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Tuesday
Aug012017

“Untethered” Clean Energy Subsidies Survive Post-Hughes Preemption Challenges

Last year in Hughes v. Talen, the Supreme Court struck down a Maryland generator subsidy program, concluding that it had a direct impact on the wholesale energy auctions and was therefore preempted by the Federal Power Act (FPA). Broadly speaking, under the FPA, wholesale energy sales are federally regulated, by FERC and regional grid operators, and retail sales are state regulated. As described by the court, the fatal flaw inherent in Maryland’s program was that it was directly linked to the generator’s participation in the regional wholesale energy (or capacity) auction—it required generators to bid into the wholesale market but guaranteed them a price distinct from the market clearing price, thereby distorting the wholesale market. Critically, however, the court expressly limited its holding, stating: “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.” (emphasis added)

In two recent decisions, federal courts have seized on this “untethered” language in Hughes, upholding state regulatory schemes incentivizing “renewable” or “zero emissions” energy subsidies that plaintiffs alleged distorted wholesale energy markets and were therefore preempted by the FPA. The cases are some of the first to address these state clean energy programs following the Hughes decision, which some worried might jeopardize state renewable energy subsidies.

In Allco v. Klee, plaintiffs challenged Connecticut’s renewable energy RFP in which Connecticut regulators solicit bids from qualified renewable energy producers and then direct utilities to enter into contract negotiations with the winning bidders. Plaintiffs argued that the case was indistinguishable from Hughes because the contracts would result in generators receiving a price for energy greater than the prevailing wholesale market price. The court rejected the comparison, noting that unlike the Maryland program at issue in Hughes, Connecticut’s program did not require generators to bid into the wholesale auction. Rather, it only resulted in bilateral contracts between the generators and the utilities at a price that FERC must still approve as “just and reasonable.” The court further found that the incidental impact on wholesale energy prices of the resulting contracts was not impermissible because the FPA does not prohibit states from regulating a utility’s generation mix, even if this regulation has an incidental effect on wholesale energy prices.

In Coalition for Competitive Electricity v. Zibelman, plaintiffs challenged New York’s zero emissions credit (ZEC) scheme, which benefits in-state nuclear power plants. Plaintiffs argued that the ZEC scheme was preempted under Hughes because (1) ZECs were only available to nuclear plants because wholesale rates are insufficient for the plants to stay in business (2) ZEC prices are calculated by forecasting wholesale rates, and (3) the nuclear plants sell all of their energy into the wholesale market. As the court noted, however, the ZEC program is entirely distinct and “untethered” from the wholesale energy auction—generators receive the ZEC subsidy for every unit of energy generated, regardless of whether they sell that energy into the wholesale auction. Thus, there is no link between the subsidy and the generator’s participation in the wholesale markets and therefore no preemption under the FPA.

These two cases confirm that the Hughes holding is limited. Only state subsidy programs that are directly tethered to the generator’s participation in wholesale markets are preempted by the FPA. FERC has acknowledged as much in its own decisions and is currently looking at ways to incorporate state programs and priorities into the wholesale markets.

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