we will hear argument this morning in case number fourteen six fourteen hughes chairman of the maryland public service commission verses taylan energy marketing and the consolidated case mr strauss mr chief justice and they please the court maryland determined that new generation was needed for local reliability so it directed its retail utilities to sign twenty year contracts with a competitively selected project developer maryland's action did not intrude on federal authority primarily for two reasons the first reason is that maryland's new resource did not the store at the wholesale capacity auction first revised its auction bidding rules to require the maryland resource to bid on the basis of its costs backing out any state contract revenue the developer bid in accordance with the rules and clear the auction for it says that means that the resource is economic needed competitive and does not suppress prices any state revenue notwithstanding the second reason is if it doesn't suppress prices why did maryland do it maryland did it your honor because they saw a need for generation going forward as is clear in the generation order marilyn perceived the problem it had large coal units that it believe were going to retire in the coming years and it needed to have resources in place to be able to meet that need so it undertook to have those resources built pursuant to the contract mechanism before you but if that hadn't happened prices would have been higher so it was to suppress prices you know that was not suppressed prices and frankly  a could not have suppressed prices further revise the rules and twenty eleven to be clear that the resource had to bid on the basis of its costs without regard to the state revenues so there was no way for it to suppress prices if the costs had been too high for the resource it would never  and went under that auction p j m procures three years in advance for one year period all the capacity the region needs and then it allocates the cost of that capacity among all the utilities but it tells the utilities that you have a way against those costs if you have long term resources resources that you bought or procure through contract you can bid them in and if they clear they will offset the cost maryland's concern was this it wanted and needed the resource but it was concerned that the resource clear so that it hedge against the cost and customers not pay twice for the same resource so in order to do that it entered into the contract for differences in the way it did that was it did a competitive procurement and found a developer who was willing to undertake the risk of non clearance and that was the issue the contract for difference is assigned and allocates that risk to the developer not the state and that enabled the resource to go forward in a way that would not result in any possibility of a double charge the contract developer developer receives the contract price the utilities paid the contract price and no more than that receive the market price that is exactly the way this would have worked if we'd simply done it as a bilateral with one key difference the difference is that the risk of non clearance is with the developer well there's another to see a difference if you had done it directly with if c p p had contracted directly with the distribution you tell of these and that would have been subject to regulation by for what and not just this contract was as well on li after you lost on the fourth circuit did you concede that is not correct on the very day of the fourth circuit's decision no your honor and then the district court explain why in the district court during the district court litigation c p v obtain market based rate authority from the f c and filed a motion with the court telling the court that the case should be dismissed because the contract was being entered into pursuant to that authority and that made it a fair contract that could be reviewed it for so any party could have filed the complaint that your initial position was that it did not have to be reviewed by for was not that's not right that's correct the position below was that it was either of two things your honor either it was a non jurisdictional financing arrangement or it was a first jurisdictional contract but either way it was not pretty and that was the question it was either jurisdiction that means it's a wholesale sale and that's for firth to do is to set the rates and other terms of wholesale sales and that's not for the states to do so you know that means you're preempted no no no no it does not  you're exactly right to honor a wholesale sales for first to review but the way the statute works sellers under the statute are permitted to stay at rates as an initial matter by contract or tariff for superintends that process as this court decided in the energy just because they use an option is that what you're saying maryland did not set the rate because maryland did not select the price the place was selected by the seller that's true if earth itself earth doesn't set rates anymore either it allows an option to set rates but we would never say that that doesn't mean that that they're for approved rates and so here the fact that maryland decided not to set rates directly but to allow an option to do it i mean that's just a mechanism that maryland chose it there's still maryland's ra the auction the auction that for design the wholesale auction permits if not incentivize is exactly what was done here is made that very clear the purpose of the auction is to impart to provide information to the market about what kinds of long term contracting are needed what you used the auction dynamic the auction mechanism to go out side of the of that dynamic we did was perfect yes your honor but that's perfectly permissible remember that that's let me explain i'm i'm sure that that's one of the issues that the case yes your honor the auction dynamics allows for parties and indeed encourages parties to enter into long term contracts for capacity resources and bid them into the auction but they can't clear the auction they don't become auction resources unless they're able to do so and in this case fork out in front of it exactly what maryland and the related program in new jersey were about at