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

A three-judge federal appeals court panel Monday heard oral argumentsin a case regarding New York's zero-emissions credit program foreconomically struggling nuclear plants, a legal battle that highlightsincreasing friction between state policy, federal jurisdiction and marketintegrity.

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

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

The plaintiffs argue the state's nuclear subsidy program, part of itsClean Energy Standard that mandates 50% of New York's power come fromrenewable sources by 2030, oversteps its authority under federal energylaws and violates part of the US Constitution. Judges Dennis Jacobs and Pamela Chen spoke the most during theproceedings and appeared to side with the state, according to Fox. JudgeJacobs 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 SecondCircuit is likely to uphold the lower court ruling dismissing thechallenge 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 basedon oral argument, "all three judges sharply questioned the fossil fuelcompanies' attorney about their arguments, which should give the statesome confidence," Miles Farmer, an attorney with environmental groupNatural Resources Defense Council, said in a phone call. NRDC filedbriefs in the case defending the state's authority.

Farmer wrote in a blog post that NRDC is not backing the state because itsupports the nuclear subsidy program, but due to the broader consequencesthe case could render, "affecting the ability of states across thecountry to take aggressive action to spur investments in renewable energyand 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 beenbubbling to the surface over the past few years. States, particularly inthe northeast, have increasingly supported renewable energy generationwith financial incentives because they see the low-carbon power sourcesas tools to combat climate change. However, wholesale power markets aredesigned to foster open competition among all sources of generation, soincentivizing 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 anIndependent System Operator New England proposal to create a two-partpower capacity auction designed to accommodate states' energy policies.

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

FERC's next challenge will be ruling on two separate capacity marketredesign proposals filed by PJM Interconnection that are also aimed ataccommodating state policy within wholesale markets. The grid operatorfiled two proposals because its stakeholders and management could notagree on an ideal solution after more than a year of discussion, whichexemplifies the complexity of the state resource policy issue.

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

A decision in the New York ZEC appeal could take months or a year, saidFarmer, but it "will be binding in future federal court cases within theregion," which includes New York, Connecticut, and Vermont. The SecondCircuit judges will also likely wait to see what FERC or the SG has tosay in the Seventh Circuit ZEC appeal, if the government accepts theinvitation to file a brief. -- Jared Anderson, jared.anderson@spglobal.com

-- Edited by Matt Eversman, newsdesk@spglobal.com