VALERIE CAPRONI, United States District Judge:
Some say that human-caused global warming is a "hoax,"
Plaintiffs are various electrical generators and trade groups of electrical generators. They challenge one aspect of the Clean Energy Standard ("CES") Order, adopted by the New York Public Service Commission ("PSC"), that awards credits to certain nuclear generators for their zero-emissions electricity production. Plaintiffs claim that this program is preempted under the Federal Power Act ("FPA") and that it violates the dormant Commerce Clause.
Defendants, who are PSC members, move to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), arguing that there is no private right of action for Plaintiffs' preemption claims and that, even if there were, Plaintiffs' claims would fail as a matter of law. Notice of Defendants' Motion to Dismiss, Dkt. 54. Intervenors, who are the nuclear generators receiving the zero-emissions credits and their owners, also move to dismiss pursuant to Rule 12(b)(6). Notice of Motion, Dkt. 76. For the following reasons, the Court GRANTS both motions to dismiss.
In New York, wholesale electricity is bought and sold through market-based
The NYISO auctions determine electricity prices in the New York wholesale market. Compl. ¶ 27. The auction operates by "stacking" bids from generators for the sale of energy or capacity, beginning with the lowest bid and moving up until demand is satisfied. Compl. ¶¶ 32-33. The price of the highest-stacked bid that satisfies demand is known as the "market clearing price." Compl. ¶ 33. Any generator that bids at or below the market-clearing price "clears" the auction and is paid the market-clearing price, regardless of the price the generator actually bid.
Nuclear generators, such as Intervenors, bid as so-called "price-takers" in the NYISO auctions, meaning that they sell their entire output at the market-clearing price. Compl. ¶ 34. Unlike other types of electricity generators that can adjust their output to produce more or less energy depending on price, nuclear generators run continuously at maximum output. Compl. ¶ 34. Nuclear generators thus sell their entire electricity output into the auctions regardless of the price — even if the price is below their cost of production. Compl. ¶ 34.
Plaintiffs allege that the nuclear generators' price-taking behavior depresses market-clearing prices because the nuclear generators increase the energy supply available at auction. Compl. ¶ 34. Plaintiffs further allege that all electricity produced by these nuclear generators must be sold in the NYISO energy auctions because they have no alternative way to sell their output. Compl. ¶¶ 34, 64.
In order to promote the development of clean energy as part of New York's effort to stanch global warning, the PSC issued the CES Order. CES Order, Dkt. 76-1.
Tier 1 of the CES Order, which implements the REC program, requires all New York LSEs "to serve their retail customers by procuring new renewable resources." CES Order at 14; see also Compl. ¶ 49. Generators that produce energy from renewable sources, like wind or solar, are awarded a credit (a REC) for each megawatt-hour ("MWh") of renewable-generated electricity produced from renewable resources. Compl. ¶ 49; CES Order at 106. The New York State Energy Research and Development Authority ("NYSERDA") purchases RECs from generators, thereby subsidizing their cost of production, and, in turn, sells those RECs to LSEs. CES Order at 16, 107-08. Each LSE is required to purchase RECs in an amount based on a percentage of the total load served by that LSE or make an alternative compliance payment. Compl. ¶ 49; CES Order at 14-16. The cost of the RECs is passed on to commodity customers. CES Order at 17.
Tier 3 of the CES Order establishes New York's ZEC program, the program challenged in this case. CES Order at 19. A ZEC is a "credit for the zero-emissions attributes of one megawatt-hour of electricity production by" an eligible nuclear facility. CES Order, App'x E, at 1. Through the ZEC program, New York aims to "encourage the preservation of the environmental values or attributes of zero-emissions nuclear-powered electric generating facilities for the benefit of the electric system, its customers and environment." CES Order, App'x E, at 1. In particular, the ZEC program ensures that New York's nuclear generators — which comprise thirty-one percent of New York's electric generation mix and collectively avoid the emission of over fifteen million tons of carbon dioxide per year — continue to contribute to New York's electric generation mix pending the development of new renewable energy resources between now and 2030. CES Order at 19. According to the CES Order, losing the nuclear energy contributed by the generators before new renewable resources are developed "would undoubtedly result in significantly increased air emissions" and a "dangerously higher reliance on natural gas"; without the carbon-free attributes of the nuclear generators, New York would have to rely more heavily on existing fossil-fueled energy plants or the construction of new natural gas plants for its electricity, all of which would significantly increase carbon emissions.
A nuclear generator is eligible for ZECs if it makes a showing of "public necessity," i.e., the facility's revenues "are at a level that is insufficient to provide adequate compensation to preserve the zero-emission environmental values or attributes historically provided by the facility." Compl. ¶ 67 (quoting CES Order at 124). Any nuclear generator, regardless of its location, is eligible for ZECs, so long as the generator has historically contributed to the resource mix of clean energy consumed by New York retail consumers.
ZEC prices are calculated by the PSC using the federal estimate of the social cost of carbon and a forecast of wholesale electricity prices.
Plaintiffs allege that under the ZEC program, the nuclear generators eligible for ZECs effectively receive a higher price for their energy than they would have without the ZEC program and that the ZEC subsidies distort the market-clearing price in the NYISO auctions. Compl. ¶¶ 43-45. Plaintiffs allege that because the ZEC program allows the eligible nuclear generators to participate in the NYISO auctions when they otherwise would have gone out of business, New York "is using the ZEC subsidy to exert a large depressive effect on energy and capacity prices, which one group of experts estimated at $15 billion over 12 years." Compl. ¶ 47. According to Plaintiffs, this depressive effect will cause generators, including Plaintiffs, to receive a lower price than they otherwise would have received and will cause their bids to fail to clear the auctions when they otherwise would have cleared. Compl. ¶¶ 74, 81, 87.
Plaintiffs claim that the ZEC program is preempted under the FPA and that it violates the dormant Commerce Clause. Defendants and Intervenors move to dismiss, arguing that: Plaintiffs lack a private right of action to pursue their preemption claims in federal court; the ZEC program is not preempted; and the ZEC program does not violate the dormant Commerce Clause. For the following reasons, the Court holds that Plaintiffs may not raise their preemption claims pursuant to the Court's equity jurisdiction; that the ZEC program is neither field nor conflict preempted; and that the ZEC program does not violate the dormant Commerce Clause.
