On September 27, 2018, the U.S. Court of Appeals for the Second Circuit (Second Circuit) affirmed a district court's finding that New York's Zero Emissions Credit (ZEC) program is not preempted by federal law.1 The Second Circuit's opinion follows a similar affirmation by the Seventh Circuit regarding Illinois' ZEC program, and likewise interprets the Supreme Court's decision in Hughes v. Talen Energy2 to prohibit state generation subsidies only if they are explicitly "tethered" to federal wholesale electricity markets.
The Second Circuit, like the Seventh, concluded ZEC programs are
not preempted by federal law because they do not require eligible
nuclear generators to participate in wholesale auctions. That such
generators had done so in the past—and are likely to continue
to do so in the future—is irrelevant to the preemption
analysis, the court explained. In drafting the Federal Power Act,
Congress provided states the authority to regulate the production
of power within their borders, so long as they did not attempt to
regulate wholesale prices. As the court found, New York "kept
[this] line in sight" in designing its ZEC program,
"go[ing] as near as can be without crossing
it"—providing out-of-market revenues to nuclear
generators may have incidental effects on wholesale prices, but
such a practice does not amount to regulating those
prices.3
The Second Circuit also found that New York's ZEC program does
not implicate the dormant Commerce Clause, noting that plaintiffs
lacked standing to claim that New York was discriminating in favor
of in-state nuclear generators when plaintiffs themselves do not
own nuclear generation. To have standing, the court explained,
plaintiffs would need to plausibly allege that New York was
discriminating against out-of-state commerce. Instead, plaintiffs
could only allege that New York favored a particular fuel (nuclear)
over others, such as natural gas, the main fuel source of
plaintiffs' generation.4
At this point, it appears the constitutional fight over state
nuclear subsidies has come to an end. Two separate appellate courts
have upheld ZEC programs. Given the absence of a circuit split, it
is unlikely that the Supreme Court will grant certiorari should
plaintiffs seek further appeal.
Footnotes
1 See our blog post on the Seventh Circuit's opinion for a detailed discussion of ZEC programs.
2 Hughes v. Talen Energy Mktg., LLC, 136 S. Ct. 1288 (2016).
3 Opinion at 17-18, Coal. for Competitive Elec. v. Zibelman, No. 17-2654-cv (2nd Cir. Sept. 27, 2018) ("Second Circuit Opinion").
4 Id. at 23-24.