Second Circuit Joins Seventh Circuit in Upholding Constitutionality of ZECs, Ending the Current Preemption Fight Against Nuclear Subsidies

Akin Gump Strauss Hauer & Feld LLP

Akin Gump Strauss Hauer & Feld LLP

[co-author Shawn Whites, Paralegal]

On September 27, 2018, the U.S. Court of Appeals for the Second Circuit (Second Circuit)  affirmed a district court’s finding that New York’s Zero Emissions Credit (ZEC) program is not preempted by federal law.1  The Second Circuit’s opinion follows a similar affirmation by the Seventh Circuit regarding Illinois’ ZEC program, and likewise interprets the Supreme Court’s decision in Hughes v. Talen Energy2 to prohibit state generation subsidies only if they are explicitly “tethered” to federal wholesale electricity markets.

The Second Circuit, like the Seventh, concluded ZEC programs are not preempted by federal law because they do not require eligible nuclear generators to participate in wholesale auctions. That such generators had done so in the past—and are likely to continue to do so in the future—is irrelevant to the preemption analysis, the court explained. In drafting the Federal Power Act, Congress provided states the authority to regulate the production of power within their borders, so long as they did not attempt to regulate wholesale prices. As the court found, New York “kept [this] line in sight” in designing its ZEC program, “go[ing] as near as can be without crossing it”—providing out-of-market revenues to nuclear generators may have incidental effects on wholesale prices, but such a practice does not amount to regulating those prices.3

The Second Circuit also found that New York’s ZEC program does not implicate the dormant Commerce Clause, noting that plaintiffs lacked standing to claim that New York was discriminating in favor of in-state nuclear generators when plaintiffs themselves do not own nuclear generation. To have standing, the court explained, plaintiffs would need to plausibly allege that New York was discriminating against out-of-state commerce. Instead, plaintiffs could only allege that New York favored a particular fuel (nuclear) over others, such as natural gas, the main fuel source of plaintiffs’ generation.4

At this point, it appears the constitutional fight over state nuclear subsidies has come to an end. Two separate appellate courts have upheld ZEC programs. Given the absence of a circuit split, it is unlikely that the Supreme Court will grant certiorari should plaintiffs seek further appeal.

1 See our blog post on the Seventh Circuit’s opinion for a detailed discussion of ZEC programs.

2 Hughes v. Talen Energy Mktg., LLC, 136 S. Ct. 1288 (2016).

3 Opinion at 17-18, Coal. for Competitive Elec. v. Zibelman, No. 17-2654-cv (2nd Cir. Sept. 27, 2018) (“Second Circuit Opinion”).

4 Id. at 23-24.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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