In reviewing a Rule 12(b)(6) motion to dismiss, the Court accepts all of the non-movant's factual allegations as true and draws all reasonable inferences in the non-movant's favor. See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Although all factual allegations contained in the complaint are assumed to be true, this tenet is "inapplicable to legal conclusions." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009); see also Twombly, 550 U.S. at 555, 127 S.Ct. 1955. To survive a Rule 12(b)(6) motion to dismiss, the complaint must "state a claim to relief that is plausible on its face." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id.
The Supremacy Clause does not create a cause of action for preemption claims, Armstrong v. Exceptional Child Ctr., Inc., ___ U.S. ___, 135 S.Ct. 1378, 1383, 191 L.Ed.2d 471 (2015), and Plaintiffs do not argue that the FPA itself creates a private
Since Ex parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 S.Ct. 714 (1908), "the Supreme Court has consistently recognized federal [equity] jurisdiction over declaratory — and injunctive — relief actions to prohibit the enforcement of state or municipal orders alleged to violate federal law." Friends of the E. Hampton Airport, Inc. v. Town of E. Hampton, 841 F.3d 133, 144 (2d Cir. 2016) (collecting cases). Nevertheless, federal courts' "equity [jurisdiction] to enjoin unlawful executive action is subject to express and implied statutory limitations." Armstrong, 135 S.Ct. at 1385. The FPA does not expressly preclude actions in equity, but the parties contest whether Congress implicitly intended to foreclose equitable relief under the FPA.
In Armstrong, the Supreme Court held that Congress implicitly foreclosed equitable relief under Section 30(A) of the Medicaid Act, which healthcare providers sought to enforce by enjoining state officials from reimbursing medical service providers at rates lower than the federal statute required. 135 S.Ct. at 1382, 1385. The Armstrong Court reasoned that Congress intended to foreclose equitable relief because (1) pursuant to the Medicaid Act, "the sole remedy" for a State's failure to comply with the Medicaid Act's requirements was the withholding of Medicaid funds by the Secretary of Health and Human Services, and (2) Section 30(A), which mandates that States provide for payments that are "consistent with efficiency, economy, and quality of care" while "safeguard[ing] against unnecessary utilization of ... care and services," was judicially unadministrable. Id. at 1385 (alteration in Armstrong). According to the Supreme Court, the combination of those two features means that Congress intended to preclude private enforcement in equity of Section 30(A). Id. ("Explicitly conferring enforcement of this judgment-laden standard upon the Secretary alone establishes... that Congress `wanted to make the agency remedy that it provided exclusive,'...." (quoting Gonzaga Univ. v. Doe, 536 U.S. 273, 292, 122 S.Ct. 2268, 153 L.Ed.2d 309 (2002) (Breyer, J., concurring))).
In Friends of the East Hampton Airport, the Second Circuit applied Armstrong's two criteria to the Airport Noise and Capacity Act ("ANCA") in considering whether Congress intended to foreclose equitable relief; the Second Circuit held that Congress did not so intend. 841 F.3d at 145-47. Under ANCA, there is no "sole remedy" because ANCA not only provides for the loss of federal funding as a penalty for violating ANCA but also grants the Secretary of Transportation authority to pursue appropriate legal remedies, including injunctive relief. Id. at 145-46 (citing 49 U.S.C. §§ 47526, 47533). The Second Circuit reasoned that "[t]he fact that Congress conferred such broad enforcement authority on the [Federal Aviation Administration], and not on private parties, does not imply its intent to bar such parties from invoking federal jurisdiction where, as here, they do so not to enforce the federal law themselves, but to preclude a municipal entity from subjecting them to local laws enacted in violation of federal requirements."
The FPA tacitly forecloses private parties from invoking equity jurisdiction to challenge state laws enacted in alleged violation of the FPA because Congress implicitly provided a "sole remedy" in the FPA — specifically, enforcement by FERC. Similar to ANCA, the FPA grants FERC broad enforcement authority. For example, the FPA grants FERC discretion to bring an action in federal district court to enjoin any person violating the FPA or to enforce compliance. 16 U.S.C. § 825m(a). The FPA also requires every public utility to file with FERC rates for all sales subject to FERC's jurisdiction and empowers FERC to hold hearings to examine new or changed rates, to suspend rates, and to determine rates. 16 U.S.C. §§ 824d(c)-(e), 824e(a). Finally, the FPA authorizes any person to file a complaint with FERC to challenge, inter alia, anything done by a regulated entity in contravention of the FPA. 16 U.S.C. §§ 824e(a), 825e. But, unlike ANCA, Congress provided for a narrow private cause of action under the FPA in the Public Utility Regulatory Policies Act ("PURPA"), which authorizes private parties to challenge state rules governing small power production facilities, after first exhausting their administrative remedies. 16 U.S.C. § 824a-3(h)(2)(B). Congress's decision to create a limited private cause of action suggests that "the omission of a general private right of action in the [FPA] should ... be understood as intentional." Vill. of Old Mill Creek v. Star, No. 17 CV 1163, 2017 WL 3008289, at *9 (N.D. Ill. July 14, 2017); see Alexander v. Sandoval, 532 U.S. 275, 290, 121 S.Ct. 1511, 149 L.Ed.2d 517 (2001) ("The express provision of one method of enforcing a substantive rule suggests that Congress intended to preclude others."); Mass. Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 147, 105 S.Ct. 3085, 87 L.Ed.2d 96 (1985) ("[W]here a statute expressly provides a particular remedy or remedies, a court must be chary of reading others into it." (citation and internal quotation marks omitted omitted)). 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." Armstrong, 135 S.Ct. at 1385.
The second indicator of congressional intent to preclude equitable relief to a private litigant, according to Armstrong, is the presence of a judicially unadministrable standard. The FPA's requirement that wholesale electricity rates be just and reasonable, 16 U.S.C. § 824d(a), is not judicially unadministrable.