the time they revised the rules what folks ought to do was to reconcile the issue of the the state programs and how they would interact with the auction and first did that it set a different bidding process and maryland followed that bidding process the b resource bid in accordance with it and cleared on that basis at the as originally set up c t v had no incentive to add to been anything other than zero isn't that right that is all it was i'm interested in was clearing a market that is correct and that affects six it said that state resources that were being built for reliability which is exactly what this resources could bid in that zero zero price and clear automatically in order to ensure that states could meet their responsibilities to ensure reliability in two thousand and eleven when first became aware of the maryland new jersey programs it revised the rules but it didn't protect prohibit those resources it didn't preclude them it changed the rules so that they could continue to bid but they had a bit on a cost basis but i have to say that they also and just and reasonable it's something you can do why didn't that end what you're doing you're arguing that you're not affecting price for disagrees we because you're in have no incentive to bet anything other than zero i don't understand why this case is not ended by for us determination that law in contracts are unjust and unreasonable ferk determined that under the auction it would not allow a guarantee of more than three years but first did not at that time say that long term contracts outside the auction were prohibited long term contracts are a staple of this industry as this court knows and first was not trying to prohibit them with but before it was doing there was the three year lock in which i think is what you're alluding to just a sort of mine or how is it different than your contract it's different in that this is a twenty year agreement it's and i know the years are there it's that i'm talking about the mechanics the mechanics of it are that it operates outside the auction but bids into the auction the the new entry price adjustment to which you refer functions within the auction and for a very specific purpose it's designed to address the situation in which you have a relatively small geographic zone and a relatively large plant that's built the concern is that when you build that resource and put in the market it creates a glut and prices will crater and the concern was because of that no one will ever build such a resource so the auction allows you to lock those prices in for three years but that's simply in that particular circumstance what said when asked to make it longer was that's not the purpose of the auction the auction is not intended to insure revenue certainty it's intended to provide information information that the market can use in making contracting decisions and that is exactly what happened here marilyn looked at the at the auction results came up with a program to have a resource built outside the auction which would then be added into the auction but it had to do it in the courts with ferk rules first is the gatekeeper of the auction marilyn couldn't couldn't couldn't sort itself into the auction in a way that meant for it didn't allow even if it wanted to mr president i didn't i have to admit for myself in this kind of brief it would have been much much easier if people had used simplified examples with real numbers i have a hard time thinking in terms of simply abstract work but as far as i understand my law clerk says that this cost base system of fur is that the minimum offer price has to be set that is they have to set a price that ninety percent of the cost of new en a combined cycle generator that says they calculated petion him or if it's neither of those two kinds of generators it's seventy percent is that correct i believe that if you're if that's correct then if i have a generator up somewhere in the hills of surrounding their hills in maryland and it's more expensive to get coal up into those hills or oil or natural gas and so i banks and loans and so forth it allows me to charge two hundred twenty dollars a megawatt day ok ok does that i can go to further and i can say seventy percent of that is what i am going to put into the pool because i know that marilyn will give me the rest and this is not one of those two kinds and seventy percent of food two hundred twenty is around i don't know my math isn't too good one hundred eighty so they get awarded the contract because it's one hundred eighty but there some other firms that are more expensive over here and those other firms don't get into it at all because we used up all the generating capacity that we needed for the next five years with your firm and a few others and that changes rather dramatically who supplies the contract and it also changes the price at which retailers across p j s will pay for the electricity they are getting from the pool is that right that's either right or wrong well if you're not right it seems like the end of the matter if it's wrong then you explain to me why here's what's going on your honor if the cost of the generator is below the default price that ninety or seventy percent price that you describe the generator is that it's all for floor in the generators permitted to know i'm assuming that the cost is higher than the seventy percent that that might be a problem but i have two answers to that your honor first of all that was not this case in this case the the resource bid on the basis of its cost and its cost base number was below the default price so there was no issue  described as a resource with a cost above the default price that gets to bid the default or you're asking only for the case who are it's below you're not interested in the case where it's involved in this whole case has been argued only in the case where it's low well that is actually what happens i'm not saying what happens i will say we have to decide a legal issue is my legal issue to include my example or is it not i think it does not include your example your honor that is a different kind of distortion the solicitor general mentions that in its  eleven when they revised the minimum offer rule did not find a reason to adjust the offer level