Competitive Generators Look to the Supreme Court After Seventh Circuit Declines Rehearing on Nuclear Subsidies

The Seventh Circuit Court of Appeals has declined to rehear a case that challenges nuclear subsidies in Illinois, effectively dealing a blow to a group of competitive generators, which have fought the measure for several years.

In an order issued on October 9, the appellate court said its full judicial panel had voted to deny a September 29-filed petition from the Electric Power Supply Association (EPSA), a national trade association representing independent power producers and marketers, that urged it to rehear a case challenging the state's zero emissions credit (ZEC) program under the Illinois Future Energy Jobs Act. In its petition, the group argued that the court erred or overlooked significant aspects of its case when the court issuedits final judgment on September 13.

The court's decision, which essentially left the door open for states to subsidize nuclear generation, was hailed as a victory for Exelon Corp., which lobbied for the measure to protect its financially flailing nuclear assets. Exelon captured another victory two weeks later as EPSA and other plaintiffs, including NRG Energy, Dynegy, and Calpine, lost a second, pivotal legal challenge on New York's nuclear subsidy program at the Second Circuiton September 27. The Second Circuit made clear that tethering between state programs subsidizing certain nuclear units and federal regulation of wholesale rates received by those units is only unlawful if it ties to market participation, not market prices.

The Seventh Circuit's decision to deny a rehearing of the case effectively affirms the lower court's ruling on the Illinois ZEC program. But as EPSA on October 9 told its members on Tuesday, it also " 'starts the clock' for seeking review by the U.S. Supreme Court."

EPSA told POWER on October 11 that process to seek the high court's review could begin by early January. The group also said it is considering seeking a Supreme Court review of the Second Circuit's decision by December 26. It noted that in "each case, parties can request a 30-day extension to submit petitions seeking cert."

Watching How FERC Will Act on PJM's Capacity Market Proposals

EPSA is meanwhile also closely watching how the Federal Energy Regulatory Commission (FERC) will proceed on two new approaches that PJM Interconnection filed recently to reform its capacity market in response to FERC's June 29 order.

The federal regulatory body, along with the U.S. Department of Justice, backed Illinois in a brief filed with the Seventh Circuit in the nuclear subsidy case in May, essentially arguing that ZEC programs do not preempt federal statute. Yet in its decision on June 29, FERC rejected approaches by PJM to reform its capacity market, even as FERC acknowledged that the capacity market's integrity and effectiveness has been increasingly and "untenably threatened" by state subsidies for preferred generation resources.

The first of the two new approaches filed by PJM with FERC on October 2involves a coupling of the expanded Minimum Offer Price Rule (MOPR) and a Resource Carve-Out (RCO) construct. The proposed expanded MOPR would apply to all fuel and technology types and to both new and existing resources (by comparison, the original MOPR applied only to new gas-fired units). The RCO gives states the alternative to remove state-subsidized generation assets (which are subject to MOPR) from the capacity market. The RCO would then allow subsidized resources to obtain a capacity commitment without having to clear the capacity market.

The second option is what PJM calls an "extended RCO"-and it would combine the RCO with a mechanism to restore the market clearing price to the most economic, "correct" competitive level. The extended RCO would also include price formation rules to thwart price suppression, which could result if the RCO stood alone.

Public responses to the proposed approaches are due on November 6 (in Docket No. EL18-178),and FERC has said it could issue an order before January 4, 2019. PJM, however, has delayed its next base residual auction (for the 2022-23 delivery year) from May to August 14, 2019, to give FERC enough time to approve the proposal, and for PJM to implement rule changes.

PJM has acknowledged that states within its footprint have the right to support generation that meets specific environmental, economic, or political goals. That point, it noted, "has been reinforced in recent federal appeals court decisions regarding state subsidy actions in Illinois and New York."

FERC's direction to PJM in its June 29 order was clear, the entity noted: "Submit a proposal that recognizes state authority to shape the makeup of their generation fleet, noting that such a proposal should transparently and carefully ensure the costs associated with state actions are borne by the states taking those actions. Just as important, the proposal must guarantee that price outcomes for generation sellers, including those not benefiting from state support, remain fair and competitive," it said. "We believe the proposal we filed today does just that."

A Parallel Quest for Justice

EPSA has reviewed PJM's approaches and is now developing a response. But EPSA Vice President Nancy Bagot on Thursday told POWER that FERC's anticipated action would not be in place of "pursuing the correct legal finding" that nuclear subsidies are preempted by federal law, a position it would pursue in the Supreme Court. "Note that the RCO/Extended RCO proposal addresses a different issue-accommodating the policy choices made by states, regardless of the broader regional market construct or concerns," she said.

FERC's action "can happen in tandem," she noted. "Our point has been that, as this is being debated on the legal front, it is clear that FERC must fulfill its duty and mitigate the impacts of these actions on the federally regulated regional wholesale markets."

FERC is obligated "to ensure just and reasonable rates, and has found that out-of-market subsidies suppress capacity prices in PJM and therefore result in rates that are not just and reasonable, which FERC found in its June 29 order leading up to the RCO/Extended RCO proposal," Bagot stressed.

"EPSA has pointed out that in the discussions from the Circuit courts, informed in part by the amicus brief submitted by the U.S./FERC, it is clear that if FERC can address the distortive market impacts of these state actions, then it must do so, and as soon as possible to protect the wholesale markets," she said.

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

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