In sum, the Court finds that the first but not the second of Armstrong's factors indicates that Congress intended to preclude equitable relief to private parties. There is no indication in Armstrong that both factors must be satisfied in order to conclude that Congress intended to foreclose equitable relief to private parties. To the contrary, the Supreme Court in Armstrong considered the second factor — judicial administrability — in the event the provision authorizing the Secretary of Health and Human Services to enforce the statute by withholding funds "might not, by itself, preclude the availability of equitable relief." 135 S.Ct. at 1385. The limited private right of action provided by PURPA is by itself sufficient to establish that Congress intended to foreclose equitable relief. Between a statute that establishes a narrow private cause of action allowing private lawsuits in some but not most cases and a statute that establishes a specific administrative remedy, the former indicates more clearly than the latter that Congress chose to eliminate general equitable relief for private parties. The issue of creating a private cause of action was squarely before
The Supremacy Clause provides that the laws of the United States "shall be the supreme Law of the Land ... any Thing in the Constitution or Laws of any State to the Contrary notwithstanding." U.S. CONST., art. VI, cl. 2. In other words, "federal law preempts contrary state law." Hughes, 136 S.Ct. at 1297.
In considering a federal law's preemptive effect, "the ultimate touchstone" is Congress's purpose in enacting the law. Id. at 1297 (quoting Altria Group, Inc. v. Good, 555 U.S. 70, 76, 129 S.Ct. 538, 172 L.Ed.2d 398 (2008)). Relatedly, in determining whether a state law is preempted, the Court must "consider[] the target at which the state law aims." Oneok, Inc. v. Learjet, Inc., ___ U.S. ___, 135 S.Ct. 1591, 1599, 191 L.Ed.2d 511 (2015) (emphases in original).
State laws may be either "field" or "conflict" preempted. Field preemption exists where "Congress has forbidden the State to take action in the field that the federal statute pre-empts." Oneok, 135 S.Ct. at 1595. In such circumstances, "Congress may have intended to foreclose any state regulation in the area, irrespective of whether state law is consistent or inconsistent with federal standards." Id. (citation and internal quotation marks omitted). Conflict preemption, by contrast, "exists where compliance with both state and federal law is impossible, or where the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Id. (citation and internal quotation marks omitted).
Plaintiffs allege that the CES Order is both field and conflict preempted by the FPA. For the reasons set forth below, the Court concludes that it is neither.
The FPA is a paragon of cooperative federalism; it divides responsibility for the regulation of energy between state and federal regulators. See Hughes, 136 S.Ct. at 1292. For statutes such as the FPA, "where `coordinate state and federal efforts exist within a complementary administrative framework, and in the pursuit of common purposes, the case for federal pre-emption becomes a less persuasive one.'" Id. at 1300 (Sotomayor, J., concurring) (quoting New York State Dept. of Social Servs. v. Dublino, 413 U.S. 405, 421, 93 S.Ct. 2507, 37 L.Ed.2d 688 (1973)).
FERC, on behalf of the federal government, has exclusive authority "to regulate `the transmission of electric energy in interstate commerce' and `the sale of electric energy at wholesale in interstate commerce.'" FERC v. Elec. Power Supply Ass'n (hereafter, "EPSA"), ___ U.S. ___,
Although FERC has substantial authority over interstate wholesale energy sales, the regulation of retail rates for sales of electricity belongs to the States. Hughes, 136 S.Ct. at 1292. Within the zone of exclusive state jurisdiction are "within-state wholesale sales" and "retail sales of electricity (i.e., sales directly to users)." EPSA, 136 S.Ct. at 768. States also retain jurisdiction "over facilities used for the generation of electric energy." 16 U.S.C. § 824(b)(1). As discussed supra, to determine whether a State is regulating retail or wholesale rates, the Court must consider the target of the state law. Oneok, 135 S.Ct. at 1599.
The Supreme Court recently grappled with the issue of preemption under the FPA in Hughes v. Talen Energy Marketing, LLC, ___ U.S. ___, 136 S.Ct. 1288, 194 L.Ed.2d 414 (2016). In Hughes, the Court concluded that a Maryland energy program was preempted because it impermissibly "set[] an interstate wholesale rate, contravening the FPA's division of authority between state and federal regulators." 136 S.Ct. at 1297. The Maryland program, which obliged Maryland LSEs to enter into a contract-for-differences with a favored generator, required the favored generator to participate in the wholesale capacity auction, but guaranteed that generator the more favorable contract price (rather than the market-clearing price) for its energy. Id. at 1294-95, 1297. Importantly, the generator's receipt of the subsidy was explicitly contingent on the generator's sale of capacity into the wholesale auction: if the generator's capacity cleared the auction, and the market-clearing price was below the price stipulated in the contract-for differences, the LSEs paid the generator the difference between the contract price and the clearing price. Id. at 1295. The generator did not receive the subsidy if its capacity failed to clear the auction. Id. Because the Maryland program conditioned the generator's receipt of the subsidy on the generator's participation in the auction, but guaranteed the generator a rate distinct from the market-clearing price, Hughes concluded that the Maryland program "adjust[ed] an interstate wholesale rate" and was accordingly preempted. Id. at 1297.
Hughes, however, left open the possibility for States to "encourag[e] production of new or clean generation through measures `untethered to a generator's wholesale market participation.'" Id. at 1299 (citation omitted). In doing so, the Supreme Court declined to address the permissibility of other State measures to incentivize clean
Plaintiffs argue that the ZEC program is preempted under Hughes because, like the challenged Maryland program, the 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; (2) ZEC prices are calculated using forecast wholesale rates; and (3) the nuclear generators receiving the ZECs sell all of their power directly into the auction markets. Opp. 19-22; Oral Arg. Tr. (hereafter, "Tr.") 22:2-23:22, 32:16-34:14, Dkt. 141 (Mar. 29, 2017). Unsurprisingly, Defendants and Intervenors dispute all of these arguments. The Court agrees with Defendants and Intervenors.