higher which might have limited that problem if work now believes that that distortion exists i don't want to use up all your guide i'd like to reserve the recognized by her on the purchasing and of any contract to direct their local utilities to enter into any contract they want when they direct the purchaser to do so that gives rise to a contract that is certainly within for jurisdiction to review they review the rates charged on the other side of the contract the seller side of the contract and they review the ultimate contract itself but the notion that you are setting the rates by engaging in a contract with a seller is completely inconsistent with what has always been and i can only say always been there and that's how the federal power act is written as set forth in our reply brief the federal power act supplies jurisdiction on the seller side of those right if i understand what you just said you're not relying on mr strauss argument m that this wasn't a whole setting a wholesale rate because maryland did it by auction but you're saying that that's irrelevant that maryland could have just picked a price and and that that would have been fine so long as at some point for a had the power to review and veto it is that what you're saying no it's it's it's a fair point but no marilyn could not affect the price it could not impose that price on the seller  longstanding rule of for has been if it's competitively set by the seller leaving the seller free to respond to the to the bid of the purchaser then it is subject to ferric and that review processes there and it is not inconsistent with mr strauss his position in this specific circumstance of an auction what we had here i guess i don't understand i mean to just take a hypothetical case where where maryland said to all its utilities this is the price and this is the only price that you will pay for electricity and line are you saying that i don't mean that we do that i believe merits there is a case from the commission says that would cross the line i am imposing a price that all my utilities would sell that crosses the line ok but then you are saying that everything is dependent on the difference between picking the price and letting an auction pick a price but i guess i repeat the question that i made  were talking in answering your first question i was answering the conceptual question of what it is for regulates burke regulate the seller side of every transaction in the auction context things get a little more complicated as you've just discussed in the in a case this case however was a procurement to build a power plant c p b bid to build this power plant it looked at the costs it would take to build a power plant in this locale how much turbines cost how much it will cost to run the plant and to bid into the market and make it available to the market of course it then divided the price over the twenty years you have two hundred forty month monthly payments that's exactly what we did we understood that for maryland to pay for us to build a power plant and to keep all the profits from our sales in in the markets both the energy sales and capacity sales both were involved that would be unfair they didn't want their rate payers to both finance our power plant construction which is what maryland was after and keep all the revenues so the contract reads and this is on page seventeen of the reply brief the contract reads we turn over all the revenues for twenty years and we build the power plant they pay us to build the power plant we turn over the revenues it is correct enough that the net of that is the difference between the revenues and the price but the purchase here was to build the power plant now how did it in impact the auction how does it impact the auction the auction was always set up by fair on the understanding that states have the inherent power and i mean the reserve power under the federal power act itself to direct these kinds of long term contracts to direct capacity purchases outside because they control the purchasing decisions of their local utilities every single day they review them and they control them and they understood that states would be using long term contracts to support new generation so far didn't just as an act of grace allow constant sales of capacity outside the auction they constructed the auction against the existing authority of the states to do exactly what was done here would it be correct or incorrect to say that under maryland law you entered and you entered the auction and as a result you altered the consequences of that auction in a way that was inconsistent with first policy is an affair and no it is not there because folks policy it was expressed they said when states do exactly what was done here before they even set up the auction and then in in fact they said if states do what we do here we have a mechanism in our auction not corrected to adjust the auction so the auction still functions and that was the point mr strauss was making the minimum offer price rule which has two formats is acceptable to first because first says if you comply with that rule it does not artificially suppress prices that was for x judgment whether it was a seventy percent or an eighty percent situation of how you bid firk has determined that is competitive economic these are quotes does not mean ines does not artificially suppress prices because first want those bids in your competitive resource in our case however we didn't even use that the fall price we used a pure cost base price so the concern the government expressed is that there's a possibility of an exception which they say they haven't corrected i burke did it on purpose and said it doesn't suppress prices the possibility of that exception is a limit a did we were we in our case because we did a pure cost base bid and when you bid up your cost base bid does it affect the market of course the addition of supply affects the market doesn't think that's a bad thing burke thanks that's a wonderful that's another problem i have here i don't spend more than a minute on this but i understand the procedural posture of this case and it seemed to me it started out by saying that there was a supremacy clause private right of action or something which i think there