By: Stuart Caplan, Brian Harms and Emily Prince

In a speech last month, Energy Secretary Rick Perry stated that the Department of Energy (“DOE”) may need to “intervene” in state renewable energy policies to protect grid security and reliability. Secretary Perry made the statement to energy industry stakeholders at the Bloomberg New Energy Finance Summit on April 25, 2017. In early April, Secretary Perry ordered a DOE study to determine the extent wholesale market structures, energy mandates, federal policy and tax subsidies are affecting long-term grid reliability. Secretary Perry suggested that the DOE was concerned by ongoing baseload generating facility retirements stimulated in part by pressure on utilities to meet renewable portfolio standard (“RPS”) benchmarks. During a question and answer session, Secretary Perry stated that increased reliance on intermittent renewable energy sources makes the grid unreliable, which ultimately creates a concern for national security.

Were the Department of Energy to use federal preemption to attempt to change state RPS programs, it raises significant questions as to whether and how preemption would apply. Federal and state energy regulatory spheres have become intertwined, with overlap among both jurisdictions. Under the United States Constitutional framework, when there is a conflict of law or regulation between the federal government and a state government, federal law will control pursuant to the Supremacy Clause of the U.S. Constitution. When Congress has fully occupied the field it has chosen to regulate, the federal law will preempt any state law within that field (“Field Preemption”). Alternatively, if the Federal government has not fully occupied the field both the Federal and state governments may regulate so long as the state regulation does not interfere with federal regulation (“Conflict Preemption”).

In recent years the Supreme Court has attempted to clarify different preemption issues related to energy markets.

In 2015 the Supreme Court in Oneok, Inc. v. Learjet, Inc.,[1] found that both FERC and states could regulate the same subject where Congress had not fully occupied the field. The Court found that Field Preemption did not apply, but that the district court should have used a Conflict Preemption analysis to determine whether state antitrust suits would interfere with FERC regulation. Thereafter FERC adopted regulations preventing manipulation of natural gas indexes because they affected wholesale gas prices, large end use customers brought antitrust actions under state law seeking damages for alleged unlawful manipulation of natural gas pricing indices because they affected retail natural gas prices (not subject to FERC jurisdiction). The Court largely affirmed the Ninth Circuit, reasoning that FERC was not regulating a wholesale sale of gas but the practices that affected wholesale sales of gas as well as retail sales of gas. Because the state anti-trust laws were directed at the practices affecting retail rates, the Court reasoned that a Conflict Preemption analysis was appropriate and remanded the case.

In contrast, in 2016, the Court applied Field Preemption so as to overturn Maryland’s regulation of wholesale electricity sales. In Hughes v. Talen Energy Marketing,[2] the Supreme Court struck down a Maryland program subsidizing several new gas-fired plants through long-term agreements providing contracts for differences which the Court found effectively set the wholesale price of power received by the generators. There, the Court found that the program was preempted by the Federal Power Act. The Court reasoned that the program directly affected wholesale electricity rates approved by FERC.

It remains to be seen whether DOE will challenge one or more state RPS programs on Field Preemption or Conflict Preemption grounds. Some degree of RPS does not necessarily create any energy security issues. This may be a factor supporting application of Conflict Preemption analysis as opposed to Field Preemption. Conflict Preemption may necessitate a state-by-state analysis of the impacts an RPS program is having on the security of the electric system in that state or region to determine whether State regulations conflicts with Federal regulation.

For more information on Hughes see our discussion here on Troutman Sander’s Washington Energy Report.

[1] 135 S. Ct. 1591 (2015)

[2] 136 S. Ct. 760 (2016).