Update – July 11, 2017 – ZEC Litigants Brief Second Circuit Decision; First Circuit Affirms Dismissal of Offshore Wind Complaint

Parties in the cases about Zero Emission Credits (ZECs) in federal district courts in New York and Illinois filed briefs yesterday about the recent Second Circuit decision about two Connecticut programs. Not surprisingly, opposing parties offered competing interpretations of the decision.

In addition, yesterday the First Circuit affirmed a district court’s dismissal of a complaint about Rhode Island regulators’ approval of a contract for offshore wind.

Echoing the Supreme Court’s 2016 decision in Hughes v. Talen, a coalition of generation companies argues in two complaints that state-created ZECs are preempted by the Federal Power Act because the states have “invaded FERC’s exclusive regulatory field by directly altering the revenue to be paid to nuclear generators.” Moreover, they assert that the state’s action is preempted because it “interferes with FERC’s decision to structure the wholesale markets . . . on market-based principles.”

The challenge for the generators was to distinguish their arguments from the preemption claims that the Second Circuit rejected in Allco v. Klee. They contend that the court “applied the factors set out in Hughes” and concluded that the Connecticut program was not preempted under the Supreme Court’s holding. This analysis of the so-called “Hughes factors”, they claim, distinguishes their claims from those at issue in Klee and demonstrates that ZECs must be preempted under Hughes. The plaintiffs discuss three “Hughes factors” that they read into the Second Circuit’s opinion:

  1. Were the contracts at issue compelled? While the Second Circuit found that Connecticut utilities were not “compelled” by the state to enter into power purchase agreement, New York and Illinois utilities are forced to purchase ZECs.
  2. Does FERC have authority to review the contracts? The Second Circuit found it relevant that any Connecticut contracts could be reviewed by FERC. FERC does not have authority to review ZEC contracts.
  3. Does the state condition the contracts on clearing a FERC-regulated auction? The Klee court found no such condition in Connecticut’s law. The ZEC plaintiffs reiterate their disputed assertions that “the ZEC price is directly tethered to [FERC-regulated] market prices and is necessarily payable only for electricity that clears the auctions.”

The states and Exelon argue that this case is “even easier” to dismiss than Klee. While the Second Circuit was discussing state authority over contracts for FERC-jurisdictional wholesale energy, this case is about environmental attributes that Klee confirmed are wholly within state jurisdiction. They argue that Hughes is inapplicable to ZECs because, as the Klee Court concluded, Hughes establishes a “bright line” that prohibits the state from conditioning payment on a generator clearing a FERC-regulated auction. The defendants assert that no such condition exists here. With regard to FERC’s review, they note that while FERC cannot review contracts for ZECs, FERC does have authority over energy and capacity sales from ZEC-generating nuclear plants.

With regard to the plaintiffs’ claim that ZECs conflict with FERC’s market-based regulatory regime by distorting prices, defendants point to the Second Circuit’s conclusion that an “incidental effect on wholesale prices does not . . . amount to a regulation of the interstate wholesale electricity market that infringes on FERC’s jurisdiction.” Plaintiffs do not address this part of the Klee opinion.
Separately, the plaintiffs claim that by awarding ZECs only to in-state nuclear plants, the states violate the dormant Commerce Clause’s prohibition on geographic discrimination that benefits in-state businesses at the expense of out-of-state competitors. In Klee, the court found that Connecticut’s rule recognizing renewable energy credits (RECs) only from resources that could deliver energy into the New England grid was not discriminatory because those resources are uniquely capable of meeting the state’s legitimate policy objectives of protecting the health and welfare of its citizens.

The ZEC defendants point out that in-state nuclear plants qualify for ZECs because they are similarly capable of meeting the states’ environmental goals. Plaintiffs counter that the states acted with “protectionist intent to favor selected in-state nuclear plants to the exclusion of similarly situated out-of-state facilities.”

Unrelated to the ZEC cases, yesterday the First Circuit affirmed a district court’s dismissal of a complaint about Rhode Island regulators’ approval of a contract between a Rhode Island utility and Deepwater Wind. The complaint repeated preemption and dormant Commerce Clause theories that opponents of Cape Wind filed in Massachusetts federal court about state regulators’ approval of a contract with a Massachusetts utility. Both complaints were dismissed by district courts for procedural reasons. Yesterday’s First Circuit opinion affirms the lower court’s conclusion that the claims were time-barred by the relevant statute of limitations.

The ZEC briefs are available on the New York and Illinois pages.
The First Circuit’s opinion is on the Rhode Island page.