Last week, the Illinois Legislature passed a sweeping energy bill that includes a zero-emission credit (ZEC) mandate. One opponent of Illinois’ ZEC program is a party to the lawsuit against New York ZECs, and upon enactment of the Illinois legislation announced its intent to file suit there as well. Given the similarities between the two state programs, the challenge before a federal district court in New York could provide a model for a complaint about Illinois’ ZECs.
Both states require electric utilities to buy zero-emission credits that are generated by eligible facilities. ZEC prices are pegged to the federal government’s measure of the social cost of carbon and may be adjusted downward by regulators based on forecasts of wholesale rates (New York also adjusts for the price of RGGI allowances). Challengers in New York argue that the ZEC mandate is preempted by the Federal Power Act because the state is functionally replacing the FERC-approved wholesale rate received by eligible facilities and illegally distorting prices in the federally regulated energy and capacity markets. Opponents of the Illinois program might make similar claims.
In determining which facilities are eligible to generate ZECs, both states account for a facility’s financial need. Illinois law requires the Illinois Power Agency (IPA) to procure ZECs from facilities “reasonably capable of generating cost-effective ZECs.” In doing so, the IPA must account for the environmental benefits “preserved by the procurement” and consider the recommendations of a state report that touts the benefits of preserving in-state nuclear plants. In arguing preemption claims, complainants in both states are likely to point to the financial need factor and argue that the states are impermissibly targeting FERC-regulated wholesale rates and not state environmental goals.
The New York challenge also includes a dormant Commerce Clause claim. The dormant Commerce Clause generally forbids states from favoring in-state businesses at the expense of their out-of-state competitors. In New York, regulators concluded that only three in-state nuclear plants are eligible to generate ZECs. This determination was based in part on those facilities’ historic contribution to clean energy consumed in the state. Challengers in New York claim that the selection was motivated by economic protectionism and unlawfully discriminates against out-of-state competitors.
In Illinois, once the IPA identifies the ZEC-generating facilities, the largest practical distinction between the two state programs will disappear. The law sets a May 2017 deadline for the IPA to conduct the procurement. Future challengers might await the results, or at least the release of the IPA’s procurement rules, before filing any lawsuit. Nonetheless, the difference in process might be relevant to the dormant Commerce Clause arguments in the two cases.
The Illinois law does not identify geographic criteria but instead requires the IPA to account for carbon dioxide emissions that result from electricity consumed in Illinois and other air pollutants that affect Illinois. Of course, if the IPA selects only in-state facilities, opponents are likely to make assertions about economic protectionism. A non-discriminatory procurement process that allows out-of-state resources to participate would not insulate Illinois’ program from a dormant Commerce Clause challenge. And yet, an open process would reinforce two arguments that Illinois might make in defense of its program.
First, by defining eligibility based on attributes and not location, the law does not facially discriminate against out-of-state businesses. Second, an open procurement process for ZECs may eliminate several potential complainants from filing a dormant Commerce Clause challenge. Any challenger must demonstrate that it has legal standing to file a claim. The state may argue that only entities that participated in the process and submitted competitive bids that lost only because of the facility’s location would have standing. Under that theory, companies that do not participate in the procurement because they do not own zero-emission resources or that submit bids that are not as cost-effective as the winning bids would not be able to establish standing.
In New York, the state’s response to the complaint is due this Friday and will be available at statepowerproject.org/new-york. Meanwhile, an environmental organization and an organic farm have filed a challenge in New York state court that makes various claims under state law. Their complaint is also available at statepowerproject.org/new-york.
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