By Rich Heidorn Jr

A federal judge on Friday dismissed challenges to Illinois’ zero-emission credit program, saying the customers and independent power producers who filed suit lacked standing and failed to exhaust their remedies at FERC.

U.S. District Court for the Northern District of Illinois Judge Manish S. Shah ruled in favor of motions by the state and Exelon to dismiss the case. “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 pre-empt the state program,” the judge wrote in a 43-page opinion (17-cv-1163, 17-cv-1164).

The ZECs were authorized by the Future Energy Jobs Act, which the Illinois legislature approved in December after Exelon threatened to close its Clinton and Quad Cities nuclear plants. Following the bill’s signing, Exelon pledged to keep the plants — which it said had lost more than $800 million over the last six years — operating for another 10 years, saving 4,200 direct and secondary jobs.

2 Challenges Combined

The Electric Power Supply Association (EPSA) and members Calpine, Dynegy, Eastern Generation and NRG Energy filed suit in February, saying they stand to lose millions because the subsidized nuclear plants will suppress capacity and energy prices. (See IPPs File Challenge to Illinois Nuclear Subsidies.) The court combined EPSA’s suit with one filed by customers of Exelon’s Commonwealth Edison utility. Exelon intervened in both cases to defend the ZEC program.

On Monday, EPSA and its members filed an appeal with the 7th U.S. Circuit Court of Appeals. NRG spokesman David Gaier said the plaintiffs will ask for an expedited ruling. “If upheld, the Illinois decision would effectively strip FERC of its authority to regulate wholesale markets, would harm ratepayers, and threaten FERC’s ability to drive investment in energy infrastructure,” he said.

Initial briefs are due Aug. 28 under a schedule set by the 7th Circuit on Wednesday. Consolidated briefs are due by Sept. 27 and reply briefs by Oct. 27.

The suits both alleged the ZEC program violates the U.S. Constitution’s dormant Commerce Clause and that it is pre-empted by the Federal Power Act. The consumer plaintiffs also said the ZECs violated the Fourteenth Amendment’s Equal Protection Clause because only Illinois ratepayers will be billed to pay for the subsidy. The court cited an estimate that the ZECs will cost state ratepayers $235 million annually over 10 years.

Illinois modeled the ZECs on renewable energy credit programs enacted by Illinois and most other states, which have not been found to intrude on federal jurisdiction. The Illinois Power Agency will issue ZECs equal to 16% of the electricity delivered by each electric utility to retail customers in the state during calendar year 2014. Retail suppliers are required to purchase the ZECs under 10-year contracts ending May 31, 2027. The price for each ZEC is EPA’s social cost of carbon minus a “price adjustment,” based on energy and capacity prices.

Legal Tests

The Illinois suits raised state-federal jurisdictional issues similar to two cases the Supreme Court ruled on last year. In a January 2016 ruling, the court rejected EPSA’s challenge to FERC Order 745, upholding the commission’s jurisdiction over wholesale market operators’ compensation of demand response. (See Supreme Court Upholds FERC Jurisdiction over DR.) In its April 2016 decision in Hughes v. Talen, the court found Maryland’s attempt to subsidize construction of a natural gas-fired generator encroached on FERC’s authority under the Federal Power Act. (See Supreme Court Rejects MD Subsidy for CPV Plant.)

The same issues have been cited in EPSA’s federal court challenge to the New York’s ZEC program. (See related story, NY, Ill. Cite Allco Ruling in Defense of ZECs.)

EPSA and its members also have filed complaints asking FERC to subject the subsidized nuclear plants to the minimum offer price rule (MOPR) in capacity market auctions.

Plaintiffs’ Standing

In evaluating the motions to dismiss, the court assumed the facts represented by the plaintiffs were true; the case was terminated without any fact finding on the “injuries” the plaintiffs claimed.

