DOJ, FERC Back Illinois in Nuclear Subsidy Fight

The U.S. Department of Justice (DOJ) and the Federal Energy Regulatory Commission (FERC) on May 29 told the U.S. 7th Circuit Court of Appeals that Illinois' nuclear subsidy program does not preempt federal statute, siding with the state and Exelon Corp. in a contentious legal fight that has divided the power sector.

The case, now known as Village of Old Mill Creek, et al. v. Anthony Star, et al. (No. 17-2445), pits several power producers who bank on sales in wholesale markets-including members of the Electric Power Supply Association (EPSA), Dynegy, Eastern Generation, NRG Energy, and Calpine-against the state of Illinois, among other parties. At issue are subsidies created by state's the Future Energy Jobs Act.

A Long Background and A Murky Horizon

The law that took effect in June 2017 requires utilities to buy zero-emissions credits (ZECs) from certain qualifying generators, such as Exelon, which owns the nation's largest fleet of nuclear power plants. Exelon fought a long and hard campaign to push the legislation to passage, warning that two nuclear plants it owns in the state-1,069-MW Clinton and 1,871-MW Quad Cities-were rendered uneconomic by cheap gas and a surge of renewable power in wholesale markets operated by PJM Interconnection and MISO, and the plants would be forced to retire unless the state provided financial relief.

EPSA and others legally challenged the measure, however, arguing that the Illinois ZEC program preempts the Federal Power Act (FPA), a law that allows both FERC and the states to regulate aspects of the electricity industry. While the FPA gives FERC exclusive jurisdiction over wholesale sales of power in the interstate market, ZECs-which would provide out-of-market payments for electricity-would affect FERC-approved energy market auction structures, effectively suppressing wholesale market prices artificially, the groups said.

In July 2017, Judge Manish S. Shah of the U.S. District Court for the Northern District of Illinois ruled in favor of motions by the state and Exelon to dismiss the case. The judge, in a 43-page opinion, wrote that the ZEC program "falls within Illinois' reserved authority over generation facilities. Illinois has sufficiently separated ZECs from wholesale transactions such that the [FPA] does not preempt the state program." After EPSA and other plaintiffs appealed the decision to the 7^thCircuit, the Chicago court heard oral arguments in the case on January 3, 2018, and it received supplemental briefings on January 26.

On February 21, however, the court urged the U.S. government to provide its views because it has "substantial interest in the court's resolution of the preemption issue. On Tuesday, the DOJ and FERC filed a brief with the court as "amici curiae in support of defendants-respondents and affirmance," arguing that the Illinois program is not preempted.

The move surprised some industry observers because FERC's commissioners have expressed mixed reactions to state intervention in wholesale markets. The regulatory body also says it has received a "series of complaints" regarding out-of-market state subsidies, an issue it determined so significant that it held a two-day technical conference last year to explore the impacts of state policies on FERC-jurisdictional capacity markets.

The Argument: The Creature Should Live

The agencies declined to take a position on whether the appellants have an equitable or statutory cause of action-justification to sue-or on their claim that the program violates the Dormant Commerce Clause, which bars states from discriminating against or burdening interstate commerce. FERC and the DOJ also noted that the court would not need to address the cause-of-action issue if it concludes that the FPA does not preempt the Illinois program.

However, the brief plainly states that the Illinois program, and the subsidy at issue-which it described as a "creature of an Illinois statute" (the Future Energy Jobs Act)- is not preempted because it "does not require participation in FERC-jurisdictional wholesale auctions as a precondition to receive ZECs.

"Rather, the Illinois ZEC is 'targeted' at an attribute of generation resources over which Illinois has regulatory authority; any spillover, indirect effect on wholesale electricity markets over which the Commission has authority does not warrant preemption," it says.

It adds that FERC's existing statutory authority allows it to ameliorate detrimental effects on markets. "If the Illinois program, in fact, impairs the functioning of the wholesale markets subject to FERC jurisdiction, the Commission thus has the means and the authority to confront those effects," the brief says.

FERC is meanwhile overseeing an administrative proceeding (Docket No. EL16-49), which was initiated by a January 2017 complaint filed by Calpine, but has since accrued related complaints filed by several appellants. Generators in that proceeding challenge PJM's minimum offer price rule (MOPR) as unjust and unreasonable under the FPA, specifying that the MOPR failed to address the "price suppressive" effect of resources that benefit from subsidies awarded by state retail regulators, like Illinois' ZEC program. On Tuesday, the government noted that FERC is soon expected to issue a final order in that proceeding that will allow aggrieved parties to have the opportunity to seek judicial review. However, FERC declined to comment on whether the MOPR needs correction to address state initiatives like the Illinois ZEC program.

Parallel Contentions About Nuclear

Submission of the U.S. government's amici curiae could mean the 7th Circuit's opinion in the case is imminent. An opinion may also soon come from the 2nd Circuit, which is weighing oral arguments it heard on March 12, 2018, in a similar case appealing a July 2017 federal district court ruling. In that case, U.S. District Judge Valerie Caproni in Manhattan dismissed challenges against New York's Clean Energy Standard-nuclear subsidies that Exelon also strongly lobbied for-and ruled that federal law does not preempt New York and its Public Service Commission from using a ZEC program.

In their appeal filed on August 24, 2017, plaintiffs-which include the same set of generators that are appealing the Illinois case-claim that after the Supreme Court unanimously ruled in April 2016 (Hughes v. Talen Energy Marketing) that state subsidies to power generators are preempted by the FPA if they are tethered to FERC-regulated wholesale power prices, New York's Public Service Commission revised the recommendation in July 2016 and based the subsidy's formula on an estimated "social cost of carbon."

In a statement on Tuesday, Exelon said the DOJ and FERC brief shows that the federal government backs the claim that "states are free to favor clean nuclear energy over pollution-emitting energy from coal, oil and natural gas power plants." For now, the company said it remains confident "the courts will uphold the view of policymakers and regulators who support the continued operation of Illinois' nuclear plants and the environmental benefits they provide for consumers."

Jennifer Mersing, an attorney in Stoel Rives' Energy & Regulatory group, told POWER on May 31 that the the government's position expressed in the brief "definitely increases the chances that the 7th Circuit-and probably the 2nd Circuit, in a similar case going on regarding the New York nuclear subsidy case-is probably going to uphold the district court decisions dismissing the claims."

The 2nd Circuit hasn't yet requested for official government guidance but FERC's arguments in the amicus brief filed with the 7th Circuit would also be relevant in the 2nd Circuit arguments, she noted. "I would expect the 2nd Circuit-even if they don't ask for official guidance as well-will probably take into consideration the arguments the government made."

The appellants could seek a review by the Supreme Court, however, chances the high court will accept the case are slim, Mersing said. "If both the 2nd and 7th Circuits uphold the district courts' decisions-so there's no circuit split-I don't think the Supreme Court is going to take it up," she said.

How the larger issue of state-issued nuclear subsidies and their impacts on wholesale markets will play out is still also unclear, Mersing said. FERC recognizes the issue isn't going to go away even if these state laws are upheld, she noted.

"I don't think anyone knew for sure how FERC was going [weigh in on the issue]. The issue has been teed up at FERC, and they are dealing with it as well-and I think they were just trying to keep some of the complaints they have pending on their docket. So, they're trying to get jurisdiction over handling it on the FPA front, instead of having the court weighing in on the dormant clause issue. I think they're still trying to uphold that," she said.

-Sonal Patel is a POWER associate editor (@sonalcpatel, @POWERmagazine)

Updated (May 31): Adds comments from Jennifer Mersing, an attorney at law firm Stoel Rives.

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