The Court is not convinced by Plaintiffs' first argument. 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, see Hughes, 136 S.Ct. at 1299, and Plaintiffs have not argued that such state subsidies are per se preempted.
Nor does the use of forecast wholesale rates in calculating the ZEC price create an unconstitutional tether. Hughes clearly stated that the impermissible tether was "to a generator's wholesale market participation," id. at 1299 (emphasis added), and nowhere stated, implied or even considered that a State program's incorporation of the wholesale market price would provide a basis for preemption.
Rochester Gas & Electric Corp. v. PSC, 754 F.2d 99 (2d Cir. 1985) forecloses Plaintiffs' attempt to hook preemption to price. Rochester Gas concluded that the State's consideration of a "reasonable estimate" of wholesale sales revenue in calculating intrastate retail rates (an area of State jurisdiction) did not render the state program at issue preempted. 754 F.2d at 100-01, 105. The Second Circuit found "a distinction between, on the one hand, regulating [wholesale] sales, and on the other, reflecting the profits from a reasonable estimate
Plaintiffs also argue that the ZEC program is directly tied to the wholesale auction because "[a]ll electricity produced by these nuclear generators must be sold directly or indirectly in the NYISO auctions, as there are no alternative markets." Compl. ¶ 64; see also Tr. 22:7-8 ("[T]he nuclear plants[] have no alternative but to sell their output in the energy auction...."). Plaintiffs highlight that the nuclear generators are "price takers," Tr. 22:8, and that the nuclear generators "are exempt wholesale generators under the Public Utility Holding Act [("PUHA")]," which, according to Plaintiffs, requires the generators to sell all of their power and capacity into the wholesale auction. Tr. 22:10-16.
This argument is no more than an attempt to fashion a "tether" by jamming a square peg into a round hole; Plaintiffs' argument rewrites the CES Order. The CES Order itself does not require the nuclear generators to sell into the NYISO auction. As discussed supra, the nuclear generators receive ZECs for their zero-emissions production of energy, and not for the sale of that energy into the wholesale market; the CES Order grants ZECs to eligible nuclear generators, without any mention of whether or where the generators sell their power. See CES Order at 124-29 (discussing criteria for generators to receive ZECs). In that respect, the ZEC program is critically different from the challenged program in Hughes, which specifically conditioned subsidy payments on the generator's sale of capacity into the auction. See Hughes, 136 S.Ct. at 1295, 1297, 1299.
Even accepting as true Plaintiffs' allegation that the generators do, as a matter of fact, sell their entire output into the auction, see Compl. ¶ 64, that is a business decision; it is not a requirement imposed by New York. Plaintiffs have not cited, and the Court has not been able to find, any case in which a state program has been found to be field preempted based on a private business decision rather than a state directive. What the generators choose to do, as a matter of their business organization or as a product of their business decisions, is irrelevant from a preemption perspective. See Vill. of Old Mill Creek, 2017 WL 3008289, at *13 (finding the ZEC program not preempted because "the ZEC program does not mandate auction clearing ... and the state, while taking advantage of these attributes to confer a benefit on nuclear power, is not imposing a condition directly on wholesale transactions").
In summary, the Maryland program at issue in Hughes conditioned the generators' receipt of a favorable rate (distinct from the auction rate) on the generators' capacity clearing the auction; there was a direct and concrete tie (or tether) between the contracts-for-difference and the generator's wholesale market participation. Here, a ZEC is available based on the environmental attributes of the energy production — specifically, for the generators' production of zero-emissions energy — without consideration of the generators' participation in the auction. Like the challenged Connecticut program in Allco Fin. Ltd. v. Klee, 861 F.3d 82 (2d Cir. 2017), the ZEC program does not suffer from Hughes's "fatal defect" because the ZEC program "does not condition capacity transfers on [the wholesale] auction." 861 F.3d at 99. Rather, the purchase or sale of ZECs, like the contracts at issue in the Connecticut program, reflect transactions that occur "independent of the auction." Id.
Plaintiffs argue that the ZEC program is preempted because "the ZEC payments directly alter the wholesale price paid by LSEs and received by the nuclear generators." Opp. 19. They argue that by guaranteeing nuclear generators greater total compensation (i.e., the auction clearing price plus the value of its ZECs) than what they will receive at auction (clearing price only), the ZEC program disregards interstate wholesale rates that FERC has deemed just and reasonable. In addition, Plaintiffs argue that ZECs artificially depress the auction market-clearing price by allowing the nuclear generators to continue to participate as price-takers, thus increasing the supply of energy and thereby reducing the wholesale price.
Plaintiffs' argument commits the logical fallacy of concluding that state actions that affect the wholesale price in some way are the same as state actions that set the wholesale rate. In EPSA, the Supreme Court stated that "[t]o set a retail electricity
Nor is the ZEC program preempted because of the ZECs' effects on the wholesale auction. FERC has jurisdiction over "rules or practices that directly affect the [wholesale] rate," EPSA, 136 S.Ct. at 774 (alterations in original) (citation and quotation marks omitted), but "indirect or tangential impacts on wholesale electricity rates" fall outside FERC jurisdiction, id. Even if ZECs have an effect on the wholesale auction — which Plaintiffs allege and the Court must accept as true — Plaintiffs have not plausibly alleged that the ZECs directly affect wholesale rates such that they intrude upon federal jurisdiction.
In Allco, the Second Circuit squarely rejected the argument that the fact that the challenged contracts would "increase the supply of electricity available to Connecticut utilities," thereby exerting "downward pressure ... that will have an effect on wholesale prices," meant that the Connecticut contracts "infring[ed] upon FERC's regulatory authority." Allco, 861 F.3d at 101. The Second Circuit concluded that any such effect on wholesale prices was "incidental" and did not "amount to a regulation of the interstate wholesale electricity market that infringes on FERC's jurisdiction." Id. Plaintiffs here allege that ZECs affect wholesale prices by exerting pressure on the market forces that play out in the wholesale auction, but they, too, fail to state a plausible claim that ZECs directly affect wholesale rates. Like the Allco contracts, ZECs have only an incidental effect on wholesale rates and thus do not intrude upon FERC jurisdiction.