To establish the right to sue under Article III of the Constitution, Shah said the plaintiffs must show an “injury in fact” that is “fairly traceable” to Illinois’ conduct and can be fixed by the court. Shah ruled that the plaintiffs lacked Article III standing to challenge the price adjustment, noting Exelon’s observation that eliminating the price adjustment would result in the ZECs being priced at the social cost of carbon. “The injury caused by the ZEC subsidy is not traceable to the price adjustment, because that injury would exist even if the statute were cured of its ties to wholesale auction prices,” Shah ruled.

The judge also ruled the consumers did not have statutory standing for their complaint because the states have authority to regulate retail sales, making the retail surcharge funding the ZECs “outside of the zone of interests of the federal statutes.”

Dormant Commerce Clause

The court was no more sympathetic to the generators’ dormant Commerce Clause claim that the ZECs favor the Clinton and Quad Cities nuclear plants and discriminate against nuclear generators outside the state. “Regardless of whether ZEC recipients are in Illinois or not, the generator plaintiffs’ injury from lower wholesale prices remains the same, and the consumer plaintiffs will receive higher bills,” the judge said. “Since plaintiffs’ injuries are not traceable to the alleged in-state favoritism, they do not have Article III standing to challenge it.”

Shah said the validity of dormant Commerce Clause claims “turn on a ‘sensitive, case-by-case analysis’ of the facts, including the ‘purposes and effects’ of the law at issue.”

“Where the statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits,” he said. “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.”

Pre-emption

The plaintiffs had asked for an injunction to block the ZECs on the grounds that the program is pre-empted by FERC’s authority under the Federal Power Act. Shah ruled the FPA makes FERC responsible for adjudicating such issues and generally does not authorize private causes of action.

“Parties can bring a complaint to FERC if they believe a practice interferes with the markets or creates unjust or unreasonable rates or practices; FERC can take corrective actions to ensure that wholesale rates and practices remain just and reasonable; and parties that disagree with FERC’s decision can seek review in the circuit courts,” Shah said. “A coherent regulatory policy for interstate electricity markets is a desirable outcome, and it is one that private suits undermine.”

He also said the EPSA and Hughes rulings found that “pre-emption 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 pre-empted,” he continued. “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.”

Shah also said FERC was equipped to respond to any “market distortion” resulting from the nuclear subsidies. The plaintiffs’ contention that Illinois’ program conflicts with FERC’s preference for competitive auctions is “too broad a theory of pre-emption and would inappropriately limit state authority,” he said.

“So long as FERC can address any problem the ZEC program creates with respect to just and reasonable wholesale rates — and nothing in the complaints suggest that FERC is hobbled in any way by the state statute — there is no conflict,” he said. “The complaint … does not allege that FERC is damaged in its ability to determine just and reasonable rates. The regulatory structure remains unaltered, and FERC’s power undiminished. Consequently, the ZEC program does not conflict with the Federal Power Act.”

Shah’s ruling on this point appears to differ from the Supreme Court’s ruling in Hughes, which said “Maryland cannot regulate in a domain Congress assigned to FERC and then require FERC to accommodate Maryland’s intrusion.” In that case, however, the court ruled that Maryland’s contract for differences subsidy directly and improperly tied the generator’s compensation to PJM capacity market prices.

Equal Protection Claim

Also rejected was the consumers’ complaint that they were being discriminated against because only Illinois ratepayers would fund the ZECs. “The Constitution only requires Illinois to treat equally the people within its jurisdiction. As such, Illinois does not run afoul of the Fourteenth Amendment by treating Illinoisans differently from citizens from other states that live in the MISO or PJM regions,” Shah said. “Furthermore, the complaint does not allege that Illinois could have imposed a surcharge on people in the MISO and PJM regions that lived outside of Illinois.”

The judge noted that courts usually allow plaintiffs to amend a complaint after an initial dismissal. “Here, however, the deficiencies in plaintiffs’ claims cannot be cured with different allegations,” he said. “These plaintiffs cannot pursue the legal theories they have articulated (or they do not have standing to do so). Therefore, I decline to give them leave to amend.”