Electricity Markets

Appeals court upholds N.Y. program that supports nuclear power

The U.S. Court of Appeals for the Second Circuit on Sept. 27 issued a decision that upholds a New York state program that provides support for certain nuclear power plants in the state.  

At issue is a New York State Zero Emission Credit (ZEC) program, which was challenged by a number of merchant generators and the Electric Power Supply Association.

The New York ZEC program provides for qualifying nuclear plants to receive credits. The credits are based on the social cost of carbon calculated by a federal inter-agency task force. Initially set at $17.48 per megawatt-hour, the ZEC level can be adjusted downward based on forecasted wholesale market prices. 

The ZEC program was adopted by the PSC in August 2016 as part of a larger energy reform plan in the state to cut greenhouse gas emissions by 40 percent by 2030.

The program subsidizes qualifying nuclear power plants by creating ZECs. The PSC has determined that three nuclear power plants (FitzPatrick, Ginna, and Nine Mile Point) qualify for the ZEC program; other facilities, including facilities located outside New York, may be selected in the future.

EPSA and the merchant generating companies filed suit in federal district court challenging the ZEC program. The district court dismissed the challenge, and the case was appealed to the Second Circuit. 

EPSA and the generators alleged that the ZEC program influences the prices that result from the wholesale auction system established by the Federal Energy Regulatory Commission and distorts the market mechanism for determining which energy generators should close.

They challenged the program’s constitutionality on two grounds: that the program is preempted under the Federal Power Act and that it violates the dormant Commerce Clause.

Maryland case

In its decision, the appeals court noted that an FPA “field preemption” claim involving state support for generating facilities was considered by the U.S. Supreme Court in 2016 (Hughes v. Talen Energy Marketing). In that case, the Supreme Court affirmed a lower court's decision throwing out a Maryland program meant to encourage the building of new electric generating capacity in the state.

The appeals court determined that the New York ZEC program is not invalid under the concept of field preemption, which considers whether the federal government occupies the entire regulatory field for a particular activity, leaving no room for state regulation.  Unlike the Maryland program that was invalidated by the U.S. Supreme Court in Hughes, the court of appeals pointed out that the New York ZEC program does not guarantee that generators receiving ZECs will be insulated from fluctuations in the wholesale market price, and, thus did not impinge on FERC’s authority over wholesale electric rates. 

Moreover, the appeals court noted that eligibility for ZECs does not require that a qualifying plant sell its output into the wholesale markets, which was the fundamental flaw that invalidated the Maryland program in Hughes.

The appeals court also said that New York’s issuance of ZECs pursuant to the state’s authority to regulate the production of electricity was not preempted even if it had the “incidental effect” of exerting “downward pressure on wholesale electricity rates.” The court made this determination in response to an argument by EPSA and the generators that the practical effect of the ZEC program was to regulate wholesale prices.

Addressing the assertion made by EPSA and the merchant generators that federal law should preempt the New York program because ZECs distort price signals in the wholesale market, the court said that states “may require retirement of existing generators or construction of environmentally friendly units, or take any other action in their role as regulators of generation, even though it may affect the market clearing price.” 

The court found no reason to accept the idea that the ZEC program impermissibly conflicts with federal regulation and should be invalidated under a “conflict preemption” theory. 

While EPSA and the merchant generator coalition also contended that the New York program violated Commerce Clause principles under the United States Constitution, the court determined that the challengers lacked standing to raise that argument.

New York decision follows on heels of Illinois ruling

The New York appeals court decision follows closely on the heels of a similar ruling in Illinois. The U.S. Court of Appeals for the Seventh Circuit on Sept. 13 ruled that an Illinois ZEC program providing support for nuclear plants in Illinois is not preempted by the FPA.

The appeals court also said that the program does not run afoul of Commerce Clause principles. 

A group of merchant generators on Sept. 27 filed for rehearing of the Seventh Circuit’s ruling. Among other things, they argued that the appeals court mischaracterized how the ZEC program operates.

New Jersey opens proceeding to create ZEC program

Meanwhile, the New Jersey Board of Public Utilities on Aug. 29 approved an order that opens a proceeding to create a zero-emission credit (ZEC) program for eligible nuclear power plants.

The BPU said the action is in line with legislation that Gov. Phil Murphy signed into law in May that made sweeping changes to the state’s energy policy.

The bill signed by Murphy creates a ZEC program to support nuclear generation in the state -- the 2,468-MW Salem plant and the 1,240-MW Hope Creek facility.

New Jersey needs to keep the plants open to reach the state’s clean energy goals, Murphy said in May, noting they provide 40 percent of the state’s electricity and 90 percent of its emissions-free energy.