Supremacy Clause and Commerce Clause Challenge to Clean Energy Standard
Coalition For Competitive Electricity et al v. Zibelman, et al.
Recent Developments: District court granted motions to dismiss on July 25, 2017.
Supremacy Clause and Commerce Clause Challenge to PSC Approval of Contract Between Utility and Generator
Entergy v. Zibelman, et al.
Recent Developments: Entergy filed its complaint in federal district court in February 2015. After the New York PSC approved the sale of Entergy’s New York plant to Exelon, the parties agreed to a voluntary dismissal in November 2016.
Commerce Clause Challenge to RPS In-State Requirement
Cases 03-E-0188 and 08-E-0188 before the New York State Public Service Commission
Recent Developments: The Public Service Commission affirmed the in-state requirement on December 23, 2013.
The state’s Clean Energy Standard, issued August 1, 2016, mandates that the state’s utilities procure Zero-Emission Credits (ZECs) that are generated by in-state nuclear power plants. According to the Public Service Commission (PSC), ZEC revenue is necessary to avoid the closure of upstate plants that are needed to meet the state’s carbon emission goals.
The ZEC price is set by the PSC. The initial price is equal to the social cost of carbon, and in later years of the program the price may be reduced by the amount generators already pay for RGGI allowances, and further reduced to account for the amount by which future NYISO energy and capacity prices are forecast to exceed $39 per MWh. Eligible nuclear generators selected by the PSC will enter into contracts with NYSERDA, a state agency, which in turn will enter into contracts for ZECs with utilities and competitive retail suppliers in proportion to the load they serve.
In October 2016, a coalition of electric generators filed a complaint arguing that the state’s ZEC program is preempted because it “invades FERC’s exclusive regulatory field by directly altering the revenue to be paid to nuclear generators.” Moreover, they claimed, the revenue awarded by the state is impermissibly “tethered” to the FERC-regulated wholesale price under the Supreme Court’s 2016 Hughes decision. They also alleged that the program “frustrates FERC’s market design” and “interferes with FERC’s decision to structure the wholesale markets . . . on market-based principles” and is therefore conflict preempted. They also asserted that the ZEC program, which benefits three in-state plants, “is purely protectionist in nature” and thus violates the dormant Commerce Clause.
In July 2017, a federal district court dismissed all claims. In September 2018, the Second Circuit affirmed the lower court’s decision.
With regard to the field preemption claim, the district court found that ZEC sales and energy sales are “entirely separate transactions, with the ZEC sales occurring independently of the wholesale auction and neither one conditioned on the other.” It therefore concluded that the state’s mandate that utilities purchase ZECs at prices determined by the state does not impermissibly “set” rates for FERC-jurisdictional energy sales.
“The death knell for Plaintiffs’ field-preemption argument,” according to the decision, “is their failure to distinguish ZECs from Renewable Energy Credits (RECs),” which are used by utilities to comply with renewable portfolio standard laws in nearly thirty states. The court explained that a 2012 FERC decision holds that RECs are exclusively under state jurisdiction when they are sold separately from their associated energy.
With regard to plaintiffs’ conflict preemption claim, the district court observed that “in the interlocking jurisdictional scheme provided by the FPA, there is no conflict preemption unless clear damage to federal goals would result.” The court “failed to see how the ZEC program causes clear damage” to FERC’s goal of setting wholesale prices through markets. Rather, it concluded that “any price-distorting effects . . . on the market signals at the wholesale auctions . . . are, at best, indirect and do not present the sort of clear damage [to FERC’s goals] required for a plausible conflict preemption claim.”
The court also found multiple reasons for dismissing plaintiffs’ dormant commerce clause claim. Because none of the plaintiffs own an out-of-state nuclear plant that might have been able to generate ZECs but-for the state’s alleged discrimination, the court concluded that plaintiffs “fail to allege any injury arising from [geographic] discrimination.” The court held that plaintiffs are therefore outside the “zone of interests protected by the dormant Commerce Clause.”
Finally, the court relied on a 2015 Supreme Court case about the Constitution’s Supremacy Clause and the “limited private right of action provided by PURPA” to conclude that courts do not have jurisdiction to hear plaintiffs’ FPA preemption claims. This novel argument was pioneered by a 2016 law review article and further developed by the states in the ZEC cases. Notably, the article is based primarily on the 2015 case, while the courts find that the text of the FPA and PURPA, a 1978 law that amended the FPA, more persuasive. According to the decisions, “Congress’s decision to create a limited private cause of action [in PURPA] suggests that the omission of a general private right of action in the [FPA] should . . . be understood as intentional.”
