Recent Strains on Cooperative Federalism in the Energy Sector

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In statutes such as the Federal Power Act and Clean Water Act, Congress divided responsibility for oversight of energy generation and transmission projects between federal agencies and the States.  In recent years, several States have more aggressively used their perceived statutory and regulatory authority in furtherance of climate change goals, prompting litigation from affected parties and regulatory pushback from the Trump Administration.  Our experts will discuss the most recent legal and regulatory skirmishes over the balancing of federal and state jurisdiction over energy policy, including: Judicial rejection of extended consideration of Section 401 certification requests; EPA proposed Clean Water Act regulations; State subsidies for power generation plants and renewable power mandates; and, State-issued rights of first refusal to incumbent utilities to build transmission lines.


Gordon A. Coffee, Partner, Winston & Strawn LLP

Prof. Ari Peskoe, Lecturer on Law, Harvard Law School


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Event Transcript

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Environmental Law & Property Rights Practice Group, was recorded on Tuesday, September 24, 2019, during a live teleforum conference call held exclusively for Federalist Society members.  


Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is on "Recent Strains on Cooperative Federalism in the Energy Sector." My name is Wesley Hodges, and I am the Associate Director of Practice Groups at The Federalist Society.


      As always, please note that all expressions of opinion are those of the experts on today's call.


      Today we are very fortunate to have with us Mr. Gordon A. Coffee, who is a Partner at Winston & Strawn as well as Mr. Ari Peskoe, who is Director of the Electricity Law Initiative at Harvard Law School. After our speakers have their remarks today, we will move to an audience Q&A, so please keep in mind what questions you have for their topics or for one or both of our speakers. Thank you very much for sharing with us today. Gordon, I believe the floor is yours to begin.


Gordon Coffee:  Thank you. First, let me add my own obligatory disclaimer. Any opinions expressed are my own and not those of Winston & Strawn or any of the firm's clients.


      Just a quick overview -- in theory, several agencies have said that national energy policy is supposed to be implemented through what's called a form of cooperative federalism between the federal government and states. In practice, that cooperation has become strained in recent years. States have become much more assertive in the energy arena to advance several goals such as reducing greenhouse emissions, favoring certain types of power generation, and protecting local companies. Those efforts have been challenged in court and through federal regulatory actions.


      Ari and I are going to talk about four specific areas in which states' efforts to steer energy policy is generating litigation or regulatory pushback. One flashpoint has been state certifications under Section 401 of the Clean Water Act. Under the statute, federal agencies must approve projects that may result in discharges into navigable waters. Section 401 requires that a state, or in some cases, a Native American tribe, affected by the project certify that discharges from project operations will comply with state water quality standards. That means that FERC cannot issue a certificate of what's called public convenience and necessity for a natural gas pipeline or a license for a hydropower project unless the affected state either provides a Section 401 certification or waives it. Moreover, if a state attaches conditions to its certification, FERC must incorporate those conditions into the license.


      States have attempted to expand the reach of this power granted them under Section 401 in recent years. Several states, most notably New York, have used their Section 401 certification authority to block or delay construction of new natural gas pipelines. Sometimes, state agencies have demanded that the applicant apply for additional state permits. Other times, the agencies have insisted on doing extensive environmental reviews, often duplicating or enlarging the environmental analyses already done by FERC. Those reviews include evaluating environmental impacts unrelated to water quality such as the downstream use of natural gas transported by the pipeline, or more broadly, climate change effects.


      Some states don't like gas pipelines. Other states don't like dams. Several states have used their Section 401 certification authority to impede FERC from relicensing hydropower projects. Other states have attached conditions to their certifications or threatened to deny certifications to obtain concessions not directly related to a dam's impact on water quality. For example, states have refused to issue a Section 401 certificate for a hydropower project unless the applicant agrees to fund environmental upgrades or build recreational facilities. Last year, a Maryland agency blocked renewal of a FERC license for a dam on the Susquehanna River unless the applicant agreed to remediate pollution not caused by the dam but originating far upstream from adjoining states. Applicants can challenge the denial of the water FERC quality certification in state court if a hydropower license is involved or if a gas pipeline is involved, denial is challenged in federal court.


