Federal Court Rejects Challenges To Illinois Nuclear Subsidies
July 17,2017
The U.S. District Court for the Northern District of Illinois has dismissed two lawsuits challenging Illinois nuclear subsidy (ZEC) program, finding that, unlike other state actions recently struck by the courts, the ZEC program does not run afoul of federal regulation of wholesale markets as the intent of the ZEC program was not to influence wholesale prices
"States may influence, through regulation, which generators participate in FERC’s market, even though the end result may affect the wholesale market," the court said
"Plaintiffs do not dispute that REC programs, tax incentives, and carbon taxes, which are within the states’ jurisdiction, are lawful. REC programs and tax incentives encourage renewable generators to produce, while carbon taxes discourage fossil fuel generation. Similarly, the ZEC program is aimed at a certain type of electricity generation facilities [sic]. Although the ZEC program will affect wholesale electricity rates, those rates were not its target; thus, the general rule supplied by Oneok (and Northwest Central) does not require preemption," the Court said
"[U]nder EPSA, a state regulation that substantially affects the quantity and terms of wholesale sales is not necessarily preempted," the Court said
"The key inquiry is whether FERC or the state is regulating what takes place in their respective markets, because when the state regulates what takes place in the retail market, in furtherance of its charge to improve that market, then the effect on wholesale rates is irrelevant," the Court said
"Illinois does not require participation in wholesale auctions in order to receive ZECs. PJM requires participation in the capacity auction, but generators are not required to clear that auction. In fact, they can receive ZECs even if they do not clear the capacity auction and even if they do not participate in the energy auction," the Court noted
"Read together, EPSA and Hughes stand for the proposition that preemption applies whenever a tether to wholesale rates is indistinguishable from a direct effect on wholesale rates. The qualifier 'direct' is important; influencing the market by subsidizing a participant, without subsidizing the actual wholesale transaction, is indirect and not preempted. Since a generator can receive ZECs for producing electricity and the credits are not directly conditioned on clearing wholesale auctions, ZEC payments do not suffer from the 'fatal defect' in Hughes, see 136 S. Ct. at 1299, nor do they alter the amount of money that is exchanged for wholesale electricity, see EPSA," the Court said
"Hughes should not be extended to invalidate state laws that do not include an express condition, but that in practice (and when combined with other market forces), have the effect of conditioning payment on clearing the wholesale auction. That is not the kind of market participation that worried the Court in Hughes, and to read Hughes to apply to this program would intrude on the state’s authority to regulate power generation," the Court said
"RECs are similar to ZECs, and the parties do not suggest that RECs are preempted," the Court noted
"Plaintiffs argue that the ZEC program invades FERC’s field of exclusive jurisdiction because it provides nuclear plants with substantial out-of-market payments, thereby directly affecting the revenue that nuclear generators will be paid and effectively replacing the auction clearing price. I conclude, however, that the ZEC program falls within Illinois’s reserved authority over generation facilities; Illinois has sufficiently separated ZECs from wholesale transactions such that the Federal Power Act does not preempt the state program under principles of field preemption," Judge Manish S. Shah wrote for the Court
The Court also determined that Congress intended FERC, not the courts, to address such matters
"In the wholesale electricity markets arena, parties can bring a complaint to FERC if they believe a practice interferes with the markets or creates unjust or unreasonable rates or practices," the Court said
"Plaintiffs agree that states can affect the wholesale
market by subsidizing local industry, but they argue that this program distorts the market too much," the Court noted. Contrary to Congress's intent, "The declaration sought by plaintiffs would require a court to draw some lines, to give the state direction on how not to interfere with wholesale rates while acting within its undisputed authority to regulate, and once a court enters that arena, it treads on FERC’s exclusive expertise," the Court said