Coal. for Competitive Elec., Dynergy Inc. v. Zibelman
906 F.3d 41 (2018)
Rule of Law:
A state energy subsidy program is not preempted by the Federal Power Act if the subsidy is untethered from a generator's participation in a federally regulated wholesale market and instead rewards the production of energy with desirable attributes, even if the program has an incidental effect on wholesale electricity prices.
Facts:
- In 2016, the New York Public Service Commission (PSC) established the Clean Energy Standard, which included the Zero Emissions Credit (ZEC) program, to reduce greenhouse-gas emissions.
- The ZEC program was designed to prevent the retirement of financially struggling nuclear power plants by providing them with a subsidy.
- A ZEC is a state-created credit representing the zero-emission attributes of one megawatt-hour of electricity produced by a qualifying nuclear plant.
- The PSC selected three in-state nuclear plants (FitzPatrick, Ginna, and Nine Mile Point) to receive ZECs.
- The ZEC price is based on the 'social cost of carbon' and can be adjusted based on forecasted, but not actual, wholesale energy prices.
- The New York State Energy Research and Development Authority (NYSERDA) purchases ZECs from the qualifying plants.
- Local utilities are then required to purchase ZECs from NYSERDA in proportion to the amount of electricity they sell, with the costs ultimately passed on to consumers.
- A group of competing electrical generators, who do not receive ZEC subsidies, alleged that the program artificially suppresses wholesale energy and capacity prices in the FERC-regulated market, thereby harming their businesses.
Procedural Posture:
- A group of electrical generators and trade groups (Plaintiffs) sued members of the New York Public Service Commission (Defendants) in the U.S. District Court for the Southern District of New York.
- The nuclear power plants benefiting from the ZEC program intervened as Defendants.
- Defendants and Intervenors filed motions to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6).
- The district court granted the motions, dismissing the plaintiffs' preemption and dormant Commerce Clause claims.
- The plaintiffs (as Appellants) appealed the district court's judgment to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does New York's Zero Emissions Credit (ZEC) program, which subsidizes in-state nuclear power plants for their clean energy attributes, intrude upon the Federal Energy Regulatory Commission's exclusive jurisdiction over wholesale electricity sales and is it therefore preempted by the Federal Power Act?
Opinions:
Majority - Jacobs, Circuit Judge
No, New York's ZEC program is not preempted by the Federal Power Act. A state energy program that subsidizes energy production based on its environmental attributes without conditioning payments on participation in FERC-regulated wholesale markets does not unlawfully intrude on federal jurisdiction. Regarding field preemption, the court found the ZEC program is not impermissibly 'tethered' to wholesale market participation as defined in Hughes v. Talen Energy Marketing. Unlike the Maryland program in Hughes, the ZEC payments are for the environmental attribute of the electricity produced, not for clearing the wholesale auction. The fact that the ZEC price calculation considers forecasted wholesale prices does not create a prohibited tether. Regarding conflict preemption, the program does not create 'clear damage to federal goals.' State policies that have incidental effects on wholesale prices by encouraging certain types of generation are a known feature of the dual state-federal regulatory system and do not inherently stand as an obstacle to FERC's objectives. The court also held that the plaintiffs lack Article III standing for their dormant Commerce Clause claim because their alleged injury (depressed market prices) is caused by the subsidy itself, not by any alleged discrimination against out-of-state generators.
Analysis:
This decision provides a crucial roadmap for states wishing to subsidize preferred energy sources, such as nuclear or renewables, to achieve environmental goals without violating federal law. By distinguishing between subsidies for the production of energy with certain attributes and subsidies conditioned on clearing a federal auction, the court reinforces a key limitation on the Federal Power Act's preemptive scope established in Hughes. This ruling, along with a similar Seventh Circuit decision, empowers states to shape their local energy mix through direct financial support, even if it indirectly impacts the broader federally regulated wholesale markets. It solidifies the principle that incidental effects on wholesale prices from legitimate state regulation of generation do not amount to federal preemption.
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