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FERC, DOJ: Federal Power Act does not pre-empt Illinois nuclear credit program

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FERC, DOJ: Federal Power Act does not pre-empt Illinois nuclear credit program

The Federal Power Act does not pre-empt Illinois' program to award zero-emissions credits, or ZECs, to nuclear plants in the state, the Federal Energy Regulatory Commission and the U.S. Department of Justice jointly told a U.S. appeals court on May 29.

At issue is several consolidated cases — Village of Old Mill Creek v. Anthony Star (17-2433) — before the U.S. Court of Appeals for the 7th Circuit challenging the Illinois Power Agency's ZEC program. Crafted in response to a law passed by the state legislature in December 2016, the program requires Illinois' electric distribution companies to pay credits or subsidies to "zero emission facilities" based on the amount of electricity those facilities generate. The price for each ZEC is the social cost of carbon, $16.50 per MWh, but that price may go down if a "market price index" is higher than $31.40.

Significantly, the statute does not require a generator to participate in FERC-jurisdictional wholesale auctions as a prerequisite to receiving ZECs. Nevertheless, several parties challenged the program in a federal district court, claiming that it is pre-empted by the Federal Power Act.

That district court disagreed, ruling that state regulations can influence which generators participate in FERC's wholesale markets even if the end result affects those markets, so long as the policies do not target areas Congress set aside for federal regulation. The plaintiffs then appealed to the 7th Circuit.

Meanwhile, FERC is considering a related complaint (FERC docket EL16-49) filed by several of the same court plaintiffs, including Calpine Corp., challenging the PJM Interconnection's "minimum offer price rule." That rule is intended to mitigate the "price suppressive" effect of resources that benefit from subsidies awarded by state retail regulators, one of which is the Illinois ZEC program. But the complainants asserted that the rule does not go far enough because it does not apply to existing resources.

The joint brief

In the May 29 brief, FERC and DOJ said the Illinois program is not pre-empted by the FPA 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, "any spillover, indirect effect on wholesale electricity markets over which the commission has authority does not warrant preemption," the brief added.

If the program does harm wholesale markets, the brief said FERC "has the means and the authority to confront those effects" and would do so in the PJM complaint proceeding. Any "aggrieved parties" can seek judicial review once FERC issues a final order in the proceeding, the brief said.

FERC and DOJ added that the Illinois ZEC program lacks the "fatal flaw" that rendered a Maryland subsidy program unacceptable in the case Hughes v. Talen Energy. There, the U.S. Supreme Court found that the Maryland program conditioned its subsidies on participation in wholesale auctions and promised a rate distinct from the wholesale market price, thereby intruding on FERC's jurisdiction and deserving of pre-emption.

"The ZECs are separate commodities that represent the environmental attributes of a particular form of power generation; they are not payments for, or otherwise bundled with, sales of energy or capacity at wholesale, and thereby fall outside of FERC’s exclusive jurisdiction over wholesale transactions," the commission brief said.

FERC and DOJ said Hughes recognized the ability of states to craft energy policy in a way that avoids federal pre-emption. "A subsidy like the ZEC that affects (in some way) wholesale rates should not be conflated with a state law that targets the wholesale market," the brief said. Furthermore, the brief asserted the Illinois statute does not impede its ability to regulate wholesale markets, as FERC has done with respect to state policies to encourage greater renewable energy deployment in ISO New England.

Lastly, FERC and DOJ noted that it has previously found that certain state programs supporting clean power do not intrude on its authority to set wholesale rates. Renewable energy credits that are "unbundled" from and independent of wholesale energy transactions are not within the commission's purview, the brief noted. It added that state requirements to purchase renewable energy also do not intrude on FERC's authority under the Public Utility Regulatory Policies Act so long as they do not set wholesale rates or payments to "qualifying facilities" in excess of the purchasing utilities' avoided costs.

The brief drew praise from Exelon Corp., whose Clinton Power Station and Quad Cities nuclear plants were set to close before Illinois adopted the ZEC program, enabling Exelon to continue operating the facilities.

FERC and DOJ "told the courts that states are free to favor clean nuclear energy over pollution-emitting energy from coal, oil and natural gas power plants," Exelon said in a May 29 statement. "We remain confident that 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."