December 05, 2018

Preemption and the Federal Power Act: Federal Appellate Courts Uphold Zero-Emissions Credits Programs

Jehmal Terrence Hudson

Overview

Jurisdiction over the power sector is split between the federal and state governments. The Federal Energy Regulatory Commission (FERC) has exclusive jurisdiction over wholesale electricity sales in interstate commerce, while the states have jurisdiction over retail electricity sales and power generation. The Federal Power Act (FPA) preempts state regulation of wholesale electricity, but the courts are still deciding where the line between federal and state jurisdiction lies.

Presently, Hughes v. Talen Energy, 136 S. Ct. 1288, 1293 (2016) is the leading Supreme Court case delineating the boundary between the realms of federal and state authority. In Hughes, the Supreme Court quashed a Maryland program that incentivized the construction of a new gas-fired power plant by guaranteeing a particular price for sales of electricity into the PJM capacity market. The Supreme Court, however, unanimously indicated that state policies “untethered” to the wholesale power market should still be permitted under the FPA. Id.

Recently, two federal court decisions involving challenges to zero-emissions credit (ZEC) programs in New York and Illinois highlight just how blurred the line between federal and state jurisdiction has become in an era where FERC regulation relies primarily on markets to ensure just, reasonable, and not unduly discriminatory electricity prices. Both cases raise the question of whether the FPA’s conferral of exclusive jurisdiction to FERC over wholesale prices preempts state authority to support renewable generation because it may affect outcomes in FERC-jurisdictional markets.

Electric Power Supply Association v. Star (7th Cir.)

On September 13, 2018, in Electric Power Supply Association v. Star, 904 F.3d 518, the US Court of Appeals for the Seventh Circuit upheld the ZEC program established by the Illinois Future Energy Jobs Act. The program at issue provided subsidies to two nuclear-generating facilities in Illinois that may otherwise have been retired as uneconomic. These subsidies came in the form of ZECs that other carbon-emitting power producers in Illinois were required to purchase from the nuclear plants.

In Star, the Seventh Circuit found that Illinois’ ZEC program was consistent with the principles of federalism reflected in the Federal Power Act. 904 F. 3d at 524. The court held that, although Illinois’ ZEC program might have an indirect effect on wholesale energy markets under FERC jurisdiction, the program stayed within the bounds of state authority because it was not conditioned on any parties’ participation in a wholesale electricity market. Because the ZEC program did not require selling power in a wholesale electricity market, it was not preempted, even though the program would indirectly affect wholesale electricity prices by increasing the quantity of electricity available for sale.

Coalition for Competitive Electricity v. Zibelman (2d Cir.)

On September 27, 2018, the Court of Appeals for the Second Circuit similarly upheld New York’s ZEC program. See Coalition for Competitive Electricity v. Zibelman, 906 F.3d 41. New York’s ZEC program also aimed to support the continued operation of nuclear generation facilities, which do not emit carbon dioxide, until renewable energy sources could meet a more significant proportion of New York’s energy needs. Under New York’s ZEC program, qualifying nuclear generators are awarded one credit for every megawatt hour of electricity generated, subject to a cap, in addition to whatever revenues the facility receives for selling the power. The New York Public Service Commission sets the ZEC price biennially based on the social cost of carbon.

In Zibelman, the Second Circuit determined that the Federal Power Act did not preempt New York’s ZEC program because it did not require wholesale market participation and therefore did not present the impermissible “tether” to the FERC-regulated markets that were present in Hughes. 906 F.3d at 46. Without such a tether, and given that the ZEC program addressed a matter that was otherwise squarely within the state’s purview under the FPA, the court refused to find that the New York ZEC program was preempted by the FPA, even if the program otherwise may impact prices in the FERC-regulated New York Independent System Operator wholesale market. To this end, the court noted that ZEC sales and energy sales were entirely separate transactions, with the ZEC sales occurring autonomously from the wholesale electricity markets. Therefore, the court concluded that the state’s mandate that utilities purchase ZECs at prices determined by New York does not impermissibly set rates for FERC-jurisdictional energy sales. Because New York did not require nuclear generators to sell through the FERC-regulated market to receive ZEC payments, the court concluded that the state’s program did not create an unconstitutional tether under Hughes.

Conclusion

The Seventh and Second Circuit decisions in Star and Zibelman adopt a narrow interpretation of the prohibition in Hughes on the tethering of state-level initiatives to FERC-regulated organized electricity markets. The two decisions create opportunities for states to subsidize zero-emission generation sources as long as the states do not directly set the wholesale market price. These decisions also build legal support for an increasing number of state subsidy programs that nuclear generators say are needed to sustain nuclear reactors in competitive wholesale markets flooded with cheap gas-fired generation.

It will be up to FERC to decide how to incorporate subsidized resources in wholesale power markets. FERC is the agency with authority to consider changes to market rules that address the impact of such state subsidy programs. 16 U.S.C. § 824d(a). Moving forward, FERC will need to determine how to best allow states to regulate energy production within their borders without unduly interfering in wholesale markets. 

    Jehmal Terrence Hudson

    Published: December 5, 2018

    Jehmal Hudson is an attorney and the Government Affairs Director at the Federal Energy Regulatory Commission. The views expressed in this article are solely those of the author and do not reflect the views of FERC or the US government.