      But states often don't just outright deny certification. Often, they would delay consideration of the application. The rub for those states, however, is that under Section 401, states have a reasonable amount of time, but not more than one year, to act on a certification request. States have adopted several gambits to get around that deadline. Those gambits have been the focus of several recent court cases and administrative decisions. For example, a New York agency took the position that the one-year clock for action on a request for water quality certification for a gas pipeline did not start until the agency viewed the application as complete, with it being the arbiter of completeness.


      FERC disagreed that the agency could decide whether an application was complete and held that New York had waived its right to certify. The Second Circuit upheld FERC. The court ruled that the state had no statutory right to decide when an application was complete. The Second Circuit left the door open, however, to a state denying an application without prejudice based on alleged incompleteness or of asking an applicant to withdraw and then resubmit an application.


      The D.C. Circuit and FERC have taken a narrower view, however, of at least one of those alternatives. Earlier this year, the D.C. Circuit rejected an arrangement under which an applicant for a water quality certification for a hydro project would withdraw the application and then resubmit it for the ostensible purpose of restarting the one-year clock. In this case, which is called Hoopa for short, the parties had an agreement to toll the one-year clock through a withdrawal and resubmission scheme. That had gone on for over 10 years. Once a year, the applicant would withdraw the certification request and then resubmit it.


      The D.C. Circuit declared that the arrangement circumvented the deadline set by Congress. The court also dismissed contrary statements by the Second Circuit decision as dicta. FERC evidently has decided to give full effect to the Hoopa decision. In several recent orders, FERC held that other state agencies waived their right to deny certification for energy projects by failing to act within one year, even if the parties had jointly agreed that the applicant would withdraw and resubmit the certification request. FERC also has refused to limit the Hoopa decision to just hydropower projects and has applied it equally to gas pipeline projects.


      More litigation is coming. A month ago, two environmental groups filed a cert petition with the U.S. Supreme Court seeking reversal of the D.C. Circuit's Hoopa decision. Although it is statistically unlikely the Supreme Court will take the case, other cases may follow as parties contest FERC's recent finding of waiver by states and other Section 401 certifications. State may react, and they already have reacted, to the Hoopa case and FERC's waiver rulings by trying a different stratagem. Rather than having a formal written submit and withdraw mechanism, there may be what I would call a wink and a nod arrangement with the applicant. Under that arrangement, the state agency denies a certification request without prejudice, and then the applicant later refiles it, perhaps with additional information. Whether that different stratagem survives judicial scrutiny remains to be seen.


      Other states may take a simpler tack, and that is just deny the certification. Indeed, in May, a New York agency denied a Section 401 certification for a gas pipeline. That denial likely will be challenged in court, and the issue on appeal would be whether the agency acted arbitrarily and capriciously in denying certification.


      The Trump administration is not waiting to see how these court cases play out, and this our second topic. In April, the President issued an order directing the EPA to, among other things, review its regulations implementing Section 401. Last month, the EPA asked for comments on draft regulations that would impose stricter time limits for states to act on certification requests. The EPA's proposing to let the licensing agency, which is typically FERC or the Corps of Engineers, set a time limit for a state to act on a certification request. And it can be less than one year, provided that the period does not exceed one year. Under the regulation, there would be no tolling provision, no mechanism that would allow the parties to agree to stop the clock. However, the EPA is asking for comments on whether there's a legal basis to let the licensing agency give the state additional time if the state claims it needs it to analyze a certification request.


      And perhaps the most controversial section of the proposed regulations, the EPA's considering limiting the scope of review of a project by states and the conditions that states can put on certifications. The EPA's proposing to limit states to considering the effects of a discharge by the project on water quality rather than the effect of the entire project on water quality; that is, discharge versus the entire project. Thus, a state could look at whether construction of a gas pipeline might harm water quality, but not whether the consumption of the gas transported by the pipeline somehow hurts water quality or has broader greenhouse gas impacts.


