UPDATED 02.26.2016 with link to audio recording of Hughes oral argument.

There were two big events in the energy-environmental world at the Supreme Court this week: oral argument in a Federal Power Act case and a request to stay EPA’s MATS rule.

Yesterday, the eight justices held oral argument in the consolidated cases of Hughes v. Talen Energy Marketing, LLC and CPV Maryland, LLC v. Talen Energy Marketing, LLC.*  This is the second set of cases in which the Court is being asked to decide where the Federal Power Act draws the line, or indeed if a line exists, between state and federal regulatory authority in areas of the country with regional energy markets.  Earlier this term, in FERC v. EPSA, the Court addressed whether FERC’s demand response compensation rule intruded on states’ authority over retail markets and found that it did not.  In Hughes, the Court has been asked to look at the flip side of the jurisdictional coin and address whether a state program incentivizing the construction of new electric generation is preempted by the Federal Power Act.

By way of background, the state of Maryland, which is located within PJM’s centralized generation market, identified a need for new generation based on a concern that pending retirements of existing facilities could affect future reliability. To address this concern, Maryland issued a request for proposals for new generation and directed its retail utilities to contract with the winning bidder.  The winning bidder was obligated to construct a plant and make it available within PJM for 20 years.  In exchange, the retail utilities would pay or receive a refund from the winning bidder for the difference between the contract price and the PJM auction payment.

In PJM, wholesale power supply is procured through a three-year forward regional capacity auction (i.e. the 2016 auction will procure supply for delivery in 2019-2020). Generators that “clear” the auction are awarded a capacity payment.

A group of generators that offer supply into the PJM market sued the state alleging, among other things, that Maryland’s program was preempted by the Federal Power Act because it intruded on and/or conflicted with FERC’s Federal Power Act jurisdiction over wholesale electricity sales.

The U.S. District Court for the District of Maryland and the U.S. Court of Appeals for the Fourth Circuit agreed with the third-party generators and found the state regulation preempted. The U.S. District Court for the District of New Jersey and the U.S. Court of Appeals for the Third Circuit found a similar New Jersey program also preempted.  Both the states and CPV, a generation company that won bids in each state, sought cert and asked the Supreme Court to overturn the lower court decisions.  The New Jersey cases are on hold with the Supreme Court and will likely be decided on the basis of the Court’s decision in Hughes.

The petitioners are supported by, among others, the National Governors Association, National Conference of State Legislatures, and the Council of State Governments; the National Association of Regulatory Utility Commissioners; other states from across the country and state ratepayer advocates; and the American Public Power Association and National Rural Electric Cooperative Association. The respondents are supported by, among others, the U.S. government, the Independent Market Monitor for PJM, and private utility industry trade associations.  All briefs are available here.

Given the transformation occurring in the energy industry—e.g. fundamental changes to the nation’s energy portfolio, shifting roles of consumers, compliance with environmental regulations, etc.—the outcome of Hughes has the potential to impact future state resource decisions.  Based on yesterday’s argument, the transcript of which is available here and oral argument here, it is difficult to predict where the Court will land on these cases.  Nevertheless the oral argument made two things clear.  First, regional energy markets have complicated the long standing jurisdictional divide between federal and state regulatory authority over the energy industry, and the Court is still working its way through untangling the morass.  Second, if a majority does affirm the lower court rulings—an outcome that is questionable—it seems likely that such a ruling will be issued on very narrow grounds.  The justices’ questions seemed to indicate that they are wary of finding that states are precluded from taking any action to incentivize the construction of new generation in areas with regional energy markets.

In other Supreme Court news this week, 20 states led by Michigan filed an application with Chief Justice Roberts requesting that the Court stay or enjoin further operation of EPA’s Mercury and Air Toxics Standards (MATS), Docket No. 15A886.  At the end of last year, the D.C. Circuit denied the applicants’ request to vacate the rule pending EPA’s implementation of the Supreme Court mandate that the agency consider costs.  Bolstered by the Supreme Court’s decision earlier this month to stay the Clean Power Plan, the applicants request the Chief Justice issue an order staying MATS pending a cert petition asking that the rule be vacated.  There are several notable differences between the MATS and CPP stay requests, including Justice Scalia’s absence—he was one of the five justices that voted in favor granting the stay to the CPP—and the fact that MATS, unlike the CPP, has previously been reviewed and acted upon by the Court.  Responses to the request are due by March 2, 2016 at 4:00 P.M.

*Spiegel & McDiarmid LLP Partner Scott H. Strauss argued the case on behalf of petitioners, the Maryland Public Service Commission.