“Staying Nuclear”?: Legal Challenges to State Subsidies for Aging Nuclear Power Plants and Related FERC Actions

“Staying Nuclear”?: Legal Challenges to State Subsidies for Aging Nuclear Power Plants and Related FERC Actions

Legal Sidebari

“Staying Nuclear”?: Legal Challenges to State
Subsidies for Aging Nuclear Power Plants and
Related FERC Actions
March 26, 2021
Nuclear power plants can produce large amounts of electricity with relatively low greenhouse gas (GHG)
emissions, potentially assisting the United States in reducing such emissions. But the U.S. nuclear power
industry faces a number of challenges, including high operating and maintenance costs; aging plants;
competition from natural gas and renewable energy sources; and lawsuits from labor and environmental
groups, among others. According to the U.S. Nuclear Regulatory Commission, 21 nuclear power reactors
are currently undergoing decommissioning in the United States; two reactors are currently under
construction.
The federal government provides some financial support to the nuclear energy industry in the form of tax
credits and other measures. But states have also increasingly sought to subsidize nuclear power plants that
operate within their jurisdictions to preserve existing nuclear generation capacity and the jobs and tax
base they provide to local communities. For example, under a 2018 law, the New Jersey Board of Public
Utilities may issue state-created Zero Emissions Credits (ZECs) to eligible nuclear power plants. ZECs
are state-created, state-issued subsidy instruments that represent the value of nuclear power generation’s
low GHG emission attributes. Participating nuclear power plants receive ZEC payments for qualified
electricity generation from electric distribution utilities because state laws require utilities to purchase
credits at a state-determined price. The New Jersey program, like similar programs in other states such as
Connecticut, Illinois, and New York, is intended to preserve existing nuclear generation capacity in the
state, thereby reducing greenhouse gas emissions.
This Legal Sidebar examines key recent circuit court decisions related to state subsidization of the nuclear
power industry and litigation against the Federal Energy Regulatory Commission (FERC)’s subsequent
orders expanding the Minimum Offer Price Rule (MOPR) in the PJM Interconnection. For an overview
and analysis of challenges facing the nuclear energy industry, see this CRS Report.
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Federal Court Decisions Upholding State Subsidies
During the past few years, state credit programs in Illinois and New York have faced legal challenges
from electrical generators that use fossil fuels. Plaintiffs have argued that state subsidies infringe upon
federal authority and distort the wholesale electric power markets by providing a competitive advantage
to in-state nuclear power generators at the expense of other wholesale market participants. However, in
two cases decided in September 2018, federal circuit courts of appeals (circuit courts) upheld state
subsidies for nuclear power plants, suggesting that such programs do not run afoul of federal law so long
as they do not require generators to participate in wholesale markets as a condition for receiving the
subsidy.
In Coalition for Competitive Electricity v. Zibelman, the Second Circuit Court of Appeals affirmed a
federal district court’s decision dismissing a challenge to New York’s ZEC program. Electrical generators
and trade groups representing the generators challenged the program, arguing that: (1) the FPA and
FERC’s jurisdiction over regional wholesale electric power markets preempt the state program; and (2)
the program violates the dormant aspects of the U.S. Constitution’s Commerce Clause by
unconstitutionally discriminating against interstate commerce.
With regard to the plaintiffs’ preemption claims, the court wrote that the FPA “establishes a collaborative
scheme between the states and federal government to regulate electricity generation” and that states retain
the authority to regulate facilities’ production of energy and the retail sale of electricity. Consequently,
because FERC’s jurisdiction extends only to rules or practices that directly affect wholesale rates, the
states retain authority to legislate to achieve environmental goals, even if such actions indirectly affect the
rates. Quoting from the Supreme Court’s decision in Hughes v. Talen Energy Marketing LLC, the Second
Circuit wrote that states may encourage clean energy generation by offering credits for the environmental
attributes of electrical power generation so long as the states do not condition receipt of the subsidies on a
generator’s participation in wholesale power markets. The court found there was not a sufficient “tether”
between New York’s ZEC program and the wholesale market. For similar reasons, the court held that
New York’s program was not preempted by any conflict with a federal objective.
With respect to the plaintiffs’ dormant Commerce Clause claim, the court held that the plaintiffs lacked
Article III standing to sue, noting they did not own any nuclear power plants. Consequently, their alleged
injuries were not traceable to New York’s program, even if the program favored in-state generators. In
other words, even if the court ordered New York to grant the same subsidies to out-of-state nuclear power
plants—a step the state had already contemplated—the plaintiffs would still suffer injury in the wholesale
markets from the “general market-distorting effects of the ZEC program.” The court wrote that the
plaintiffs’ alleged injuries stemmed from “their production of energy using fuels that New York
disfavors”—that is, the subsidies themselves—rather than the possibility that those subsidies
discriminated against out-of-state power plants.
The same month the Second Circuit issued its decision in Zibelman, the Seventh Circuit Court of Appeals
affirmed a lower court’s dismissal of a similar challenge to Illinois’s credit program. In Electric Power
Supply Ass’n v. Star, the Seventh Circuit affirmed the district court’s grant of summary judgment to the
defendants. Echoing the Second Circuit, the court held that a state may enact measures to encourage new
or clean generation, provided such measures are not “tethered” to the generator’s participation in the
wholesale markets. In addition, the court rejected the plaintiffs’ dormant Commerce Clause challenge
because Congress specifically authorized states to regulate local generation and the subsidy produced no
overt discrimination against interstate commerce.
In April 2019, the Supreme Court declined to hear appeals of these two circuit court decisions, allowing
the lower court rulings that upheld the state subsidy programs to stand.

