Power generators ask SCOTUS to overturn Illinois 'Zero Emissions Credit' subsidies for Exelon nuke power plants

By Jonathan Bilyk | Jan 10, 2019

Clinton Nuclear Power Station, Clinton, Ill.   By Daniel Schwen [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], from Wikimedia Commons

A group of electrical power generators have asked the U.S. Supreme Court step in and unplug “zero emissions credit” subsidy programs in Illinois and elsewhere, arguing the state programs intrude on federal regulatory turf and unconstitutionally rig wholesale electricity generation and supply markets to prop up nuclear power plants that should otherwise be retired.

On Jan. 7, the plaintiffs, mainly rivals to electricity generation giant Exelon, filed petitions with the Supreme Court to review two decisions coming from the U.S. Seventh Circuit Court of Appeals in Chicago and the Second Circuit court in New York, upholding the so-called zero emissions credit (ZEC) programs in Illinois and New York.

The petitions ask the court to hear arguments first on the Second Circuit decision, which the plaintiffs concede makes for a “better vehicle” to air the matter and reach a decision on the merits of the case.

However, in the petition to appeal the Seventh Circuit decision dealing with Illinois’ ZEC program, the power generators assert the Prairie State’s program runs afoul of federal law, just as in New York, usurping the role of the Federal Energy Regulatory Commission’s role in governing electrical wholesale markets, and thus, the price of electricity across interstate regions.

The power generators said the stakes in this case are “enormous,” as the ZEC programs steer billions of dollars to Exelon and potentially others, paid for ultimately by consumers through higher rates.

“The proper allocation of authority between the States and the federal government depends upon striking the appropriate balance between permissible state efforts to promote energy production and impermissible state encroachment on FERC’s exclusive authority over all wholesale rates and charges,” the power generators wrote in their petition appealing the Seventh Circuit decision. “But by drawing the boundary of federal authority as narrowly as it did, the court of appeals has opened the door to all manner of parochial state schemes to augment the wholesale revenues of favored local energy generators.

“If left uncorrected by this Court, that ruling (and a similar one by the Second Circuit…) will ratify a fundamental transfer of regulatory authority to the States and away from the federal government and its policy of relying on market forces to set just and reasonable wholesale rates and send economically efficient signals regarding market entry and exit.”

Power generator plaintiffs include Dynegy Inc., NRG Energy Inc., Calpine Corporation and Eastern Generation LLC, and the trade group, the Electric Power Supply Association.

The lawsuit in Illinois was initially filed in February 2017, about two months after the Democrat-controlled Illinois General Assembly and Republican Gov. Bruce Rauner approved the so-called Future Energy Jobs Act, establishing the ZEC program.

Under that regime, power producers who rely on coal, oil and natural gas, so-called “fossil fuels,” to produce electricity, are required to pay the emissions credits to the Illinois Power Agency.

However, the lawsuit noted the law and criteria were written in such a way to effectively leave only two Illinois power plants eligible to receive those credits from the IPA: the Clinton and Quad Cities nuclear power stations operated by Exelon.

The lawsuit argued the ZEC system oversteps the state’s constitutional authority to regulate electricity markets, as the state’s ZEC mandate would upset wholesale supply and generation markets which are regulated as interstate commerce by FERC. Specifically, the lawsuit alleged the ZEC system would guarantee price premiums for two Exelon plants of more than 70 percent.

The lawsuit alleged such premiums would disrupt the functioning of markets under which suppliers currently bid for electrical supply production and capacity rights, usurping federal supremacy and harming consumers and market competition.

The lawsuit asserted the law merely used environmental concerns to establish a state interest to cover the giveaway to Exelon, after Exelon threatened to close the two power plants, threatening the loss of thousands of jobs and the loss of billions of dollars to the state economy.

The legal action against the ZEC program was opposed by environmental organizations, including the Environmental Law and Policy Center, and others.

At the Seventh Circuit, FERC filed a friend of the court brief supporting the state.

U.S. District Judge Manish Shah sided with the state, as did the Seventh Circuit, determining the ZEC program does not abuse the state’s authority to regulate its electricity market or create new energy standards.

On appeal to the Supreme Court, the plaintiffs zeroed in on the Seventh Circuit’s assertion Illinois’ ZEC program should be allowed because it does not cross a line established in the Supreme Court’s 2016 decision in Hughes v Talen Energy Marketing LLC.

In the Hughes decision, the Supreme Court threw out a similar Maryland subsidy program, declaring states generally can’t interfere with FERC’s authority to set rates.

However, in the Seventh Circuit’s decision, the appellate judges determined Illinois’ program was not the same as the prohibited Maryland program, because it does not compel electricity producers to sell their power on FERC-regulated markets to receive the subsidies.

But in their petition to appeal, the power generator plaintiffs contended that reasoning “exalts form over substance,” as Exelon in practice must sell its power on those regulated interchanges, whether the state requires it or not.

“Whatever its rationale, Illinois cannot supplant the FERC-authorized wholesale rates by guaranteeing that favored producers will receive an alternative, state-determined rate in connection with their wholesale electricity sales,” the plaintiffs wrote.

The Supreme Court petition was filed by attorneys Donald Verrilli Jr., Henry Weissman, Mark Yohalem and Stephanie Herrera, of the firm of Munger Tolles & Olson LLP, with offices in Washington, D.C., and Los Angeles; and Jonathan Schiller, David Barrett and Stuart Singer, of the firm of Boies Schiller Flexner LLP, of New York.

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Organizations in this Story

Boies, Schiller & Flexner Calpine Corporation Dynegy Inc Electric Power Supply Association Exelon Corporation Munger Tolles & Olson NRG Energy, Inc. State of Illinois U.S. Court of Appeals for the Seventh Circuit U.S. District Court for the Northern District of Illinois U.S. Supreme Court

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