Oral arguments heard in New York ZEC case, state subsidies in spotlight

New York (Platts)--12 Mar 2018 655 pm EDT/2255 GMT

A three-judge federal appeals court panel Monday heard oral arguments in a case regarding New York's zero-emissions credit program for economically struggling nuclear plants, a legal battle that highlights increasing friction between state policy, federal jurisdiction and market integrity.

"At least two of the three judges appeared skeptical of petitioners' claims that the ZEC program infringes on the Federal Energy Regulatory Commission's exclusive jurisdiction over wholesale markets," Timothy Fox, vice president at consultant ClearView Energy Partners, said in an emailed note to clients.

The US 2nd Circuit Court of Appeals in New York is hearing the case in which the plaintiffs are appealing the US District Court for the Southern District of New York's July 2017 ruling that upheld the states' nuclear subsidy program. Judge Valerie Caproni dismissed the challenge to the New York ZEC program brought by the Coalition for Competitive Electricity, Dynegy, Eastern Generation, Electric Power Supply Association, NRG Energy, Roseton Generating and Selkirk Cogen Partners.

The plaintiffs argue the state's nuclear subsidy program, part of its Clean Energy Standard that mandates 50% of New York's power come from renewable sources by 2030, oversteps its authority under federal energy laws and violates part of the US Constitution. Judges Dennis Jacobs and Pamela Chen spoke the most during the proceedings and appeared to side with the state, according to Fox. Judge Jacobs said state subsidies were "quite tolerated" and Judge Chen "appeared to nod in agreement with Jacobs," Fox wrote.

"This component of the oral argument leads us to conclude that the Second Circuit is likely to uphold the lower court ruling dismissing the challenge to the ZECs," he said. NEW YORK APPEARS TO BE ON STRONG LEGAL FOOTING

Noting that it is always difficult to predict the outcome of a case based on oral argument, "all three judges sharply questioned the fossil fuel companies' attorney about their arguments, which should give the state some confidence," Miles Farmer, an attorney with environmental group Natural Resources Defense Council, said in a phone call. NRDC filed briefs in the case defending the state's authority.

Farmer wrote in a blog post that NRDC is not backing the state because it supports the nuclear subsidy program, but due to the broader consequences the case could render, "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," he said. NEW YORK CASE PART OF WIDER NATIONAL DEBATE

The issue of state policy clashing with free market integrity has been bubbling to the surface over the past few years. States, particularly in the northeast, have increasingly supported renewable energy generation with financial incentives because they see the low-carbon power sources as tools to combat climate change. However, wholesale power markets are designed to foster open competition among all sources of generation, so incentivizing a portion of the generation stack has led to complications, especially with capacity markets.

For example, FERC had a difficult time deciding whether to approve an Independent System Operator New England proposal to create a two-part power capacity auction designed to accommodate states' energy policies.

FERC approved the proposal late Friday in a messy decision with one commissioner dissenting, another dissenting and concurring in part, and a third concurring in part. Opponents will likely "re-double their efforts on rehearing" and if rehearing is denied, the order is "weaker on appeal" due to the fractured decision, former FERC chairman Norman Bay said on Twitter.

FERC's next challenge will be ruling on two separate capacity market redesign proposals filed by PJM Interconnection that are also aimed at accommodating state policy within wholesale markets. The grid operator filed two proposals because its stakeholders and management could not agree on an ideal solution after more than a year of discussion, which exemplifies the complexity of the state resource policy issue.

Additionally, a similar ZEC case to New York's is unfolding in the Seventh Circuit Court in Illinois where Judge Manish Shah of the US District Court for the Northern District in Chicago dismissed a lawsuit in 2017 filed by a group of competitive power producers. The judges in that appeal recently invited the US government -- most likely FERC or the solicitor general -- to file a brief, which suggests they may be having some difficulty reaching a decision.

A decision in the New York ZEC appeal could take months or a year, said Farmer, but it "will be binding in future federal court cases within the region," which includes New York, Connecticut, and Vermont. The Second Circuit judges will also likely wait to see what FERC or the SG has to say in the Seventh Circuit ZEC appeal, if the government accepts the invitation to file a brief. -- Jared Anderson,

-- Edited by Matt Eversman,

Copyright © 2018 S&P Global Platts, a division of S&P Global. All rights reserved.