Update – July 25, 2017 – New York Wins Round 1: Federal Court Dismisses Claims Against ZECs

This afternoon, a New York federal district court dismissed all claims against the state’s zero emission credit (ZEC) program. Less than two weeks after a court in Illinois dismissed nearly identical claims, the New York court similarly rejected plaintiffs’ preemption and dormant Commerce Clause claims on multiple grounds. Importantly, both courts agreed with the states’ procedural argument that the Federal Power Act (FPA) does not provide courts with authority to hear preemption claims brought by private parties. If upheld, this argument would provide states with a complete defense against similar FPA preemption challenges about state electricity policies.

In October, a coalition of electric generators filed a complaint arguing that the state’s mandate that utilities purchase ZECs from identified nuclear generators 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.

With regard to the field preemption claim, the 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 court also found plaintiffs’ “tethering” argument unpersuasive, reading the Supreme Court’s decision in Hughes to “clearly state that the impermissible tether was ‘to a generator’s wholesale market participation.’” Because New York does not require nuclear generators to sell through the FERC-regulated auction in order to receive ZEC payments, the court concluded that the state’s program does not create an unconstitutional tether under Hughes.

“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. Although the court found “factual differences between RECs and ZECs,” the court held that “none is legally significant” and thus applied FERC’s jurisdictional determination about RECs to ZECs.

With regard to plaintiffs’ conflict preemption claim, the 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 summarized that the ZEC program does not “circumvent the FERC auction. . . . If the ZEC program were aimed at wholesale market participation or wholesale prices for sales of energy or capacity, then this would be a stronger case for conflict preemption.”

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.”

Even if the plaintiffs could have overcome this procedural barrier, the court separately found that the state’s ZEC program is permissible under the so-called market participant exception. Supreme Court cases distinguish between a state acting as a regulator and a state participating in the market like a private party. When the state is a market participant, it may choose to favor in-state businesses. Here, the court found that by distributing subsidies, “New York is participating in the energy market and exercising its right to favor its own citizens.” Even if the court did not apply the market participant exception, it would still have held the program constitutional because the Supreme Court has never struck down a state subsidy under the dormant Commerce Clause.

Finally, with regard to the procedural barrier to the plaintiffs’ preemption claims, 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.”

Plaintiffs will almost certainly appeal today’s decision to the Second Circuit Court of Appeals.
The decision is available on the New York page.