United States: New York Federal District Court Decision Supports State's Role In Furthering Clean Energy

Meredith L. Hiller is an associate in our Boston office.

For the third time in the past month, a federal court has upheld a state program to pursue support for clean energy, including renewable energy certificates (RECs), and zero emission credits (ZECs) in New York and Illinois. The courts appear to be implementing Justice Sonia Sotomayor's concurring opinion in Hughes v. Talen Energy Marketing that "'coordinate state and federal efforts exist within a complementary administrative framework, and in the pursuit of common purposes, the case for federal pre-emption becomes a less persuasive one.'"

Last Tuesday, the federal district court for the Southern District of New York dismissed all of the claims against the state's ZEC program in Coalition for Competitive Electricity, et al v. Zibelman, rejecting the generators' claims that the program violated the dormant Commerce Clause and was preempted by the Federal Power Act (FPA). The group of generators had claimed that the FPA preempted New York's ability to mandate that utilities purchase ZECs from specific nuclear generators because it directly altered the revenue to be paid those generators, invading FERC's exclusive regulatory field. They also argued the ZEC program impermissibly tied the ZEC revenue to FERC-regulated wholesale prices, violating the principles the Supreme Court had set forth in Hughes.

The court interpreted the Supreme Court's decision in Hughes to "clearly state that the impermissible tether was 'to a generator's wholesale market participation'" and rejected the idea that a state's incorporation of the wholesale market price in a program to encourage clean energy development could provide the basis for preemption. The court pointed out that regulation of environmental attributes is clearly within states' jurisdiction and reflecting a current market price in a calculation of such values was not the same as setting wholesale market rates.

Further, the court refuted the plaintiff's proposal that the ZEC program requires the nuclear facilities to sell all of their power and capacity into the New York Independent System Operator auctions. The court emphasized that the nuclear generators receive ZECs for the "zero-emissions production of energy, and not for the sale of that energy into the wholesale market," differentiating it from the Maryland program in Hughes, which had "specifically conditioned subsidy payments on a generator's sale of capacity into the auction." The plaintiffs' failure to distinguish RECs, which a 2012 FERC decision had found to be exclusively under state jurisdiction when sold separately from their associated energy, from ZECs ultimately condemned their field-preemption argument.

The coalition of generators also claimed the New York ZEC program was conflict preempted because it changes the wholesale prices utilities pay, frustrating FERC's market design. The court, however, found that ZEC sales were entirely separate from energy sales under the New York program, not conditioned upon each other, and that any effect on wholesale prices was indirect, referring to Allco Fin. Ltd. v. Klee. The court therefore found the state requirement that utilities purchase ZECs at the New York Public Service Commission's (PSC) set prices, calculated using the federal estimate of the societal cost of carbon and a forecast of wholesale electricity prices, does not set impermissibly rates for energy sales under FERC's jurisdiction. Since the ZEC program does not circumvent the FERC auction and does not damage the federal goals, because any effects on the wholesale auctions' market signals are at best indirect, the court found no conflict between the PSC program and the FPA.

Finally, while the generators had alleged the ZEC program was protectionist and therefore violated the dormant Commerce Clause, the court credited the PSC's stated goals of supporting "otherwise financially struggling nuclear power plants" and "'encourag[ing] the preservation of the environmental values or attributes of zero-emissions nuclear-powered electric generating facilities for the benefit of the electric system, its customers and environment.'" The court found the plaintiffs were not harmed by any geographic discrimination because they do not own out-of-state nuclear plants, and further, that the market participant exception applied to the ZEC program because the state is distributing subsidies and participating in the market, noting that the Supreme Court has never struck down a state subsidy under the dormant Commerce Clause.

Significantly, both the New York and Illinois courts agreed that the FPA does not give courts authority to hear preemption claims brought by private parties. The Illinois and New York federal courts found "Congress's decision to create a limited private cause of action [in PURPA] suggests that the omission of a general private right of action in the [FPA] should . . . be understood as intentional." This procedural argument will give states a complete defense against similar FPA preemption challenges related to state electricity policies if upheld, and given that the plaintiffs in Illinois have appealed that decision and the plaintiffs in this case probably will, further examination of this argument is likely.

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