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FERC’s Expansion of the Minimum Offer Price Rule in the
PJM Interconnection
Following the circuit courts’ decisions rejecting challenges to state credit programs, FERC declined to
approve a compliance filing made by the nation’s largest wholesale power market, the PJM
Interconnection. In FERC’s view, the filing did not mitigate the alleged negative impacts of state
subsidies for certain electric power generators on the effectiveness of wholesale capacity markets. In June
2018, FERC opened a proceeding to explore changes to the auction process. The resulting FERC orders
required the expansion of the MOPR in the PJM Interconnection to establish a new price floor for offers
into the wholesale forward capacity market from a wider variety of generators that receive state subsidies,
including some nuclear power plants. FERC’s order was intended to mitigate lower market prices that
may result from state subsidies for certain electrical generators. FERC’s ruling affects subsidies for new
capacity offered in the forward capacity market, which means that existing facilities with subsidies are not
subject to the new rule.
In April 2020, New Jersey, Maryland, and several other entities filed a petition for review of the FERC
orders in federal court, arguing the orders prevent the states from regulating the production and retail sale
of electricity to achieve environmental objectives and would increase costs to consumers, among other
things. The litigation, which was transferred to the Seventh Circuit Court of Appeals, remains ongoing.
Some states have apparently threatened to withdraw from the PJM capacity market if the FERC orders are
not overturned. It is also possible that, under the Biden Administration, a change in leadership at FERC
may lead to a review of the PJM MOPR order or its implementation.
Implications for Congress
Two circuit court decisions dismissing challenges to state subsidies for nuclear power plants suggest that
states likely have broad legal authority to regulate the production and retail sale of electricity to achieve
environmental objectives, even if such policies indirectly affect wholesale market prices. As some
commentators have noted, the rulings support the legality of state renewable energy credit (REC)
programs that rely upon a similar mechanism. Nonetheless, FERC’s orders requiring the expansion of the
MOPR for the PJM Interconnection demonstrate that, although federal law may not preempt state credit
programs, federal regulation may minimize the impact of such programs by mandating a price floor for
offers from state-subsidized generators. It remains to be seen whether the FERC orders will affect states’
ability to implement ZECs for nuclear generation effectively in the PJM capacity market.
Congress has several options to address state nuclear subsidies. Congress could enact legislation that
would preempt—or, alternatively, preserve—state credit programs. Congress might also consider
legislation to establish a federal credit program for preserving existing nuclear generation. For example, a
bipartisan group of senators introduced the American Nuclear Infrastructure Act in the 116th Congress,
which included provisions to preserve existing nuclear energy generation by compensating companies for
lost revenues that resulted from electricity market prices. The legislation was not enacted. Alternatively,
Congress could await further developments in administrative and judicial forums at the federal and state
levels.

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Author Information

Brandon J. Murrill

Legislative Attorney

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