      The EPA further is weighing limiting the conditions that a state may impose on certification. The EPA has recommended giving federal licensing agencies the power to determine if a state has properly denied certification. If the licensing agency, again, typically, it's going to be FERC and the Corps of Engineers, finds that the state's denial is for reasons unrelated to water quality effects, it, again, the agency, could deem the state to have waived certification. Federal licensing agencies also would be empowered to determine if the conditions imposed by a state when granting certification truly relate to water quality standards.


      If promulgated, the EPA regulations are almost guaranteed to be challenged in court. Some states undoubtedly will argue that regulations exceed the EPA's authority under the Clean Water Act and unfairly restrict the states' rights. The EPA itself has recognized that its draft regulations reflect a narrower interpretation of Section 401, and one that may appear, at least at first blush, to be inconsistent with an earlier Supreme Court case.


      The EPA argues, however, that the Court decision, that is the Supreme Court decision back in the 1990s, was based in large part on deference to the EPA's earlier interpretation of the statute. The EPA asserts that its new interpretation of Section 401 is entitled to deference, given the ambiguity in the statue. That argument may prevail, but it, of course, leaves the door open for a later administration to revert to the earlier interpretation of Section 401.


      The ability of the EPA to essentially delegate regulatory functions to other federal agencies may also be contested. Under existing EPA regulations and D.C. Circuit precedent, licensing agencies such as FERC have the authority to determine whether a state waived certification by not acting in a timely manner. But, by contrast, there is little case law addressing whether a licensing agency, as opposed to the EPA, would have the authority to determine whether a state improperly denied certification, or whether the conditions that a state attached to certification were appropriate under Section 401.


      In addition, courts previously have held that FERC has no discretion, and thus must accept conditions imposed by states under Section 401. The EPA's arguing in the proposed regulations that those cases are distinguishable because the conditions at issue were presumed to be within the scope of Section 401. In other words, while FERC cannot second guess the reasonableness of the conditions, it can determine whether those conditions comply with Section 401. The proposed EPA regulations do not address what happens if an applicant voluntarily agrees to conditions imposed by a state to ensure that it receives the desired certification.


      It's not clear in that circumstance whether FERC would still be required to review the conditions to see if they comply with Section 401, or whether FERC would have the authority, or maybe the obligation, to simply incorporate the parties' agreement into the license terms. And even if the EPA regulations allow FERC to defer to the parties' agreement, the courts may not go along. Recall that courts have said that parties cannot alter the deadline for acting on a request for Section 401 certification. Courts may also say that parties cannot expand the scope of conditions permitted by 401 that can be tied to certification. In short, the regulations likely will generate protracted litigation.


      Ari will now talk about two other areas that have generated litigation over the proper role of states in setting energy policy.


Ari Peskoe:  Thanks, Gordon, and thank you everyone for joining today. And Gordon, I appreciate you organizing this event. Let me give my own quick disclaimers, which is that I'm speaking for myself here, not representing the views of Harvard University, not representing the views of Gordon. And I am not you lawyer, and this is obviously just informational and not providing any legal advice.


      So with that, I'm pleased to be able to share my perspective on two legal controversies that illustrate how regulating the interstate electric power system pursuant to an 85-year-old law, the Federal Power Act, leads to tension between historic state authority and federal oversight of interstate markets. So I'm going to begin by talking about two year-old federal appeals court decisions that dismiss preemption challenges to state mandated payments to nuclear power plants. The second topic I'll talk about is Dormant Commerce Clause challenges still in the courts to state laws that give utilities a right of first refusal to build new transmission lines.


      So last September, the Second and Seventh circuits affirmed lower court dismissals of challenges to New York and Illinois programs that require utilities to purchase energy credits from in-state nuclear plants. State regulators in New York and legislators in Illinois aim to ensure that plans that may not have been earning sufficient revenue from federally regulated wholesale sales remained in operation. The state programs explicitly paid the plans for the environmental benefits of emission-free power hour of energy that they produced, plants could sell a zero-emission credit, or a ZEC, that is valued by the states at the social cost of carbon as computed by the Obama administration. And so these programs argued in federal court that states were intruding on FERC's exclusive authority to regulate rates for interstate wholesale sales of power. They lost.


