Nuclear NY: “ZEC” Subsidies Permitted by Second Circuit

On September 27, 2018, the Second Circuit Court of Appeals upheld the District Court’s ruling in Coalition for Competitive Elec., et al. v. Zibelman, et al., and determined that New York State’s ZEC program is neither field nor conflict preempted. No. 17-2654, 2018 WL 4622696 (2nd Cir. Sept. 27, 2018). Moreover, the court found that the plaintiffs lacked Article III standing to raise a dormant Commerce Clause claim.

In August 2016, the New York Public Service Commission (PSC) adopted the Zero Emissions Credit (ZEC) program as part of a larger energy reform plan aimed at reducing greenhouse-gas emissions by 40 percent by 2030. Id. at *2. To achieve this goal, the ZEC program subsidizes qualifying nuclear power plants by creating “ZECs,” which are state-created and state-issued credits certifying the zero-emission attributes of electricity produced by a participating nuclear power plant. Id. Nuclear plants qualify for the program based on five criteria: “(1) ‘verifiable historic contribution…to the clean energy resource mix…in New York’; (2) the degree to which projected wholesale revenues are insufficient to prevent retirement; (3) costs and benefits of ZECs relative to clean-energy alternatives; (4) impacts on ratepayers; and (5) the public interest.” Id. Three nuclear facilities in New York State were qualified for the program and the State indicated facilities outside New York might qualify in the future. Id. For the first two years of the program, the ZEC price was set to $17.48, meaning each qualifying facility receives an additional $17.48 for each MWh of electricity it generates, in addition to the price it receives for the sale of electricity and capacity in the NYISO market. Id. The price will be recalculated every two years beginning in 2019. Id. at *3. NYSERDA then purchases the ZECs from the qualifying plants, and local utilities are required to purchase ZECs from NYSERDA in proportion to their share of the total state electric load. Id. Alternatively, the utilities can purchase both ZECs and energy directly from the generators. The utilities are then permitted to pass these costs along to consumers. Id.

The plaintiffs in the action were a group of electrical generators and trade groups of electrical generators. They argued the ZEC program influences the prices that result from the wholesale auction system established by the Federal Energy Regulatory Commission (FERC) and distorts the market mechanism for determining which energy generators should close. Id. The plaintiffs alleged the subsidized nuclear generators will receive the value of the ZEC in addition to what they earn in the wholesale markets which will then create a depressive effect on energy and capacity prices causing generators such as the plaintiffs to receive lower prices than they would have otherwise. Id. The plaintiffs challenged the constitutionality of the program on two grounds: (1) that the program is preempted (through both field and conflict preemption) under the Federal Power Act (FPA), and (2) that it violates the dormant Commerce Clause. Id.

The defendants, who were members of the PSC, and Interveners, who are the nuclear generators (and their owners) receiving ZECs, moved to dismiss on the grounds that the plaintiffs lacked a private cause of action to pursue their preemption claims because the FPA implicitly forecloses equity jurisdiction, and that the plaintiff’s claims failed as a matter of law. Id. at *1.

The Second Circuit cited to Hughes v. Talen Energy Marketing, LLC (which held state subsidies cannot be “tethered” to wholesale market prices) and concluded the ZEC program was not field preempted because plaintiffs “failed to identify an impermissible ‘tether’” between the ZEC program and wholesale market participation.” Id. at *1, 5. The Second Circuit clarified that “tethering” is only illegal if it ties to market participation, not market prices. Id. Additionally, the Second Circuit held the ZEC program was not conflict preempted because the plaintiffs failed to identify any clear damage to federal goals. Id. at *1. Lastly, the court held the plaintiffs lacked Article III standing as to the dormant Commence Clause. Id. The court noted that this decision is consistent with the recent Seventh Circuit decision in Elec. Power Supply Ass’n v. Star, No. 17-2433, 2018 WL 4356683, at *1 (7th Cir. Sept. 13, 2018). Id.

The take away?

New York’s subsidy program is sure to serve as an example for other states drafting their own ZEC programs. States wishing to implement similar programs will be able to escape federal preemption arguments as long as their ZEC programs do not directly set the wholesale market price. Now, the burden shifts to FERC to reconcile wholesale electricity market consumer pricing with new state clean energy policies. As a result, future FERC decisions will likely result in more litigation over how to reconcile state and federal electricity authority. This decision will also help bolster the nuclear power industry that has suffered lately facing market pressures.

Overall, the Second Circuit’s holding on New York’s “ZEC” program pleases both states and environmental groups alike as they work to reduce the country’s reliance on fossil fuels.

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