With Clean Energy Standard, New York looks to save nukes, skirt legal challenges

Regulators say three nuclear plants are essential to meeting state climate goals, but is their plan to save them legal?

New York regulators approved an aggressive Clean Energy Standard this week that calls for 50% renewable energy and includes income supports to keep three upstate nuclear plants online. A close reading of the Public Service Commission’s order reveals the state believes it has no choice but to support the plants, or risk falling short on emissions goals. At the same time, the order has been carefully crafted to pass federal or legal scrutiny, though a challenge is all but inevitable.

New York has had fairly strong support for its push into clean energy, including the Clean Energy Standard and other regulatory pushes to modernize the utility system. But "when you're dealing with something like nuclear, you have people who are very opposed," said Jennifer Mersing, of counsel at Stoel Rives in the firm's energy department. "This is a very controversial decision."

The Fitzpatrick, Ginna and Nine Mile nuclear plants are expected to produce 27.6 million MWh of carbon-free generation per year, making their operation essential to meeting Gov. Andrew Cuomo's (D) goal of cutting greenhouse gas emissions 40% from 1990 levels by 2030, and 80% by 2050. 

Each of the plants is struggling in interstate energy markets due to the low price of natural gas and stagnant growth in power demand, but regulators determined it is not feasible to harness enough energy efficiency or bring on sufficient new renewable resources to make up for their loss. 

“It is simply unrealistic to assume that sufficient additional energy efficiency measures could be identified and implemented in time,” the Public Service Commission said in the order approving the CES. Even if the incremental energy efficiency rate could be increased by 25% per year above the projected rate, the commission concluded only 13% of the nuclear plants’ output would be offset. To replace all of the energy, efficiency would have to be tripled to 6.6 million MWh per year.

The same holds true for renewable resources, they said.

“It is not realistic to assume that sufficient additional renewable resources at a reasonable price or perhaps any price could be identified and implemented in sufficient time,” the commission said. Replacing 27.6 million MWh of zero-emission energy would require 9,000 MW of onshore wind or 22,000 MW of solar deployment, they said, and “it is virtually impossible to deploy this magnitude of resources in the short-term.”

While the order is clear in its support for the plants, it also acknowledges that New York must walk a fine line in how the supports are structured, if it is to avoid wading into wholesale market functions under the jurisdiction of the Federal Energy Regulatory Commission.

New York’s nuclear support is unique, in that it uses the federal government's social cost of carbon as an integral part of the formula determining the level of financial support to plants. Regulators hope that formulation will insulate them from legal challenges, but the National Energy Marketers Association has argued that the nuclear supports are the same type of regulatory action invalidated by the Supreme Court in Hughes v. Talen Energy Marketing. The Natural Gas Supply Association has said the ZEC proposal steps into FERC’s territory.

The commission acknowledged the challenges, noting that many of the comments it received expressed concern that supports for clean generation must be put in place in a way that is "untethered" to a generator’s wholesale market participation, borrowing the term the Supreme Court used to describe acceptable state power subsidies in Hughes.

“But that federal law on what measures are or are not untethered is currently unclear," regulators wrote, "creating an element of risk for any kind of program."

A group of power marketers and generators, including Astoria Energy, Calpine Corp., BP Energy and Shell Energy North America, argued the plan would significantly harm the New York ISO wholesale markets by artificially suppressing installed capacity prices. 

But regulators pushed back, saying the CES “does not establish wholesale energy or capacity prices, it only establishes pricing for attributes completely outside of the wholesale commodity markets administered by NYISO.”

With parties on both sides of the issue staking out positions, a challenge in front of either federal regulators or a judge is likely. And because time is of the essence for these challenged plants, it remains unclear what impact a drawn out fight could have.

So far, however, sides are still reviewing the documents. The Natural Gas Supply Association said it was too early to determine whether it would challenge the subsidies, and if so, what approach it would take.

Entergy has been in talks with Exelon to possibly purchase its James A. FitzPatrick plant, but that deal was contingent on the state passing the Clean Energy Standard. With the credit now passed Exelon said in a statement that "those negotiations can continue now that the CES has been approved, providing an opportunity to prevent the plant from being shut down."

Exelon also operates R.E. Ginna and Nine Mile Point, and said approval of the standard means it will invest about $200 million in the plants in spring of 2017.

Determining credit value

Under federal law, FERC holds jurisdiction over interstate wholesale power markets, while states are free to regulate and shape policy in the retail markets within their own borders. New York's Zero Emission Credit (ZEC) formula aims to allow the three upstate nuclear plants to survive in those markets, while keeping the income supports themselves "untethered" to the market. 