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. Plaintiffs even concede that such measures "would have some of the same effects" on the market. Tr. 26:2-3.
Hughes declined to rule on the permissibility of such state-incentive measures, see Hughes, 136 S.Ct. at 1299 ("We ... need not and do not address the permissibility of various other measures States might employ to encourage development of new or clean generation, including tax incentives, land grants, [and] direct subsidies...."), and Plaintiffs do not argue here that such incentives are per se impermissible, Tr. 25:22-26:4 (acknowledging that "if New York decided to just write a check to a nuclear plant, that would have some of the same effects"). Hughes made
The death knell for Plaintiffs' field-preemption argument is their failure to distinguish ZECs from RECs. In WSPP, FERC concluded that RECs fall outside FERC jurisdiction because they are state-created certifications of an energy attribute that are unbundled from wholesale energy sales. WSPP, Inc., 139 FERC P 61061, 2012 WL 1395532, ¶¶ 18, 21, 24 (FERC Apr. 20, 2012). WSPP held that these unbundled transactions did not affect wholesale rates and were not "in connection with" wholesale sales of electricity. Id. ¶ 24; see also Allco, 861 F.3d at 93 ("RECs are inventions of state property law whereby the renewable energy attributes are `unbundled' from the energy itself and sold separately." (quoting Wheelabrator Lisbon Inc. v. Conn. Dep't of Pub. Util. Control, 531 F.3d 183, 186 (2d Cir. 2008))). Curiously, Plaintiffs argue that WSPP supports their position.
Plaintiffs argue that WSPP does not foreclose their preemption claim because WSPP noted that a wholesale sale that "requires the use of an emissions allowance" is subject to FERC jurisdiction because such a transaction would directly affect and be "in connection with" the wholesale rate, WSPP ¶¶ 22-23. Plaintiffs argue that because the ZEC program requires that LSEs purchase ZECs in proportion to the electric energy load that they serve, Compl. ¶ 73, ZECs are not "unbundled" from wholesale sales as RECs are. Opp. 28-29.
Plaintiffs' argument fails given the allegations in their own Complaint: the REC program also requires that LSEs purchase RECs in proportion to their total electricity load or to make a compliance payment. Compl. ¶ 49; CES Order at 14, 16. That LSEs may make a REC compliance payment, but no analogous ZEC compliance payment exists, is immaterial; the REC program, like the ZEC program, requires that LSEs make a proportional payment. See CES Order at 109-10. Like RECs, ZECs are credits for the environmental attributes of energy production. Like the sales of RECs, sales of ZECs are unbundled from wholesale sales for energy or capacity. If RECs are not preempted (and WSPP makes clear that they are not), then the Court fails to see how ZECs are.
Plaintiffs further argue that RECs are distinguishable from ZECs because: REC prices are not calculated using forecast wholesale prices, Opp. 30-31; RECs are available to all generators, not just a favored few, Opp. 31; and ZECs are not unbundled from or "independent of other `attributes'" of the eligible generators because the generators receive ZECs based on their inability to remain profitable from wholesale market sales, Opp. 31. See also Compl. ¶¶ 50-51. For these reasons, Plaintiffs claim that "the REC is different and is not subject to the same issues." Tr.
Although there are factual differences between ZECs and RECs, none is legally significant. As discussed above, the fact that the ZEC price is calculated using a forecast of wholesale prices does not mean that the ZEC program is preempted. Nothing in WSPP considered the REC pricing mechanism to be constitutionally significant; indeed, WSPP did not even explicitly address how RECs were priced.
Like a REC, a ZEC is a certification of an energy attribute that is separate from a wholesale charge or rate. Like a REC, the purchase or sale of a ZEC is the purchase or sale of this attribute, rather than the purchase or sale of wholesale energy. Like a REC, the purchase or sale of a ZEC is independent of the purchase or sale of wholesale energy. Like a REC, payment for a ZEC is not conditioned on the generator's participation in the wholesale auction; rather, RECs and ZECs are given in exchange for the renewable energy or zero-emissions production of energy by generators. Compl. ¶ 64 ("payment of ZEC subsidies occurs if, and only if, the nuclear generator `produces' electricity"); CES Order, App'x E at 1. Because of these similarities between ZECs and RECs, the effect of ZECs on the wholesale auction is legally indistinguishable from the effect of RECs on the wholesale auction.
Plaintiffs argue that the ZEC program's effect on wholesale prices is "far greater" than the effects of programs held preempted
Mississippi Power and Nantahala also do not help Plaintiffs' case. In Mississippi Power, which is a conflict (not field) preemption case, the State barred the utility from recovering costs that the utility was required to pay under a FERC order mandating a certain allocation of power. Mississippi Power, 487 U.S. at 373-74, 108 S.Ct. 2428. The Supreme Court concluded that "Mississippi's inquiry into the reasonableness of FERC-approved purchases" was preempted by FERC. Oneok, 135 S.Ct. at 1601-02 (discussing Mississippi Power). Similarly, in Nantahala, which also is a conflict preemption case and a case on which Mississippi Power relied, a State commission prevented the utility from recovering the costs incurred in paying the wholesale rate for a FERC-mandated allocation of power. Mississippi Power, 487 U.S. at 370-71, 108 S.Ct. 2428 (discussing Nantahala). As in Nantahala, the Supreme Court held that the State commission's action was preempted. Id. at 370-73, 108 S.Ct. 2428 (discussing Nantahala). Here, the ZEC program does not challenge or seek to re-determine the reasonableness of the wholesale rate. Rather, ZECs are payments for the environmental attributes of zero-emission energy. Unlike the challenged state laws in Mississippi Power and Nantahala, and despite Plaintiffs' protestations otherwise, the ZEC program is simply not tethered to the wholesale rate.
