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Analysis: Federal support for Illinois nuclear subsidies could embolden other states

The US federal government Tuesday threw its support behind an Illinois district court conclusion that the state's nuclear power subsidy program is not preempted by federal law, which could strengthen the case for other states pursuing similar plans, experts said Wednesday.

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The brief was jointly filed by the Federal Energy Regulatory Commission and the Department of Justice in response to the February 21 US 7th Circuit Court of Appeals order inviting the federal government to express its views in the case.

The Illinois legislature in 2016 enacted a zero-emissions credit program to provide subsidies to Exelon's Quad Cities and Clinton nuclear plants, totaling nearly 3,000 MW, that were struggling with low wholesale power prices.

In 2017, Judge Manish Shah of the US District Court for the Northern District of Illinois in Chicago dismissed a lawsuit against the ZEC program filed by a competitive power group including Calpine, Dynegy, NRG Energy and Eastern Generation and the Electric Power Supply Association. Shah agreed with Exelon's arguments that Illinois had the right to enact the ZEC program, the state law is not pre-empted by the Federal Power Act and it does not violate the Commerce Clause of the US Constitution.



That decision was quickly appealed to the 7th Circuit, which is also located in Chicago. The federal government's Tuesday brief in that appeal said the Illinois ZEC program is not preempted by the FPA because it does not require participation in FERC-jurisdictional wholesale auctions as a precondition to receive ZECs.

The Illinois ZEC program is targeted at an attribute of nuclear power generation over which Illinois has regulatory authority, the brief said. Any indirect wholesale power market impact over which FERC has authority does not warrant preemption, and FERC is considering the issue of subsidized resources participating in wholesale markets under separate proceedings. "The Commission is now considering the impacts on wholesale markets of these sorts of programs" the brief said, calling it "very much a live issue at the Commission."


WHOLESALE, RETAIL POWER MARKETS NOT 'HERMETICALLY SEALED'


FERC and the DOJ argued that although power markets are complex and sometimes interrelated, the overlapping impact does not create a jurisdictional infringement issue in this case.

Power markets "subject to federal (wholesale) and state (retail) regulation, cannot be 'hermetically sealed' from one another," the brief said. "In this context, 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."


OTHER STATES CONSIDERING ZECS COULD BE EMBOLDENED


If the Illinois ZEC appeal is denied, it could strengthen the resolve of lawmakers in other states considering similar programs. "The brief could also embolden states like Pennsylvania to pursue their own programs," Gordon Coffee, an energy litigator with Winston & Strawn, said in a phone call Wednesday. "They may still wait to see what happens with the litigation in New York and Illinois, but this could accelerate their efforts to pursue ZECs," he said.

Critics of the subsidies, like PJM Interconnection's market monitor, have called such ZEC contagion a threat to wholesale market integrity.

The federal government's brief also provided support for state-level Renewable Energy Credit and Renewable Portfolio Standard programs that could have been exposed to potential litigation if ZECs were to be struck down.

"The government's view provides additional legal cover to state REC and RPS programs, the brief says either is permissible," Coffee said.

A similar case regarding New York's ZEC program is unfolding in the 2nd Circuit, located in Manhattan. The defendants in that case, including Exelon, filed the federal government's brief in the New York proceeding late Tuesday.

Noting that the 2nd Circuit would be unlikely to rule before seeing the government's response in the Illinois case, "we expect readthrough to the New York case to be very strong," energy consultant Clearview Energy Partners said in a research note Wednesday.

Coffee said the 7th Circuit's request for the federal government's view suggests the court may be struggling with a decision and the New York decision could be reached first.

"The 2nd Circuit Court is likely to decide first as there is no evidence that they are struggling with a decision. They also benefit from having the 7th Circuit ask the federal government to weigh in with its amicus brief," Coffee said.

Clearview expects the appeals courts to issue rulings within the next four to six weeks. A split result between the Illinois and New York rulings could elevate the ZEC issue to the US Supreme Court.

--Jared Anderson, jared.anderson@spglobal.com
--Edited by Valarie Jackson, newsdesk@spglobal.com