      The states' victories in these cases are consequential. They reinforce the status quo, which is that states may subsidize particular power generators that sell energy at wholesale through FERC regulated auctions. And to explain why this is controversial, I'm going to go back to the beginning. Starting in the early 20th centuries, states exclusively regulated investor-owned electric utilities. Public utility laws provided state regulators with broad authority over then rapidly growing monopolists that dominate the industry.


      In 1935, the Federal Commission entered the regulatory space. Congress gave the Federal Commission exclusive jurisdiction over interstate transmission and wholesale sales in interstate commerce. And this is a narrow grant of authority. Interstate transactions were a very small slice of the power industry. Most power was then generated by utilities themselves and distributed to their own captive rate payers.


      By the 1970s, for a number of reasons, state utility regulation became more intrusive. In particular, it scrutinized utility decisions about power plant development. Integrated resource planning where state regulators reviewed utility proposals to meet forecast and demand was common by the 1980s. In addition, since utilities were all vertically integrated at the time, that is, they recovered investments and generation through state regulated consumer rates, state regulators held the power of the purse and could effectively dictate utility generation development decisions.


      States have other means of implicitly regulating utility generation portfolios. States site all electric infrastructure not on federal lands, except for nuclear and hydro plants. State siting regimes may effectively exclude certain resources by imposing environmental conditions, for example. Or states might refuse to site transmission lines, which could prevent location dependent renewables from coming online. All of this is uncontroversially within state authority.


      In the late 1990s, through a series of reforms at the state and federal level, enabled the creation of interstate auction markets for power. And in these auctions, generators offer quantities of power at various prices, and the auction operator selects the mix of resources that will meet reliability targets at the lowest reasonable cost. Numerous auctions throughout the day ensure supply and demand remain in balance.


      In some regions, the market operator also conducts annual or monthly capacity auctions, and these happen in the eastern markets of PJM, ISO New England, and the New York ISO. Under current design, these auctions procure sufficient resources to meet the region's peak demand and are intended to signal where and when investment may be profitable and if existing resources should retire. FERC has exclusive authority to regulate these auction rules. The regional transmission operators that manage these auctions and the transmission network serve consumers in about 30 states.


      Now, it's legally uncontroversial that states may indirectly affect auction results. So for example, auction prices might indicate it would be profitable to build the new plant in a particular location, but since states can site new power plants, a state can block that development, which has effects on prices in the market. No one seriously contends that FERC's duty under the Federal Power Act to set just and reasonable rates and oversee auction rules would allow it to preempt state siting authority.


      So the question that these cases raises is what happens when state action more directly affects investment signals? Can a state go so far as to subsidize particular generators that sell power through the FERC regulated auction market? Is the state impermissibly distorting the federally regulated market when it subsidizes its favorite resources?


      So under the Second and Seventh Circuit decisions issued last year about zero-emission credits, states may favor particular generators that sell energy and capacity at wholesale through a FERC regulated auction. More precisely, the courts held that a state mandate that utilities purchase energy credits that represent attributes of power, such as its lack of emissions, is not preempted by the Federal Power Act. But state power has a limit. The state may not order the generators selling those credits to bid into the FERC regulated auction. So long as the credit is sold independently of the energy at wholesale, the state program would survive judicial scrutiny under the appeals courts decisions. So put differently, the state mandated credit sale may not be contingent on a federally regulated energy or capacity sale.


      The appeals courts derive this prohibition from Hughes v. Talen, which is a 2016 Supreme Court decision. That's the only Supreme Court case about preemption of a state generation subsidy by FERC's regulation of interstate auction markets. Recall, these auction markets are only 20 years old, and this is the only Supreme Court case that's directly on point on this issue. That issue in that case was a Maryland Public Service Commission order that required utilities to sign contracts for differences with a natural gas power generator. The state required utilities to pay the generator the difference between a state set price and the price generated by the FERC regulated auction.


      The Court held the state's order was preempted. It observed that the purely financial contract operated within the auction, exchanged nothing of value between the parties, and held that the, quote, "fatal defect of the state's program was that it condition payment on the generator bidding into and clearing the federally regulated auction." By requiring a generator to bid it in clear, Maryland directly inserted itself into the market.