The ZECs will be determined by starting with the social cost of carbon and subtracting out benefits received from the Regional Greenhouse Gas Initiative, a multi-state carbon cap-and-trade system in the Northeast. Then, regulators will subtract the amount by which the sum of the New York ISO Zone A Forecast Energy Price and ROS Forecast Capacity Price exceeds $39/MWh — the PUC's forecast for long-term avoided power costs.

For the carbon cost, staff used the U.S. Interagency Working Group's analysis, the same formula used by federal agencies in rulemaking.

The PSC's order sets the ZEC price at $17.48/MWh for the first two years of the program, amounting to $965 million. ZEC prices will be adjusted every two years using the social cost formula. Utilities and other suppliers will make ZEC purchases by contract with NYSERDA and then recover costs from ratepayers through commodity charges on customer bills. 

The regulatory staff's original proposal was based on a more traditional assessment of operating costs and called for $7 billion in income supports over 12 years. "This would result in a fair price for the environmental attribute of each facility," the PSC noted in its order. But following the comment period, where both Entergy and Constellation Energy Nuclear Group pressed for a fuel-neutral carbon standard over the proposed financial need analysis, staff modified its proposal to start with the social cost of carbon.

The nuclear plants will be obligated to produce the ZECs and to sell them to NYSERDA, except during periods when the ZEC price falls to $0 based on the formula. "This contractual obligation would be enforced by appropriate financial consequences for failure to produce," the PSC said.

Importantly, the PSC's order explicitly says the $39/MWh reference price is "used to measure the change in independent forecasts over time, it is not used to establish a quantity of energy or capacity revenues." Using a forecast, rather than actual prices, could help keep the PSC's subsidies from running afoul of wholesale markets and FERC jurisdiction. As will the social cost aspect: Experts say pricing an attribute, rather than the power, will also help counter arguments that the subsidy overreaches state regualtory power.

"FERC has determined that attributes credit payments do not interfere with wholesale competition," the commission wrote in its order.

The PSC said a "vast number" of public comments came in, "either opposing or supporting Staff’s
Responsive Proposal," making it difficult to judge public support. Among state and local officials, support was "strong but not universal."

The commission's notes that a number of parties were opposed to any support for the plants, "arguing that nuclear power is not safe, clean, or carbon-free." Among those parties were AGREE, Council on Intelligent Energy & Conservation Policy, Promoting Health and Sustainable Energy, Indian Point Safe Energy Coalition, Susan Shapiro, Green Education and Legal Fund, NY Climate Action Group, and CEC.

Potential legal challenges

With opposition to the CES bubbling among fossil fuel providers, its likely the decision will face some challenge, either regulatory or legal. 

In the days after its announcement, much of the legal speculation has centered on Hughes v. Talen Energy Marketing.

In a unanimous decision in April, the U.S. Supreme Court rejected a controversial Maryland program to incentivize new in-state generation, finding that it intruded on federal authorities' jurisdiction over wholesale energy markets.

That case is also being talked about in the context of Ohio's struggles with uneconomic generation. A previous subsidy passed by that state was blocked by FERC, forcing the utilities to revise and reduce their subsidy proposals. 

The Hughes case in Maryland focused on a program that guaranteed income for new in-state gas generation, to ensure it cleared the PJM Interconnection wholesale auctions. Opponents argued, and federal officials agreed, that the program artificially suppressed power prices and infringed on FERC's market authority,

But Ari Peskoe, senior fellow in electricity law at Harvard Law School, said he concluded the New York order would not be preempted — at least, not based on the Hughes argument.

“The distinction, and the PSC was very deliberate — the commission is not adjusting a wholesale rate. What they’re doing is valuing the carbon-free attribute," Peskoe said. "They’ve been smart about how they’re going about it."

That's not to say some party won't make that argument. But “Hughes is a really narrow decision," Peskoe said.

One reason the subsidies might not face opposition, Peskoe said, is that challenging a nuclear subsidy could open up a generator’s own fuel source to attack.

“It will be interesting to see who might challenge it,” he said. “If you challenge nuclear revenue, it might endanger something else that these entities like.”

The order will likely face rehearing in New York, where it could face arguments that a cost-effectiveness analysis should have been used. And Stoel Rives' Mersing agreed that New York had gone out of its way to focus on renewable credits and not prices. Despite that, opponents will likely head to the courts, since they were successful there before with Talen.

“It’s an argument people who are opposed to the subsidies will make,” she said. “I feel it’s inevitable someone will challenge it and that argument will be made, but my feeling is the New York PSC really made an effort to distinguish what it was doing from the Maryland case.”

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