Lastly, Northern Natural Gas is simply inapposite. In that case, Kansas required the ratable purchase of gas from a particular gas field. N. Nat. Gas, 372 U.S. at 85-86, 83 S.Ct. 646. The Supreme Court held that Kansas' orders were preempted because they were "unambiguously directed at purchasers who take gas in Kansas for resale after transportation in interstate commerce" and thereby invaded federal jurisdiction "over the sale and transportation of natural gas in interstate commerce for resale." Id. at 90-92, 83 S.Ct. 646 (Kansas orders "directly affect[ed] the ability of the Federal Power Commission to regulate comprehensively and effectively the transportation and sale of natural gas, and to achieve the uniformity of regulation, which was an objective of the Natural Gas Act."). Unlike in Northern Natural Gas, the ZEC program does not order utilities to make any purchases of energy or capacity, let alone from any particular electricity source.
Conflict preemption "exists where compliance with both state and federal law is impossible, or where the state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress." Oneok, 135 S.Ct. at 1595 (quotation marks and citation omitted). "State regulation of production may be pre-empted as conflicting with FERC's authority over interstate transportation and rates if it is impossible to comply with both state and federal law; if state regulation prevents attainment of FERC's goals; or if a state regulation's impact on matters within federal control is not an incident of efforts to achieve a proper state purpose." Nw. Cent. Pipeline Corp. v. State Corp. Comm'n of Kansas, 489 U.S. 493, 515-16, 109 S.Ct. 1262, 103 L.Ed.2d 509 (1989). Where, as here, conflict preemption is alleged based on the obstacle presented by state law to the federal purpose and objective, "[w]hat constitutes a sufficient obstacle is a matter of judgment, to be informed by examining the federal statute as a whole and identifying its purpose and intended effects." In re Methyl Tertiary Butyl Ether (MTBE) Prods. Liab. Litig., 725 F.3d 65, 101 (2d Cir. 2013) (internal quotation marks and citation omitted); see also PPL EnergyPlus, LLC v. Nazarian, 753 F.3d 467, 478 (4th Cir. 2014) (same).
In "a system of `interlocking' [state and federal] jurisdiction" like the FPA, Nazarian, 753 F.3d at 478; see also Hughes, 136 S.Ct. at 1300 (Sotomayor, J., concurring), "conflict preemption analysis must be applied sensitively ... so as to prevent the diminution of the role Congress reserved to the States while at the same time preserving the federal role," Nw. Cent. Pipeline, 489 U.S. at 515, 109 S.Ct. 1262. When state law has an impact on matters within FERC's control, "the State's purpose must be to regulate production or other subjects of state jurisdiction, and the means chosen must at least plausibly be related to matters of legitimate state concern." Nw. Cent. Pipeline, 489 U.S. at 518, 109 S.Ct. 1262. A state law "creates a conflict rather than demands an accommodation" when the State is attempting to regulate a matter of federal concern in the guise of regulating a matter of state concern. Id. But when the State is legitimately regulating a matter of state concern, "FERC's exercise of its authority must accommodate" that state regulation "[u]nless clear damage to federal goals would result." Id. at 522, 109 S.Ct. 1262.
Plaintiffs argue that the ZEC program is conflict preempted because it causes "clear damage" to and "interferes with FERC's regulatory objective" of maintaining competitive energy markets. Opp. 32-33. Plaintiffs allege that the ZEC program "disrupt[s] market signals" and "interferes with FERC's decision to structure the wholesale markets ... on market-based principles" to encourage the maintenance of efficient generators. Compl. ¶¶ 88-89. Plaintiffs further argue that conflict preemption presents a factual issue inappropriate for resolution on a motion to dismiss. Opp. 34.
Defendants and Intervenors respond that the ZEC program is consistent with FERC's policy statements and that NYISO,
Accepting the Complaint's factual allegations as true, as the Court must at this stage, the Complaint does not state a plausible claim of conflict preemption. The ZEC program is plainly related to a matter of legitimate state concern: the production of clean energy and the reduction of carbon emissions from the production of other energy. Thus, in the interlocking jurisdictional scheme provided by the FPA, there is no conflict preemption "[u]nless clear damage to federal goals would result." Nw. Cent. Pipeline, 489 U.S. at 522, 109 S.Ct. 1262.
Plaintiffs allege that the ZEC program "interferes with FERC's decision to structure the wholesale markets ... on market-based principles" to encourage efficient generators. Compl. ¶ 89. Accepting as true that one of FERC's goals is to promote market efficiency through energy auctions, there is no conflict. The ZEC program does not run afoul of the goal of having an efficient energy market. Instead, by incentivizing clean energy production, it seeks to minimize the environmental damage that is done by generating electricity through the use of gas and fossil fuels. CES Order at 19. Far from objecting to state programs that encourage energy production with certain desirable environmental attributes, FERC has approved state programs with "renewable portfolio mandates and greenhouse reduction goals." See, e.g., Pac. Gas & Elec. Co., 123 FERC P 61067, 2008 WL 1780603, ¶ 34 (FERC Apr. 21, 2008). The ZEC program does not thwart the goal of an efficient energy market; rather, it encourages through financial incentives the production of clean energy.
Plaintiffs' only remaining allegations relative to their conflict preemption claim are that ZECs "will disrupt market signals" within the auction, Compl. ¶ 88, and that "the ZECs will have market-distorting ripple effects throughout the national market and beyond New York's borders," Compl. ¶ 90. Accepting these factual allegations as true, Plaintiffs have not stated a plausible claim of conflict preemption.
Plaintiffs' core complaint is that the ZEC program will permit certain nuclear generators to continue to participate in the energy market when they otherwise would have gone out of business.
