Following up on our recent blog post regarding the Seventh Circuit’s decision to uphold Illinois’ nuclear subsidy program, two weeks later on September 27, 2018, the Second Circuit upheld a district court’s decision finding that New York’s nuclear subsidy program was not preempted by the Federal Power Act (Coalition for Competitive Electricity, et al. v. Zibelman, et al., Dcase No. 17-25640-cv).

The New York program is similar to the Illinois program, with variations in the pricing of zero emissions credits (ZECs).  In New York, the price of the ZEC is based on the federally-determined social cost of carbon, as may be adjusted for renewable energy penetration and forecasted wholesale prices, and is fixed for two year periods.  The Second Circuit found this pricing mechanism was different than the Maryland program struck down by the Supreme Court in Hughes v. Talen Energy Marketing, LLC (136 S. Ct. 1288 (2016) (Hughes) since the ZEC price does not fluctuate to match the wholesale clearing price and therefore receipt of ZECs is not tethered to a generator’s participation in the wholesale markets (the fatal defect in Hughes).

Similar to the Seventh Circuit, the Second Circuit focused on the mechanisms of the New York subsidy program, and determined that the practical effect of the subsidy program exerting downward pressure on wholesale electricity rates was insufficient to justify preemption.  The court noted that ZECs are created when electricity is produced, regardless of whether or how the electricity is ultimately sold (and how generators sell their electricity is a business decision that does not raise preemption concerns).  According to the Second Circuit, “New York has kept the line [between federal and state jurisdiction] in sight, and gone as near as can be without crossing it.”

Along with the Seventh Circuit decision, the Second Circuit decision provides flexibility for states to subsidize generation of their choosing (as long as the state is not directly setting the wholesale market price and only indirectly impacting a Federal Energy Regulatory Commission (FERC)-jurisdictional rate).  But, now that two circuit courts have upheld state nuclear subsidy program, the fight over such programs will very likely be at FERC as the agency considers changes to market rules to address the impact of such state subsidies.