is and my opinion and then and then it seemed to go we don't have first opinion we only have it through the as g l it was a doctrine called primary jurisdiction where if the agency really their views is really relevant on that you've got their views directly what happened to all that we want to be in front of the commission we believe the commission should decide these issues we think the commission would decide these issues favorably to us because they have done so in connection with this very case when the issue arose of this offer being present but i don't understand your position and your you're arguing that fork does not think that this adversely affects the options that what you're saying adversely affects the uk and has for filed a brief arguing the opposite i know arguing as if you had even here if you if you read the first decisions that we've cited the one thirty five and one thirty seven that's how it's numbered in the briefs if you read that and you read the quotes they're included in joint appendix you will see that burke has determined that these bids are competitive if they're submitted in this way so you cited for doesn't understand its own order i'm saying burks as happened in the morgan stanley case there is a little bit of changing of of tunes that's at issue here if this issue was presented to the commission which is exactly who should decide these issues of energy  this court whether something artificially suppresses these kinds of issues of energy policy and how the auction should work should be decided by fair under this court's case northwest central it says if the issue between the states authority and the federal authority can be reconciled and they were reconciled with these specific contracts in front of us for modified the rules to allow exactly this bid and determined that it did not artificially suppress prices does it affect prices of course new supply of x prices so as to how artifice do that how would this work normally meaning forget that a lawsuit was storied you enter into this contract do you have to submit the contract to further know because we have what's called market based rate authority that's been discussed in your cases so we notify them anyone can the very complaints we have here the complaints about the commute the our fees and the solicitations from new jersey and maryland and they presented this to for burke said ah we take care of this in iraq and we've always known how with the minimum offer price rule they said the minimal offer price rule when it is applied will result in not artificially suppressing prices that is how this was presented to her with these specific contracts here and there in three of the fourth circuit appendix these specific contracts now if they want to protest it again and say these have rates or the rates that affect the jurisdiction they're free to protest it yet again and i am i believe would come up with the same conclusion again and say this is perfectly appropriate to bid into the auction in this way now if somebody wants to petition let's close this what they're calling the loophole the one that just as prior suggested because it doesn't require a bit exactly a cost base price they can go to further and close that loophole it would've affected our case at all because we did a cost base but they can go to first on everyone all of the conflict preemption issues should be addressed the for they're not really for this court which is obviously having some trouble conceptualizing how this all works to resolve those conflicts mansion on the north west central issues  appeal the n j b p u appeal of that order they were on our side when they kate were asked to join this case the third circuit said get in two weeks i think they took an ill advised position but it's certainly not a position that was mr command mr chief justice and may it please the court maryland's effort to dictate what c p b receives in connection with its wholesale sales to the wholesale market operator is plainly preempted marilyn's targeting of the federal market was direct in this case c p v gets nothing unless it beads and clears the ph am auction once it does it must sell all of its output all of its energy and capacity to p j m if those things happen then c p v receives thanks to the state of maryland and its state action payment streams in conjunction in connection with those sales to p j m that are different from and far more stable than the the the way he described it is worded their bidding into the p j yam is their real cost and when they're bidding their real cost maryland isn't going to pay them a dime if their and in for a marginal unit which i assume they would be the cost of p j yeah is going to be higher or lower and they'll be extra money so what they're going to do is they're going to be paying marilyn now what they said is we're going to be think it's pretty much conceded that at least in the first couple of years of this the expectation is that c p b is going to be receiving an additional payment of forced payment from the l s e the load serving entity to p j s so that's just a factual j m than would a private generator with new capacity a private generator with new capacity is going to build its actual didn't its actual costs because they don't want to clear at the expense of having an unprofitable generator it's a completely different dynamic for somebody like c p v because the bidding clear requirement for them is just an obstacle to get to the pot of gold at the end of the rainbow which is all these guarantee payments for twenty years so they have every incentive to understate their cost that incentive was realized here they talked about bidding in their costs when they first bid in their costs they bid in their cost at less than fourteen dollars a megawatt day ok now when p g m took a look at that they ended up upping the figure seven fold to about ninety six dollars so that's a great measure of their incentive to distort their costs for now what they will say is up but mr clement the ninety six dollars bid cleared and that's all that matter as well with all due respect that's wrong says it's wrong a bid like this can still have a price effect suppressive effect and you can see that a couple ways i want to say one thing though is