The lead plaintiff in a case seeking to strike down Illinois' program to provide zero-emission credits to nuclear power plants in the state said federal regulators wrongly concluded that the program does not intrude on their jurisdiction over wholesale markets.

The Federal Energy Regulatory Commission's assertion is "built upon a fundamentally flawed framework," the Electric Power Supply Association, or EPSA, insisted in a June 11 filing to the U.S. Court of Appeals for the 7th Circuit.

At issue is several consolidated cases — Village of Old Mill Creek v. Anthony Star (17-2433) — in the 7th Circuit challenging the Illinois Power Agency's zero-emission credit, or ZEC, program. Similar to initiatives in several other states, the Illinois ZEC program is aimed at rewarding nuclear plants for not producing carbon dioxide emissions so they can remain running in the face of stiffer competition from natural gas-fired and renewable energy.

Illinois' program requires electric distribution companies in the state to pay ZECs to carbon-free facilities based on the amount of power they produce. ZEC proponents say the credits provide a crucial lifeline to a zero-carbon form of energy, but critics argue the subsidies distort the competitive power markets FERC oversees.

On May 29, FERC and the U.S. Department of Justice filed an amicus brief with the 7th Circuit asserting the Federal Power Act does not pre-empt the Illinois program because it does not require participation in FERC-jurisdictional markets and is targeted at an attribute of generation resources — a plant's ability not to emit carbon dioxide — over which Illinois has authority. Furthermore, FERC said it has the means to address any potential harm the program may cause to wholesale markets.

But EPSA fired back on June 11, calling FERC's arguments "fundamentally flawed." The group, which represents independent power producers and marketers, disputed FERC's claim that the Illinois program does not share the same "fatal flaw" as a Maryland program that the U.S. Supreme Court invalidated in the landmark case Hughes v. Talen Energy Marketing. There, the court found the Maryland program intrudes on FERC's jurisdiction because it conditioned subsidies on participation in wholesale auctions and promised a rate distinct from the wholesale market price.

EPSA said the Illinois program shares the same flaw because qualifying nuclear plants cannot receive ZECs unless they sell their power into wholesale markets. Therefore, like with the Maryland program, Illinois' subsidies are also "tethered to wholesale market prices in the FERC-jurisdictional energy and capacity markets," the group asserted.

In addition, EPSA said FERC relied upon an "unfounded assertion" from Exelon Corp. that many nuclear plants in the region sell power largely to retail customers. The group also disputed FERC's suggestion that Exelon's plants, which have benefited from the Illinois ZEC program, do not need to sell into wholesale markets because they sometimes enter into bilateral energy contracts. EPSA said bilateral contracts "are subject to FERC's jurisdiction, are wholesale transactions, and can be carried out only at a rate deemed just and reasonable by FERC."

EPSA also said FERC erred in stating that the group claimed Exelon's plants in the region operate outside wholesale markets because the company's Quad Cities plant did not clear the PJM Interconnection's wholesale auction for three consecutive years. EPSA said its complaint actually said Quad Cities did not clear in PJM's annual capacity auction, which ensures plant availability for three years into the future.

"The ZEC program was set up knowing that the favored Illinois plants would sell their entire output into the wholesale market [and] so that they make enough to cover their costs despite their inability to do so via wholesale revenues," EPSA said. "By keeping uneconomic plants in the market, it will directly and substantially distort the wholesale energy and capacity markets."

The power group added that FERC's arguments "depend on the semantics of the ZEC program, rather than what the program actually does." Although the Illinois program does not expressly require participation in wholesale power auctions, EPSA said the regulation's "purpose and effect" is to target those auctions.

EPSA also said the appeals court "should be troubled, not comforted" by FERC's assurances that it can change market rules to deal with any detrimental effects of the ZECs. "That analysis is exactly backward," the group said, saying the fact that FERC could be forced to mitigate distorting market effects indicates a preemption conflict.

Lastly, EPSA challenged FERC's argument that commission-sanctioned renewable energy certificate, or REC, programs are similar to ZECs. EPSA said RECs are traded in competitive markets with prices set by supply and demand and are designed to incentivize renewable energy by the most efficient suppliers, while ZECs are only available to generators in wholesale markets and "awarded to hand-picked inefficient producers."

EPSA's fellow plaintiff in the case, Old Mill Creek, also responded June 11 to FERC and the DOJ's amicus brief. Old Mill Creek said the ZEC subsidies are preempted by federal law because the program "aims to defeat the wholesale electricity market" by subsidizing Exelon's Quad Cities and Clinton power plants "in a manner directly tied to wholesale market prices."

The village said the ZEC law impedes FERC's regulation of wholesale markets because the commission "cannot establish just and reasonable rates" in light of the credits.