Second Circuit Affirms the Constitutionality of New York’s Zero Emission Credit Program for Nuclear Power Plant Subsidies

Case Name: Coalition for Competitive Electricity, et al. v. Zibelman, et al. – Second Circuit

Date of Opinion: September 27, 2018

Opinion By: Judge Jacobs

In August 2016, the New York Public Service Commission (PSC) adopted a Zero Emissions Credit (“ZEC”) program as part of a plan to reduce greenhouse-gas emissions. The ZEC program subsidizes qualifying nuclear power plants, giving state-created and state-issued credits certifying zero-emission produced by participating nuclear plants. The ZEC program credit price for each MWh of electricity generated is calculated by PSC as the hypothetical environmental damage that would result from nuclear plan retirement, based upon federal task force estimates of damage from carbon emission. The price was $17.48 for the first two years of the ZEC program and, beginning in 2019, is to be calculated by PSC every two years with possible reduction based upon “renewable energy penetration” in the New York energy market and forecasts of wholesale electric energy prices.

In October 2016, plaintiffs, a group of electrical generators and trade groups, brought suit in the United States District Court for the Southern District of New York, challenging the constitutionality of the ZEC program, alleging that it is preempted by the Federal Power Act (“FPA”) and that it violates the dormant Commerce Clause.  Pursuant to its “exclusive power to regulate ‘the sale of electric energy at whole sale in interstate commerce,’” FERC had already established that “just and reasonable” rates for wholesale electricity should be set by competitive auctions. Plaintiffs thus alleged “that the ZEC program influences the prices that result from the wholesale auction system established by [FERC] and distorts the market mechanism for determining which energy generators should close.” According to plaintiffs, the ZEC program thus impermissibly undermines this auction system and takes authority away from FERC. The district court granted a motion to dismiss, rejecting plaintiffs’ challenge and plaintiffs appealed.

The Second Circuit affirmed the district court and dismissed plaintiffs’ challenge to the ZEC program, holding the program is neither preempted under the FPA nor a violation of the Commerce Clause. The Second concluded that the ZEC is not preempted because plaintiffs could not establish a direct connection between the program and wholesale market participation as required under Hughes v. Talen Energy Marketing, LLC, 136 S. Ct. 1288, 1293 (2016). The Second Circuit distinguished the ZEC program, which considers forecasts of wholesale pricing in calculating the credit price and, therefore according to the court falls within state authority under the FPA’s dual state-federal regulatory scheme, from programs that are impermissibly “tethered” to wholesale market participation. The court further found that plaintiffs’ failed to identify any “clear damage to federal goals” caused by the ZEC program.

The Second Circuit also held that plaintiffs lacked standing to support a dormant Commerce Clause claim because they could not show an injury in fact. Plaintiffs had not alleged that they own nuclear power plants in or out of New York and the court reasoned that “[p]laintiffs’ 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.”

Summary By: Mark S. Fanelli III

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