it is here on our site in part because they are on its record as saying this the minimum offer price rule the motor is not some sort of cure all that is designed to ward off any price suppressive did it is a default rule it is a course screen to deal with the most egregious cost reducing it also depends on an estimate of cost in here's why it doesn't really work for a bid like this one of the most important costs is your cost of capital well what we see peaveys cost of capital without this program they told you they told maryland without the twenty year guarantee we can't get any financing for this project we can't do it at the bench trial they told the district court our ability to bid this project as if in fact it's based on a cost of capital that is lower than what the cost of capital really is that is a misstatement of their cost or a lower than actual cost just as much as if the steel were in fact less expensive than what they actually have to pay absolutely and of course another component of cost is going to be future fuel costs and anybody who's been to the pump lately knows that we can all have a lot of as to what we think are going to be the future fuel costs but if i could return to the capital cost i'm just finish this point it's even worse than it's misstated because ultimately because they're getting a twenty year guarantee and no one else is everybody else is calculating their cost of a new generation financing based on the three year price signal that the capacity market essentially it destroys the ability to do an apples to apples comparison and then the one thing we know for certain here is that this project ended up displacing a project that actually could be built based on the three year forward price and without a twenty year content you'd have skewed have no objection if marilyn just decided to subsidize the construction of the plant would you we would your honor i think it might be a harder case but particularly if the subsidy was conditioned on a bit unclear requirement i would be here making a preemption argument you might not think it's as good of a preemption argument and i think the only difference is because the statutory text of the federal power act it seems to me to make our position clearly correct is the provision that says that for has the authority to dictate what a sell action that sets rates for wholesale sales and rates in this context is defined by the statute as including what it seller receives for wholesale sales we think that's preempted are they are they setting rates by having an auction we certainly think so and more importantly i think for purposes of this case so did the district court i mean it's kind of odd for me to hear my friends on the other side as i heard them in the colloquy with justice kagan they  sets the rates and that would be an odd concession in any case but particularly where it footnote forty eight of the district court's opinion the district court finds as a matter of fact i'll concede it's a mixed question of fact and on all but still there it not because i think the point is if maryland's not setting the rates here then first not setting any wholesale rates and that's not right and so just because you use an option mechanism to set the rate that doesn't mean that it's not the state setting the rate and if you look at footnote forty eight it's it goes beyond that because based on particular findings based on the testimony of the chairman of the maryland p s c the district court said that actually because there was back and forth between maryland and  b this was maryland setting the rates that so is maryland setting the rates when it subsidizes the construction of a power plant well if mr chief justice suppose they decided to i mean potentially they could not all subsidies are created equal if they had a subsidy that was measured a dollar for dollar subsidy based on sales to p j am i would think that would actually be setting the rate against you might disagree with me but i would say that in that case you would have very similar situation i think this case is that much clear because these payments from the l s e is directly conditioned on selling to the j m mr clement can you tell me how i write this opinion and i'll ask you why as i look at the relevant statutory provisions what it says is that her has the power to ensure that rates that are set are fair or just and reason so it doesn't say it gets to set the rates so they can do rules and regulations that control how the rates are set so that i'm not sure how this is feel pretty preemption a best i think it might be conflict preemption and so if i think it's conflict preemption that's something about maryland's plan conflicts with the system that ferk has set in place how do i articulate the rule in this case what is it conflicts with percs rules and regulations with respect to setting participating in the market in the auction sure because i as i understand it in think you're you've told me any differently that the people who are auctioning in the market can and  enter into contracts with states on a regular basis not with contracts with the states that's not what my friends on the other which i would be using they enter into voluntary bilateral contracts off of the market exactly and that is not what's  are voluntary contracts outside the market right why is this involuntary what we feel is the does state because the state told the load serving entities that they had to make these payments to peavy on it and it's so is that what conflicts i'm trying to articulate the preemption rule in in some simplified way i'm a little bit like justice prior on this i'm not quite sure how everything's working but i don't think it can be feel preemption well if you have to explain what field we're talking about and what rules were setting in the future i think it's conflict preemption i think it's both your honor i think part of the reason this is difficult is because it's like an overdetermined equation there is both field preemption here but there's also conflict preemption and there are multiple evidences of conflict preemption because nobody's trying to do anything like j m rates for the p j m auctions are just and reasonable as you said the starting premise here is the statute gives