The Second Circuit affirmed a lower court’s dismissal. One by one, the opinion rejects plaintiffs’ numerous and overlapping preemption arguments, and also holds that plaintiffs lack standing to bring their dormant Commerce Clause claims.
The decision opens by noting that plaintiffs’ preemption claims must clear a high bar. Quoting past circuit decisions, the panel observes that there is a “strong presumption against finding that the [State’s] powers” are preempted by the Federal Power Act (FPA), which was “drawn with meticulous regard for the continued exercise of state power.” Importantly, only states have authority to regulate the production of electric energy, while FERC regulates wholesale sales.
The panel found that “New York has kept the line [between production and sales] in sight, and gone as near as can be without crossing it.” It rejected plaintiffs’ argument that the ZEC program indirectly regulates wholesale sales by providing ZEC-generating plants with an adder to the wholesale rate, concluding that “ZECs are created when electricity is produced in a statutorily defined
manner, regardless of whether or how the electricity is ultimately sold.”
The panel also rejected plaintiffs’ attempts to devise “tethers” between ZECs and the wholesale market that would preempt the program under the Supreme Court’s Hughes decision. The panel found it significant that the preempted program in Hughes completely insulated the generator from market risk. Here, New York capped the ZEC price at the social cost of carbon, leaving plants exposed to the risk of low wholesale prices. With regard to adjustments to the ZEC price based on wholesale market outcomes, the panel found it relevant that future ZEC prices are based in part on forecasts of wholesale rates and not actual FERC-regulated rates as was the case in Hughes.
The impermissible tether in Hughes, according to the panel, is between wholesale market participation and the state subsidy. The panel disagreed with plaintiffs that the ZEC program implicitly includes this tether because the nuclear plants are “Exempt Wholesale Generators” (EWG) under federal law and therefore must sell at wholesale through the New York ISO market. Instead, the panel found no explicit condition to sell at wholesale in the state’s program and concluded that a generator’s decision to register as an EWG and sell power into the wholesale markets is “a business decision that does not give rise to preemption concerns.”
With regard to plaintiffs’ conflict preemption theories about how the state is damaging the efficiency of wholesale markets, the panel concluded that any effect on wholesale rates is “(at best)  incidental , resulting from New York’s regulation of producers.” The decision summarizes that “FERC uses auctions to set wholesale prices and to promote efficiency with the background assumption that the FPA establishes a dual regulatory system between the states and federal government and that the states engage in public
policies that affect the wholesale markets. Accordingly, the ZEC program does not cause clear damage to federal goals.”
Finally, the panel held that plaintiffs do not have standing to bring their claim that the program violates the dormant Commerce Clause by limiting ZEC awards to in-state plants. To establish standing in federal court, a plaintiff must show that she is harmed by the policy and that the court’s decision can redress the injury. The panel held that the plaintiffs’ asserted injuries “are not traceable to the alleged discrimination against out-of-state entities but rather arises from their production of energy using fuels that New York disfavors.”
Opinion (Sep. 27, 2018)
Amicus Briefs in Support of New York
• Electricity Regulation Scholars
• California, Connecticut, Illinois, Massachusetts,New York, Oregon, Vermont, and Washington
• Independent Economists
• NRDC and EDF
• Institute for Policy Integrity
• Nuclear Energy Institute
Oral Argument (Mar. 12, 2018)
District Court Decision
Memorandum Opinion and Order (Jul. 25, 2017)
Complaint (Oct. 19, 2016)
Joint Letter Outlining the Case (Dec. 8, 2016)
New York Public Service Commission’s Motion to Dismiss (Dec. 9, 2016)
Exelon’s Motion to Dismiss (Dec. 9, 2016)
Exelon’s Answer to the Complaint (Dec. 9, 2016)
Environmental Defense Fund’s (EDF) Motion to Dismiss (Dec. 9, 2016) (later re-filed as amicus in support of motion to dismiss)
Natural Resources Defense Council’s Brief in Support of Motion to Dismiss (Dec. 9, 2016)
Plaintiffs’ Opposition to Motions to Dismiss (Jan. 6, 2017)
Monitoring Analytics’ Amicus Brief in Support of Complainants (Jan. 6, 2017) (Monitoring Analytics is the PJM market monitor)
Public Service Commission’s Reply in Support of Motions to Dismiss (Jan. 27, 2017)
Exelon’s Reply in Support of the Motions to Dismiss (Jan. 27, 2017)
Environmental Defense Fund’s Reply (Jan. 27, 2017)
New York Environmental Groups’ Amicus Brief in Support of Plaintiffs (Mar. 17, 2017)
NY Public Service Commission’s Supplementary Brief on Allco v. Klee (2d Cir.) (Jul. 10, 2017)
Exelon’s Supplementary Brief (Jul. 10, 2017)
Plaintiffs’ Supplementary Brief (Jul. 10 2017)
(On June 28, the Second Circuit held that a Connecticut procurement program was not preempted and the state’s renewable portfolio standard did not violate the dormant commerce clause.)
