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IMA Energy & Environment Blog

Illinois Federal Judge Dismisses Challenge to ZEC Program

by Gordon A. Coffee

Winston & Strawn LLP is an IMA member international law firm…

Round one goes to nuclear power. On the heels of a Second Circuit decision rejecting challenges to Connecticut’s renewable energy program, on July 14 a federal judge in Illinois dismissed complaints attacking the zero emissions credit (ZEC) program enacted by Illinois last year. Under the ZEC program, qualifying nuclear plants are paid ZECs for each megawatt of energy they produce, up to a specified cap. Illinois utilities must purchase ZECs corresponding to 16% of their retail electric purchases. The ZEC price is based on the social cost of carbon, less an adjustment for wholesale energy prices.

According to the judge’s opinion, the program “effectively subsidizes nuclear power generation and corresponding sales of nuclear power in the wholesale market.” The plaintiffs, a coalition of gas and coal-fired generators, claimed that conferring such a subsidy infringes on the FERC’s exclusive jurisdiction to set wholesale energy rates and distorts the MISO and PJM markets. PJM weighed in supporting those claims. The plaintiffs also alleged that the program discriminated against out-of-state commerce in violation of the dormant Commerce Clause.

The judge disagreed, on several grounds. First, the court found that the generator plaintiffs had standing to raise a preemption attack on the ZEC price being tied to the social cost of carbon, but determined that they lacked standing to challenge the price adjustment for wholesale energy prices. Plaintiffs were also held not to have standing to raise a Commerce Clause argument. Their injury did not result from the ZEC program favoring in-state generators; rather, their injury resulted from the program favoring nuclear generators—wherever located—over non-nuclear generators.

Second, the court held that the Federal Power Act does not create a private cause of action for injunctive relief. The court also ruled that it lacked the authority to grant declaratory relief. Although the Supreme Court in Hughes v. Talen Energy Marketing addressed similar preemption claims, it did so because the defendants did not challenge the plaintiffs’ right to seek a declaration that the Maryland subsidy program at issue in Hughes was preempted. Here, the Illinois court opined that it could not simply declare the ZEC program preempted. The court held that the relief sought by the plaintiffs would require it to draw lines as to what level of support would not disrupt wholesale markets—an act that would tread on FERC’s exclusive expertise.

Third, the court went on to consider—and reject—the merits of the plaintiffs’ claims. Despite agreeing that the sale of ZECs would give nuclear plants “a benefit when pricing their energy in the wholesale market relative to competing energy producers that do not receive ZEC payments,” the court determined that Illinois has “sufficiently separated ZECs from wholesale transactions” such that the subsidies could not be viewed as attempting to alter wholesale markets. The court noted that a nuclear generator receives ZECs for producing electricity regardless of whether it sells that energy through an RTO or ISO. Moreover, the ZEC payments do not “alter the amount of money that is exchanged for wholesale electricity.” Illinois was “influencing the market by subsidizing a participant, without subsidizing the actual wholesale transaction.” According to the court, this indirect effect on wholesale markets is not preempted.

The court also agreed that ZECs are similar to Renewable Energy Credits (RECs). The court noted that FERC did not view the issuance of RECs as intruding on wholesale markets when the RECs are purchased and sold independently of electricity. Although the court noted that FERC’s views were not dispositive, FERC’s acknowledgement that RECs are outside its jurisdiction indicates that similar state-created credits are not preempted.

The plaintiffs’ argument that the ZEC program conflicts with operation of wholesale energy markets fared no better. According to the court, FERC can address any market distortion resulting from subsidizing nuclear power, and FERC’s power to set just and reasonable rates is unaffected by the ZEC program. Notably, FERC declined the court’s invitation to weigh in on the matter, citing lack of a quorum.

The court also held that plaintiffs had not proven a violation of the dormant Commerce Clause. The court noted that the ZEC program “is not facially discriminatory because it does not preclude out-of-state generators from submitting bids for ZECs.” According to the statute, all nuclear generators within the MISO and PJM markets are eligible to bid. Although the plaintiffs decried the bidding process for ZECs as a “sham” designed to ensure the selection of Illinois generators, they failed, in the eyes of the court, to include “any plausible allegations” that Illinois regulators would not conduct a fair bidding process.

The plaintiffs also claimed the statute had a discriminatory purpose, pointing to the governor’s statements at the bill-signing ceremony about preserving jobs and tax revenues. The court found no evidence, however, to reject the objectives articulated in the legislation—to safeguard public health and protect the environment by reducing emissions from power plants. The court held that “the governor’s and some legislators’ celebratory remarks about the potential job-saving effects of the law do not negate the ZEC program’s environmental purpose and public health interests.” Although the breadth of the subsidy may have been “underinclusive,” that does not mean that the purpose of the legislation was “protectionist, instead of environmental.”

The plaintiffs appealed the dismissal of their claims to the Seventh Circuit on July 17. The appeals court set a briefing schedule the following day. Contrary to press reports, the schedule is not expedited. Under the schedule, briefing will conclude by the end of October, with oral argument likely to take place in early 2018. Absent further action by the Seventh Circuit, the appeal will not delay implementation of the ZEC program.

A similar lawsuit challenging the New York ZEC program, on which the Illinois program was based, is pending in federal court in New York.


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