firk the authority to determine whether wholesale rates are just unreasonable firk has done that not just to what the nominal rate is in the auction but to what the supplier receives in connection with that say it so if a state through state action says it's all very well c p p that you've sold that  am has given you one hundred this is your lucky day we're going to give you another fifty that is clearly preempted because the state is having the supplier receive something in connection with a can't supply more than four so fur is trying to get an extra thousand people whom it will choose to give it in my lout to bid are those who are the new people who have the lowest cost all of those people in a rising market will have higher costs than the existing people so if in fact for looks to the existing people and says which can bid and says you have to use your real costs and if they really implement that where you just said it's going to have no effect on the market because they will be in the market whether they're given a subsidy or whether they're not given a subsidy and indeed it won't affect the price because the price is affected only by the marginal units who by definition have higher costs than anything that ferk will look to  what these people's costs are therefore it is without impact and they add to that we would like to make this argument to firm where they have to focus on and not just say in general to the s g this is how we think because by the time we're finished we'll be able to modify present rules so that they will see that they are not heard at all in the actual world by our costs i did get something like that out of what they said maybe i'm wrong in what they think maybe they'll just agree because they think i'm agreeing with them at the moment but i would like to know some response to that here's your response it comes in two parts because there's at least two parts to that question first i take issue with the premise because it may be that some new generation will come in in your hypothetical but it won't necessarily be this one and in fact here we know as a matter of fact that it wouldn't be this one except for the twenty year guarantee and so they've displaced somebody but please don't just shrug your show no i'm agreeing with you that that there is a huge difference is this the message this all sense to my clients is don't take for direction that you should be competing based on market forces and efficiency we should stop competing efficiently on the p g a and try to put the best bid together based on the three european stocks and we should start competing for subsidies and we should start competing for guarantees the second part of your question what about for primary jurisdiction this is all a bit rich coming from my friends on the other side because as justice alito alluded to when this all started their position was this has nothing to do with ferk at all this is a financial arrangement that for a can't even look at then my friend talks about how well they eventually got market based rate authority from ferk in a submission well i to ask you to take a look at what they said and join appendix page one forty two of that submission what they said about the contract is they said quote c p v maryland also notes that it included d in this application solely for informational purposes and is not requesting that the commission address or discuss commission jurisdiction over the c f d in its decision on c p vs maryland's request for market based rates don't look at what's behind that curtain m we don't want you to do anything with that we're just here to try to get market based rate authority for said them now to come in not having raised any objection to the supremacy clause cause of action and by the way there was a commerce clause cause of action there as well which is maybe why the parties overlooked it and i do think that's not jurisdictional so i think we're past that so for them to come in now and say oh this has to go to for i'm sorry it's a bit rich and i understood why they were making the moper argument at the early stages of the litigation before the brief but i am a little mystified why at this late stage of the game after perk has filed three briefs saying that the moper is not sufficient to eliminate price suppressive bid so that they're still saying we win because for x on our side i mean that is a bit mystifying and i think burke is absolutely right on this for the reasons that we've already talked about i mean you can seem can't really even apply the moper in an apples to apples way if you have this kind of twenty year guarantee because the cost of capitals are completely out whack and of course they do have the problem that their own testimony is they wouldn't be on the market at all if they didn't have this twenty year guarantee so in the first capacity auction that we had to deal with the price was suppressed in every energy auction since then the price was suppressed and that's why i think you know they never tried to design the moper as this perfect thing you talked about the ninety percent in the seventy percent way back in one of those proceedings my client said why isn't it one hundred percent if you think about the economics of this it should be one hundred percent and first response was post counts this isn't perfect we don't pretend it's perfect so we think ninety percent is a rough compromise fair enough probably not but it doesn't mean that this is something that the perfect solution i also don't think there's anything terribly anomalous about the procedural posture of this case and that's exactly seadrill posture you had in front of you in the snide when case that was a district court action declaratory judgment for preemption what i think makes this a preemption case and what completely distinguishes voluntary bilateral contracts is state action it's the state action forcing the  action the parties make their agreement they eventually submit it to further or if it's a market based rate somebody can object and the only time you really get state action at that point is at the very end of the process when the states doing retail rate regulation and that's the but here you've got the state action right up front and the state action is preempted mr