAVID L. MORENOFF

Acting General Counsel

ROBERT H. SOLOMON

Solicitor

WILLIAM J. BAER

Assistant Attorney General

DAVID I. GELFAND

Deputy Assistant Attorney General

KARIN L. LARSON LISA B. LUFTIG

Attorneys

Federal Energy Regulatory Commission 888 First Street, NE Washington, DC 20426 (202) 502-8236 KRISTEN C. LIMARZI ADAM D. CHANDLER Attorneys

U.S. Department of Justice Antitrust Division

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TABLE OF CONTENTS

PAGE

INTEREST OF THE AMICI CURIAE ... 1

BACKGROUND ... 3

I. PJM’s Capacity Markets ... 3

II. The New Jersey Act ... 5

III. The Commission’s 2011 Minimum Price Rule Orders And

Subsequent Appellate Review ... 6

IV. Nature Of This Case ... 8

SUMMARY OF ARGUMENT... 9

ARGUMENT ... 10

I. The Commission Has Exclusive Jurisdiction Over Wholesale Capacity Markets Including Practices “Affecting” Such

Rates ... 11

II. Bidding Behavior Directed By The New Jersey Act Is A Preempted Practice “Affecting” FERC-Jurisdictional

Rates ... 13

III. Limited Preemption Of The New Jersey Act Does Not

Interfere With Valid State Interests ... 17

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TABLE OF AUTHORITIES

COURT CASES: PAGE

Conn. Dep’t of Pub. Util. Control v. FERC,

569 F.3d 477 (D.C. Cir. 2009) ... passim

FPC v. S. Cal. Edison Co.,

376 U.S. 205 (1964) ... 10

Freehold Cogeneration Assocs., L.P. v. Bd. of Regulatory Comm’rs of N.J.,

44 F.3d 1178 (3d Cir. 1995) ... 15

Groton v. FERC,

587 F.2d 1296 (D.C. Cir. 1978) ... 12

Me. Pub. Utils. Comm’n v. FERC,

520 F.3d 464 (D.C. Cir. 2008) ... 11

Miss. Indus. v. FERC,

808 F.2d 1525 (D.C. Cir. 1987) ... 11

Miss. Power & Light Co. v. Mississippi,

487 U.S. 354 (1988) ... 11

N.J. Bd. of Pub. Utils. v. FERC,

No. 11-4245 (3d Cir. Feb. 20, 2014) ... passim

New York v. FERC,

535 U.S. 1 (2002) ... 2

N. Natural Gas Co. v. State Corp. Comm’n of Kan.,

372 U.S. 84 (1963) ... 17

NRG Power Mktg., LLC v. Me. Pub. Utils. Comm’n,

558 U.S. 165 (2010) ... 3, 11

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TABLE OF AUTHORITIES

COURT CASES (cont.): PAGE

PPL EnergyPlus, LLC v. Nazarian,

No. 12-1286, 2013 WL 5432346 (D. Md. Sept. 30, 2013) ... 10, 19

Schneidewind v. ANR Pipeline Co.,

485 U.S. 293 (1988) ... 11

Wheelabrator Lisbon, Inc. v. Conn. Dept. of Pub. Utils.,

531 F.3d 183 (2d Cir. 2008) ... 16

ADMINISTRATIVE CASES:

Cal. Pub. Utils. Comm’n,

132 FERC ¶ 61,047 (2010) ... 15

Conn. Light & Power Co.,

70 FERC ¶ 61,012 (1995) ... 16

ISO New England, Inc.,

135 FERC ¶ 61,029 (2011) ... 20

ISO New England, Inc.,

142 FERC ¶ 61,107 (2011) ... 18, 20

Midwest Power Sys., Inc.,

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TABLE OF AUTHORITIES

ADMINISTRATIVE CASES (cont.): PAGE

S. Cal. Edison Co.,

71 FERC ¶ 61,269 (1995) ... 18

WSPP Inc.,

139 FERC ¶ 61,061 (2012) ... 16

STATUTES:

Federal Power Act section 201, 16 U.S.C. § 824(b)(1) ... 2, 17

Federal Power Act section 205, 16 U.S.C. § 824d ... 14

Federal Power Act section 205, 16 U.S.C. § 824d(a) ... 2

Federal Power Act section 205, 16 U.S.C. § 824d(b) ... 2

Federal Power Act section 205, 16 U.S.C. § 824d(c) ... 11

Federal Power Act section 206, 16 U.S.C. § 824e ... 14

Federal Power Act section 206, 16 U.S.C. § 824e(a) ... 2, 11, 13

N.J.S.A. § 48:3-51 ... 1

N.J.S.A. § 48:3-98.2 ... 1

N.J.S.A. § 48:3-98.3 ... 1

N.J.S.A. § 48:3-98.3(c)(12) ... 5

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INTEREST OF THE AMICI CURIAE

This lawsuit involves the effect of New Jersey’s Long Term Capacity Pilot

Program Act (“New Jersey Act”), N.J.S.A. §§ 48:3-51, 48:3-98.2-.4, on the

regional interstate energy market administered by PJM Interconnection, L.L.C.

(“PJM”) and overseen by the Federal Energy Regulatory Commission (the

“Commission” or “FERC”). In partial response to the New Jersey Act, PJM

proposed and the Commission accepted revisions to PJM’s FERC-jurisdictional

tariff developed, in part, to mitigate the New Jersey Act’s price-distorting effect on

the PJM wholesale capacity market. See PJM Interconnection, L.L.C., 135 FERC

¶ 61,022, on reh’g, 137 FERC ¶ 61,145 (2011) (“2011 Minimum Price Rule

Orders”). On February 20, 2014, this Court affirmed the Commission’s acceptance

of those PJM tariff revisions. See N.J. Bd. of Pub. Utils. v. FERC, Nos. 11-4245,

et al. (3d Cir. Feb. 20, 2014). The following day, this Court invited the United

States to address the question: “Does the Federal Power Act preempt New Jersey’s

Long Term Capacity Pilot Program Act?” The United States and the Commission

respectfully submit that the Federal Power Act preempts the New Jersey Act on the

grounds discussed below.

This Court, in its recent decision in New Jersey Board of Public Utilities,

described in detail the Commission’s exercise of its jurisdiction under the Federal

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Briefly, Congress “unambiguously authorize[d] FERC to assert jurisdiction over

two separate activities – transmitting and selling” electric energy at wholesale.

New York v. FERC, 535 U.S. 1, 19 (2002). The Federal Power Act applies “to the

transmission of electric energy in interstate commerce and to the sale of electric

energy at wholesale in interstate commerce,” and it provides that “[t]he

Commission shall have jurisdiction over all facilities for such transmission or sale

of electric energy.” 16 U.S.C. § 824(b)(1). The Act reserves for the States

“jurisdiction . . . over facilities used for the generation of electric energy or over

facilities used in local distribution or only for the transmission of electric energy in

intrastate commerce, or over facilities for the transmission of electric energy

consumed wholly by the transmitter.” Id.

As relevant here, the Commission has exclusive jurisdiction to determine

whether “rates and charges made, demanded, or received . . . for or in connection

with the transmission or sale subject to the jurisdiction of the Commission” are just

and reasonable. 16 U.S.C. § 824d(a)-(b). The Commission’s jurisdiction extends

to “any rule, regulation, practice, or contract affecting” such rates and charges. Id.

§ 824e(a). In a regional capacity market setting such as PJM’s, where sales of

capacity1 are made in interstate commerce for resale, the Commission has

1

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exclusive jurisdiction to set the rates for electricity capacity, either directly or

indirectly through a market mechanism, and to review capacity requirements that

affect those rates. See Conn. Dep’t of Pub. Util. Control v. FERC, 569 F.3d 477,

482-84 (D.C. Cir. 2009) (“Connecticut”).

BACKGROUND I. PJM’s Capacity Markets

PJM operates the high-voltage electric transmission network in thirteen

Mid-Atlantic states and the District of Columbia, including New Jersey, and manages

the largest competitive wholesale electricity market in the country. See N.J. Bd.,

slip op. at 19-21 (describing PJM). PJM also administers a

Commission-jurisdictional tariff that details the rates, terms, and conditions of regional

transmission service and wholesale market mechanisms, including rules governing

its wholesale capacity market.

