By William Opalka

The U.S. Supreme Court cast a long shadow as New York regulators drafted the Clean Energy Standard and its incentives to preserve upstate nuclear power plants.

Audrey Zibelman, chair of the state Public Service Commission, said that the order adopted last week was drafted to avoid legal challenges that could jeopardize the standard’s goal of generating 50% of the state’s power from renewable resources by 2030. PSC lawyers feared challenges to the zero-emission credit (ZEC) program for nuclear plants and the way in which renewable energy development is encouraged. (See New York Adopts Clean Energy Standard, Nuclear Subsidy.)

The PSC says it believes it avoided the issues that caused the Supreme Court’s April ruling in Hughes v. Talen voiding Maryland regulators’ contract with a natural gas plant as an intrusion into federal jurisdiction over wholesale power markets. (See Supreme Court Rejects MD Subsidy for CPV Plant.)

The court ruled unanimously that the state’s attempt to subsidize generation interfered with FERC’s jurisdiction over wholesale electric markets because it employed a contract-for-differences tied to PJM capacity prices. The court said the contract also violated the Constitution’s Supremacy Clause, which establishes that federal law pre-empts contrary state law.

The court provided state regulators some guidance for crafting their programs in the future, saying it rejected Maryland’s initiative only because it disregards FERC’s wholesale rate.

It was not ruling on “the permissibility of various other measures states might employ to encourage development of new or clean generation, including tax incentives, land grants, direct subsidies, construction of state-owned generation facilities or reregulation of the energy sector,” the court said. “Nothing in this opinion should be read to foreclose Maryland and other states from encouraging production of new or clean generation through measures ‘untethered to a generator’s wholesale market participation.’”

FERC General Counsel Max Minzner has called the ruling “a very narrow decision” that preserved “a wide range of tools for states.” (See Court’s Reticence Frustrates Energy Bar.)

The PSC order considered various scenarios for procuring renewable energy, including its existing renewable energy credit model, a reliance on long-term power purchase agreements and a hybrid of the two. (See NYPSC: Minimal Cost to Meet 50% Renewable Goal.) The order adopted last week relies on the REC-only framework, which New York has used for 12 years to encourage compliance with its renewable portfolio standard.

“One question is our ability as a retail regulator to mandate power purchase agreements in light of the Supreme Court’s recent decision, so we didn’t want to get embroiled in litigation and have that slow up the program and introduce uncertainty,” Zibelman said at a news conference following the order’s adoption.

“The potential for federal pre-emption creates a risk that could slow the implementation of the CES. The [Maryland case] does not directly bar power purchase agreements. It does, however, cast uncertainty over state-mandated contracts that parties may argue interfere with federally supervised wholesale markets,” the PSC order states.

Zibelman said the REC approach also is better for ratepayers. “With longer PPAs, you’re fixing the price upfront, and obviously that’s the value investors see. But … to the extent that the technology costs continue to go down, you’re pushing that risk onto consumers.”

The New York State Energy and Research Development Authority will continue to run competitive auctions for developers selling renewable projects’ environmental attributes — competitions separate from NYISO’s energy and capacity markets.

ZEC Pricing

New York has priced ZECs based on EPA’s social cost of carbon, minus prices for carbon allowances sold under the nine-state Regional Greenhouse Gas Initiative, in which New York participates. Load-serving entities must purchase ZECs, which recognize the carbon-free attribute of nuclear power, proportionate to their annual energy sales.

Although it was designed to be similar to the REC procurement, the ZEC program may face a legal challenge that the mandate would suppress energy and capacity prices.

A group of power generators advanced that argument during the public comment period last month.

The comments were “a dry run driving right at the heart of ZEC,” said David Appelbaum, an attorney for the New York Power Authority. “They’re going to try to derail this. I don’t know if they’re going to be successful.”

The suppliers, 11 power generators and marketers, say the ZEC proposal violates the Federal Power Act and impinges on FERC jurisdiction over wholesale markets. “It conflicts with FERC’s policy that the NYISO’s capacity market provide the necessary price signals to encourage maintenance of existing, and development of new, facilities to meet reliability needs,” the suppliers contend. “But for the artificial price suppression, prospective new generators that may have been economic may forego entry, and existing generators that may have been economic may prematurely retire.”

The PSC order sought to head off this line of attack. The proposal “does not establish wholesale energy or capacity prices; it only establishes pricing for attributes completely outside of the wholesale commodity markets administered by NYISO,” the order states. “To the contrary, it addresses a well recognized externality that otherwise would lead to economic inefficiencies with respect to the costs incurred due to environmental damage, in particular, climate change.”

John Reese, the senior vice president of Eastern Generation, one of the suppliers, told RTO Insider on Monday that no decisions on any appeal have been made.

“We continue to look at all of the options, so we are in the process of deciding what is the best action to take,” he said.