committed it does seem to me important what that kind of state action is and this goes back to the question the chief justice raised with you if the state had just said we need another power plant and had delivered a load of money to c p p and said go build a power plant you're not saying that that would be preempted are you if it's not at all it does it you know that's going to have an effect on the kind of b is going to make but the state is not itself changing the outcomes of the auction process you wouldn't say that's preempted would you it would depend i mean the way you just described it i would say especially as i think it's a helpful answer of course not not preempting but if they condition all of that money on a big unclear requirement i would be saying that that was preempted i think it's a harder case but i'd hate to lose that case here because their cases like that  being litigated in the lower court thank you thank you counsel mr chief justice in may it please the court in the government's view the maryland generation order is preempted because by requiring the state selected generator to bid into and clear the p j m capacity auction in order to receive the guaranteed payments provided in the contract the maryland program directly intrudes on the federal auction and it also interferes with the free market mechanism that first has approved for setting capacity prices in that auction do you have a position on the question that mr clemente avoided about what if the state would have the state subsidize the power plant is that good or bad i agree with mr clements answer if the state just what was mr if if the state just paid to build a power plant that's not directly targeting what's happening in the p j m option sure it's adding supply to the market but as long as the state is staying within its sphere under the federal power act that's fine but i also agree with the second part of his answer which is that if there was some kind of a bit unclear requirement in the auction attached to it for example if the state paid to build the power plant and turned it over to see peavy but then they said ok we want to get some money back for this power plant that we built so you're going to bid the capacity of this plant into the auction and unless you clear we're taking the plan away from you or something like that that changes the incentives of the participants in the works auction and that's what the what is the that's the conflict yes that yes that's because yes it's charming it's in creating a conflict changing the incentives of the people in the market in a way that conflicts with the market mechanism that first has set up we think that shows both field and conflict  have both arguments field and conflict if if you were to win this case would you rather win it on field or conflict and why i mean i think that field preemption is probably a better way to decide the case and it would probably it would be a broader ruling in such a in such a ruling i think the court would say that when the state does something that alters the incentives of the people that are participating in for its market that is on the federal field or poor at that ensures the earlier question no they can't give money to build a generator because that changes the incentives the generators cost by definition change if it's receiving subsidies for free if the state is just acting completely outside of the auction with no requirement to bid in two unclear in the auction then that is not something that changes the incentives of the folks that are participating in the the auction produces and changes that rate for c p v and for all the utilities in maryland i think justice kagan the the reason why we don't agree with that broader interpretation is because we  does not think that just receiving extra money in in connection with capacity that's being sold into the auction is necessarily preempted and let me explain why there's something that happens in this industry a widespread practice called contracts for differences the contracts in this case are sometimes referred to as contractor differences but because of the been clear requirement they don't operate in the same way and hardy's can enter into a hedge agreement for it no but that's but that's when mr clement said that there's a real difference here between voluntary agreements you know if there's a contract for difference is fine but that this is maryland coming in and effectively force and the l s e is to enter into such a contract and by doing so changing the whole show right well i think the problem that that book sees with this is the effect that it has on the auction if this was just a bilateral contract occurring outside of the auction where maryland was accepting the results of a competitive procurement and then submitting that biological contract to for review that's where for a quick review that contract the field that we're talking about here is the auction and what fergus concerned about here is the effects on the auction of a state program like the one here that ties a subsidy or extra payments under the contract to a requirement that the person receiving it bit into and clear the capacity in the auction and see how far do you think your authority reaches with respect to want auction because that was the point of my question on the subsidies i mean a lot of things are going to have an effect auction is it only because of the legal mandate in this case yes it's because the the program in this case by requiring the capacity to be bid into the auction and clear it directly targets the auction it has a direct effect on the auction we recognize that in the context of the federal power act the state has its sphere to the state regulates retail rates the state has control over generation and it can do things within that sphere that have indirect effects on the field but in this case the problem is that because of the bidding and clearing requirement it's directly altering the a complete solution because as we've described in our brief if somebody bids then at the minimum offer price roll but its costs are actually higher it is necessarily going to knock somebody out of the auction that would have cleared otherwise and the price of the auction will go down but and i think as