Update – May 30, 2018 – FERC and Department of Justice Side with States on ZECs

Yesterday, the U.S. Department of Justice and FERC filed a brief in the Seventh Circuit that argues Illinois’ zero emission credit (ZEC) program is not preempted by the Federal Power Act (FPA). The government’s brief argues that ZECs are “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.” It urges the court not to “resort [ ] to the extraordinary and blunt remedy of preemption” where FERC has authority to address any “spillover, indirect effects” that ZECs might have on wholesale power rates.

In 2016, the Illinois Legislature enacted the ZEC program that requires utilities to purchase ZECs at administratively set prices from specified nuclear plants. Last July, a federal district court held that the program is not preempted by the FPA and does not violate the dormant Commerce Clause. Generators that compete with the ZEC-receiving nuclear plants appealed the decision to the Seventh Circuit. Following January’s oral argument, the court invited the U.S. government to file a brief. Meanwhile, generators are also appealing a decision by a federal court in New York to reject nearly identical challenges to that state’s ZEC program. At oral argument in March, the Second Circuit panel indicated that it would review the U.S. government’s filing in the Illinois case. Exelon has already filed the government’s brief at the Second Circuit.

The government’s brief urges the Seventh Circuit to affirm the district court’s preemption holding. Its primary argument is that the ZEC program is not preempted under the Supreme Court’s 2016 decision in Hughes. In that case, the Court affirmed lower court rulings preempting a Maryland public service commission order that required utilities to sign contracts with a generator selling through the PJM regional market. The state program’s “fatal defect,” according to the Court, was that it conditioned payment on the generator’s participation in the FERC-regulated PJM market.

By contrast, the Illinois ZEC program pays nuclear plants for each megawatt-hour of generated energy, regardless of how it’s sold. According to the government’s brief, “the object of the subsidy is the participant, not the actual wholesale transaction. . . . The district court thus properly concluded that the ZEC program ‘falls within Illinois’s reserved authority over generation facilities,’ and that Illinois ‘has sufficiently separated ZECs from wholesale transactions such that the Federal Power Act does not preempt the state program.’”

The government’s brief also rejects the argument that the ZEC pricing formula is identical to the pricing structure of the preempted contracts in Hughes. Maryland required utilities to pay the generator the difference between the wholesale price and a price set by the state. Illinois sets the ZEC price at the social cost of carbon, as calculated by a federal government working group, and adjusts the price based on an average of prices in two FERC-regulated markets (MISO and PJM). According to the government, the connection between FERC-regulated wholesale rates and the state-set ZEC price does not impermissibly “tether” ZECs to wholesale rates. Critically, unlike Maryland, Illinois “does not link ZECs to a particular generator’s actual wholesale revenues.”

The government’s brief is signed by attorneys at the U.S. Department of Justice Environment and Natural Resources Division, FERC General Counsel’s Office, and the FERC Solicitor. It does not address ZEC opponents’ dormant commerce clause claims, which were rejected by the lower court and barely mentioned at oral arguments in the two appeals courts. The brief also does not opine on the district court’s conclusion that the FPA does not provide private parties, such as the ZEC opponents, with the right to bring preemption claims to federal court.

The government’s brief is available on the Illinois page.