      FERC's brief filed in Hughes emphasized this point. FERC argued that Maryland's bid in clear requirement, quote, "directly targeted the interstate market mechanism and was therefore preempted." The Supreme Court was clearly cautious about upsetting the current balance between state and FERC authority, and it limited its holding to state interference within the auction and did not prevent states from compensating an individual generator outside of the auction.


      Now, some parties wanted the Court then to go farther. A trade group representing merchant generation companies argued in that case that any state program that guarantees a rate distinct from the auction price should be preempted. It revived this argument in its cert petitions asking the Supreme Court to review the ZEC decisions. Had the Court accepted that petition—it rejected it in April—and had the Court gone on to endorse that test, it would have likely triggered a wave of litigation about other state energy programs, and in particular, about renewable energy mandates that utilities meet by holding renewable energy credits.


      These state programs that are active in about half of states are essentially the same as ZEC programs. They require utilities to purchase credits from renewable generators. The argument would have been that these state credit mandates effectively change the rate for wholesale energy purchases. Anyone who is still interested in advancing that argument in federal court will have to convince that court to broaden the Supreme Court's Hughes decision and also ignore the Second and Seventh Circuit ZEC decisions.


      So to sum up this issue, ZEC cases are among the first to apply the Supreme Court's Hughes decision. These cases are critical for understanding how states can subsidize power generators that sell energy in interstate auction markets. Both courts held that ZEC mandates are not preempted by FERC's exclusive authority to determine whether wholesale rates are just and reasonable. The credit mandates neither adjust the rate for an energy sale nor do they impermissibly interfere with the auction's price signals. Both courts emphasized that whatever interference there is in the market can be addressed by FERC through its oversight of market rules. So that's where the merchant generators are now focused.


      The key proceeding is about the PJM capacity market. PJM is the regional market that stretches from North Carolina to Chicago. It's the largest market in the country by volume. Merchant generators there are calling for a rule that would essentially exclude state subsidized resources from the market. That would include six nuclear plants spread across Illinois, New Jersey, and Ohio, as well as gigawatts of wind and solar that sell renewable energy credits. They would also exclude capacity owned by vertically integrated utilities such as Dominion in Virginia because while such utilities sell energy and capacity through the market, they benefit from state regulation that provides a return on equity on their investments through retail rates.


      That's unlike the merchants which enjoy no backing from state regulated retail rates. So the merchant generation companies argue that these state subsidies are distorting the market and interfering with competition. But the result of their proposal would be that PJM and FERC would exclude gigawatts of capacity from the auction. It would untether the auction from regional reliability need.


      An alternative advanced by nuclear owner states and renewable energy developers would reduce the size of the capacity auction. Currently, all load serving entities must meet either all or none of their capacity needs through the auction. Their proposal would allow state subsidized resources to exit the market with a commensurate amount of load. Resources still in the auction would just be those that do not receive any subsidies from the states.


      FERC's been sitting on this issue for a year and a half. We might see a decision by the end of the year. Litigation is inevitable but will be delayed as the law, the Federal Power Act, allows courts to hear a challenge only after FERC issues its order on rehearing. And the Commission's current practice is to sit on rehearing requests.


      So I'm now going to turn to the second issue, which is litigation about whether state laws granting incumbent utilities rights of first refusal to develop new transmission projects violates the Dormant Commerce Clause. Investor-owned utilities dominate transmission and have used their control over the nation's power delivery systems to inhibit the development of competitive wholesale markets. They had and continue to have clear incentives to use their control over transmission to favor their own power generation assets.


      FERC orders in the 1990s, which I alluded to earlier, aim to end discriminatory utility practices by separating control of transmission from utility power marketing interests. These initiatives by FERC spawned the regional transmission organizations that operate the interstate auction markets that I mentioned earlier. Under FERC rule issued in 2011, zoning utilities must participate in a regional transmission planning process. In some regions where there are RTOs, the RTOs administer planning processes that identify projects that improve grid reliability and efficiency. The RTO must solicit proposals from non-utility developers and provide utilities and non-utilities the same opportunities to allocate costs of projects throughout the region. FERC also explicitly prohibited tariffs from including a right of first refusal that provides the incumbent utilities with the option of developing any new projects. FERC's goal here was to encourage competition in the development of transmission.


