This morning, a federal district court in New York heard oral arguments on motions to dismiss a complaint about the New York Public Service Commission’s Zero Emission Credit (ZEC) program. Plaintiff generators argue that the PSC’s ZEC program is preempted by the Federal Power Act and violates the dormant Commerce Clause. Both the PSC and Defendant-Intervenor Exelon, which owns all three plants identified by the PSC as eligible to sell ZECs, filed motions to dismiss.

It was clear from the outset that Judge Valerie Caproni was extremely well prepared. Although Judge Caproni has never decided a case about the electricity industry, her questions to both sides demonstrated a clear-eyed understanding of the PSC’s order, the FERC-regulated markets, and the relevant legal issues. At the close of the argument, she commended all parties, remarking that it was the “best briefed case I’ve ever had.”

On the issue of whether the PSC’s order is field preempted because it amounts to regulation of wholesale electric rates, the Judge’s questions focused on: 1) whether ZECs are “tethered” to the wholesale market, and 2) how ZECs are legally distinct from permissible renewable energy credits (RECs). The plaintiffs argue that the preempted tether has two components. First, the PSC chose three nuclear plants as eligible to generate ZECs based in part on its determination that these plants receive insufficient revenue from the wholesale market. Second, as a practical and legal matter, plaintiffs argue that the nuclear plants must sell their power into the FERC-regulated auction market, and the PSC’s order is therefore preempted because it effectively conditions the ZEC award on a generator’s participation in a FERC-regulated market.

The PSC and Exelon argue that New York’s program is not illegally “tethered” to the FERC-regulated wholesale auction market because the PSC does not require nuclear generators to bid into and clear the wholesale market as the preempted Maryland program did. They point to the final line of the Supreme Court’s recent Hughes decision, which they claim precisely defines the relevant field preemption test as whether a state conditions payment on a plant clearing a FERC-regulated auction. On the second aspect of the supposed tether, Exelon responded that there are other business models that it could pursue to dispose of the power, and that preemption cannot turn on the actions of a private party in response to state and federal regulations. The Judge remarked that the tether between the state program and wholesale rates in Hughes was “very tight,” that the supposed tether here was “not that tight,” and that she “didn’t buy” plaintiffs’ argument that the PSC’s revenue determination is relevant to preemption.

With regard to ZECs, plaintiffs argue that because the ZEC price formula set by the PSC includes an adjustment based on forecasted wholesale prices, ZECs are legally distinct from RECs. Exelon responded that this argument concedes the legality of ZECs in the program’s first two years (when there are no adjustments based on wholesale market forecasts). Moreover, because the adjustment can only reduce the ZEC price, plaintiffs would not be injured by lower prices to their competitors and therefore would not have standing to pursue that claim. The PSC added that the adjustment to the ZEC price does not set a wholesale rate, and so the distinction in price-setting mechanisms between ZECs and RECs is irrelevant to a preemption analysis.

On the issue of whether the PSC’s order is conflict preempted because it interferes with or stands as an obstacle to FERC’s market-based regulation, the Judge pressed the plaintiffs to distinguish between the market distortion caused by ZECs and effects of a hypothetical tax credit, which all parties agree would be legal. (The PSC noted that “New York didn’t invent subsidies” in electricity markets.) Plaintiffs struggled to identify a limiting principle that would allow states to take some actions that would affect market prices but would render ZECs illegal. The Judge also asked whether FERC can act to address any market distortions. The PSC noted that FERC has authority to address whether market design should account for ZECs and that the plaintiffs have filed a complaint at the Commission asking it to order the New York ISO to change its market rules. Exelon added that the plaintiffs are asking the court to preempt ZECs before they even give FERC an opportunity to address their concerns.
Plaintiffs had also argued that the PSC’s order discriminates under the dormant Commerce Clause by providing ZECs only to three in-state nuclear plants. Here, the Judge’s questions focused on whether or not the plaintiffs have standing. The PSC and Exelon have argued that because plaintiffs do not own any out-of-state nuclear plants, they are not being discriminated against and therefore have no standing to bring the claim.

At the conclusion of the oral argument, Judge Caproni rejected a proposed amicus brief filed by Pat Wood III, the former Chair of FERC. Mr. Wood is currently the chairman of Dynegy, one of the plaintiffs.

If the Judge grants the motions, it is likely that the plaintiff generators will file an appeal in the Second Circuit. If the Judge denies the motions (in whole or in part), the case will proceed to a trial, which will presumably be held this summer or fall.