The US Court of Appeals for the Seventh Circuit on September 13 affirmed a decision of the US District Court for the Northern District of Illinois that dismissed two complaints seeking to invalidate the Illinois Zero Emission Credits (ZEC) program.
The Illinois ZEC program was created in 2016 as part of the Future Energy Jobs Act. A ZEC is a credit that represents the environmental attribute of one megawatt hour of energy produced from an eligible zero-emission facility as defined by the statute. The Illinois Power Agency confers ZECs to eligible facilities generating zero-emission power and requires utilities to purchase those ZECs. The act set an initial price for ZECs based on a calculated “social cost” of carbon, but the price can adjust downward based on an index of wholesale power prices. While the eligible zero-emission generators will still participate in wholesale electricity markets, ZECs provide additional out-of-market payments to compensate the generators for their zero-emission power.
Plaintiffs in the Northern District of Illinois sued to invalidate the ZEC program, arguing that the Federal Power Act preempts the program and that the program violates the dormant commerce clause. In July 2017, the district court dismissed the complaints, and an appeal to the Seventh Circuit followed. On appeal, opponents of the program argued that the ZEC program is preempted by the Federal Power Act because it interferes with wholesale electricity markets regulated by the Federal Energy Regulatory Commission (FERC), and is invalid based on the 2016 US Supreme Court decision Hughes v. Talen. In Hughes, the Court distinguished between state laws that depend on participation in an interstate auction and state laws that do not depend on such participation but may affect auctions. Laws that depend on participation are invalid, while laws that may only affect auctions are permissible.
In upholding the ZEC program, the Seventh Circuit held that a state policy that affects price only by increasing the quantity of power available for sale is not preempted by federal law, and that this is what the Illinois ZEC program does. Increasing the total amount of energy available for purchase at auction will have some effect on the clearing price because a larger supply of electricity will likely mean a lower market-clearing price, but the court held that this does not violate the Federal Power Act or impinge on federal authority to regulate wholesale markets.
In addressing the claim that the ZEC program violates the dormant commerce clause by unduly burdening interstate commerce, the Seventh Circuit held that under the Federal Power Act, states retain the authority to regulate within their borders. Here, only qualified zero-emission generators in Illinois can receive ZECs, only Illinois utilities must purchase the ZECs, and the cost of the ZECs is borne only by Illinois rate payers. Critically, all power whether generated inside or outside Illinois received the same price in the interstate auction. Thus, the court found, the effects of the ZEC program stop at the Illinois border and the program does not discriminate against out-of-state generators.