On September 13, 2018, the U.S. Court of Appeals for the Seventh Circuit (“Seventh Circuit”) dismissed challenges to the Illinois “zero emission credit” (“ZEC”) program, a state law which compensates nuclear plants and other generators that do not produce carbon emissions (“ZEC Program”).  In doing so, the Seventh Circuit ruled, among other things, that: (1) the ZEC Program is not preempted by the Federal Power Act (“FPA”) because eligibility to receive ZECs does not depend on the generator’s participation in a wholesale auction, and (2) the ZEC Program does not violate the dormant Commerce Clause because it does not discriminate against interstate commerce.

Illinois’ ZEC Program compensates nuclear generators and other carbon-free resources by requiring non-qualifying coal and natural gas generators to purchase ZECs from nuclear and other carbon-free generators at a set price.  Notably, while the initial price of each ZEC is calculated using the Social Cost of Carbon, the price of a ZEC decreases if a market price index, the calculation of which includes the clearing prices of certain regional wholesale energy auctions, exceeds a certain amount.

In February 2017, the Electric Power Supply Association and several municipalities (“Plaintiffs”) filed a complaint in the U.S. District Court for the Northern District of Illinois, Eastern Division (“District Court”).  Plaintiffs, argued that the ZEC Program is preempted by the FPA because it indirectly regulates wholesale energy auctions by using average auction prices as a component in a formula that affects the cost of a credit (see June 5, 2018 edition of the WER).  In addition, Plaintiffs argued that because ZECs only benefit certain Illinois generators, the ZEC Program discriminates against interstate transactions and violates the dormant Commerce Clause.  In July 2017, the District Court rejected the Plaintiffs’ arguments.  Plaintiffs then appealed to the Seventh Circuit.  Uniquely, the Seventh Circuit asked FERC to express its views in an amicus brief.  In response, FERC and the U.S. Department of Justice filed a joint brief arguing, among other things, that the ZEC Program is not preempted by the FPA because the ZEC Program does not require participation in FERC-jurisdictional markets and merely targets zero-carbon emission attributes of nuclear generators within Illinois.

In its opinion, the Seventh Circuit first distinguished between state laws that effectively regulate wholesale electricity markets, and thus are preempted by the FPA, and those incidentally affecting such markets, and thus are not preempted.  With respect to the ZEC Program, the Seventh Circuit found that the program does not effectively regulate wholesale markets because a generator’s eligibility for ZECs does not depend on participation in the wholesale markets.  Moreover, the Seventh Circuit noted that the value of a ZEC does not depend on what a generator bids into an auction; rather, every successful bidder in the auction receives the same market-clearing price.  Accordingly, the Seventh Circuit held that the ZEC Program can only affect auction prices indirectly by keeping certain generators online and by raising the costs of carbon-emitting generators.  The Seventh Circuit also concluded that Illinois did not violate the dormant Commerce Clause because Illinois did not discriminate against interstate commerce and because states are permitted by statute to regulate local generation.

The Seventh Circuit’s opinion can be viewed here.