By Rich Heidorn Jr.

Merchant generators’ Hail Mary pass for a U.S. Supreme Court review of Illinois and New York nuclear subsidies has won support from PJM’s Independent Market Monitor and others, who said lower courts have misinterpreted precedent on federal jurisdiction.

The Electric Power Supply Association asked the court in January to review rulings by the 2nd and 7th U.S. Circuit Courts of Appeals that the subsidies did not intrude on EPSA Asks Supreme Court to Review ZEC Rulings.)

Exelon joined Illinois and New York officials in saying the court should leave standing the states’ zero-emission credit programs. EPSA was supported by the Monitor, PJM industrial customers, the American Petroleum Institute and a group of economists.

The Supreme Court hears a small percentage of the cases on which it is petitioned. But the stakes of a ruling could have impacts beyond New York and Illinois. New Jersey and Connecticut have also approved nuclear subsidies and Pennsylvania regulators introduced a subsidy bill on Monday. (See Pa. Lawmakers Unveil $500M Nuke Subsidy Bill.)

Exelon’s Byron Generating Station’s two nuclear reactors in Illinois produce more than 2,300 MW of electricity.

‘Artful Description’

EPSA’s supporters said the appellate courts misinterpreted the Supreme Court’s 2016 ruling in Hughes v. Talen, in which the court unanimously rejected Maryland’s contract-for-differences with a natural gas plant.

The court also provided state regulators guidance for crafting their programs in the future, saying it rejected Maryland’s initiative only because it was tied to PJM capacity prices. “So long as a state does not condition payment of funds on capacity clearing the auction, the state’s program would not suffer from the fatal defect that renders Maryland’s program unacceptable,” the court said.

Monitoring Analytics, PJM’s Monitor, said the appellate courts were mistaken in upholding the ZEC programs based on the Hughes ruling.

“Legislators can easily contravene FERC’s authority over wholesale rates by artful description or avoiding description of the mechanism rather than transparent statutory language. An explicit tether like that appearing in Hughes is easily avoidable, as the ZECs programs at issue here illustrate,” the Monitor wrote.

The Monitor said failing to overturn the appellate rulings “may effectively end federal control over the interstate wholesale power markets, contrary to the jurisdictional framework in the Federal Power Act. The record shows that FERC has gone out its way to accommodate the states. How have the states accommodated FERC? If anything, petitioners understate the risk. The public will be ill served if regulation through competition survives in name only.”

Seven economists, including Roy Shanker and Harvard’s William Hogan, agreed.

“The courts of appeals sought to distinguish the ZEC subsidies adopted by Illinois and New York from the contract-for-differences subsidy adopted in Maryland. From an economic point of view, however, those distinctions are without substance,” they wrote. “As with the Maryland program, the ZECs pay favored generators a subsidy based on their wholesale market participation, thereby guaranteeing them a price that is different from the price set in the auction. Although there are differences in the details of the price-setting mechanisms employed by the subsidy programs, those differences are largely irrelevant to their basic design and purpose.”

The economists also said the ZEC programs may not support carbon-free electric generation, as their supporters contend.

“There is no assurance that the generating resources that the nuclear generators will displace are carbon-emitting: on the contrary, the distorted market may discourage entry of clean energy sources and thereby perpetuate carbon emissions,” they said. “It also may discourage conservation, and indeed encourage greater consumption, due to lower wholesale prices, resulting in greater amounts of generation from less ‘clean’ resources.”

A group of industrial consumers disagreed with the lower courts’ likening of ZECs to renewable energy credits. “ZECs are calibrated to backfill the difference between wholesale market revenue and the claimed revenue requirement of particular uneconomic nuclear units,” said the PJM Industrial Customer Coalition, the American Forest & Paper Association, the Illinois Industrial Energy Consumers and the Electricity Consumers Resource Council. “While RECs are traded on an open market among various market participants, ZECs are state-mandated payments from customers in that state to specific qualifying nuclear units.”

The American Petroleum Institute also called for a Supreme Court review of the New York program, calling it “incompatible with federal energy policy governing wholesale markets.”

Exelon, States Respond

Exelon Generation, the largest nuclear operator in the U.S., said the court should leave the circuit court rulings alone, citing what it said are procedural problems with EPSA’s petition.

“FERC, the states and all eight judges to have considered the question agree: There is no pre-emption,” Exelon said. “Petitioners cry that ZEC programs will destroy FERC’s markets, but that is belied by FERC’s own words. FERC and the United States told the court that FERC ‘has the means and the authority to confront’ any ‘effects’ on its markets from ZEC programs, and that ‘the Federal Power Act does not pre-empt’ such state programs.”

Exelon noted that FERC is considering market rule changes to accommodate state programs while insulating wholesale markets. “Judicial intervention now would disrupt FERC’s effort to use the scalpel of regulation, rather than the chainsaw of pre-emption,” it said.

The Illinois Power Agency and Illinois Commerce Commission insisted the 7th Circuit’s ruling upholding the state program was consistent with Hughes and other precedents under the FPA.

“Petitioners’ argument disregards key differences between the two programs that firmly support the 7th Circuit’s conclusion that the ZEC program falls comfortably within the states’ authority over power generation and does not invade FERC’s authority to regulate rates for wholesale sales of electricity,” they said. “Put simply, ZEC payments for generating emission-free electricity do not set the price for any wholesale sale of that electricity.”

The New York Department of Public Service agreed. “Because ZECs are awarded for production without regard to sales, they will not change how eligible plants sell their output,” it said. “They will not induce a generator to sell in a wholesale auction instead of by contract or at retail. Nor will they change the bidding behavior of a generator that opts to sell in a wholesale auction. When a nuclear plant sells its output in a wholesale auction, it does so as a price taker because it cannot readily turn off and on in response to short-term price fluctuations.”