State Programs Claim Third Victory in Federal Court: New York Nuclear Subsidies Survive Legal Challenge

In a July 25, 2017 ruling, the U.S. District Court for the Southern District of New York dismissed a challenge to the component of New York’s “Clean Energy Standard” offering subsidy payments, known as “zero-emissions credits” or ZECs, to certain at-risk, zero-emission nuclear resources.  The ZECs are intended to assist in keeping nuclear power plants on-line, thereby preserving their zero-emissions attributes, until additional renewable resources can be built to meet New York’s aggressive clean energy goals.

The plaintiffs in the New York case, a group of fossil-fuel generating companies and trade associations, alleged in their complaint that the ZEC program was preempted by the Federal Power Act (FPA) because receipt of the subsidies was impermissibly “tethered” to the FERC-jurisdictional wholesale market auctions in a manner similar to the Maryland program declared unconstitutional in Hughes v. Talen Energy Marketing, LLC. The plaintiffs also argued that the program would interfere with FERC reliance on competitive markets to set wholesale energy prices.  The district court found that the plaintiffs’ lacked a preemption cause of action because “the FPA precludes private enforcement except as provided for by PURPA, and private parties such as Plaintiffs ‘cannot, by invoking [the Court’s] equitable powers, circumvent Congress’s exclusion of private enforcement.’” The court went on to find that even if the plaintiffs’ preemption claims were properly before the court, they still would not prevail: “[b]y establishing a program that does not condition or tether ZEC payments to wholesale auction participation, New York has successfully threaded the needle left by Hughes that allows States to adopt innovative programs to encourage the production of clean energy.” The district court also emphasized the lack of any meaningful distinction between New York’s use of ZECs to support its zero-carbon nuclear facilities and its use of Renewable Energy Certificates (RECs) to support wind, solar, and other renewable resources, noting that “[t]he death knell for Plaintiffs’ field-preemption argument is their failure to distinguish ZECs from RECs,” which the plaintiffs conceded are valid.  The district court also rejected the contention that the program conflicts with FERC’s reliance on markets, finding that:

The ZEC program does not run afoul of the goal of having an efficient energy market. Instead, by incentivizing clean energy production, it seeks to minimize the environmental damage that is done by generating electricity through the use of gas and fossil fuels. CES Order at 19. Far from objecting to state programs that encourage energy production with certain desirable environmental attributes, FERC has approved state programs with “renewable portfolio mandates and greenhouse reduction goals.” See, e.g., Pac. Gas & Elec. Co., 123 FERC P 61067, 2008 WL 1780603, ¶ 34 (FERC Apr. 21, 2008). The ZEC program does not thwart the goal of an efficient energy market; rather, it encourages through financial incentives the production of clean energy.

The district court likewise rejected the plaintiffs’ dormant Commerce Clause claims.  The plaintiffs alleged that the ZEC program violates the dormant Commerce Clause by facially discriminating against out-of-state energy producers and by unduly burdening interstate commerce by distorting market pricing and incentives.  After declaring the plaintiffs’ alleged injuries outside of the zone of interests protected by the dormant Commerce Clause, the district court went on to hold that even if the plaintiffs had a cause of action under the dormant Commerce Clause, their claims would still fail because New York was acting as a market participant, not as a regulator, when it created ZECs:

[B]y distributing subsidies through the ZEC program to otherwise financially struggling nuclear power plants, New York is participating in the energy market and exercising its right to favor its own citizens. . . . New York [is not] required to provide financial assistance in the form of ZECs to out-of-state power plants when the ZECs are ultimately paid for by New York ratepayers.

The decision makes the U.S. District Court for the Southern District of New York the third federal court this year to affirm state authority to implement programs to incentivize generation development and retention.

*Spiegel & McDiarmid LLP attorneys Scott H. Strauss, Peter J. Hopkins, Jeffrey A. Schwarz, and Amber L. Martin represented the defendants in the litigation—the Chairman and members of the New York Public Service Commission.

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