Oral Argument Transcript (Mar. 29, 2017)
FERC Proceeding on Sale of Fitzpatrick Nuclear Plant
Protest of Public Citizen to section 203 Application (Oct 8, 2016)
Response of Entergy and Exelon (Oct. 19, 2016) (arguing that consideration of ZECs is beyond the scope of a proceeding to evaluate the sale of a nuclear power plant)
FERC Order (Dec. 7, 2016) (approving sale and dismissing ZEC claims as irrelevant to approval)
FERC Complaint Proceeding about NYISO Capacity Market Rules
EPSA’s amended complaint (Jan. 9, 2017)
Exelon’s Answer (Jan. 24, 2017)
Nuclear Energy Institute’s Comments
NRDC and Sustainable FERC’s Answer (Jan. 24, 2017)
NY PSC’s Answer (Jan. 30, 2017)
Complaint of Hudson River Sloop Clearwater and Goshen Green Farms (Nov. 30, 2016)
Entergy v. Zibelman, et al.
NOTE: After the New York PSC approved the sale of Entergy’s New York plant to Exelon, the parties agreed to a voluntary dismissal in November 2016.
In 2012, the owner of the Dunkirk generating station, a 625 megawatt coal-fired generator in New York, announced it was mothballing the facility due to unfavorable economic conditions. In January 2013, the New York Public Service Commission (PSC) cited reliability concerns and ordered National Grid, a New York distribution utility, to evaluate alternatives to retirement. In June 2014, the PSC approved a ten-year contract between Dunkirk and National Grid that provides for annual payments from the utility to the generator and requires the generator to continue operating and add 435 megawatts of natural gas-fired capacity.
In February 2015, Entergy, the owner of a nuclear power plant in New York, filed suit in federal district court claiming that the PSC’s approval of the contract is preempted by the Federal Power Act and is discriminatory in violation of the dormant Commerce Clause.
The plaintiffs argue that the Dunkirk contract effectively sets a wholesale energy price and is therefore field preempted by FERC’s exclusive jurisdiction over wholesale power sales. Dunkirk sells energy and capacity through FERC-regulated markets. Plaintiffs allege that the out-of-market payments to Dunkirk under the contract replace the FERC-approved clearing price with a price preferred by the PSC. Plaintiffs also argue that the PSC’s approval is conflict preempted because FERC relies on markets to provide price signals to market participants. The out-of-market payments to Dunkirk will suppress the market price and therefore conflict with FERC’s regulatory approach. Plaintiffs further argue that Dunkirk’s ten-year contract conflicts with FERC’s policy, which is that out-of-market payments for reliability reasons should be short-term so as not to undermine market prices.
With regard to the dormant Commerce Clause, the plaintiffs claim that the PSC discriminated against out-of-state and Canadian generators because it was seeking in-state economic benefits. In addition, the approval burdens interstate commerce by suppressing market prices.
In the underlying PSC proceeding, the Commission concluded in its June 13, 2014 order that its approval was not preempted because the contract does not set wholesale rates. Instead, the contract is for the addition of natural-gas fired capacity to enhance reliability. The effect of the PSC’s order is to provide cost recovery for the utility from retail customers, not to require any wholesale sales or set any wholesale prices. At most, the PSC argued, the contract has an indirect effect on wholesale rates, which is insufficient to preempt the PSC’s approval.
In a related matter, on February 19, 2015, FERC issued an order directing the NYISO to file tariff provisions that provide for out-of-market payments to generators needed for reliability reasons. In response, the PSC filed a request for rehearing, noting that the existing NYISO tariff explicitly relies on the PSC’s approval of reliability agreements, therefore obviating the need for amendments to the NYISO tariff to address reliability. The PSC asked FERC to “preserv[e] the respective jurisdictional boundaries of each regulatory commission” by revising the order so it does not overreach into the PSC’s jurisdiction over generation facilities in New York. FERC approved the NYISO’s tariff amendments on April 21, 2016.