At issue here is PJM’s forward-looking locational capacity market, the

“Reliability Pricing Model.”2 Id. at 13-15, 19-31 (describing PJM’s capacity

auctions); see also PPL EnergyPlus, LLC v. Hanna, No. 11-745, 2013 WL

energy, rather than purchasing the energy itself.” NRG Power Mktg., LLC v. Me.

Pub. Utils. Comm’n, 558 U.S. 165, 168 (2010).

2

“Reliability Pricing Model” means PJM’s capacity market model that secures capacity on behalf of electric load serving entities to satisfy load

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5603896, at *14 (D.N.J. Oct. 11, 2013) (detailing how capacity resources bid into

PJM’s Reliability Pricing Model auction and how the “clearing price” is

determined). The resulting price of capacity from an auction is referred to as the

clearing price. Any capacity supplier that bids at or below the clearing price

“clears” the auction and receives the clearing price for its bid capacity. Any

capacity supplier that bids above the clearing price fails to “clear” the auction, and

its capacity does not sell through the auction. Id. A competitive capacity market

should send appropriate market signals to build new generation capacity when it is

needed. See Connecticut, 569 F.3d at 480.

Entities that are net purchasers of capacity (i.e., they sell capacity into the

market, but purchase more than they sell) have a natural incentive to keep capacity

prices as low as possible. To counter the potential for artificial price suppression,

PJM’s rules for the capacity auction, as set forth in its FERC-approved tariff,

include measures to mitigate buyer-side market power caused by below-cost offers

– the Minimum Offer Price Rule (“Minimum Price Rule”). Under the original

Minimum Price Rule accepted by FERC in 2006, prior to enactment of the New

Jersey Act, offers for capacity were subject to mitigation if they failed three

“screens.” N.J. Bd., slip op. at 26-27. An offer that failed all three screens would

be subject to a mitigated price, i.e., the uneconomic offer is replaced with a price

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multiple exemptions, including an exemption for offers submitted by a

state-mandated resource, which was defined to include “any planned resource being

developed in response to a state regulatory or legislative mandate to resolve a

projected capacity shortfall.” Id. at 29 (detailing the exemption for state-mandated

resources).

II. The New Jersey Act

The New Jersey Act is described in detail in both the District Court opinion

(at *19-21) and New Jersey Board of Public Utilities, slip op. at 31-32. It is a state

initiative to develop new generation resources. It is designed to “invoke the

[Minimum Price Rule’s] exemption for state-mandated resources.” N.J. Bd., slip

op. at 31.

The New Jersey Act requires generators selected under the statute to

“participate in and clear the annual base residual auction conducted by PJM as part

of its reliability pricing model.”3 N.J.S.A. § 48:3-98.3(c)(12); see also Hanna,

2013 WL 5603896, at *20. This statutory obligation to “clear” PJM’s auction is

again reflected in the contracts – the “Standard Offer Capacity Agreements” –

entered into pursuant to the New Jersey Act between the state’s electric

3

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distribution companies (the utilities that distribute electricity to retail customers in

the state) and the selected generators. Hanna, 2013 WL 5603896, at *24-25. “To

ensure that [the selected generators] would clear, New Jersey intended to offer the

capacity into [PJM’s] market at a price below their actual cost.” N.J. Bd., slip op.

at 32. Moreover, the New Jersey Act ensures that the selected generators will be

reimbursed under the state scheme to the extent the clearing price is below the

amount set in the contracts. The state subsidy is thus tied directly and explicitly to

the wholesale rate.

III. The Commission’s 2011 Minimum Price Rule Orders And Subsequent Appellate Review

In response to the New Jersey Act, a group of power providers operating in

PJM filed a complaint with the Commission, arguing that the New Jersey and

Maryland initiatives result in buyer-side market power and urging elimination of

the Minimum Price Rule exemption for state-mandated resources. N.J. Bd., slip

op. at 35. In response, PJM acknowledged that “state programs intended to

support new generation entry through out-of-market payments to the generator”

have the potential to “raise the price-suppression concerns that [Minimum Price

Rule]-type provisions are intended to address.” Id. at 35-36.

