Federal Appeals Court Upholds New York Nuclear Subsidy Program Paid By ESCOs

The United States Court of Appeals for the Second Circuit has upheld New York's Zero Emissions Credit (ZECs) nuclear subsidy program, affirming a lower court and denying a challenge brought by certain generators

Unlike programs in other states, the New York program is notable in that ZEC costs are allocated to ESCOs and other generation suppliers (e.g. default service providers), rather than being assumed by the distribution utility for all customers.

The Appeals Court held that the plaintiffs, in challenging the ZEC program, failed to identify an impermissible "tether" to wholesale markets, the distinction which had previously resulted in a federal court striking a Maryland generator subsidy program (under Hughes v. Talen Energy Marketing, LLC, or "Hughes")

The Appeals Court held that the ZEC program is not tethered to FERC-regulated wholesale prices

The Appeals Court explained, "Because the fixed ZEC price is capped based on an independent variable (the social cost of carbon), generators are exposed to market risk in the event that energy prices fall. Moreover, the price may be fixed below the social cost of carbon, but only on the basis of forecast wholesale prices -- forecasts based on futures prices that FERC does not regulate..."

The Appeals Court further said, "the tether in Hughes is tied to 'wholesale market participation,' not prices ... the Maryland program was unlawful because it conditioned payment on auction sales," which the Court said the ZEC program does not do

Plaintiffs argument, "mischaracterizes the ZEC program, which avoids setting wholesale prices and instead regulates the environmental attributes of energy generation and in the process considers forecasts of wholesale pricing," the Appeals Court said

Discussing precedent in a prior case, the Appeals Court said, "The analogous question here would be whether ZECs compel generators to make wholesale sales. We conclude that they do not."

"Plaintiffs point to nothing in the CES Order that requires the ZEC plants to participate in the wholesale market ... Accordingly, there is no support for Plaintiffs’ assertion that the CES Order tethers the ZEC plants’ receipt of ZECs to participation in the wholesale markets -- the 'fatal defect' that doomed the contract‐for‐differences program in Hughes," the Appeals Court said

Again citing a prior case, the Appeals Court quoted precedent that, "we must take seriously the lines Congress drew in establishing [this] dual regulatory system," between federal and state regulation

"New York has kept the line in sight, and gone as near as can be without crossing it," the Appeals Court said

"[E]ven though the ZEC program exerts downward pressure on wholesale electricity rates, that incidental effect is insufficient to state a claim for field preemption under the FPA," the Appeals Court said

"FERC uses auctions to set wholesale prices and to promote efficiency with the background assumption that the FPA establishes a dual regulatory system between the states and federal government and that the states engage in public policies that affect the wholesale markets. Accordingly, the ZEC program does not cause clear damage to federal goals, and Plaintiffs have failed to state a plausible claim for conflict preemption," the Appeals Court said

"To the extent the ZEC program distorts an efficient wholesale market, it does so by increasing revenues for qualifying nuclear plants, which in turn increases the supply of electricity, which in turn lowers auction clearing prices. But that is (at best) an incidental effect resulting from New York’s regulation of producers. In any event, ZECs do not guarantee a certain wholesale price that displaces the NYISO auction price," the Appeals Court said

The Appeals Court also said that Plaintiffs lack Article III standing to raise a dormant Commerce Clause claim. "Because Plaintiffs’ asserted injuries are not traceable to the alleged discrimination against out‐of‐state entities, but (rather) arises from their production of energy using fuels that New York disfavors, they lack Article III standing to challenge the ZEC program," the Appeals Court said

No. 17‐2654‐cv