This presentation from the Infocast Mid-Atlantic (PJM) Market Summit (Oct. 2017) analyzes the jurisdictional and preemption limits of state programs to subsidize chosen power sources as they impact the PJM wholesale power market.

1. STUART A. CAPLAN, CLIFF SIKORA, ANDREW SCHIFRIN
TROUTMAN SANDERS
Mid-Atlantic Power Market Summit
October 23-25, 2017
Increasing Friction in Jurisdiction:
Interplay between State Subsidies and the PJM Market

2. Increasing Friction in Jurisdiction:
•FERC v. State Jurisdiction
•Preemption – conflict and field preemption
•The Supreme Court Trilogy in Brief
•Pending Battles
Agenda
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3. Three recent Supreme Court decisions (the Trilogy) have called into question the
dividing lines between FERC and State PUC regulation of energy
The Court left much to be decided case-by-case
The boundary wars include:
• Whether state antitrust cases can proceed against natural gas companies that are subject
to FERC regulation (Lear Jet)
• Whether FERC regulation of demand response participation in ISO markets steps on State
PUC jurisdiction over the retail market (EPSA)
• Whether states may incentivize development of new generation through state-administered
competitive solicitations resulting in retail electric distribution company financial hedges
(CFDs) with the generators (Hughes)
Battle Lines Between FERC and States
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4. The boundary wars (Cont.)
• Whether certain state subsidies for existing generators
(including Zero Emissions Credits) are permitted or preempted
• Whether State Renewable Portfolio Standards may be
preempted by DOE
• Whether Renewable Energy Credit pricing may be preempted
What’s next?
Battle Lines (Cont.)
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5. FERC FPA Jurisdiction
• FERC has jurisdiction over sales of
electric energy for resale in interstate
commerce (not a Commerce Clause
analysis)
– Wholesale sales on the interconnected
grid even when buyer and seller in a
single state are in interstate commerce
– Exceptions -- ERCOT, HI, AK
• Wholesale sales are for resale --
generator to utility or marketer
• FERC does not have jurisdiction over
retail sales -- sales to end users
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6. FERC NGA Jurisdiction
• FERC has jurisdiction over certain sales of
natural gas for resale in interstate commerce
• FERC has jurisdiction over the transportation of
natural gas in interstate commerce
• FERC does not have jurisdiction over any other
transportation (intrastate transportation or local
distribution), or over production or gathering.
– These activities are regulated by the states.
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7. FERC FPA and NGA Jurisdiction Summary
• “FERC Direct Jurisdiction”
– FPA: Transmission of electric energy in interstate
commerce and wholesale sales of electricity;
– NGA: certain wholesale sales of natural gas in interstate
commerce; the transportation of natural gas in interstate
commerce.
• “FERC Indirect Jurisdiction”
– FPA & NGA: “any rule, regulation, practice, or contract
affecting” jurisdictional rates, charges, or classifications.
• “State Direct Jurisdiction”
– FPA: jurisdiction over local distribution, retail sales,
electric generation;
– NGA: production, gathering, distribution or intrastate
transportation.
• “State Indirect Jurisdiction”
– Practices, rates, etc. affecting state jurisdiction.
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8. Federal Preemption
Preemption is based on the Supremacy Clause of the
U.S. Constitution
Federal Law is supreme
Three types of preemption
• Express preemption controls when Congress explicitly
preempts state action
• Field preemption applies when Congress (and
Federal agencies acting within their authority) have
occupied the field leaving no room for state regulation
• Conflict preemption applies when the field is not fully
occupied at the Federal level
– States can regulate so long as it does not interfere with
Federal regulation and the Federal agency is acting within
its statutory authority
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9. The Trilogy – Case 1 ONEOK (Lear Jet)
Pipelines/natural gas companies allegedly
manipulated NG price indices through erroneous
price disclosure
Wholesale and retail sales of natural gas were priced
based on the indices
FERC regulated the process of price disclosure and
index publishing
Plaintiffs in two states brought antitrust cases
against the natural gas companies
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10. • Dist. Court granted the pipelines' motion for summary judgment on field preemption
• The U.S. Court of Appeals for the 9th Circuit REVERSED. No preemption because state-
law claims aimed at damages for only excessive retail prices
• The Supreme Court:
– Affirmed in part: FERC's regulation of gas index publishing affected both wholesale and
retail electric rates but did not constitute regulating wholesale and retail sales (not Field
preempted); and
– Remanded: because lower court did not engage in conflict preemption analysis to
determine whether state anti-trust suits would interfere with FERC’s regulation of gas
index publishing practices (a practice that affects wholesale rates).
