The US Court of Appeals for the Second Circuit on September 27 affirmed a decision of the US District Court for the Southern District of New York dismissing a complaint seeking to invalidate New York’s Zero Emissions Credit (ZEC) program. This decision comes on the heels of a Seventh Circuit decision affirming the validity of a similar ZEC program in Illinois. In its opinion, the Second Circuit noted that its conclusions accorded with the Seventh Circuit’s decision, which we wrote about in an earlier post.
New York’s ZEC program was adopted by the New York Public Service Commission (PSC) in 2016 as part of a larger Clean Energy Standard Order, which seeks to reduce New York’s greenhouse-gas emissions by 40% by 2030. A ZEC is a credit representing the zero-emission attribute of one megawatt-hour (MWh) of electricity produced by a qualified nuclear power plant. The New York State Energy Research and Development Authority (NYSERDA) purchases ZECs from qualified plants, and local utilities must purchase ZECs from NYSERDA in proportion to the utility’s share of total state electrical load. For the first two years of the ZEC program (2017-2019), the ZEC price is $17.48 per MWh, which is based on the federal government’s calculated “social cost” of carbon less the amount of revenue the qualified facilities receive for participation in the Regional Greenhouse Gas Initiative. ZEC prices will be recalculated every two years based on the growth in renewable energy generation and forecasted wholesale electricity prices.
Plaintiffs in the Southern District of New York sued to invalidate New York’s ZEC program, alleging the ZEC program alters prices determined by the Federal Energy Regulatory Commission’s (FERC) auction system and distorts the FERC-regulated wholesale power market. Plaintiffs claimed the ZEC program is preempted by FERC’s authority over wholesale electricity markets under the Federal Power Act (FPA) and by the US Supreme Court decision, Hughes v. Talen, which struck down a Maryland program to support new in-state generation by providing additional payments tied to the generator’s participation in FERC-regulated wholesale markets. Plaintiffs also alleged the ZEC program violates the dormant Commerce Clause because ZECs benefit only nuclear power plants in New York.
In upholding New York’s ZEC program, the Second Circuit noted that while the FPA grants FERC jurisdiction over wholesale rates in interstate commerce, it reserves authority for states to regulate several in-state activities, most notably the regulation of retail sales. The Second Circuit also pointed out that Hughes did not invalidate all state support of in-state generation but reserved states’ ability to “encourage[e] production of new or clean generation through measures untethered to a generator’s wholesale market participation” so long as those programs do not “condition payment of funds on capacity clearing the auction.”
As to plaintiffs’ preemption claim, the Second Circuit held that New York’s ZEC program, unlike the program at issue in Hughes, is not preempted by the FPA because the creation of ZECs is not “tethered” to the generator’s participation in the wholesale market. ZECs are produced by the generation of electricity but how the plants sell their electricity (by bidding into wholesale markets or through bilateral contracts, for example) is a business decision retained by the plants. Nor are ZECs directly tethered to the wholesale price of electricity: ZEC prices are fixed for two-year intervals, and prices do not fluctuate during those two years to match wholesale prices. Because ZEC prices are based on independent variables (the social cost or carbon and wholesale futures prices that FERC does not regulate), the Second Circuit found that there is no “tether” to FERC-regulated wholesale prices. While ZECs will likely exert downward pressure on wholesale prices by increasing the supply of electricity, the Second Circuit held this “incidental effect is insufficient” to support a preemption claim.
Regarding plaintiffs’ dormant Commerce Clause claim, the Second Circuit held that the plaintiffs did not assert injuries traceable to New York’s alleged discrimination against out-of-state entities. Instead, their alleged injuries arose from their production of electricity using fuels New York chose to disfavor. The plaintiffs, therefore, lacked Article III standing to challenge the ZEC program.