Plaintiffs argue that the issue of conflict preemption is not appropriately decided on a motion to dismiss, pointing out that other district courts decided the conflict preemption question after considering factual and expert evidence in the case. See PPL EnergyPlus, LLC v. Nazarian (hereafter, "Nazarian II"), 974 F.Supp.2d 790 (D. Md. 2013); PPL EnergyPlus, LLC v. Hanna, 977 F.Supp.2d 372 (D.N.J. 2013). Nazarian II and Hanna, however, presented plausible claims of conflict preemption. In those cases, the programs guaranteed a fixed price that displaced the wholesale auction price; that displacement resulted in clear damage to FERC's goal of setting wholesale prices at auction. See Mem. and Order re: Mot. to Dismiss at 11, ECF 71, Nazarian II, No. MJG-12-1286 (D. Md. Aug. 3, 2012) (Plaintiffs asserted a plausible claim of conflict preemption based on their allegation that the generator benefitting from the Maryland program was "guaranteed receipt of the PSC fixed price" through a contract for difference and was therefore "not appropriately market-based.");
Plaintiffs cite International Paper Co. v. Ouellette, 479 U.S. 481, 107 S.Ct. 805, 93 L.Ed.2d 883 (1987), to argue that state programs with the potential to undermine a federal regulatory structure are conflict preempted because States "cannot `do indirectly what they could not do directly.'" Opp. 32 (quoting Ouellette, 479 U.S. at 495, 107 S.Ct. 805). Ouellette is inapposite. In Ouellette, the Court considered whether a Vermont nuisance law was preempted by the Clean Water Act, which established a federal permit program regulating the discharge of pollutants and assigned different state regulatory roles based on whether the State was the source of the discharge. 479 U.S. at 489-91, 107 S.Ct. 805. Because application of the Vermont law could "effectively override the permit requirements and the policy choices made by the source State," the Court concluded that the Vermont law effectively circumvented and upset the balance of interests contemplated by the Clean Water Act. Id. at 494-95, 107 S.Ct. 805. Accordingly, the Court held that the Vermont law was conflict preempted. Id. at 487, 493-97, 107 S.Ct. 805.
Nothing about the ZEC program "effectively override[s]," id. at 495, 107 S.Ct. 805, the FPA. ZECs do not circumvent the FERC auction — at the risk of being redundant, ZECs, like RECs, are payments for environmental attributes that are unbundled from and involve separate transactions than those for the wholesale sales of energy or capacity. If the ZEC program were aimed at wholesale market participation or wholesale prices for sales of energy or capacity, then this would be a stronger case for conflict preemption. Unlike the Vermont law at issue in Ouellette, which did present a clear conflict between the state law and the federal regulatory scheme, the ZEC program does not "stand[] as an obstacle," Oneok, 135 S.Ct. at 1595 (internal quotation marks and citation omitted), to the FERC auction or the FPA.
Plaintiffs' proposed discovery highlights the implausibility of their conflict preemption claim. The only two topics of discovery proposed by Plaintiffs relevant to the conflict preemption claim are: (1) fact discovery supporting Plaintiffs' allegation that "the nuclear energy is not being sold directly to any customers at retail; it's going into the auction process"; and (2) fact and expert discovery to demonstrate that the ZEC program "will, in fact, have a substantial impact on the wholesale rate." Status Conference Tr. 29:25-30:9-10, Dkt. 90 (Dec. 16, 2016). Again, even if all of the nuclear generators' electricity is sold into the auction and the ZECs have an impact on the wholesale rate by affecting market signals, Plaintiffs will not have stated a
Therefore, the Court concludes that the Complaint does not state a plausible claim of conflict preemption.
The Commerce Clause empowers Congress "[t]o regulate Commerce ... among the several States." U.S. CONST. art. I, § 8, cl. 3. "The negative or dormant implication of the Commerce Clause prohibits state ... regulation ... that discriminates against or unduly burdens interstate commerce and thereby impedes free private trade in the national marketplace." Gen. Motors Corp. v. Tracy, 519 U.S. 278, 287, 117 S.Ct. 811, 136 L.Ed.2d 761 (1997) (internal citations and quotation marks omitted). But "there is a residuum of power in the state to make laws governing matters of local concern which nevertheless in some measure affect interstate commerce or even, to some extent, regulate it." Kassel v. Consol. Freightways Corp. of Del., 450 U.S. 662, 669, 101 S.Ct. 1309, 67 L.Ed.2d 580 (1981) (internal quotation marks and citation omitted). Therefore, a state law or regulation violates the dormant Commerce Clause "only if it (1) `clearly discriminates against interstate commerce in favor of intrastate commerce,' (2) `imposes a burden on interstate commerce incommensurate with the local benefits secured,' or (3) `has the practical effect of "extraterritorial" control of commerce occurring entirely outside the boundaries of the state in question.'" Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 90 (2d Cir. 2009) (quoting Freedom Holdings Inc. v. Spitzer, 357 F.3d 205, 216 (2d Cir. 2004)).
Only the first two means of violating the dormant Commerce Clause are at issue here. Plaintiffs allege that the ZEC program violates the dormant Commerce Clause because: (1) the ZEC program facially discriminates against out-of-state energy producers, including nuclear and other carbon-free energy producers, by selecting only New York nuclear power plants to receive ZECs, Compl. ¶ 98; and (2) the ZEC program imposes an undue burden on interstate commerce by distorting market pricing and incentives, which will cause energy generators, including out-of-state energy providers, to leave the market or discourage their entry into the market, Compl. ¶ 99. Plaintiffs have no cause of action under either theory and have, in any event, failed to allege a dormant Commerce Clause claim.
Intervenors argue that Plaintiffs lack prudential standing to bring a dormant Commerce Clause claim because they do not allege a nexus between their
The Supreme Court recently held that the zone of interests test does not fall under the prudential standing rubric; instead, whether a plaintiff's injury falls within a law's zone of interests goes to whether the plaintiff has a cause of action. Lexmark Int'l, Inc. v. Static Control Components, Inc., ___ U.S. ___, 134 S.Ct. 1377, 1387, 188 L.Ed.2d 392 (2014). The Supreme Court in Lexmark addressed the zone of interests inquiry only as it applies to statutory claims; it did not address constitutional claims, such as Plaintiffs' dormant Commerce Clause claim. Id. To the Court's knowledge, only the Third Circuit has addressed whether Lexmark applies to constitutional claims. In Maher Terminals, the Third Circuit applied the zone of interests test to determine whether the plaintiff had stated a Tonnage Clause
Plaintiffs entirely fail to allege any injury arising from discrimination against or an undue burden on out-of-state economic interests. As to their claim that the ZEC program facially discriminates against out-of-state nuclear power providers by awarding ZECs only to New York nuclear power plants, Plaintiffs do not allege that they own or represent an out-of-state nuclear power plant.
