State Programs to Encourage Zero-Emitting Generation are Really, Really, Constitutional

Hard on the heels of decision upholding the Illinois “zero-emission credit” program to prop up nuclear plants in that state, Judge Valerie Caproni of the South District of New York has now upheld a similar ZEC program in New York. There’s definitely a trend here.  So long as state programs do not directly interfere with wholesale markets, it looks as though they will be affirmed.

(Renewed caveat:  This firm represents, in unrelated matters, a number of the generators who challenged the statute.  We also represent numerous renewable energy firms generally supportive of state authority to provide incentives to renewable energy.  This post is definitely agnostic about the New York statute.  It is the broader question of state authority that interests me here.)

The reasoning of the New York decision was very similar to that in Illinois (as well as the Allco 2nd Circuit decision upholding Connecticut statutes supporting renewable energy generation).  I note only two points from the New York decision that were not discussed, at least with the same directness, in the prior cases.

First, Judge Caproni found that the plaintiffs did not even have standing to argue that the Federal Power Act preempted the New York statute, because she concluded that, under Armstrong v. Exception Child Center, private parties cannot bring Supremacy clause challenges against States.

Thus, the FPA precludes private enforcement except as provided for by PURPA, and private parties such as Plaintiffs “cannot, by invoking [the Court’s] equitable powers, circumvent Congress’s exclusion of private enforcement.”

Second, in finding on the merits that the FPA does not preempt the ZEC program, the plaintiffs argued that:

ZEC program is “tethered” to the wholesale auction. Plaintiffs argue that there is an impermissible tether because: (1) a nuclear generator is eligible for a ZEC only if the NYISO auction rates are insufficient for the generator to stay in business….

Importantly, the court noted that plaintiffs’ argument essentially proved too much.  Many state programs that no one would consider preempted would be at risk if that were the test:

A whole host of measures that States might employ to encourage clean energy development—such as tax incentives or direct subsidies—involve propping up the operation of a generator that might otherwise be unprofitable. Hughes did not prohibit such state assistance, and Plaintiffs have not argued that such state subsidies are per se preempted.

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Fatal to Plaintiffs’ argument is their failure to offer any cogent explanation why ZECs are preempted but other state incentives to generate clean energy—such as tax exemptions, land grants, or direct financial subsidies—are not. Such incentives also allow clean energy generators to be more competitive than they would otherwise be, and they therefore also affect price signals in the wholesale auction.

And that’s the key to it all.  States can encourage all kinds of generation.  States can provide financial incentives for all kinds of generation.  West Virginia could probably implement a program to encourage coal generation, articulating policy reasons specific to the Mountain State.  As long as the programs do not directly interfere with FERC authority over wholesale markets, the programs should survive constitutional challenge.

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