Meredith L. Hiller is an associate in Holland & Knight's Boston office
An Illinois federal district court bolstered states seeking to support renewables and nuclear clean energy Friday and offered clarity on the interplay of state and federal law after Hughes v. Talen Energy Marketing. As in the recent U.S. Second Circuit Court of Appeals decision in Allco Finance Ltd. v. Klee, the U.S. District Court for the Northern District of Illinois also interpreted Hughes narrowly, and found that the state's influence on the market was indirect and "subsidizing a participant, without subsidizing the actual wholesale transaction."
In two joined cases, Village of Old Mill Creek v. Star and Electric Power Supply Association v. Star, a coalition of consumers, independent power producers and a national industry association for competitive electric power producers sought to invalidate the Future Energy Jobs Act. That statute amended the Illinois Power Agency Act and created a new commodity, the "zero emission credit" (ZEC) to subsidize nuclear power generation and corresponding sales of nuclear power in the wholesale market. The challenging plaintiffs argued that the Illinois program requiring utilities to purchase the ZECs from nuclear plants was preempted by the Federal Power Act (FPA) because it effectively replaced a FERC-regulated wholesale price and impinged upon FERC's exclusive jurisdiction over wholesale sales and conflicted with FERC's regulatory regime by distorting outcomes in FERC-regulated markets. Further, they asserted that it violated the dormant Commerce Clause by discriminating in favor of in-state businesses (the Illinois nuclear power plants).
As in Allco, the Illinois district court focused on the fact that the ZEC program involves purchases of ZECs, as opposed to conventional wholesale capacity and energy, and specifically equated ZECs with RECs, citing a 2012 FERC order concluding that states have jurisdiction over RECs when they are sold "unbundled" from their associated power. The court found that since the ZECs were separated from wholesale transactions, under the FPA, the Illinois program fell within the state's reserved authority over generation facilities. The court noted that because Illinois nuclear generators would receive ZECs for producing electricity regardless of whether that energy was sold in a FERC-regulated auction market, ZEC payments did not suffer from the same 'fatal defect' as in Hughes, and did not alter the amount of money exchanged for wholesale electricity. Further, and specifically citing Allco, the court noted the ZEC program does not impose any conditions directly on wholesale transactions. The state's indirect influence was therefore appropriate action not preempted under the FPA.
The court further found that the alleged "market distortion" in FERC-regulated markets was not preempted by the FPA either and could be addressed by FERC since its regulatory structure remained unaltered and its power undiminished by the ZEC program. Finally, regarding the dormant Commerce Clause, the court held the Illinois statute was not facially discriminatory because it did not preclude out-of-state generators from submitting bids for ZECs. Despite the Illinois governor's statements at the bill signing ceremony about saving jobs at two in-state nuclear plants, and the name of the statute (the Future Energy Jobs Act), the court found no evidence of an intent to discriminate against out-of-state commerce and that Illinois had a legitimate interest in the furthering ZEC program's environmental purpose and public health interest.
Together with the Allco decision, the Illinois decision gives support and clarity to state governments seeking to achieve the environmental benefits of renewable portfolio standards and nuclear energy subsidization programs, showing them where lines between federal and state power under the FPA can be drawn. The plaintiffs in both cases will appeal or request rehearing, and a federal district court in New York continues its deliberations over another ZEC program, so additional insight into boundaries for state renewable and nuclear clean energy programs can be expected.
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