Coalition for Competitive Electricity v. Zibelman

The Second Circuit Court of Appeals affirmed the dismissal of a lawsuit challenging New York State’s Zero Emissions Credit (ZEC) program, which subsidizes qualifying nuclear power facilities. The price of ZECs is based on the social cost of carbon. The Second Circuit concluded that the Federal Power Act did not preempt the ZEC program because the plaintiffs failed to allege “an impermissible ‘tether’” between the ZEC program and wholesale market participation. The Second Circuit found that the ZEC program did not set wholesale prices, but instead “regulates the environmental attributes of energy generation and in the process considers forecasts of wholesale pricing.” The Second Circuit also concluded that ZECs did not compel generators to make wholesale sales. In addition, the court rejected the argument that the “practical effect” of the ZEC program was to regulate wholesale prices, stating: “even 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 [Federal Power Act].” The court also rejected the plaintiffs’ attempts to distinguish ZECs from renewable energy credits, which the Federal Energy Regulatory Commission (FERC) previously confirmed were within states’ jurisdiction. The Second Circuit also found that the plaintiffs failed to identify “clear damage to federal goals,” foreclosing their claim of conflict preemption. While the plaintiffs argued that the ZEC program was at odds with FERC’s goal of promoting competition in the wholesale market from more efficient generators, the court said FERC acted “with the background assumption that the [Federal Power Act] establishes a dual regulatory system between the states and federal government and that the states engage in public policies that affect the wholesale markets.” Finally, the Second Circuit held that the plaintiffs lacked Article III standing for a dormant Commerce Clause claim. The court said the plaintiffs’ alleged injuries arose not from alleged discrimination against out-of-state entities, but from the plaintiffs’ use of fuels disfavored by New York.

In the Second Circuit, New York responded that in fact FERC’s June 2018 order supported New York’s position that zero-emission credits (ZECs) were valid exercises of state authority. The function of FERC’s order, New York said, was to determine “how ZECS will affect auction prices by deciding how subsidized resources participate in PJM auctions.”

Intervenor-appellees, in letters to the Second and Seventh Circuits, characterized the FERC order as a “final blow” to the plaintiffs’ case since the order “repeatedly recognizes states’ authority to subsidize, and rejects Plaintiffs’ preferred tariff changes in favor of ‘accommodat[ing]’ such subsidies.” Exelon characterized the FERC order as proposing “a market design that complements states’ choices.”

The plaintiffs appealing district court orders that upheld state subsidies for nuclear power plants sent letters to the Second Circuit to inform the court of a June 2018 FERC order that rejected tariff provisions of PJM Interconnection, L.L.C. (PJM), which administers the wholesale capacity market in 13 states and Washington, D.C. The plaintiffs’ letter noted that FERC’s order began by stating that “the integrity and effective of the capacity market administered by [PJM] have become untenably threatened by out-of-market payments provided or required by certain states [to support] … continued operation of preferred generation resources ….” The plaintiffs asserted that the FERC order refuted the market analysis in an amicus brief filed by the United States and FERC in the Seventh Circuit (Intervenor-appellees submitted the U.S. amicus brief to the Second Circuit.) The plaintiffs’ letter to the Second Circuit stated: “This disruption of FERC, PJM, and the whole energy market is exactly why states are preempted from meddling with the wholesale market.”