Court Decisions Affirm States’ Authority to Incentivize Generation Development and Retention

In two recent federal court decisions, the Second Circuit Court of Appeals and the U.S. District Court for the Northern District of Illinois affirmed state authority to implement programs to incentivize generation development and retention. The two decisions are the latest in a line of federal court cases navigating the jurisdictional dividing line between state and federal energy regulators. In FERC v. Electric Power Supply Association, the Supreme Court held that the Federal Energy Regulatory Commission’s (FERC) demand response compensation rule did not intrude on states’ authority over retail markets.  And in Hughes v. Talen Energy Marketing, the Supreme Court held that a Maryland program incentivizing the construction of new electric generation was preempted by the Federal Power Act (FPA) because it premised payments to the generator on the successful completion of sales into a FERC-jurisdictional wholesale capacity market.

Allco Finance Ltd. v. Klee. On June 29, 2017, the Second Circuit issued its decision in Allco Finance Ltd. v. Klee, denying an appeal challenging Connecticut’s Renewable Portfolio Standard (RPS), as well as a Connecticut statute authorizing the state’s energy regulators to (a) solicit proposals for renewable energy generation and (b) direct state‑regulated utilities to enter into contracts with the winning bidders.  The plaintiff in Allco argued that Connecticut’s renewable energy procurement statute was preempted by the FPA, and that locational qualifications in Connecticut’s RPS program violated the dormant Commerce Clause.  The Second Circuit affirmed the a decision by the federal district court in Connecticut dismissing the plaintiff’s preemption claims, finding the renewable procurement to be “a permissible exercise of the power that the FPA grants to Connecticut to regulate its [load-serving entities].”  The court also affirmed the district court’s dismissal of the plaintiff’s dormant Commerce Clause claims, finding that “Connecticut’s RPS program serves its legitimate interest in promoting increased production of renewable power generation in the region,” and that the burden of the program’s geographic restrictions on interstate commerce was not “clearly excessive in relation to the putative local benefits.”

Village of Old Mill Creek v. Star and Electric Power Supply Association v. Star. More recently, on Friday, July 14, 2017, the U.S. District Court for the Northern District of Illinois dismissed a pair of complaints challenging Illinois’ “Future Energy Jobs Act.”  The statute created a new commodity—the “Zero Emission Credit” (ZEC)—intended to compensate qualifying nuclear facilities for the environmental attributes of their power production.   In the two companion cases, Village of Old Mill Creek v. Star and Electric Power Supply Association v. Star, the plaintiffs challenged the Illinois ZEC program on grounds that it was preempted by the FPA and that the program burdened interstate commerce in violation of the dormant Commerce Clause.

The Illinois plaintiffs argued that the ZEC payments intruded on FERC’s exclusive jurisdiction under the FPA because those payments would “effectively replac[e] the auction clearing price received by [ZEC recipients] with the alternative, higher price preferred by the Illinois General Assembly,” and would distort the outcomes in FERC’s wholesale electricity markets. Additionally, Plaintiffs asserted that Illinois’ ZEC Program violated the dormant Commerce Clause because it would “solely benefit [in-state nuclear generators] . . . to the disadvantage of out-of-state producers who compete in the wholesale market.”

The district court disagreed, finding that “Plaintiffs’ preemption claims do not constitute ‘proper cases’ for private suits for injunctive relief,” but, even if they did, the ZEC program did not run afoul of the jurisdictional divide between states and FERC because it “falls within Illinois’ reserved authority over generation facilities,” and “Illinois has sufficiently separated ZECs from wholesale transactions such that the [FPA] does not preempt the state program under principles of field preemption.” The court likewise declined to find conflict preemption, determining instead that the “Plaintiffs’ theory . . . that distorting the wholesale market conflicts with FERC’s preference for competitive auctions” was “too broad a theory of preemption” and would inappropriately limit state authority.  The court found that FERC’s power was “undiminished” by the ZEC program, noting that FERC “can address any problem the ZEC program creates with respect to just and reasonable wholesale [electricity] rates.”

The court likewise dismissed the plaintiffs’ dormant Commerce Clause challenges, holding that “[t]he statute is not facially discriminatory because it does not preclude out-of-state generators from submitting bids for ZECs,” nor did “the circumstances surrounding the enactment of the statute . . . warrant an inference of discrimination.” The court went on to find that “[t]he creation of the ZEC has created a new market, and while that market may affect the wholesale energy market, it is an incidental burden on the channels of interstate commerce in which plaintiffs participate.”  Accordingly, the court found that “[t]he alleged harm to out-of-state power generators who will be competing in auctions against subsidized participants is not clearly excessive” when balanced against the states’ interests in environmental protection.

Motions to dismiss similar challenges to New York’s ZEC program remain pending before the U.S. District Court for the Southern District of New York.*

*The Members of the New York Public Service Commission, defendants in the S.D.N.Y. litigation, are represented by Spiegel & McDiarmid LLP attorneys Scott H. Strauss, Peter J. Hopkins, Jeffrey A. Schwarz, and Amber L. Martin.

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