      Utilities raised numerous objections at FERC, including that when they formed the RTO, they bargained for the right of first refusal and FERC had no authority to alter the terms of their deal. After losing several proceedings at FERC, utilities lost four federal appeals court decisions that upheld FERC's requirement that RTOs remove rights of first refusal. Having lost at the federal level, utilities turned to the states. In 2012, Minnesota enacted a statute that provided the incumbent transmission owners with the right to construct new transmission lines that have been approved by the federally regulated planning entity. Texas enacted a similar law in 2019.


      Transmission developers have filed suits in federal court in both states. A few other states have similar laws, but these state laws are the ones being challenged because they are blocking companies from developing projects that were competitively bid through the federal process. The result is that under these laws, utilities that lost the competitive process at the federal level may develop these projects instead of the transmission companies that offered to build them at a lower cost. In Minnesota, a case is now on appeal before the Eighth Circuit. Oral argument is scheduled for October 16.


      As a reminder, under Dormant Commerce Clause case law, courts typically strike down state laws that mandate deferential treatment of in-state and out-of-state competing economic interests in a way that benefits the former and burdens the latter. U.S. DOJ Antitrust Division filed a statement of interest in this case, telling the district court in Minnesota it believes, quote, "a state law which grants local electricity monopolists the right to obtain new monopolies in transmission in interstate commerce, and thereby block entry by potentially out-of-state competitors, unconstitutionally regulates interstate commerce."


      The district court disagreed. It dismissed the challenge, relying on a 1997 Supreme Court case about an Ohio law that taxed gas sales by marketers but not gas sales by utilities. It's a complicated case and I'm not going to go into it, but I'll note that Justice Scalia's concurring opinion in that case explained that the argument that the law discriminated against interstate commerce relied on a novel premise that private marketers engaged in the sale of natural gas, quote, "similarly situated to public utilities." As I said, the Dormant Commerce Clause is about deferential treatment of competing economic interests. The Minnesota court similarly concluded the state is entitled to consider the effect on public utilities that the law has and fear that the negative impact on the ability of utilities to serve consumers weighed against invalidating the challenged statute.


      On appeal, the transmission developer argues that the law discriminates against interstate commerce three times over. First, it discriminates on its face by securing lucrative business opportunities for favorite local operators. Second, it discriminates in effect by granting entities with an in-state presence a preference at the direct expense of out-of-state entities that lack such a presence. And third, the law was enacted for a discriminatory purpose of insulating in-state companies from competition. The Texas suit was just filed in June, so it's still very early in the litigation.


      Finally, before I close with my opening remarks, let me just plug my website,, where we track all of these lawsuits, all of the briefs and all of the decisions in these cases and more than a dozen others are posted on the site. And you can go there and, please, I welcome you to sign up for email updates on all of these issues.


Wesley Hodges:  Well, very good. Thank you so much, Ari, and thank you, Gordon, for your remarks. So while we wait for any audience questions, Gordon, would you like to comment on any of Ari's remarks?


Gordon Coffee:  Ari, just a couple questions. One is has the U.S. government taken a position on cases or the statutes involving the right of first refusal?


Ari Peskoe:  Yeah, I those ROFR cases, the DOJ Antitrust division did file a statement of interest supporting the transmission developer and saying that the law is discriminatory and should be invalidated. Oddly, the Minnesota -- unfortunately, I guess, the statement came after briefing was over, and parties quickly responded to the U.S. government's brief. The district court decided in its decision that it was going to ignore the brief because it was late filed, but then it had some odd statement about, "Well, even if we did consider the brief, which we read, we would have ruled the same way we did anyway."


      So in the appeal, the U.S. DOJ Antitrust Division filed a timely brief, and they continued to support the transmission developer challenging the law. I believe they have also filed some kind of notice in the Texas case as well. As I mentioned, we're still very early in that case. I don't think they've submitted a formal filing yet.


Gordon Coffee:  We've covered I guess what I would call four flashpoints involving overlapping or conflicting federal and state jurisdiction. Are there any other flashpoints that you think are worth mentioning?