The Trilogy – Case 1 ONEOK (Lear Jet) (Cont.)
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11. Supreme Court:
•Both FERC and the States were free to regulate (or litigate under antitrust) the same subject matter (gas index/price
formation and associated manipulation) as long as the State regulation does not interfere with the Federal
regulation.
On remand, District Court held:
•No conflict preemption either.
• Compliance with federal law was not necessarily made “impossible” by stricter state laws.
• Case name: Reorganized FLI, Inc. v. Williams Cos. (In re Western States Wholesale Natural Gas Antitrust Litig.),
2017 U.S. Dist. LEXIS 49435, at *204 (D. Nev. Mar. 30, 2017)
The Trilogy – Case 1 ONEOK (Lear Jet) (Cont.)
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12. EPSA
• FERC regulated demand response offered into
wholesale electric markets
• DC Cir 2-1 reversed -- finding demand response
took place in the retail market which FPA
reserved for states
• The Court reversed -- Regulation of DR was not
regulation of retail rates for electricity
• FERC was free to regulate
• Offered into ISO/RTO markets
• Jurisdiction was the key. There was no state
initiative which was analyzed under preemption
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13. • MD wanted new generation to locate in certain areas
• Held competitive solicitation
• Winners got Contract for Differences (“CFDs”)
• Fed Dist Court challenges (in MD and parallel NJ CFD challenge)
• Dist Courts found Field Preemption; MD Dist Court found Conflict Preemption too
• Third and Fourth Cirs affirmed
• The Court affirmed -- MD was setting the price a supplier received for wholesale power and
energy -- reserved for FERC. The subsidy was tethered to the wholesale price of capacity
(and energy)
• States may incentivize generators through such things as tax incentives but not by crossing
the line of FERC's jurisdiction and not by tethering to the wholesale market prices
Hughes
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14. Trilogy in the Jurisdictional/Preemption Matrix:
Jurisdiction/Preemption Tool
FERC Direct Jurisdiction FERC Indirect
Jurisdiction
State Direct Jurisdiction Hughes – Field Preemption
State Indirect Jurisdiction Lear Jet – Conflict Preemption
EPSA (not a preemption case)
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15. Allco Fin. Ltd. v. Robert J. Klee, 2nd Circuit (June 28, 2017)
•2013 CT law required state agency to solicit renewable energy proposals, and “direct [Connecticut’s utilities]
to enter into” power purchase agreements with the chosen winners.
– Later agency guidance: utilities are not obligated to accept bid in the 2015 procurement
– Separate CT law: RECs will count toward a utility’s RPS requirement only if they come from an ISO-NE source
• Challenges:
– Preemption: renewable procurement law’s requirement that CT agency “direct” utilities amounts to CT compelling states to enter
into wholesale contracts, which are regulated by FERC (with a limited exception under PURPA)
– Dormant commerce clause violation: import surcharges on RECs from, e.g. Georgia, burden interstate commerce
• Held:
– “Direct” does not mean “compel” because utilities were allowed discretion to accept any bid;
– Unlike Maryland in Hughes, CT’s program does not condition capacity transfers on any wholesale auction. “Connecticut, instead,
transfers ownership of electricity from one party to another by contract, independent of the auction.”
