By Rory D. Sweeney

Defenders of Illinois’ nuclear subsidy program faced harsh questioning Wednesday as a federal appeals court judge challenged their assertions that the zero-emission credits (ZECs) avoid federal pre-emption concerns. But the judge also expressed doubts about the standing of those challenging the program.

A three-judge panel of the 7th U.S. Circuit Court of Appeals heard oral arguments in Chicago from attorneys for the Electric Power Supply Association and Illinois customers, who oppose the law, and Exelon and the state, who defended ZECs legislation approved in 2016.

EPSA and retail ratepayers are asking the 7th Circuit to overturn a district court ruling that dismissed their challenge in July. (See Illinois Zero-Emission Credit Suit Dismissed.)

Under the law, Illinois ratepayers fund payments to supplement nuclear plants that don’t earn enough other revenue to cover their operating costs. Although the subsidies would make up the difference, the legislation was careful not to condition the subsidies on the generators selling into wholesale markets — an attempt to avoid the pitfalls that led the Supreme Court to reject Maryland’s attempt to subsidize construction of a gas-fired generator in its 2016 Hughes v. Talen decision.

The court ruled in Hughes that Maryland’s contract for differences with the generator could distort price signals in PJM’s annual capacity auctions, improperly intruding on federal jurisdiction over wholesale markets. (See Supreme Court Rejects MD Subsidy for CPV Plant.)

Judge Frank Hoover Easterbrook kept returning to the Hughes ruling, despite efforts by attorneys for the state and Exelon to differentiate their program.

“If you think you avoid Hughes by eliminating [the connection to wholesale markets], that again strikes me as fantasy,” Easterbrook said. “There is no world in which these nuclear plants produce energy, but it’s not sold onto the regional grid because that’s the world in which they melt down.”

Exelon’s Matthew Price argued the plants don’t have to sell their output into wholesale markets. He pointed to MidAmerican Energy, which uses its 25% stake in Exelon’s Quad Cities nuclear facility near Cordova, Ill., to serve its customers in the region.

“When you sell at retail, you put your energy onto the grid and buy a transmission path to the user. That happens all the time,” he said. “I don’t think it’s pure fantasy that this distinction matters.”

Judge, State Clash

But Easterbrook pressed Illinois Assistant Attorney General Richard Huszagh to identify a nuclear facility that eschews wholesale markets. The question turned into a fiery exchange, with Easterbrook cautioning Huszagh on his wording and Huszagh repeatedly disagreeing.

Huszagh said plants could use bilateral contracts instead of markets to sell power but acknowledged that “I don’t think that’s likely.”

“I don’t think, as a practical matter, they could sell all of their output to retail customers. That seems unlikely given the volume” of output, he said.

“If it’s not likely, if there’s no nuclear plant in the country that does that, then the fact that the state has not formally said that ‘it depends whether you sell in the auction’ doesn’t matter. They are going to sell in the auction,” Easterbrook said. “Illinois may be entitled to do that, but I’m just perplexed at the denial that that’s what’s going on. It is what’s going on.”

“It is what’s going on, but that’s not the ultimate goal. It’s a necessary step on its way to achieving its environmental goals,” Huszagh responded. He noted that the U.S. goal during World War II wasn’t to “deliver a bunch of money to [General Motors] for making tanks, but it had to do that to accomplish its greater goal.”

“It’s fine to say: ‘Our aim is to defeat the signals being sent by that market and we’ve got a really good reason for doing that.’ That’s fine, but just go ahead and say that,” Easterbrook responded.

Huszagh called that characterization a “false choice,” saying that FERC can accommodate different state policies — even if they do affect price signals — without violating its mission under the Federal Power Act. He said it “doesn’t make any sense” to create a carbon trading market in Illinois that would only have a few suppliers from which ratepayers must buy.

“Now it sounds like the state of Illinois just is against competition all together,” Easterbrook said. “You need to be careful what you’re saying. Every word out of your mouth makes this case sound more like Hughes.”

“I disagree,” Huszagh replied.

“You may disagree, but that’s the effect you’re having on your audience,” Easterbrook shot back.

Huszagh contended that markets that don’t account for the social cost of pollution are not economically efficient “in the broader sense of the word,” but that it’s not FERC’s mission to promote those environmental concerns. “It’s the state’s … distinct regulatory authority over production to do so, and it may do so permissibly as long as it does not engage in wholesale rate setting,” he said. “And it’s not engaged in wholesale rate setting.”

“This is the same line of argument that the state made in Hughes and it didn’t work,” Easterbrook said.

“I disagree,” Huszagh responded.

Critique of Appellants

Judges Michael J. Reagan and Diane S. Sykes asked questions about the legal arguments but were less aggressive in their questions than Easterbrook, who was also critical of the appellants’ positions.

Easterbrook questioned why the court should act when EPSA has already asked FERC to subject the subsidized nuclear plants to the minimum offer price rule (MOPR) in capacity market auctions.

“The problem is the state has done something and the FERC so far has done nothing,” Easterbrook told Donald Verrilli, representing EPSA. “And you’re asking us, effectively, to predict that the FERC will do something.”

He asked Verrilli, a former solicitor general in the Obama administration, to explain how the ZEC program is different constitutionally from a carbon cap-and-trade program.

“The means requires the purchase of credits,” Easterbrook said. “That’s what a cap-and-trade scheme requires. … And the price of buying those credits will affect prices bid in the energy auction. Both the Illinois scheme and the cap-and-trade establish prices in a separate trading market that inevitably affect the price in the auction.”

“This scheme doesn’t establish prices in a separate trading market. … It’s just an additional payment for units of output sold into wholesale,” Verrilli said.

Patrick Giordano, representing Illinois customers, argued that Exelon pushed for deregulation of its in-state generation to seek better returns in regional markets and cannot now request reregulation because it doesn’t like the prices it’s getting. He favored the approach of the Department of Energy’s recent Notice of Proposed Rulemaking to address all nuclear plants “instead of one state singling out two favorite nuclear plants for subsidies and FERC reacting to it.”

Easterbrook largely ignored Giordano’s arguments and pressed him to explain why his clients have standing in the case given the Supreme Court’s Illinois Brick doctrine (431 U.S. 720), which established that only direct customers can complain about excessive energy charges. Giordano attempted to respond without specifically addressing the case.

“If you want to address Illinois Brick, that would be helpful. If you don’t know what Illinois Brick is because it hasn’t been raised by any of the parties, just say so,” Easterbrook said. “But filibustering won’t help.”

“I’ve read the case a long time ago, but it wasn’t raised,” Giordano said.

“That’s what I thought,” Easterbrook said.

Briefs Ordered

The court ordered supplementary briefs on three procedural issues that are due Jan. 17. The parties were asked to explain whether the court should defer to FERC’s primary jurisdiction; whether Anthony Star, the director of the Illinois Power Agency, can be held liable for enforcing the law if it’s found unconstitutional; and whether retail customers have standing given Illinois Brick.