Ari Peskoe:  Yeah, there's a couple other cases I'm interested in. The one that's just getting underway is in the D.C. Circuit. It's another FERC case I happened to spend -- since I'm Director of the Electricity Law Initiative, I've spent a lot of time in FERC-land. And the case is about FERC's recent order about energy storage. And most of the order is uncontroversial. It basically tells these market operators of these interstate auction markets they have to ensure that storage resources can get paid for the value of the services they provide. These auction markets, as I mentioned, are 20 years old. Modern storage devices like batteries were really not around then, and so market rules may not be designed to take advantage of all the value that these resources can provide to the market. That's pretty uncontroversial.


      The part that is controversial is the part of the rule that says market operators have to accept bids from storage resources that are connected to the utility distribution system, and even ones that are connected behind the meter, customer operated and owned resources. And utility trade associations, that's the Edison Electric Institute for the Investment on Utilities, the American Public Power Association, and the cooperative association for the rural co-ops, as well as NARUC, which is the trade association for state regulators, are all against this particular part of the order and say that inviting these resources connected at the distribution level invades state jurisdiction.


      So this case's briefing, I believe, is due in a couple of weeks from the challengers. And this is a next frontier in this litigation as small scale resources, whether it's batteries, small scale solar, who knows what other resources may come next, and what role does FERC have in regulating these resources through its interstate auction markets versus what role do states have regulating these resources through their retail programs? And how do these two worlds play together, or are they just at odds with each other? And so this could be an important case.


      And it comes just a couple years -- actually, three years after Supreme Court case on this matter that was FERC v. Electric Power Supply Association, which was about the role of demand response as customers who reduce their energy usage in response to price signals, whether such resources can participate in wholesale markets. And the Supreme Court determined that they could because they directly affect wholesale prices when these resources sell into wholesale markets. So I suspect this -- regardless of what happens in this case, this will somehow not be the last case about state regulation of retail programs and small scale behind the meter resources and how that interacts with FERC regulation of wholesale markets. So that's one issue right there.


      Another thing that I'm waiting for that's going to start happening next month, at least it should,  you mentioned the April executive order that talked about the instruct to EPA to promulgate some 401 regulations. It also instructed DOT and DOE to come out with some reports about barriers to energy exports and barriers to interstate energy transportation; in particular, natural gas. And so I'll be interested to see whether—assuming these reports actually come out on time, which would be sometime next month—whether they lay the groundwork for any sort of administrative action on these interstate energy transfer issues.


Wesley Hodges:  Well, very good. It looks like we do have one question from the audience. Caller, you are up.


Caller 1: Thank you. And thank you for this very informative presentation. I have a question going back to the 401 issues. I'm wondering if it might be a strategy for applicants or if you have any thoughts on how FERC might react to a situation that's under that Option 1 where there's a denial or the wink and nod agreement and denial with an informal, undocumented understanding that the applicant would resubmit a 401 application. I'm wondering if there's a strategy or if you have an idea of how FERC would respond if that application doesn't go back in before they need to issue their public certificate. Do you think there's a possibility that FERC would just decide that this delay, even if it's at the hands of the applicant, somehow equate to a waiver? Any thoughts on that would be really interesting.


Gordon Coffee:  I guess it depends on who the new commissioners will be at FERC. It's hard to predict because FERC was so schizophrenic about the prior agreements. On the one hand, FERC, prior to the Hoopa decision, said that if a state -- if an applicant agreed to postpone the deadline, that was unenforceable because that violated the Clean Water Act. On the other hand, an agreement by the applicant and the state to have this submit, withdraw, and resubmit stratagem, that was kosher because each new application was a new request that would restart the clock.


      I don't know how FERC, frankly, reconciled those two. After FERC got its hand slapped in the Hoopa case, it decided to be consistent. And so I guess I would lean toward thinking that FERC is going to look askance at the wink and nod arrangement. Sometimes it's very sympathetic to the need of states to evaluate the impacts on water quality. Other hand, it gets frustrated when licenses get held up because the state drags its feet. Congress sometimes chomps on FERC for the fact that the licensing process can take so many years. So if I had to vote, I would vote that FERC is not going to be terribly sympathetic to what I call the wink and nod arrangement.


