Electricity Markets

FPA does not preempt Ill. ZEC program, FERC and DOJ tell court

The Federal Power Act does not preempt a "zero emission credit," or ZEC, program in Illinois that is aimed at helping to keep a pair of nuclear power plants in the state up and running, the Federal Energy Regulatory Commission and the Department of Justice recently said in a brief filed with the U.S. Court of Appeals for the Seventh Circuit.

The May 29 brief was filed by FERC and the DOJ’s Environment and Natural Resources Division.

In December 2016, Illinois Gov. Bruce Rauner signed a broad energy bill into law that was intended to ensure that Exelon's financially troubled nuclear power plants in Clinton and Quad Cities, Illinois, remain open for another 10 years, the governor's office noted in a news release at the time of the signing. The measure also will give a boost to energy efficiency and renewable energy efforts in Illinois.

The law will provide 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 in Illinois 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

Two sets of plaintiffs filed suit 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.

Both sets of plaintiffs brought claims against Anthony Star in his official capacity as director of the Illinois Power Agency and the commissioners of the Illinois Commerce Commission in their official capacities, seeking to invalidate the statute. Exelon intervened in both actions to defend the ZEC program. Star, the commissioners of the ICC and Exelon each filed motions to dismiss the complaints.

In July 2017, a judge with the U.S. District Court for the Northern District of Illinois issued a decision that turned aside legal challenges to the state law.

In his ruling, U.S. District Judge Manish Shah said that the preemption claims made by the plaintiffs do not constitute "proper cases" for private suits for injunctive relief.

FERC, DOJ weigh in

In their brief filed with the appeals court, the DOJ and FERC argued that the Illinois ZEC program is not preempted by the FPA, saying it does not require participation in FERC-jurisdictional wholesale auctions as a precondition to receive ZECs. 

“Rather, the Illinois ZEC is ‘targeted’ at an attribute of generation resources over which Illinois has regulatory authority; any spillover, indirect effect on wholesale electricity markets over which the Commission has authority does not warrant preemption,” FERC and the DOJ said.

Therefore, the DOJ and FERC said, it lacks the “fatal defect” that undid a Maryland program in Hughes v. Talen Energy Marketing, L.L.C . and the district court’s decision was correct as a matter of law.

The Hughes case involved a state regulatory program that required the distribution utilities to sign long-term “contracts-for-differences” with a new natural gas generator on the condition that the new generator would sell its capacity into a FERC-regulated wholesale auction, and offer at a low enough price to clear the auction.

Competitors of the new generators brought suit, and ultimately, the Supreme Court held that the state's regulatory scheme invaded FERC's exclusive jurisdiction. This decision also applied to a similar contracting program established by 2011 New Jersey legislation.

In the Hughes case, the Supreme Court concluded that the Maryland contract was preempted because the terms of the contract impermissibly set an interstate wholesale rate, contravening the FPA’s division of authority between state and federal regulators.

Because the program conditioned that contract payment on generators’ participation in the wholesale auction (bidding and clearing requirement), while promising a rate distinct from the wholesale market price, the Court found that it adjusted the interstate wholesale rate and, accordingly, was preempted.

“Here, the district court correctly found that Illinois imposed no such condition on ZECs,” FERC and the DOJ said in their brief.

Generators may receive ZECs even if they do not clear the capacity auctions conducted by the two FERC-jurisdictional market operators in Illinois, PJM and Midcontinent Independent System Operator, they noted.

The ZECs are separate commodities that represent the environmental attributes of a particular form of power generation; they are not payments for, or otherwise bundled with, sales of energy or capacity at wholesale, and thereby fall outside of FERC’s exclusive jurisdiction over wholesale transactions.

There are key differences between the Maryland program and the Illinois program, FERC and the DOJ said.

For example, the price adjustment feature of the Illinois statute does not raise the sort of concerns as did the Maryland “contract for differences” in Hughes, they said.

“Unlike the payment under the Maryland program, the Illinois statute does not link ZECs to a particular generator’s actual wholesale revenues.” Rather, the price adjustment reduces ZEC payments by a combination of forecasted energy prices and capacity prices averaged over two different regional markets. The provision is not directed at wholesale markets, but instead ensures that ZECs remain affordable “to retail customers” in Illinois should electricity prices rise.

“And unlike the Maryland generator in Hughes, the Clinton and Quad Cities plants here are not limited to selling their output through the PJM auction,” FERC and the DOJ said.

They may receive ZECs for production of zero-emission power, regardless of whether they opt to sell that power via wholesale auction, bilateral contracts, or directly to retail customers, the brief noted.

FERC’s ability to regulate wholesale markets

Meanwhile, the DOJ and FERC noted that the Commission can exercise its responsibility under the FPA to ensure just and reasonable prices in the wholesale markets subject to its jurisdiction. “The Court thus need not, and should not, resort here to the extraordinary and blunt remedy of preemption,” they said.

“Indeed, the interplay of state policies and wholesale markets— specifically how, and subject to what restrictions, generators that receive state support may participate in wholesale markets—is very much a live issue at the Commission.”

FERC and the DOJ noted that the Commission recently approved a proposal by ISO New England to allow state-supported renewable resources to obtain wholesale capacity supply obligations. Such resources may do so if their market entry is coordinated with the market exit of an equal quantity of retiring capacity.  The approved proposal would phase out the existing rule that exempted up to 200 megawatts of certain state-supported renewable resources from the minimum-offer-price rule.

The brief notes that several FERC Commissioners attached separate statements to the Commission’s orders, elaborating on their views as to the interplay of state policies and wholesale markets.

Moreover, FERC is also now considering whether PJM should revise its wholesale market rules to deal with the effects of state subsidies, including ZECs.

“After the Commission issues an order in that proceeding, aggrieved parties will have the opportunity to request rehearing of that order,” FERC and the DOJ said.

On rehearing, the Commission “may change its mind or modify its initial order.  And ultimately, after it issues a final order, the Commission will need to defend its decision making in federal court should an aggrieved party petition a court of appeals for review.” The Commission might have the opportunity to consider the issue in other proceedings as well, the brief said.

“Congress chose this particular path for the agency to regulate and for courts to review such regulation.  The Illinois law poses no obstacle to the Commission exercising its regulatory authority under the Federal Power Act.  The statutory framework thus does not support preemption here,” the DOJ and FERC said.

FERC and the DOJ said the court should conclude that the FPA does not preempt the Illinois ZEC program.