Update – July 17, 2017 – Illinois Wins Round 1: Federal Court Dismisses Claims Against ZECs

On Friday, a federal district court in Illinois dismissed all claims against the state’s zero emission credit (ZEC) program. The court decisively rejected arguments that ZECs are preempted by the Federal Power Act and further concluded that ZECs do not discriminate under the dormant Commerce Clause. The court also found multiple procedural reasons for dismissal, potentially shutting the door to similar challenges to state electricity policies.

In February, a coalition of electric generators and a group of Illinois consumers filed separate complaints in federal district court. They argued that the state’s program requiring utilities to purchase ZECs from nuclear plants is preempted by the Federal Power Act because it: 1) “effectively replaces” a FERC-regulated wholesale price and thus intrudes on FERC’s exclusive jurisdiction over wholesale sales and 2) conflicts with FERC’s regulatory regime by “distorting” the outcomes in FERC-regulated markets. In addition, they asserted that by benefitting only in-state plants, the program discriminates in favor of in-state businesses and thus violates the dormant Commerce Clause.
With regard to the first preemption claim, the court held that plaintiffs’ field preemption theories fail because Illinois has “sufficiently separated ZECs from wholesale transactions.” Under the Federal Power Act, therefore, “the ZEC program falls within Illinois’s reserved authority over generation facilities.”

Plaintiffs had argued that two 2016 Supreme Court decisions about the Federal Power Act support their claims. But the court found otherwise. Because a generator receives ZECs for producing electricity regardless of whether it sells that energy through a FERC-regulated auction market the court found that “ZEC payments do not suffer from the ‘fatal defect’ in Hughes, nor do they alter the amount of money that is exchanged for wholesale electricity, see EPSA.” Rather, the court concluded that the state was “influencing the market by subsidizing a participant, without subsidizing the actual wholesale transaction” and such state action that “indirectly” affects the market is not preempted.
The court also agreed with defendants that a 2012 FERC order concluding that states have jurisdiction over renewable energy credits (RECs) when they are sold “unbundled” from their associated power supports dismissal. According to the court, “while not dispositive, FERC’s acknowledgment that RECs are outside its jurisdiction indicates that similar programs that authorize transactions in state-created credits that are distinct from wholesale transactions are not preempted.”

With regard to second preemption claim, the court found that any market-distorting effects of ZECs can be addressed by FERC. Plaintiffs’ conflict preemption theory is “too broad,” the court concluded, and if accepted would “inappropriately limit state authority. So long as FERC can address any problem the ZEC program creates with respect to just and reasonable wholesale rates . . . there is no conflict.” FERC’s “regulatory structure remains unaltered and [its] power undiminished.”

In rejecting the dormant Commerce Clause claims, the court held that the Illinois statute “is not facially discriminatory because it does not preclude out-of-state generators from submitting bids for ZECs.” While plaintiffs alleged that the bidding process is a “sham” that will inevitably result in Illinois regulators selecting two in-state plants, the court found it significant that plaintiffs did not make “any plausible allegations that [regulators] will ignore [their] statutory duties” to conduct a fair bidding process; thus “there is no support for the conclusion that the procurement process is facially discriminatory.”

Plaintiffs highlighted the governor’s statements at the bill signing ceremony about saving jobs at two in-state plants. But the court determined that these statements had little relevance to determining whether or not the law has a discriminatory purpose. According to the court, “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. These statements suggest political favoritism on the part of some for the local economy, but they do not evince an intent to discriminate against out-of-state commerce.”

The court also dismissed the complaints on procedural grounds. First, the court concluded that neither the plaintiff generators nor the plaintiff consumers had standing to bring their preemption or dormant commerce clause claims. The court also held that the Federal Power does not allow a plaintiff to a bring preemption claim. If the court’s determination is upheld on appeal and adopted in other circuits, it would preclude future lawsuits that argue the Federal Power Act preempts a state electricity policy.

The plaintiffs will appeal the court’s ruling to the Seventh Circuit. A federal district court in New York is still deliberating over that state’s nearly identical ZEC program.

The Illinois court’s opinion is available on the Illinois page.