Finding the Line: Federal and State Jurisdiction on Electricity

1. “Where is the line between federal and state jurisdiction on electricity?” [“The Bright Line” R.I.P.] Context, Cases, Consequences and Controversies John E. Shelk, EPSA President & CEO Power Markets Today Webinar June 30, 2016 Title Page

2. BLUF: Bottom Lines Up Front Context – Challenging Markets, Disruptive Technologies, State Policies, and Address How to Reduce Carbon Emissions – Not Best Time for More Uncertainty but Inevitable for Now Cases – More than the “trilogy” of EPSA, Hughes and Oneok – need to also consider Delaware v. EPA and North Dakota v. Heydinger, among others Consequences/Legal – While more litigation to come, asymmetrical relationship between federal and state – In EPSA, feds win “no matter the effect on retail rates” while in Hughes, feds win even if state is pursuing a legitimate policy goal Consequences/States #1 – Tendency to view all States on same side of “federal versus state” jurisdiction, but not so; were state policy objectives frustrated? – regardless, how can federal, state and regional entities work more collaboratively? Consequences/States #2 – FERC Commissioner Clark has suggested a joint FERC/States technical conference or workshop to discuss what States can do under the decisions, helpful but Congress and federal courts will have to decide what can and cannot be done 2

3. BLUF: Bottom Lines Up Front (continued) Consequences/Commercial – EPSA kept status quo as to energy markets, did foreclose a future avenue to challenge DR in the capacity markets; Hughes is “mixed” (plant built without subsidy, but relevant to other actions, e.g., Ohio) Consequences/Policy – Strengthens FERC on DERs generally and Net Energy Metering in particular? Climate change? Greater regionalization of the grid? Consequences/Intra-Federal – Federal/State are not only jurisdictional lines involving FERC; FERC v. EPA, and FERC v. CFTC on private rights of action Consequences/Practical – “Cases and Controversies” so each case takes time and pieces of the puzzle only emerge over time, but can we wait? Cost to wait? Consequences/Political –Congressional review of the Federal Power Act and perhaps more contentious FERC confirmation battles? West-wide RTO issue? 3

4. Color Commentary – EPSA Demand Response Case • FERC jurisdiction is more than “rates” extends to “practices directly affecting wholesale …” • D.C. Circuit majority said DR is FERC regulating retail non-sale, SCOTUS majority said FERC was not regulating retail – impact on retail is not enough, even significant impact, since FERC regulation is on the wholesale side (boot-strap?) • Contrary view conflicts with FPA’s core purposes; EPSA “subverts the FPA”; all about lower wholesale rates, not traditional “just and reasonable” balancing of interests; reliability often cited • Compensation– FERC did not seek rehearing or cert; Court “not necessarily what we would do” but FERC gets “great deference on rate design” – technical understanding and policy judgement; value the service not the costs; FERC could change full LMP • Hmmm – Justice Kagan ends with reference to State Opt Out in Order 719 – “cooperative federalism where States retain the last word” – Really? How might this apply in other cases? Did she mean it literally or as a “throw away” in this case? 4

5. Color Commentary: Hughes v. Talen Energy • Major victory for integrity of wholesale power markets and FERC regulation: over two cases 16 federal jurists of various political parties and judicial philosophies unanimously found federal preemption (8 SCOTUS, 6 U.S. Circuit and 2 U.S. District) • Broader decision than some give it credit for – while in this case the “tethering to the wholesale market” that caused Maryland’s program to be preempted was a requirement to “bid and clear” PJM markets, the broader principle is that States cannot interfere in wholesale markets by setting a different rate for wholesale sellers than the FERC rate • To be sure, there are things States can do to promote “new or clean” – but the listed items do not include State actions that interfere with FERC wholesale regulation of rates and practices directly affecting wholesale rates (must read in light of EPSA and Oneok) • At a minimum, there is legal uncertainty because now strong legal grounds to challenge a single State’s action (e.g., Ohio PPAs) or multi-State actions (NEE/PSEG complaint), but challenges take time (DR was 5 years) – so focus on practical ways to make this work at a time of great uncertainty, clearer policy direction is essential 5

6. Color Commentary: Delaware v. EPA • D.C. Circuit vacated aspects of EPA’s RICE NESHAPS rule (hazardous air pollutant regulations for diesel back up generators) on May 1, 2015, effective as of May 1, 2016 • EPSA was an intervenor in support of petitioners challenging the EPA rule • Overturned exemption for back-up generators for up to 100 hours if used in an emergency Demand Response program • Panel unanimously said EPA’s decision was “arbitrary and capricious” because EPA failed to respond to comments about the impact on efficiency and reliability of wholesale capacity and energy markets • EPA had first justified the 100-hour exemption on reliability grounds, commenters said EPA should work with FERC, then EPA shifted to justification as air quality; court panel said FERC has reliability, not EPA, and EPA should work with FERC on the reliability aspects of EPA regulations (Supreme Court nominee Garland one of the panel judges) 6

7. Color Commentary: North Dakota v. Heydinger • U.S. Eighth Circuit decided on June 15, 2016, illustrates overlap of these legal issues • At issue was provision of the Minnesota “Next Generation Energy Act of 2007” that prohibited both new large coal plants built in Minnesota and imports into Minnesota (even though Minnesota is part of the interstate MISO FERC-regulated RTO) • Not enough for a State to say “area of traditional state regulation” (same in Hughes) • Three-judge panel unanimously affirmed District Court summary judgment for North Dakota striking down the Minnesota law, but for three different reasons, each of which has potentially far-reaching implications for energy and environmental regulation: • Judge #1 – Unconstitutional as extra-territorial so violates Dormant Commerce Clause • Judge #2 – Preempted by Federal Power Act as a ban on wholesale sales • Judge #3 – Since not a complete ban disagrees with Judge #2, but preempted by Clean Air Act • Implications – FPA preempts state environmental law, one state can’t regulate emissions from out of state, importance of Congressional/FERC policy preference for regional wholesale power markets – how does all this square with Clean Power Plan and SIPs? 7

8. John E. Shelk President & CEO Electric Power Supply Association 1401 New York Ave., NW Suite 1230 Washington, DC 20005 Telephone: (202) 628-8200 Fax: (202) 628-8260 E-mail: jshelk@epsa.org Website: www.epsa.org 8