mr clement correctly pointed out the moper is not a perfect solution to this in this particular case i think the incentives of what what were what's happening under the state program is demonstrated by the fact that p tried to bid in so low even when it tried to cost justify their bids and the market monitor and p j m when trying to actually reconstruct the c p u these costs came to different numbers on what those costs would be so it's not a perfect way to try to screen out offers that are not actually based on cost or that should not be coming in and additionally just the fact that for how to expand the moper to cover this program i think shows that there's been an intrusion  for has tried to correct what's happening in these programs through extending the minimum price offer rule to these beds but i think that that just shows that what's happening here is that the state programs are changing the incentives of the people in the field well but i don't see how that could be true if earth could in fact get rid of the problem then it leaves you with no conflict i don't think that's right i think the conflict is still with the the market mechanism that has set up in order to determine wholesale capacity rates in the auction when you have a program that has this bit in clear requirement it alters those incentives even if there's not an actual price suppressive effect the the the possibility for a conflict or the imminent possibility of a conflict still calls for field is the effects of the of the state program on the participants in its auction if this particular the way that these contracts are constructed the c p b is going to get the contract price regardless of whether the clearing price now look billions of actions of states affect the cost of the generator and thereby affect the bid price into the p j m auction ninety nine point nine nine nine nine percent we want the state to do they're perfectly free to do what you want this one percent no and i want the words that are going to define that field that's what justice sort of i was asking for before it's something to do with the rule here in maryland that forces them not just to have these artificial cost but to put it on the the auction right one of the words i think directly targeting the auction to take some words from one zero could be a fine way to do it  on the field that we're talking about is the p j m auction and any other state program that directly targets the auction in the incentives of the participants in that auction by the bidding clear requirement is would be preempted under a field preemption theory we think also under a conflict preemption theory i could distinguish just a just a little bit the contracts for differences that are not tied to a bit unclear requirement in the auction states or the parties in this context will sometimes enter into a hedge agreement where they agree on a price like one hundred dollars if the auction clearing price is below that say it's eighty then the person that the generator has contracted with like merrill lynch or something owes the generator twenty dollars regard less of what what else happens that transaction will always take place the generator then has to make a separate decision of whether it wants to bit into the auction if it's if the auction price is eighty and its costs are ninety it's not going to if it's costs or seventy it will bid in that sort of a contract for differences is not preempted here it's just when there's a bidding and clearing apartment that the subsidy is tied to thank you council mr strauss you have three minutes remaining thank your zero nine there is a regulation which for essentially says so that's all that happened here the question of whether we targeted the auction we did not regulate the auction we could not regulate the auction we could not regulate c p v either their wholesale generator if they make their own choices in the me their own agreement here to enter into this contract we couldn't regulate the outcome of the auction because first regulates the outcome of the auction they control every aspect of it and in this case what first found was a rule change was needed to address this very contract the change was made the resource bid in accordance with the rule change and cleared first said it's will change would reconcile the tensions between state policy and auction integrity f said that this resource was economic needed competitive and did not suppress prices there was no undue price suppression or no artificial price oppression from this resource first said that and said it more than once even with the state subsidy in the reason it's very clear because the bid was a cost base bid without regard to the contract revenue and keep in mind it's been a lot of talk about a subsidy here maryland concluded that over the life of this contract this was going to be a better deal for ratepayers than for the generator and that is in the generation order a point i would make your honor is that the rule that should be articulated here is one that allows each of the parties to fulfill their responsibilities under the statute sellers get to set rates as an initial matter first gets to review those r states get to direct the procurement decisions of their retail utilities but a lot of talk here about what the retail utilities were forced to do this subject to state regulation state courts have affirmed what maryland did here with respect to its retail utilities that should be no question about that states can take actions where necessary to develop new power plants and as we move forward into an era of a new generation portfolio in this country the last thing the courts should be considering is trying to limit state options it's very important to keep them open especially in a case here where first has reviewed this precise contract if you look on page six of our reply brief there's a quote from the first rehearing order in november of two thousand and eleven in which first describes an acceptable arrangement and describes this arrangement one in which local utilities contract with the generator and the generator bids the unit into the market that is exactly what happened under this contract for speaks approvingly of it thank you ron thank you pound so cases submitted