The Second Circuit Court of Appeals affirmed a district court’s dismissal of a complaint about 1) Connecticut’s RFP for renewable energy and 2) the state’s rule that renewable energy credits (RECs) used for RPS compliance must be from resources in New England or an adjacent region. The opinion is particularly significant because it is the first federal court decision to discuss the scope of the Supreme Court’s 2016 Hughes decision. The Second Circuit’s interpretation of Hughes will inform district courts that are weighing motions to dismiss claims about zero emission credits (ZECs) for nuclear plants.

1) Preemption Claim about Connecticut RFP
The plaintiff renewable energy generator argued that a state law requiring regulators to conduct an RFP for renewable energy “compels” utilities to enter into wholesale purchases. This compulsion, the plaintiff argued, intrudes on FERC’s exclusive jurisdiction over wholesale sales and is therefore preempted by the Federal Power Act. In November, the Second Circuit had issued an injunction that prevented Connecticut regulators from approving contracts. It then lifted the injunction the day after oral argument.

The Second Circuit panel rejected plaintiff’s preemption argument for three reasons: 1) the plaintiff failed to allege facts sufficient to support its contention that the FRP “entails the kind of ‘compulsion’ that might sustain a preemption claim of this sort;” 2) there are legally relevant distinctions between the RFP and the Maryland program that the Supreme Court invalidated in Hughes; and 3) the RFP’s “incidental” effects on the wholesale market do not amount to impermissible regulation of that market.

On the first point, the panel found that the RFP does not obligate utilities to actually sign contracts with a winning bidder. In fact, the RFP specifies that utilities “will be responsible for negotiation and execution of any final Power Purchase Agreement.” The court’s opinion does not speculate whether or not an RFP could be preempted if it did, in fact, compel a utility to sign a contract with a specific generator.

The Court then rejected the plaintiff’s argument that the RFP was “economically identical” to the contracts at issue in Hughes. In that case, Maryland required utilities to sign contracts with a generator. Under the contracts, utilities would pay the generator the difference between PJM auction prices and a price specified by state regulators.

By contrast, the Second Circuit found that Connecticut had not “sought essentially to override the terms set by the FERC-approved auction” nor did it “require transfer of ownership through the FERC-approved auction.” Connecticut’s bilateral contracts are subject to FERC’s review and are “precisely what the Hughes court placed outside its limited holding.” Moreover, the RFP will not “produce contracts that violate the bright line laid out in Hughes: the RFPs do not, for instance, require bids that are ‘tethered to a generator’s wholesale market participation’ or that ‘condition payment of funds on capacity clearing the auction.’

The decision provides fodder for both sides of the pending ZEC cases. On the one hand, New York and Illinois will point to the court’s emphasis on the connection between the state program and a FERC-regulated auction. They have argued that their ZEC programs are not preempted because they do not require nuclear plants to sell into a FERC-regulated auction and therefore do not cross Hughes’ “bright line.” On the other hand, ZEC opponents will highlight that the panel found it “significant” that FERC has the final say on any contracts that result from the RFP. This distinguishes RFP contracts from ZECs, which the states argue are not subject to FERC’s review.

2) Dormant Commerce Clause Claim about Connecticut RPS
This case includes a separate claim about Connecticut’s renewable portfolio standard (RPS). Connecticut law requires that RECs used for compliance be from a resource that is located within the ISO-NE region or is in an adjacent region and delivers energy into New England. The plaintiff asserted that these geographic restrictions on eligible RECs amounted to impermissible discrimination under the dormant Commerce Clause.

The panel emphatically rejected the claim. Importantly, the court concluded that for purposes of the dormant Commerce Clause eligible RECs are a different product from the plaintiff’s RECs generated in Georgia. ““RECs are inventions of state property law . . . and Connecticut has invented a class of RECs that differs from” RECs produced in Georgia. The panel held that the two types of RECs are not “similarly situated” under the Supreme Court’s 1997 opinion in General Motors v. Tracy.

The decision also endorses the purposes behind the state’s REC requirement. It found that “Connecticut consumers’ need for a more diversified and renewable energy supply . . . would not be served by RECs” from Georgia. In addition, the program serves the state’s “legitimate interest in promoting increased production of renewable power generation in the region, thereby protecting its citizens’ health, safety, and reliable access to power.”

While the panel recognized that there is a national market for RECs that does not distinguish on the basis of geography, it found that the needs of Connecticut’s local energy market permits the state to create a separate class of RECs. The panel concluded it would not serve the pro-competitive purposes that underlie the dormant Commerce Clause to eliminate Connecticut’s requirement.

The decision is available on the Connecticut page.