Order Denying Motion to Dismiss (Mar. 7, 2016)
Amended Complaint (Aug. 17, 2015; original complaint was filed Feb. 27, 2015 and a first amended complaint was filed Jul. 17, 2015)
State’s Motion to Dismiss (Jul. 27, 2015)
Dunkirk’s Memorandum of Law in Support of NYPSC Motion to Dismiss (Sep. 14, 2015)
Entergy’s Response to NYPSC’s Motion to Dismiss (Sep. 14, 2015)
Entergy’s Letter Brief on the Supreme Court’s Hughes Opinion (May 6, 2016)
State’s Letter Brief on the Supreme Court’s Hughes Opinion (May 6, 2016)
Dunkirk’s Letter Brief on the Supreme Court’s Hughes Opinion (May 6, 2016)
State’s Motion to Dismiss for Lack of Jurisdiction (Aug. 2, 2016)
Entergy’s Motion in Opposition to State’s Motion to Dismiss (Aug. 23, 2016)
State’s Reply in Support of its Motion to Dismiss (Aug. 29, 2016)
PSC and FERC Proceedings
FERC Order Approving NYISO Market Rule (Oct. 9, 2015)
FERC Order Denying Rehearing and Clarification (Feb. 5, 2016) (The proceeding in federal court is being held in abeyance pending final resolution of this FERC docket)
NY PSC Order Addressing Repowering, Cost Allocation and Recovery (June 13, 2014)
FERC Order Denying Complaint about NYISO Market Rules (Mar. 19, 2015) (complainants alleged that reliability contracts, such as the one at issue in this case, suppress market prices and requested amendments to NYISO rules)
FERC Order Instituting Proceeding to Establish Reliability Must Run NY ISO Tariff Provision (Feb. 19, 2015)
NY PSC Request for Rehearing of FERC Order (Mar. 23, 2015)
FERC Order on ISO NY Tariff Provisions (Apr. 21, 2016) (This order is about the ISO’s Reliability-Must-Run agreements and related process. See PP 155-161 for discussion of jurisdictional issues.)
FERC Order on Rehearing about Ginna Nuclear Power Plant (Jul. 13 2015) (This is a separate proceeding about substantially similar issues. FERC addresses the NY PSC’s jurisdictional arguments in PP 16-22.)
FERC Order on Ginna Settlement (Mar. 1, 2016) (See PP 28-31 for discussion of jurisdiction issues.)
NY PSC Notice Soliciting Comments (May 17, 2016)
Cases 03-E-0188 and 08-E-0188 before the New York State Public Service Commission
In 2004, the New York State Public Service Commission (PSC) established a Renewable Portfolio Standard (RPS) and tasked NYSERDA, a state agency, with procuring sufficient renewable energy to meet the PSC’s goals. In 2012, NYSERDA petitioned the PSC to require that the RPS be met with in-state generation only. The Agency claimed that limiting the program to in-state sources would better promote the three principal objectives of the RPS: environmental improvement, energy security, and economic benefits to New York.
In adopting NYSERDA’s petition, the PSC found that the in-state requirement will not impose a burden on interstate commerce. According to the PSC, an RPS contract is a state subsidy, administered by NYSERDA, and is therefore outside the scope of Commerce Clause scrutiny.
HQ Energy Services, a subsidiary of Hydro Quebec, petitioned for rehearing, arguing that the renewable energy credits (RECs) generated in New York or elsewhere are marketable commodities, not state subsidies. Developers sell RECs to NYSERDA and other buyers in interstate commerce, and the Commerce Clause applies to the state’s RPS. The PSC’s in-state requirement is therefore unconstitutional.
The PSC issued an order affirming the in-state requirement but changing its reasoning about the Commerce Clause. The PSC agreed with HQ that RECs are commodities sold in interstate commerce, not subsidies. However, these sales are exempt from Commerce Clause scrutiny because NYSERDA, a state agency, is the purchaser. Under the “Market Participant” exception to the Commerce Clause, a state may validly discriminate in favor of its own citizens.
Order Modifying Renewable Portfolio Standard Program Eligibility Requirements (May 22, 2013)
Order Granting in Part and Denying in Part a Petition for Rehearing (Dec. 22, 2013)
Filed Briefs and Petitions
NYSERDA Petition for Modification of the RPS Program (Dec. 14, 2012)
HQ Energy Services Petition for Rehearing (June 21, 2013)