• Solicitation program within States’ Direct Jurisdiction.
• Any “incidental effect” on wholesale prices does not amount to wholesale market regulation (cited EPSA)
– Plus, 2015 procurement rules require that the resulting bilateral contracts be subject to FERC’s J&R review.
– Dormant Commerce Clause: no violation because, inter alia, RECs from states like Georgia are different products.
Post-Trilogy Jurisdiction Disputes: Allco v. Klee et al.
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16. Zero-Emission Credit (“ZEC”) programs in NY and Illinois
New York: regulatory ZEC program
Illinois: statutory ZEC program
Purpose: to provide financial support for nuclear generators struggling to compete in eastern organized energy and
capacity markets.
Challengers argue:
– Field and conflict preempted by FPA (adversely impacts wholesale markets)
– Barred by the dormant commerce clause (burdens interstate commerce)
Defenders argue:
– Programs are within states’ direct jurisdiction over environmental attributes unbundled from energy (similar to RECs)
STATUS: District Courts dismissed the challenges in July 2017; Appeals now in 7th and 2nd Circuit Courts of Appeal
Currently Active Disputes: ZEC Challenges
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17. Zero-Emission Credit (“ZEC”) programs in NY and Illinois
Illinois District Court Decision:
• Applied Lear Jet: States may influence, through regulation, which generators participate in FERC’s markets, even
though the end result may affect those markets.
• Applied Hughes: no “tether” because ZECs earned regardless of capacity market participation or clearing
• Applied EPSA:“[t]he key inquiry is whether FERC or the state is regulating what takes place in their respective
markets.”
“Read together, EPSA and Hughes stand for the proposition that preemption applies whenever a tether to
wholesale rates is indistinguishable from a direct effect on wholesale rates.”
Currently Active Disputes: ZEC Challenges (cont.)
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18. Zero-Emission Credit (“ZEC”) programs in NY and Illinois
New York District Court Decision:
• Applied Lear Jet: No conflict preemption because nothing about the ZEC program effectively overrides or “stands
as an obstacle” to the FERC-jurisdictional auction or to the FPA.
– Price-distorting effects from the ZECs are not enough to trigger the conflict preemption bar.
– Otherwise, Renewable Energy Credits, other state subsidies (e.g. tax incentives and land grants) could be called into question.
• No “tethering” because Hughes “clearly stated that the impermissible tether was ‘to a generator’s wholesale
market participation,’” not to market-based price forecasting, and the generators are not required to sell into the
wholesale auctions.
• ZECs do not “directly affect” FERC-jurisdictional wholesale rates, as opposed to only indirectly affecting them.
Unlike the Maryland program that the Hughes Court found “set” a wholesale rate, “the ZEC program does
not adjust or ‘set’ the amount of money that a generator receives in exchange for the generator’s sale of
energy or capacity into the auction.”
Currently Active Disputes: ZEC Challenges (cont.)
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19. Other Issues in the ZEC Decisions…
• Dormant Commerce Clause
– Illinois:
• Not facially discriminatory because out-of-state generators could participate;
• Only an incidental burden on interstate commerce and outweighed by in-state public health and environmental benefits
– New York
• Challengers lacked standing: they were not non-NY nuclear generators
• No “undue burden”: non-nuclear generators would still be “burdened” if non-NY nuclear generators allowed in
• NY is a “market participant” when it pays $$ for each MWh of zero-emission electricity.
• Equal Protection (only in Illinois case)
– Illinois consumers argued extra ZEC costs made them “second-class consumers” vis-a-vis MISO and PJM consumers
– Court: No EP problem because all Illinois consumers are treated the same; plus Legislature had “rational basis” for law
• Whether the FPA grants right of action to bring preemption claims in court, as opposed to before FERC.
– Both Courts raised this problem—and said NO right of action—but continued analysis nonetheless.
Currently Active Disputes: ZEC Challenges (cont.)
