The U.S. Court of Appeals for the Seventh Circuit on Sept. 13 ruled that an Illinois “zero emission credit,” or ZEC, program providing support for nuclear plants in Illinois is not preempted by the Federal Power Act (FPA). The appeals court also said that the program does not run afoul of dormant Commerce Clause principles.
Plaintiffs challenged Illinois law that created ZECs
In December 2016, Illinois Gov. Bruce Rauner signed a broad energy bill into law that would help ensure that Exelon's financially troubled Clinton and Quad Cities nuclear power plants in Illinois, remain in operation for another 10 years.
The law provides about $235 million a year through a 10-year contract to the two nuclear power plants. The 1,065-MW Clinton and 1,871-MW Quad Cities plants faced looming shutdowns prior to the law.
The Future Energy Jobs Act amended the Illinois Power Agency Act and created a new commodity, the ZEC, which is a tradeable credit that represents the environmental attributes of one megawatt-hour of energy produced from a zero carbon-emission facility, such as a nuclear power plant. The statute grants ZECs to certain qualifying energy generating facilities.
Two sets of plaintiffs filed suit in federal district court in Illinois to challenge the statute. In one case, the plaintiffs are delivery services customers of Commonwealth Edison Company, a subsidiary of Exelon. The second lawsuit was brought by the Electric Power Supply Association, a national industry association for competitive electric power producers, and several independent power producers: Calpine Corporation, Dynegy Inc., Eastern Generation, LLC and NRG Energy, Inc.
In a July 2017 decision, the federal district court dismissed the challenges, and the plaintiffs appealed to the Seventh Circuit Court of Appeals. The Sept. 13 ruling affirms the lower court’s dismissal of the case.
Preemption analysis focused on Supreme Court ruling
In its decision, the appeals court addressed arguments that the ZEC program is preempted by the FPA. In a brief filed with the court earlier this year, the Federal Energy Regulatory Commission and the Department of Justice said the FPA does not preempt the state’s ZEC program.
The court observed that the FPA “divides regulatory authority between states and the FERC,” noting that FERC regulates interstate wholesale sales of electricity, while the statute leaves states with authority to regulate facilities used to generate power. The FPA’s division of authority, the court explained, “leads to conflict, because what states do in the exercise of their powers affects interstate sales, just as what the FERC does in the exercise of its powers affects the need for and economic feasibility of plants over which the states possess authority.” The U.S. Supreme Court has often had to weigh in on federal-state jurisdiction questions, the court noted.
In analyzing the Illinois ZEC program, the Seventh Circuit’s preemption analysis focuses largely on the U.S. Supreme Court’s 2016 decision in Hughes v. Talen Energy Marketing, LLC, which invalidated a Maryland program that provided support for new generation in the state.
Under the Illinois ZEC program, qualifying nuclear plants in Illinois receive credits, which are initially set at $16.50 per megawatt-hour, but can be reduced if a market-price index exceeds a set threshold.
Unlike the Maryland program at issue in Hughes, eligibility for ZECs depends only on generating the power, and not on selling power into auctions operated by regional transmission organizations and independent system operators. The court of appeals found this distinction to be crucial.
Citing the Supreme Court’s suggestion in Hughes that states may encourage “production of new or clean generation through measures ‘untethered to a generator’s wholesale market participation,’” the court concluded that, in the design of the ZECs, “that’s what Illinois has done.”
The court explained that the ZEC program can only indirectly influence the RTO/ISO auction clearing price, such as by supporting generation units that might otherwise retire and reduce the amount of supply in the market. The court said that such an indirect effect was not enough to invalidate the Illinois statute: “because states retain authority over power generation, a state policy that affects price only by increasing the quantity of power available for sale is not preempted by federal law.”
Court rejects arguments tied to recent FERC ruling
The appeals court also turned aside arguments that preemption of the ZEC program is supported by a June 29, 2018 order issued by FERC that the PJM Interconnection’s capacity market rules are unjust and unreasonable because they do not adequately address the suppressive effect of state subsidies on PJM capacity market clearing prices.
The court observed that FERC, instead of deeming state systems such as Illinois’ to be forbidden, “has taken them as givens and set out to make the best of the situation they produce.”
Referring to the ongoing FERC proceedings considering changes to PJM’s capacity market rules to address state out-of-market support for certain generation resources, the court said that once the Commission reaches a final decision, “the adequacy of its adjustments will be subject to judicial review; the need to make adjustments in light of states’ exercise of their lawful powers does not diminish the scope of those powers.”
The court also rejected claims that the Illinois program must be overturned based on dormant Commerce Clause principles under the United States Constitution.
The court addressed the objection that the ZEC program unconstitutionally favors in-state firms. It said that this amounts to saying that the powers reserved to the states by the FPA are denied to the states by the Constitution, because state regulatory authority is limited to the state’s territory.
Accepting such a view, the court went on to say, would invalidate any state action that increases or reduces the state’s generation capacity, or affects the price of energy, an outcome that “would be the end of federalism.”
The court noted that an indirect effect on interstate commerce does not preclude states from legislating on matters relating to the health, life, and safety of their citizens. Given that the FPA reserved authority over generation to the states, the court said there is no need to analyze whether the state’s interest is strong enough to justify an interstate effect under the Supreme Court’s dormant Commerce Clause decisions.
ZECs in other states
Other states have also moved to establish ZEC programs aimed at supporting nuclear generation.
In New York, a clean energy standard (CES) adopted by state utility regulators allows for ZECs as a way to keep nuclear generation online in the state.
As with the Illinois program, generators challenged the New York ZEC program in the courts, raising similar preemption and dormant Commerce Clause arguments. A federal judge in July 2017 turned aside the challenges to the New York program. The United States Court of Appeals for the Second Circuit heard arguments in March 2018 in an appeal of the lower court ruling, but it has yet to issue a decision.
Meanwhile, the New Jersey Board of Public Utilities on Aug. 29 approved an order that opens a proceeding to create a zero-emission credit (ZEC) program for eligible nuclear power plants.
The BPU said the action is in line with legislation that Gov. Phil Murphy signed into law in May that made sweeping changes to the state’s energy policy.
The bill signed by Murphy creates a ZEC program to support nuclear generation in the state -- the 2,468-MW Salem plant and the 1,240-MW Hope Creek facility.
New Jersey needs to keep the plants open to reach the state’s clean energy goals, Murphy said in May, noting they provide 40 percent of the state’s electricity and 90 percent of its emissions-free energy.