The Commission agreed with PJM and directed it to modify its tariff to

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op. at 39-42 (describing the 2011 Minimum Price Rule Orders). As the

Commission explained, removal of the state-mandated resource exemption is

necessary to prevent “subsidized entry supported by one state’s or locality’s

policies” from “disrupting the competitive price signals [the auction] is designed to

produce . . . .” PJM Interconnection, L.L.C., 137 FERC ¶ 61,145 at P 3; see also

PJM Interconnection, L.L.C., 135 FERC ¶ 61,022 at P 143 (any state remains free

to seek a state-specific, case-specific exemption).

New Jersey and multiple other parties appealed the 2011 Minimum Price

Rule Orders. This Court affirmed the Commission’s Orders, including the

elimination of the exemption from the Minimum Price Rule for state-mandated

resources. N.J. Bd., slip op. at 48-55. Rejecting New Jersey’s arguments in

support of the New Jersey Act, the Court held that the Commission may lawfully

“approv[e] rules that prevent the state’s choices from adversely affecting wholesale

capacity rates.” Id. at 55. This Court reasoned that the 2011 Minimum Price Rule

Orders “permit states to develop whatever capacity resources they wish, and to use

those resources to any extent that they wish, while approving rules that prevent the

state’s choices from adversely affecting wholesale capacity rates.” Id.; see also id.

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IV. Nature Of This Case

Separate from the Commission’s administrative proceedings and the

subsequent appeal involving the 2011 Minimum Price Rule Orders, Appellees, a

group of wholesale, retail, and marketing companies who produce and sell energy

and are located within the PJM market, filed suit in federal district court seeking

(i) a declaration that the New Jersey Act is preempted by the Federal Power Act

and (ii) an injunction prohibiting the New Jersey Board of Public Utilities from

engaging in activities in furtherance of the Act. Hanna, 2013 WL 5603896, at *2.

The District Court held that the New Jersey Act was preempted by the Federal

Power Act. The court concluded that the contracts requiring selected generators to

bid into and clear the PJM auction “occupy the same field of regulation as the

Commission and intrude upon the Commission’s authority to set wholesale energy

prices through its preferred . . . auction process.” Id. at *32. The court further

concluded that the New Jersey Act “poses as an obstacle to the Commission’s

implementation of the [Reliability Pricing Model]” and was therefore preempted

under a conflict preemption theory. Id. at *36. New Jersey and the other

defendants appealed. Neither the United States nor the Commission is a party to

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SUMMARY OF ARGUMENT

The New Jersey Act is preempted by the Federal Power Act to the extent

that the New Jersey Act directs or requires actions that intrude upon and interfere

with the competitive operation of Commission-regulated wholesale markets and

the rates they produce. The Commission has exclusive jurisdiction under the

Federal Power Act to oversee wholesale electricity markets, including auctions that

set wholesale capacity prices. The Commission’s jurisdiction extends beyond the

rates themselves, to any practice directly affecting wholesale rates.

The Commission and this Court have previously determined that the New

Jersey Act, specifically the requirement that selected generators bid into and clear

PJM’s capacity auction, lowers the auction’s resulting clearing price – a practice

unmistakably affecting rates. The New Jersey scheme also guarantees payments to

or from the selected generators to make up the difference between the

market-clearing price and an amount specified in the state-mandated contracts, thereby

tying the subsidy explicitly and directly to, and thereby directly affecting,

wholesale rates. Accordingly, the United States and the Commission are of the

view that the New Jersey Act is preempted because of its price-suppressive and

distorting effect on PJM’s wholesale capacity market prices. The State’s

jurisdiction over facilities used for the generation of electric energy is preserved.

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certain generation resources or incentivizes new resources through economic (or

non-economic) subsidies, provided those incentives do not directly interfere with

the competitive operation of the Commission-regulated regional wholesale market.

