On September 27, 2018, the U.S. Court of Appeals for the Second Circuit (“Second Circuit”) dismissed challenges to the New York zero emission credit (“ZEC”) program, ruling that: (1) the ZEC program is not field preempted by the Federal Power Act (“FPA”) because the ZEC program is not expressly tied to wholesale market participation or prices; (2) the ZEC program is not conflict preempted because it does not intrude on federal goals; and (3) the ZEC challengers did not have standing to raise a dormant Commerce Clause claim because they did not own out-of-state nuclear generators that they alleged were discriminated against by the ZEC program.

In August 2016, the New York Public Service Commission (“NYPSC”) issued the Clean Energy Standard Order (“CES Order”) adopting the ZEC program as part of a larger effort to reduce greenhouse‐gas emissions. The program allocates ZECs to qualifying in-state nuclear energy generators that are financially “at-risk” of closing. New York utilities are then required to purchase ZECs from either New York State Energy Research and Development Authority or the nuclear generators based on the price set by the NYPSC. The initial price of each ZEC is calculated using the Social Cost of Carbon; however, the price of a ZEC decreases if a market price index, the calculation of which includes the clearing prices of certain regional wholesale energy auctions, exceeds a certain amount. Accordingly, nuclear generators receive a fixed amount under the ZEC program for each MWh generated in addition to what the generators receive in the NYISO wholesale auctions.

In October 2016, ZEC challengers filed a complaint in the U.S. District Court for the Southern District of New York (“District Court”) alleging that the ZEC program was unlawful on two grounds. First, the complainants alleged that the ZEC program is both field and conflict preempted by the FPA because it alters prices in the wholesale NYISO auction. Second, the complainants argued that the program violates the dormant Commerce Clause by distorting interstate wholesale markets in favor of in-state nuclear generators. In July 2017, the District Court dismissed the complaint (see July 31, 2017 edition of the WER). On August 24, 2017, the case was appealed to the Second Circuit.

In its opinion, the Second Circuit first found that the ZEC program is not field preempted because it is not impermissibly “tethered” to wholesale market participation under U.S. Supreme Court precedent in Hughes v. Talen Energy Marketing, LLC (“Hughes”). While ZEC challengers argued that Hughes preempts state programs if they are tethered to “FERC-regulated wholesale electricity prices,” the Second Circuit disagreed and stated that under Hughes, the “tether” is to “wholesale market participation.” Because the CES Order does not expressly require ZEC recipients to participate in wholesale markets, the Second Circuit reasoned that there is no impermissible “tether” under Hughes. Moreover, the Second Circuit held that any incidental effect of the ZEC program on wholesale prices is insufficient to state a claim for field preemption. The Second Circuit also rejected the plaintiffs’ claims that the ZEC program conflicts with FERC’s goals of market competition, finding that FERC has previously approved state programs that incidentally affect wholesale market prices. Finally, the Second Circuit found that ZEC challengers lacked standing to challenge the ZEC program under the dormant Commerce Clause because the plaintiffs’ asserted injuries arose from not owning nuclear generators, not from owning out-of-state nuclear generators that were being allegedly discriminated against.

The Second Circuit’s opinion can be viewed here.