By Michael Kuser

Illinois and New York state officials filed briefs this week saying a recent appellate court decision upholding two Connecticut renewable energy programs vindicates their zero-emission credits for nuclear plants.

A coalition of generation owners opposing the nuclear subsidies countered that the 2nd U.S. Circuit Court of Appeals’ June 28 ruling rejecting Allco Finance’s challenge to a Connecticut renewable energy credit (REC) program and renewable portfolio standard did not support the legality of the ZECs (Allco v. Klee, 16-2946, 16-2949). (See Second Circuit Upholds Conn. Renewable Procurement Law.)

The generation owners sued New York in December 2016 and Illinois in February 2017, arguing that the ZECs intrude on FERC’s jurisdiction over wholesale electric markets. In both complaints, the generators cited the Supreme Court’s 2016 decision in Hughes v. Talen, which found Maryland’s attempt to subsidize construction of a natural gas-fired generator encroached on FERC’s authority under the Federal Power Act. (See Federal Suit Challenges NY Nuclear Subsidies and IPPs File Challenge to Illinois Nuclear Subsidies.)

The Illinois ZEC case (17-cv-1163, 17-cv-1164) is being heard by Judge Manish S. Shah of the U.S. District Court for the Northern District of Illinois, Eastern Division, and the New York ZEC case (1:16-CV-8164) is being heard by Judge Valerie Caproni of the U.S. District Court for the Southern District of New York.

All the nuclear plants expected to receive the ZECs in the two states are owned by Exelon.

Injunction Sought

The generators sought an injunction on the ZEC program in Illinois, which Shah declined to rule on, preferring instead to consider first the defendants’ motion to dismiss. He heard oral arguments on May 22.

Attorneys for Illinois noted that the court approved the Connecticut RPS “even though the program differs from the Illinois ZEC program by authorizing the state’s agencies to direct utilities to enter into contracts with renewable power generators for the purchase of electric power and capacity, not just the environmental attributes of renewable power.”

In their July 10 brief, attorneys for the New York Public Service Commission said the Allco ruling “is the first appellate decision construing Hughes, and confirms that the decision is ‘limited’ and establishes a ‘bright line’ proscribing only state-sponsored payments for electric sales into wholesale energy auctions.”

The PSC said the New York ZECs are “even further removed from Hughes than Allco.”

“New York has neither ‘“command[ed] generators to sell capacity” into the FERC-approved interstate auction,’ nor premised the receipt of ZEC revenues on selling into and clearing the wholesale auction, and the ZEC program ‘thus lack[s] the “fatal defect” that triggered Hughes pre-emption,’” the PSC said.

“Compared to the Allco power purchases, the ZEC program is more clearly on the state side of the jurisdictional line, as it involves the purchase and sale of environmental attributes separate, i.e., ‘unbundled,’ from any electricity sale. [FERC] has already held — in the REC context — that such sales do not directly affect wholesale energy transactions.”

As in Allco, the PSC continued, the state’s program is not pre-empted by the Federal Power Act because FERC retains the ability to review any bilateral contracts that arise out of the program or — if the nuclear power sells in NYISO auctions — can regulate the terms of market participation and resulting clearing prices.

Caproni heard oral arguments on New York’s motion to dismiss on March 29 and is expected to rule soon.

Plaintiffs’ Response

The plaintiffs contend that the Connecticut program survived the court challenge because the state’s solicitation “did not require forced purchases, but rather allowed [load-serving entities] discretion to accept or reject bids. LSEs have no right to decline to enter into ZEC purchase contracts” under the New York and Illinois programs, the plaintiffs said.

In Illinois, the generator coalition’s July 10 brief alleged, “Exelon’s nuclear plants will receive ZECs only to the extent they produce electricity and that all electricity they produce must be sold in the FERC-regulated PJM or MISO wholesale auction markets. Moreover, the ZEC price is directly tethered to those market prices and is necessarily payable only for electricity that clears the auctions.”

Commerce Clause

The generators claimed that ZECs going only to in-state nuclear plants violates the dormant Commerce Clause’s prohibition on geographic discrimination.

The 2nd Circuit ruled in Allco that it was not discriminatory for Connecticut to recognize renewable energy credits only from generators that could deliver energy into the New England grid, finding the distinction compatible with the state’s legitimate aim of ensuring a reliable power supply. The state discriminates “only insofar as it piggybacks on top of geographic lines drawn by ISO-NE and the [New England Power Pool], both of which are supervised by FERC — not the state of Connecticut,” the court said.

The generators’ Illinois brief argued that “Connecticut’s program did not require utilities to purchase RECs at all; it simply permitted LSEs to use RECs to meet their renewable energy portfolio requirements, which they otherwise had to satisfy by generating renewable energy themselves.”

In contrast, “the Illinois ZEC program affords no such flexibility in responding to market conditions, because it requires LSEs to purchase ZECs from specified in-state nuclear plants,” the generators said.

The New York PSC addressed this point, saying that “if an out-of-state nuclear plant were to provide electric energy to New York and later suffer financial difficulty jeopardizing its ability to continue providing its zero-emission attributes, the plant could seek ZECs in future tranches. Thus, there is no geographic discrimination.”

Hughes ‘Key’ to NY Case

Ari Peskoe, senior fellow in electricity law at Harvard Law School, said the 2nd Circuit ruling directly affects the New York case because of its interpretation of the Hughes ruling. “One of the key issues in Allco was what does the Hughes decision mean, and that’s the key issue in this case too,” he said. “So I think [Caproni] really had to wait to see what the 2nd Circuit was going to say before she issued her decision. It potentially could have been nullified by the 2nd Circuit decision.”

While he doesn’t like to speculate on the outcome of any case, Peskoe said, “Intuitively, to me, the states’ reading of Allco is more straightforward than how the plaintiffs are trying to spin it. But that doesn’t mean the judges see it that way. It’s tempting to read into the oral arguments, but it’s not always ‘what you see is what you get.’”

Peskoe predicted that if New York wins a dismissal from Caproni, “the generators would likely appeal to the 2nd Circuit.”

[Editor’s Note: An earlier version of this story incorrectly quoted attorneys for Illinois as saying the Connecticut REC program survived the legal challenge although it allows the state to direct utilities to sign contracts for electric power and capacity, and “not just the environmental attributes of renewable power.” Illinois’ reference was to Connecticut’s renewable portfolio standard, not its REC program.]