Last week, in Electric Power Supply Association v. Star, Nos. 17-2433 & 17-2445, the Seventh Circuit upheld Illinois’s Zero Emissions Credit (ZEC) program, concluding that it is not preempted by the Federal Power Act and not in violation of the dormant Commerce Clause.
Under the Illinois program, eligible nuclear facilities receive ZECs, and coal- or gas-fired generators must purchase these credits from the recipient nuclear plants at a price set by the state to reflect the social cost of carbon emissions. The price per credit falls if a “market price index” exceeds $31.40 per MWh, and Illinois derives this index from the annual average energy prices in PJM’s auctions and the prices in two of the state’s regional energy markets. The plaintiffs, an association of electricity producers and several municipalities, contended that the price adjustment mechanism indirectly regulated the wholesale energy markets.
The Seventh Circuit concluded that the Illinois program was not preempted by the Federal Power Act after comparing it to the Maryland program struck down by the Supreme Court in Hughes v. Talen Energy Marketing, LLC. The Seventh Circuit observed that 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).” While the Maryland program was preempted because the subsidy there depended on selling power into the wholesale market, here eligibility to receive ZECs depends on generation of power, and not selling the power into Regional Transmission Organization-operated auctions. As such, the court concluded that ZECs can “influence the auction price only indirectly,” and “a state policy that affects price only by increasing the quantity of power available for sale is not preempted by federal law.”
The court also concluded that the ZEC program does not violate the dormant Commerce Clause rule that “states may not discriminate against interstate transactions.” It explained that the Federal Power Act’s reservation of authority over local generation to the states and the absence of any overt discrimination—the subsidy’s recipients and payors are both in Illinois—defeated any constitutional challenge to the ZEC program. The court explained that “Illinois has not engaged in any discrimination beyond what is required by the rule that a state must regulate within its borders.”
