September 21, 2018
Energy Law Alert
The U.S. Court of Appeals for the Seventh Circuit on September 13, 2018, issued a ruling that upholds the zero emissions credit program in the Illinois Future Energy Jobs Act.
The U.S. Court of Appeals for the Seventh Circuit on September 13, 2018, issued a ruling that upholds the zero emissions credit (“ZEC”) program in the Illinois Future Energy Jobs Act (“Act”). The ruling was in two consolidated cases designated as Electric Power Supply Association et al., v. Anthony M. Star, Director of the Illinois Power Agency et al. The Seventh Circuit’s ruling removes substantial legal uncertainty from the ZEC program, which is a linchpin in the Act’s substantial restructuring and modernization of Illinois’ regulation of electricity generation in Illinois to better enable the state to achieve its goal of 25% renewable energy, including an estimated 1,300 MW of new wind generation by 2022, and an estimated 2,800 MW of solar generation by 2022. Pursuant to the Act, the Illinois Power Agency has already procured 1,000,000 renewable energy credits (“RECs”) through procurements in late 2017 and spring 2018 and anticipates additional procurements in 2018 of (i) 2,000,000 RECs delivered annually from new utility scale wind projects, (ii) 2,000,000 RECs delivered annually from new utility scale solar projects and (iii) 80,000 RECs delivered annually from new brownfield solar projects.
The Act updated and modernized Illinois’ energy regulatory programs by, among other things, revising Illinois’ renewable energy portfolio standards and energy efficiency standards, and establishing new programs for community solar, distributed generation, low-income solar and ZECs. The purpose of the ZEC program at issue in the subject lawsuit was to provide subsidies, anticipated to be $235 million annually, for two nuclear generating facilities in Illinois which would otherwise have been retired as uneconomic. The subsidies (i.e., mandatory purchase of ZECs) must be paid by carbon-emitting power producers in Illinois. The policy objective was to keep these nuclear facilities operating as power generating facilities, thereby increasing the supply of electricity in Illinois without carbon emissions from these facilities. Plaintiffs in the two consolidated cases, a coalition of independent power producers and Illinois energy consumers, claimed that the ZEC program under the Act was invalid under the Federal Power Act on the grounds that the Federal Energy Regulatory Commission (“FERC”) had exclusive jurisdiction over wholesale energy prices. The plaintiffs argued that the Illinois ZEC program affected prices in the wholesale energy markets and thus were similar to the subsidies in Maryland that had been stricken down by the U.S. Supreme Court in Hughes v. Talen Energy Marketing. The plaintiffs also claimed that the Illinois ZEC program violated the Commerce Clause in the U.S. Constitution by discriminating against out-of-state power producers.
The U.S. District Court in Chicago disagreed and granted the defendants’ motion for summary judgment, rejecting the plaintiffs’ claims that the ZEC program violated the Federal Power Act and the Commerce Clause. In upholding the District Court, the Seventh Circuit stated that Illinois’ ZEC program was consistent with the principles of federalism reflected in the Federal Power Act, i.e., that states have the authority to regulate power generation within their borders and FERC has exclusive jurisdiction over wholesale/interstate energy markets. The Seventh Circuit recognized it as inevitable that actions taken by either the states or FERC might affect matters within the authority of the other. However, in this case, although Illinois’ ZEC program might have an indirect effect on wholesale energy markets under FERC jurisdiction, the Illinois ZEC program stayed within the bounds of state authority because the ZEC program applies only to Illinois power producers and is not conditioned on any parties’ participation in an interstate energy auction under FERC jurisdiction, which was the fatal flaw in Maryland’s program that was invalidated in the U.S. Supreme Court’s Hughes decision. The Seventh Circuit also rejected the plaintiffs’ Commerce Clause argument because it is inevitable that state regulation of power generation will have some effect on energy supply and energy prices, but to invalidate state regulatory authority on that basis would undermine principles of federalism under which states retain authority to regulate sources of power generation.
If the plaintiffs had prevailed in this lawsuit, the effect could have been materially detrimental to many of the other energy regulatory modernizations in the Act because a substantial source of Illinois’ energy is provided by nuclear plants, and the economics of the revisions to the Renewable Portfolio Standards implemented in the Act could have been undermined. The Seventh Circuit opinion upholding the Illinois ZEC program enables the State of Illinois, through the Illinois Power Agency and the Illinois Commerce Commission, to proceed to implement the substantial regulatory modernization programs contained in the Act with the critical ZEC program in place.
It is unclear whether the plaintiffs will appeal this Seventh Circuit decision to the U.S. Supreme Court. It is noteworthy that a similar case based on New York subsidies for nuclear generating facilities is already under review by the U.S. Court of Appeals for the Second Circuit, which (depending on outcome) may increase the chances of the U.S. Supreme Court accepting the issue for decision. However, barring reversal by the U.S. Supreme Court, based on this Seventh Circuit’s validation of the Illinois ZEC program, Illinois is open for renewable energy business and is expected to remain so for a long time.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.