Update – September 27, 2018 – Second Circuit Upholds New York Zero Emission Credit Program

Today, the Second Circuit affirmed a lower court’s dismissal of preemption and dormant Commerce Clause challenges to New York’s Zero Emission Credit (ZEC) program, which benefits in-state nuclear plants. 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 comes two weeks after the Seventh Circuit dismissed all claims against Illinois’ nearly identical ZEC program.

The decision is a win for both ongoing state efforts to preserve existing nuclear plants – New Jersey regulators expect to finalize a ZEC program by the end of the year – and long-standing renewable energy policies. The panel held that renewable energy credits (RECs), instruments that are used for compliance with Renewable Portfolio Standards, are legally indistinguishable from ZECs. Today’s decision thus implicitly concludes that RECs are not preempted under the FPA, an issue which no court has ever squarely addressed.

The Second Circuit’s 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’ 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.”

The decision is available on the New York page.