ARGUMENT

Congress, in enacting the Federal Power Act, gave the Commission plenary

jurisdiction over wholesale sales in interstate commerce. FPC v. S. Cal. Edison

Co., 376 U.S. 205, 215-16 (1964). The District Court accurately stated the

fundamental principles of federal preemption generally and, in particular, Federal

Power Act preemption. Hanna, 2013 WL 5603896, at *31-36 (finding New Jersey

Act preempted by the Federal Power Act); see also PPL EnergyPlus, LLC v.

Nazarian, No. 12-1286, 2013 WL 5432346, at *27-31 (D. Md. Sept. 30, 2013)

(finding similar Maryland program preempted by the Federal Power Act). The

New Jersey Act’s requirement that selected generators bid into and clear the PJM

auction, and the subsidies tied directly to the market-clearing price which result in

those generators submitting below-cost and market-distorting bids, directly affect

the auction’s resulting wholesale capacity rate. Those aspects of the New Jersey

Act – which might benefit select generation resources in New Jersey, but to the

detriment of other resources in other PJM states facing artificially low prices for

their capacity – intrude on the exclusive jurisdiction of the Commission over

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I. The Commission Has Exclusive Jurisdiction Over Wholesale Capacity Markets Including Practices “Affecting” Such Rates

The Commission oversees PJM’s operation of its organized capacity market,

the terms and conditions of participation in that market, and the wholesale rates

produced by that market. See Me. Pub. Utils. Comm’n v. FERC, 520 F.3d 464,

479-80 (D.C. Cir. 2008) (rejecting challenge to FERC’s authority over regional

forward capacity market).4 Indeed, as this Court recently noted in the related

appeal, this dispute “‘is fundamentally a dispute over the rates that will be paid to

suppliers of capacity,’ a concern squarely within FERC’s jurisdiction.” N.J. Bd.,

slip op. at 53-54 & n.22 (discussing Me. Pub. Utils, 520 F.3d 464).

The Commission’s jurisdiction under the Federal Power Act extends to

regulating contracts and practices directly “affecting” rates. 16 U.S.C. §§ 824d(c),

824e(a); see Miss. Power & Light Co. v. Mississippi, 487 U.S. 354, 374 (1988)

(FERC has exclusive jurisdiction over power allocations that affect wholesale

rates); Schneidewind v. ANR Pipeline Co., 485 U.S. 293, 308 (1988) (recognizing

Commission’s exclusive authority, under similarly structured Natural Gas Act, to

regulate “practices affecting” jurisdictional rates); Miss. Indus. v. FERC, 808 F.2d

1525, 1542 (D.C. Cir. 1987) (recognizing FERC’s authority to review the

4

The Supreme Court subsequently reversed in part as to another issue. See

NRG Power Mktg., 558 U.S. 165 (agreeing with FERC that Federal Power Act

(61)

allocation of capacity costs among various affiliated utilities as a practice affecting

rates).

Capacity market rules are practices “affecting” rates within the

Commission’s jurisdiction. See, e.g., Connecticut, 569 F.3d at 483, 485 (finding

capacity-related rules, notwithstanding effect on non-jurisdictional generation

decisions, are “practice[s] . . . affecting” Federal Power Act wholesales rates); see

also Groton v. FERC, 587 F.2d 1296, 1302 (D.C. Cir. 1978) (finding charge for

failure to maintain a prescribed level of generating capacity “affects” the rate for

power and thus is within the Commission’s jurisdiction).

In Connecticut, the D.C. Circuit addressed Commission orders establishing a

forward capacity market in New England, very similar to PJM’s capacity market

auction. In the New England market, capacity providers (e.g., generators)

competitively bid to meet future capacity needs. Connecticut, 569 F.3d at 480-81

(describing capacity market operation). Several state regulatory authorities

claimed that the Commission crossed the Federal Power Act’s jurisdictional divide,

which precludes the Commission from regulating generation facilities. Id. at 481.

The Court affirmed the Commission’s exercise of authority, holding that “[w]here

capacity decisions about an interconnected bulk power system affect

FERC-jurisdictional transmission rates for that system without directly implicating

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