State Clean Energy Authority at Stake in New York ZEC Case

This blog post was co-authored with legal intern Anthony Raduazo.

A three-judge panel of the U.S. Court of Appeals for the Second Circuit heard oral arguments today in a case, Coalition for Competitive Electricity v. Zibelman, that will decide the fate of New York’s Zero Emissions Credits program. Fossil fuel power plant owners challenged the New York Public Service Commission’s regulations supporting the continued operation of financially challenged nuclear generators, arguing that the program exceeds the state’s authority under the Constitution and federal energy laws. After a total defeat in district court (discussed here), the companies are appealing the decision to the Second Circuit.

NRDC filed briefs defending the state’s authority, not because it supports the nuclear support program, but because the consequences of the case could be far broader, affecting the ability of states across the country to take aggressive action to spur investments in renewable energy and other clean technologies like energy storage. A decision from the panel upholding the district court’s order would send a clear message to states that they can utilize similar programs to support renewable energy resources to fight climate change. The case is also an initial look at how federal courts will interpret a landmark Supreme Court decision on electricity markets and federal control. 

While it is always hard to predict the outcome of a case based on oral argument, the judges’ sharp questioning of the fossil fuel companies’ attorney suggests that states are on strong legal footing in advancing clean energy programs.

This appeal follows the July 2017 decision of U.S. District Judge Valerie Caproni, dismissing arguments by fossil fuel power plant owners that the program conflicts with the regulation of regional electricity markets by the Federal Energy Regulatory Commission (FERC), the federal agency responsible for overseeing those markets. The judges pressed counsel for the fossil fuel coalition to provide a reason why they should reverse the district court’s ruling, noting that unlike a prior state program that the U.S. Supreme Court struck down, the New York Zero Emissions Credit program did not regulate how the plants at issue sold their power. Judge Jacobs stated that the Supreme Court has made “plain that there is a very substantial role” in utility regulation for states, and “they can supply subsidies to favored producers” even though that necessarily affects electricity prices. A decision from the panel upholding the district court’s order would send a clear message to states that they can utilize similar programs to support renewable energy resources to fight climate change.

At issue in this appeal is the legality of the Zero Emissions Credits program, which is a component of New York’s ambitious Clean Energy Standard. The Clean Energy Standard mandates that New York obtain fifty percent of its electricity from renewable energy resources by 2030. The fossil fuel coalition did not object to this fifty percent standard but challenged the program’s provision of Zero Emissions Credits to nuclear power plants. The fossil fuel companies brought suit against the Commissioners of the New York Public Service Commission in the U.S. District Court for the Southern District of New York, arguing that the credit program intrudes upon FERC’s authority and is therefore invalid under the U.S. Constitution (which provides that federal law can override state law). NRDC filed an amicus brief in support of dismissing the lawsuit, which pointed out the fossil fuel coalition’s mischaracterization of the Supreme Court’s rulings regarding the scope of state energy policy authority, highlighted the important role that states have traditionally played in the regulation of energy resources, and explained the disturbing and unprecedented restriction to state authority that would occur were the court to accept plaintiffs’ broad arguments.

Ultimately, Judge Caproni sided with NRDC and the state of New York, and found the fossil fuel companies’ arguments unconvincing, in part due to their mischaracterization of the Supreme Court’s ruling in Hughes v. Talen Energy Marketing, LLC (discussed here). In Hughes, the Supreme Court struck down a Maryland program designed to support the construction of natural gas generation because it functioned by modifying capacity market prices already approved by FERC. (The federal agency regulates both electric energy markets and so-called capacity markets, in which power producers offer to provide electricity generation during times of peak demand.) The Supreme Court made clear, however, that its ruling covered only this narrow circumstance where a state modifies prices for energy or capacity after they have already been approved by FERC. Judge Caproni’s decision states that Hughes does not bar states from compensating power plants for contributing to emissions reductions, which FERC does not address in the markets that it oversees.  

On appeal, the fossil fuel coalition rehashes many of the same arguments that failed at the district court level, arguing that the Zero Emissions Credits program is indistinguishable from the Maryland program the Supreme Court invalidated in Hughes. As in the district court, NRDC filed an amicus brief defending state authority to adopt clean energy policies. The judges' questioning suggested an understanding of the case law, including Hughes, and a skepticism of the fossil fuel coalition's position. 

The decision by the three-judge panel will very likely provide the final say on the validity of New York’s Zero Emissions Credit Program under federal law. Even more importantly, the Second Circuit decision will be binding in future federal court cases within the region (which includes New York, Connecticut, and Vermont). The state is currently considering supporting offshore wind through the issuance of contracts that, like Zero Emissions Credits, compensate the generators for their lack of harmful emissions and other benefits that they provide above and beyond the energy and capacity they produce.

The decision will also be one of the first circuit court decisions to interpret the meaning of the Hughes case, setting a precedent that could influence the ability of states across the country to combat climate change and dangerous pollution emitted by power plants. Fortunately, the law is on the side of New York and states’ authority to direct the development of renewable energy.