Dive Brief:

• The U.S. Court of Appeals for the 7th Circuit on Wednesday heard oral arguments in a case that seeks to overturn the zero emission credit (ZEC) program that the Illinois legislature passed in December 2016.

• The case, Village of Old Mill v. Anthony Star and Exelon Generation Co. LLC, came to the appeals court after the U.S. District Court for the Northern District of Illinois in July upheld the ZEC program in the face of a challenge mounted by generators,including NRG Energy and the Electric Power Supply Association (EPSA).

• The appeals court ordered the petitioners to file memoranda by Jan. 17 on three specific issues that generally address whether or not the appeals court is the proper venue for settling the ZEC issue.

Dive Insight:

The substantive issues in the Illinois ZEC case have been well aired in several venues, including district courts in Illinois and New York, which both upheld state nuclear subsidy programs; in addition to courts in Connecticut, and the U.S. Supreme Court, which in Hughes v. Talen Energy Marketing knocked down programs in New Jersey and Maryland that put in place incentives for in-state generation project.

The issue of matter of law involves the balance of state and federal jurisdiction when it comes to electric power policies, specifically the reach and interaction of the Federal Power Act with state initiatives and whether or not federal law pre-empts state policies and programs and, secondly, to what extent such state policies and programs might violate the dormant Commerce Clause of the U.S. Constitution, which bars states from impeding inter-state commerce.

The claim that the ZEC program violates the dormant Commerce Clause because it benefits only in-state plants was lightly touched upon in during the hour-long hearing. About half of the hearing was devoted to the question of pre-emption and whether or not the Illinois law interferes with the Federal Power Act’s jurisdiction over wholesale power markets.

The Illinois program, established by the Future Energy Jobs Act, provides ZECs to two nuclear power plants, Quad Cities and Clinton, both owned by Exelon Generation. The program was carefully designed to avoid entanglement with wholesale power markets. That entanglement was identified as the fatal flaw in the Hughes case at the Supreme Court. Both of the Illinois nuclear plants sell power into the PJM Interconnection. Similar programs in New York and Connecticut were also modeled on state programs to encourage renewable energy, which has been an area established under law to be within a state’s jurisdiction.

Judge Frank Easterbrook challenged EPSA to explain a meaningful difference between the ZEC program and a state cap-and-trade program. Counsel for EPSA argued that the ZEC program provides payments that supplement wholesale market while a cap-and-trade program sets up a market for a separate commodity. Judge Easterbrook countered that both programs establish markets for separate commodities that in some way affect wholesale power prices.

Judge Easterbrook also asked how the ZEC program differs from a state’s right to impose a tax on generators and use the proceeds to fund nuclear plants. And he said Illinois and Exelon were seeking to “defeat the market” and why that is permissible under Hughes.

The state’s attorney said Illinois was aiming to achieve an environmental goal by subsidizing particular generators, while Maryland program sought to change a generator’s compensation in a wholesale market.

Judge Easterbrook, however, opened the hearing by focusing on procedural issues; about half the hearing was taken up by those issues. His opening line of questioning had to do with primary jurisdiction. Under that doctrine, claims of pre-emption under the Federal Power Act should be heard first by federal agency responsible for administering the law: in this case the Federal Energy Regulatory Commission. He repeatedly asked parties on both sides of the issue why the issue should not properly fall under FERC’s jurisdiction.

The judges also brought up the procedural issue of Ex parte Young, a 1908 Supreme Court decision, and asked if that decision provided a basis for equitable relief. Ex parte Young empowers federal courts to override issues of state sovereignty to hear cases that claim a state has acted unconstitutionally.

The third procedural issue involves Illinois Brick Co. v. Illinois, a 1977 Supreme Court decision that found that indirect purchasers of goods or services do not have standing to claim damages from antitrust violators. Under questioning, Judge Easterbrook asked why generators not directly affected by any possible higher prices resulting from the ZEC program should have a valid claim.

Some parties in the hearing were familiar with Illinois Brick, but not sufficiently briefed on the issue to respond. That issue is one of the three procedural issues on which the court told the parties to prepare memoranda by Jan. 17.