On October 19, 2016, the Coalition for Competitive Energy, along with several generators, filed a complaint in the Southern District of New York seeking to invalidate the New York Public Service Commission’s new Clean Energy Standard and associated zero emission credit (ZEC) program. As expected, the complaint charges that the program is preempted by the Federal Power Act because it “intrudes on the exclusive authority of FERC.” The complaint also alleges a violation of the dormant Commerce Clause, arguing that the program only benefits the four New York nuclear programs and therefore “disadvantages” out-of-state generators that sell in the interstate electricity market.

Preemption Arguments

The complaint argues that the ZEC program is both field and conflict preempted. The complaint relies on the Supreme Court’s decision in Hughes v. Talen Energy Marketing, where the Court agreed that a Maryland program guaranteeing local generators a minimum price infringed on FERC’s exclusive jurisdiction to set wholesale energy rates. The Court in that case found that making the subsidies contingent on generators clearing the PJM market created an incentive to submit artificially low bids, thereby depressing prices.

There are some similarities to the circumstances in Hughes. For example, for ten years of the 12-year program term, the amount of the ZEC is reduced by the amount that wholesale electricity and capacity prices are projected to exceed $39. The credits also are paid on the actual output of the nuclear plants, meaning that the plants have an incentive to ensure that they are dispatched by the NYISO, as under the Maryland program. The complaint here argues that, because of these factors, the ZEC price is “tethered” to the FERC-regulated NYISO price, thereby disrupting market signals and “interfer[ing]” with FERC’s structuring of markets.

But there are critical distinctions between the two programs. Most notably, the ZEC is initially calculated by reference to the social cost of carbon. The Seventh Circuit in Zero Zone v. Department of Energy recently upheld the use of the social cost of carbon in promulgating energy efficiency regulations. This undermines the argument that the ZEC is merely a way to interfere with wholesale rates for nuclear generation. And, in prior decisions, FERC has agreed that renewable energy credits are creatures of state law and outside FERC’s jurisdiction if they are sold separately from energy. In addition, for the program’s first two years, the ZEC is reduced for revenues under the Regional Greenhouse Gas Initiative, not revenues received from NYISO. In the remaining ten years, the reduction for capacity and energy prices in excess of $39 is based on expected revenues, not the actual LMP paid by NYISO. Finally, although selling ZECs is dependent on plant output, credits are capped at the amount of historic plant output.

Dormant Commerce Clause

The complaint also alleges that the ZEC program is “purely protectionist in nature” because it benefits only in-state plants, in violation of the dormant commerce clause. While there are cases invalidating laws that favor in-state generation, as well as a statement by the Seventh Circuit that a renewable portfolio standard limiting participation to in-state generation “trips over an insurmountable constitutional objection,” this aspect of the complaint may face difficulty showing any intent by New York to discriminate against out-of-state generators. In Hughes, the district court denied a dormant commerce clause claim, finding that the Maryland subsidy program did not erect any barriers to the sale or transmission of electricity into or out of the state or confer a competitive advantage on domestic generators. So too with the ZEC program.

The ZEC program also may be defended on the ground that New York is the market participant, and thus is free to favor its in-state generators. The ZEC program does not require LSEs to buy zero emissions credits from nuclear generators; rather, NYSERDA buys credits from the generators and sells them to the LSEs.

Conclusion

In the end, we recognize the critical significance of New York’s ZEC program to New York nuclear generators and to the nuclear industry more broadly. There may be only one chance to get it right, lest a defeat of the ZEC program deter other states from considering similar programs.