Wesley Hodges:  Looks like we do have another question. Caller, you are up.


John Shepherd:  Hi. This is John Shepherd, and I'm asking if Gordon and Ari can flesh out two of the issues they brought up in this way; one, to talk about where the line is between preemption on the one hand and FERC authority on the other hand with regard to the subsidization issues they brought up in light of the D.C. Circuit decision in Connecticut DPUC in 2009 and the D.C. Circuit and Third Circuit decisions in NEPA and NJBPU about the earlier times that were dealing with state subsidies at FERC.


      The question with regard to the transmission issue is what do you make of the fact that Order 1000 said that it was eliminating federal rights of first refusal but took no position on whether or not there can ever be state rights of first refusal?


Gordon Coffee:  These sound like Ari questions.


Ari Peskoe:  Yeah, sure. Thanks, John. So the Connecticut DPUC decision was, I believe, a 2009 D.C. Circuit case that essentially upheld FERC's authority to have capacity markets in the first place. The Federal Power Act is explicitly clear that states have authority over, quote, "generation facilities," or maybe it's "facilities for the generation of power." I don't remember their exact words. And so the argument in that case was by creating a market that's designed to procure a certain amount of generation capacity, FERC is impermissibly regulating facilities. And the court essentially said, "No, it's not directly regulating the facilities themselves. This is just all about a matter that directly affects wholesale rates." So capacity rates directly affect wholesale rates, and therefore, FERC has authority to oversee these auctions.


      And the Third and Fourth Circuit cases were the precursors to Hughes. Both New Jersey and Maryland had essentially identical programs. Two federal appeals courts struck both of them down, and the Supreme Court ultimately agreed. And so those cases, the Third and Fourth Circuit decisions, they don't get a lot of play anymore since they were overtaken by Hughes. I don't know that there's anything inconsistent in those decisions with what the court said about zero-emission credits.


      I think that where this litigation goes next, as I alluded to, is FERC's pending decision about the PJM capacity auction. And we're going to see these arguments in the reverse. Rather than arguing whether the Federal Power Act preempts state authority, the issue will be is FERC authority over matters that directly affect energy sales so broad that it can allow the auction market to essentially pick and choose between certain resources, depending on how they're supported or whether or not they're supported by state policies. So I think the line, as I said, as I see it, between state authority to subsidize generation and FERC authority over wholesale rates is that test in Hughes that both ZEC courts endorsed, which is that as long as the state support is independent of the wholesale energy sale, states can do it.


      On your second question, Order 1000 is that FERC order that required the utilities to remove the right of first refusal from their tariffs. And there, as John mentions, FERC said it took no position on whether or not states can have such rules. I think that was just FERC being cautious, is my read of it, and not wanting to necessarily involve itself in subsequent litigation which is now playing out by making a statement about the Dormant Commerce Clause. I think that's generally FERC's approach to such constitutional legal issues.


      We saw a departure recently just last week where FERC actually did weigh in on preemption issues about a New Hampshire law that subsidized certain biomass plants in the state. And often, FERC, as I said, chooses not to weigh in on preemption issues and Dormant Commerce Clause issues, but we had an exception last week where they said the law is preempted. So I think this is FERC being cautious. And I would note one FERC commissioner, I think it was the chairman at the time or a later chairman, actually did write in a concurrence that he did think these laws violate the Dormant Commerce Clause. But I don't see FERC's lack of a position as particularly relevant to the current litigation.


Wesley Hodges:  Very good. Thank you so much, caller. We do appreciate your question. And Ari, thank you so much for the response. Seeing that there's no queue, I'll turn the mike back to Ari and Gordon. Do either of you have a question for each other or a topic you'd like explore further?


Ari Peskoe:  I think we covered a lot of ground today.


Wesley Hodges:  Absolutely. So on behalf of The Federalist Society, I would like to thank our experts, Ari and Gordon, for the benefit of their valuable time and expertise. We welcome all listener feedback by email at [email protected]. Thank you all for joining for the call. We are now adjourned.


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