On April 24, 2017, PJM Interconnection, L.L.C. (“PJM”) submitted an amicus curiae brief in a legal challenge against an Illinois program to provide additional revenue for some of the state’s financially-struggling nuclear energy facilities.  The program allows eligible generators to generate and sell Zero Emission Credits (“ZECs”) and obligates the state’s utilities to buy a certain share of those credits.  In its brief, PJM argued that the program allows uneconomic generators to continue participating in wholesale energy and capacity markets, thereby causing “substantial[] harm” to the markets and other participating generators.

Illinois Governor Bruce Rauner signed the Future Energy Jobs Act (“the Act”) into law on December 7, 2016.  Among other provisions, the Act established a ZEC program that provides financial support to certain in-state nuclear generators that have become uncompetitive in wholesale markets dominated by cheap natural gas and renewable energy.  Through this program, eligible nuclear energy generators—currently, the Exelon-owned Clinton and Quad Cities nuclear facilities—create one Zero Emission Credit per MWh of electricity that is produced and sold into the wholesale markets managed by PJM and the Midcontinent Independent System Operator, Inc. (“MISO”).  The ZECs’ price is determined through a formula based partly on the Social Cost of Carbon and factors derived from futures prices for wholesale energy and capacity in auctions administered by PJM and MISO.  Illinois utilities, in turn, are required to buy ZECs in an amount equal to 16% of the electricity that they distribute each year.  The cost for these ZEC purchases is filtered down to retail customers in the form of distribution surcharges.

On February 14, 2017, the Electric Power Supply Association (“EPSA”), along with a group of generators in the MISO and PJM footprints, filed a complaint in the U.S. District Court of the Northern District of Illinois (“District Court”), arguing that the ZEC Program is, among other legal infirmities, preempted under recent Supreme Court precedent.  In particular, the plaintiffs argued that it ran afoul of Hughes v. Talen Energy Mktg., LLC, 136 S. Ct. 1288 (2016), in which the Supreme Court determined that a Maryland generator funding scheme was preempted by the Federal Power Act (“FPA”) because it effectively set wholesale rates and thereby infringed on FERC’s exclusive jurisdiction under the FPA (see April 27, 2016 edition of the WER).  In dicta, the Court opined that states could encourage and support new or clean energy generators, if such support is “untethered to a generator’s wholesale market participation.”

Various intervenors, and the Illinois’ Attorney General, representing the state as Defendant, filed motions to dismiss the complaint, asserting that the ZEC Program was not preempted by the FPA.  In particular, the Illinois Attorney General defended the program as within the regulatory authority over electricity generators that is reserved to states under the FPA and that it is similar to other FERC-approved state schemes that create marketable property interests in the environmental benefits of renewable energy generation—property interests that are often called Renewable Energy Credits.

PJM moved to intervene and to file an amicus curiae brief in support of the plaintiffs and in opposition to the motions to dismiss.  In its brief, PJM pushed back on Defendant’s characterization of its regulatory actions.  Contrary to Defendant’s argument that the ZEC program merely creates and monetizes the environmental property interests of zero-emission generation, PJM asserted that the Program instead essentially regulates resource adequacy for the state.  As PJM argued, when Illinois restructured its electricity sector in the 1990s, it ceded authority to regulate resource adequacy to PJM, FERC’s approved Regional Transmission Organization.  Because ZECs would allow otherwise-uneconomic generators to continue participating in wholesale energy and capacity markets, PJM argued, the program would adversely impact the functioning of those markets, thereby intruding into FERC’s jurisdiction to set just and reasonable wholesale electricity rates.  PJM ultimately urged the District Court to deny the motions to dismiss because the ZEC Program was at least suspect under Hughes and other Supreme Court precedent.

This litigation, and PJM’s comments, come at a time in which many of the eastern organized markets are struggling to address the potential market impacts from state-subsidized generators.  Indeed, this case mirrors a challenge to a similar state ZEC scheme, which was established administratively by the New York Public Service Commission in August 2016 and that is currently being litigated in U.S. District Court for the Southern District of New York.

PJM’s amicus brief in this case, Electric Power Supply Association, et al., v. Anthony M. Star, Case No. 1:17-cv-01164 (E.D. Ill.), can be found here.