On September 13, 2018, in Electric Power Supply Association v. Star (Case No. 17-2433 and 17-2445), the Seventh Circuit upheld a district court decision finding that Illinois’ zero emissions credit (ZEC) program (i.e., its nuclear subsidy) was not preempted by the Federal Power Act.  With this decision, the Seventh Circuit adopted a narrow reading of the Supreme Court’s decision in Hughes v. Talen Energy Marketing, LLC (136 S. Ct. 1288 (2016)) (Hughes) (which struck down a Maryland generation subsidy program that required participation in the PJM capacity auction) and left the door open for states to subsidize generation of their choosing (as long as the state is not directly setting the wholesale market price).  Thus, in subsidizing generation, states may achieve indirectly what they are prevented from ordering directly.

Under the Illinois program, certain nuclear generators in Illinois (i.e., Exelon’s Quad Cities and Clinton nuclear facilities) receive ZECs (initially priced at $16.50 per MWh) for each MWh of electric energy they produce.  The price of a ZEC will drop if an Illinois-set market-price index (based on the annual average energy prices in the PJM auction and two of the state’s regional energy markets) exceeds $31.40 per MWh.  The Illinois program does not require that the nuclear facilities participate in the PJM capacity auction (although it is acknowledged that the nuclear generators will very likely be participating in the PJM capacity auction).  Illinois’ nuclear subsidy program was challenged by an association representing electricity producers and several municipalities.

Jurisdiction over the power sector is divided between the federal government and the states.  The Federal Energy Regulatory Commission (FERC) has jurisdiction over wholesale power sales in interstate commerce, while the states have jurisdiction over retail power sales and generation facilities.  State regulation of whole power sales would be preempted by the Federal Power Act, but the courts are still deciding where exactly the line between federal and state jurisdiction lies.

According to the Seventh Circuit’s opinion, the Supreme Court’s decision in Hughes “draws a line between state laws whose effect depends on a utility’s participation in an interstate auction (forbidden) and state laws that do not so depend but that may affect auctions (allowed),” and the Illinois program came down on the right (i.e., allowed) side of this line.  The fact that the clearing price of the PJM auction may affect the ZEC price was not enough for the Seventh Circuit to find preemption.  As the Seventh Circuit stated, “because states retain authority over power generation, a state policy that affects price only by increasing the quantity of power available for sale is not preempted by federal law.”  In addition, the Seventh Circuit took note that FERC has not treated the state subsidy programs as prohibited, and FERC has instead worked to fashion auction rules that take into account the impact of such state programs.

Thus, Maryland could not support its chosen generators by providing a subsidy contingent on the generator participating in the PJM auction.  But, Illinois can support its chosen generators by providing a subsidy tied to the amount of electric energy produced (even if such subsidy allows the chosen generators to continue participating in the PJM auction).  The end result of the Maryland and the Illinois subsidy programs are the same (participation of the state’s chosen generators in the PJM auction), but the means of the subsidy programs are different (contingent on auction participation versus contingent on only producing energy).  With this decision, the Seventh Court focused on the means states employ to achieve their end goals – and not on the end goals themselves.  Thus, the Seventh Circuit has provided states with leeway to develop programs that support generators of their choice (whether nuclear facilities or renewable facilities) as long as they choose means that only indirectly impact a FERC-jurisdictional rate.

The Second Circuit’s decision on a similar New York nuclear subsidy program is still pending (Coalition for Competitive Electricity et al. v. Zibelman et al., Case No. 17-2654).