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20. Where the Illinois & NY District Courts came down:
ZEC Challenges (cont.)
FERC Direct Jurisdiction FERC Indirect
Jurisdiction
State Direct Jurisdiction Hughes – Field Preemption ZEC Cases – held: under state direct
jurisdiction AND only indirect effect on
FERC jurisdiction
Allco
State Indirect Jurisdiction Lear Jet – Conflict Preemption
EPSA (not a preemption case)
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21. Preemption Issues Raised in the Appeals (so far)
•Illinois decision appeal in 7th Circuit: Elec. Power Supply et al., v. Star et al., (17-2445)
– Appellants: Tethering because “as market prices rise, the subsidy falls” and subsidy received “in connection with” WS sale
• RECs are safe because their prices “are essentially determined by supply and demand of renewable energy”—i.e. independent
from WS market
– Appellees: Answering brief due October 27, 2017 (court granted one month extension on Sept. 20)
• New York decision appeal in 2nd Circuit: Coalition for Competitive Elec. v. Zibelman (17-2654)
– Appellants: October 13, 2017 Opening brief:
• Analogizes ZEC subsidies to MD program in Hughes: “In both cases, the state has set a wholesale rate different from the
FERC-approved rate.”
• The lack of market participation mandate should not mean FERC jurisdiction is avoided. The generators participate regardless.
– Appellees: Answering brief due November 17, 2017
ZEC Challenges (cont.)
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22. FERC MOPR and BSM challenges
– Should PJM Minimum Offer Price Rule mitigate subsidized units?
– Should NYISO Buyer Side Mitigation Rules mitigate subsidized units?
State court challenges from PUC/PSC decisions
– Are the subsidies J&R?
– Did the proceeding rationally address renewable and conservation alternatives?
– Was the proceeding deficient under state Administrative Procedures Act?
– Was the result unduly discriminatory or preferential?
Parallel Challenges and Other Issues
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23. While we were involved in two of the three appeals in the Trilogy cases,
we would not wish this case-by-case uncertainty on any client, but we
will gladly help you sort this out
Stuart Caplan Cliff Sikora Andrew Schifrin
Partner, Troutman Sanders LLP Partner, Troutman Sanders LLP Partner, Troutman Sanders LLP
212.704.6060 202.274.2966 212.704.6022
Stuart.Caplan@troutman.com clifford.sikora@troutman.com andrew.schifrin@troutman.com
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24. Stuart Caplan
Partner, Troutman Sanders LLP
212.704.6060
Stuart.Caplan@troutman.com
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Stuart Caplan has for 30 years represented energy companies and financial
institutions in Federal Energy Regulatory Commission (FERC) and state
public utility commission proceedings involving electric and natural gas
markets; energy transactions; project development and finance; M&A;
formation of independent system operators (ISOs) and regional transmission
organizations (RTOs); and regulatory compliance and investigations.

25. Cliff Sikora
Partner, Troutman Sanders LLP
202.274.2966
clifford.sikora@troutman.com
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Cliff Sikora is a partner in the Washington, D.C. office of Troutman Sanders.
Over his 20-year career with the firm, Cliff has solely worked with clients in
the energy industry, concentrating in electricity industry matters. He has
represented a wide array of business interests within the electricity sector,
including vertically-integrated utilities, energy project development companies
(fossil generation, renewable generation, hydropower, transmission and
storage), banks, private equity investors, energy technology companies, and
EPC contractors.

26. Andrew Schifrin
Partner, Troutman Sanders LLP
212.704.6022
andrew.schifrin@troutman.com
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Andrew Schifrin has been practicing law for more than two decades and
focuses his practice on infrastructure and energy-related project
development and finance as well as transactional, regulatory and litigation
matters. He represents a broad range of industry participants including
investors, developers/sponsors, power plant owners, industrial and
commercial concerns, lenders and other financial institutions, energy
marketing and management companies, manufacturers and service
providers.