Although "the zone of interests test is not a rigorous one," Nat'l Weather Serv. Employees Org., Branch 1-18 v. Brown, 18 F.3d 986, 989 (2d Cir. 1994), the interest sought to be protected must be at least arguably within the zone of interests to be protected by the dormant Commerce Clause, Ass'n of Data Processing Serv. Orgs., Inc. v. Camp, 397 U.S. 150, 153, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970). Because Plaintiffs' interests are, at best, "marginally related" to the protection of out-of-state economic interests, Plaintiffs lack a cause of action.
Even if Plaintiffs had a cause of action, their dormant Commerce Clause claim would fail because New York was acting as a market participant, not as a regulator, when it created ZECs. The dormant Commerce Clause "does not prohibit
In Alexandria Scrap, in order to ameliorate the aesthetic and environmental problem associated with abandoned automobiles, Maryland created a bounty payable to any licensed processor that destroyed any vehicle formerly titled in Maryland. Id. at 797, 96 S.Ct. 2488. Maryland imposed a more burdensome title documentation requirement on out-of-state processors than in-state processors in order to receive the bounty. Id. at 801, 96 S.Ct. 2488. An out-of-state processor claimed that the Maryland law violated the dormant Commerce Clause because it gave Maryland processors an unfair advantage in the market for bounty-eligible hulks. Id. at 802, 96 S.Ct. 2488. The Supreme Court disagreed. It held that the Maryland law did not violate the dormant Commerce Clause because Maryland did not seek to prohibit the flow of hulks or regulate that flow but instead "entered into the market itself to bid up their price" for the legitimate purpose of protecting Maryland's environment. Id. at 806, 809, 96 S.Ct. 2488. The Court acknowledged that the effect of the law was that Maryland hulks would be primarily destroyed by in-state processors and that in-state processors would primarily receive the bounties, but the Court held that "no trade barrier of the type forbidden by the Commerce Clause" restricted the movement of Maryland hulks out-of-state. Id. at 810, 96 S.Ct. 2488. Instead, the hulks remained in Maryland "in response to market forces, including that exerted by money from the State." Id.
Building on Alexandria Scrap, in a case involving facts and allegations much closer to those at issue here, the District Court for the District of Connecticut dismissed the plaintiff's dormant Commerce Clause claim, reasoning that Connecticut was acting as a market participant when it created a market for RECs that subsidized clean energy generation. Allco Fin. Ltd. v. Klee, Nos. 3:15-cv-608 (CSH), 3:16-cv-508 (CSH), 2016 WL 4414774, at *23-25 (D. Conn. Aug. 18, 2016), aff'd, 861 F.3d 82 (2d Cir. 2017). In Allco, the Plaintiff generated RECs in Georgia through one of its solar power facilities, but those RECs did not satisfy Connecticut's requirements, which required that RECs be generated from power plants within the Northeast. Id. at *21. The district court concluded that, just as Maryland had incentivized market participants to destroy hulks by financially rewarding them to do so, Connecticut was merely making it "more lucrative for generators to produce and distribute clean energy in Connecticut" by creating a secondary REC market. Id. at *24. Connecticut is "not obligated to spread the benefit of that market to states that do not also bear the burden of the cost of the subsidy, which is ultimately paid by Connecticut ratepayers." Id. The district court held that Connecticut was not acting as a regulator because it was "not preventing the flow of clean energy or regulating the conditions
This case follows in the footsteps of Alexandria Scrap and the district court's decision in Allco. New York's ZEC program does not create a trade barrier or prevent or regulate the flow of energy — renewable, nuclear, or otherwise. New York gives financially eligible nuclear generators that have historically contributed power into the New York market credit for the zero-emission attributes of each MWh of electricity they produce. Compl. ¶ 67. NYSERDA then buys the ZECs from the nuclear generators at an administratively determined price, and the cost is ultimately passed on to New York ratepayers. Compl. ¶¶ 69, 73. Just like Maryland in Alexandria Scrap and Connecticut in Allco, by distributing subsidies through the ZEC program to otherwise financially struggling nuclear power plants, New York is participating in the energy market and exercising its right to favor its own citizens.
Plaintiffs argue that this case is distinguishable because New York, and not the free market, sets the price of the ZECs and because ZECs are distributed on the basis of financial need. Opp. 40. Plaintiffs have not articulated why those distinctions are relevant to the dormant Commerce Clause analysis, and the Court does not find them to be relevant. New York is paying the nuclear power plants a set dollar amount for each MWh of electricity they produce in recognition of the zero-emission attributes of their electricity. This is no different than Maryland paying a set bounty to hulk processors. Whether the subsidy amount is at a government-set rate, as it is here and as it was in Alexandria Scrap, 426 U.S. at 797 n.5, 96 S.Ct. 2488, or set by market forces, as it was in Allco, 2016 WL 4414774, at *20, has no impact on the market participant analysis. Nor does the fact that ZECs are distributed based on financial need. The dormant Commerce Clause does not restrict which in-state businesses a State may subsidize when it is expending its own funds to do so, so long as the State does not also impose "taxes and regulatory measures impeding free private trade in the national
Indeed, regardless of the market participant exception, although the Supreme Court has "never squarely confronted the constitutionality of subsidies," Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 589, 117 S.Ct. 1590, 137 L.Ed.2d 852 (1997) (quotation marks and citation omitted), "[a] pure subsidy funded out of general revenue ordinarily imposes no burden on interstate commerce, but merely assists local business," West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 199, 114 S.Ct. 2205, 129 L.Ed.2d 157 (1994); see also New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 278, 108 S.Ct. 1803, 100 L.Ed.2d 302 (1988) ("Direct subsidization of domestic industry does not ordinarily run afoul of [the dormant Commerce Clause]....").
For the foregoing reasons, the Court GRANTS Defendants' and Intervenors' motions to dismiss. The American Wind Energy Association's motion for leave to file an amicus brief is GRANTED. The Clerk of Court is respectfully directed to terminate Docket Entry Nos. 54, 76 and 150 and to close this case.
