ZECs and RECs: A Quick Look at the EPSA v. Star Decision on Nuclear Plant Subsidies

Frederick M. Lowther

lowther-fOn July 14, 2017, Federal District Judge Shah (N.D. Ill.), in EPSA v. Star, 1:17-cv-01164, dismissed the complaints of electricity consumers and an array of electric power generators and their association seeking to invalidate the Illinois Future Energy Jobs Act, enacted in December 2016. The Act created “zero emission credits” (“ZECs”) for the benefit of two nuclear power plants, which the plant owner (Exelon) threatened to retire absent outside economic support. As the Act’s title indicates, a principal motivation for the legislation was the prospect of significant job loss and other economic harms caused by shuttering the two nuclear plants, but the environmental benefit of “zero emission” nuclear power was a major driver as well. Judge Shah’s decision addresses a multitude of legal issues raised by the plaintiffs, and ultimately finds that plaintiffs had failed to state a claim and failed to establish subject-matter jurisdiction. In short, the Judge’s dismissal was resounding, despite the complexity of the legal and factual issues. It is reasonable to expect that the decision will be appealed, although the Court did note that “[t]he market distortion caused by subsidizing nuclear power can be addressed by [the Federal Energy Regulatory Commission (“FERC”)] and the interplay between state and federal regulation can continue to exist.” Memorandum Opinion at 34.

EPSA v. Star is at the intersection of the drives toward aggressive climate action and competitive electric generation. Advocates of aggressive climate action strongly favor carbon-free renewable energy and also favor zero-emission nuclear power. While many climate activists meet themselves coming around the corner on the nuclear issue—opposing expansion of the nuclear fleet on safety grounds but advocating retention of the existing fleet of operating nuclear plants—the drive to save the planet tips the scale in favor of saving the nuclear plants we have. On the other hand, advocates of competitive electric power generation are avid supporters of constructing new efficient generation, fueled by now-plentiful, low cost domestic natural gas. While natural gas-fired generation is not emissions free, it is climate friendly compared to coal and oil-fired units. The competitive power advocates oppose the Act (and other comparable state-level actions) because they see these measures as economic subsidies that threaten to distort the competitive balance.

While the Act’s ZEC program is complex, it boils down to conferring tradable credits on power plants meeting specified “zero emission” criteria. The only plants in Illinois that meet the criteria of the Act are the Clinton and Quad Cities nuclear generating stations owned by Exelon. Utilities that provide electricity supplies to the retail markets in Illinois are required to enter into ten year contracts to purchase the ZECs. The cost of the ZECs can then be passed on to the ratepayers of the retail suppliers. The base value of the ZECs is established by the Act, but the base value is subject to a “Price Adjustment” based on a complex market price index. In short, ZECs impact the wholesale price of electricity sold by the qualifying nuclear plants (to their advantage relative to competitors), and the burdens of that impact are ultimately borne by the retail ratepayers (and potentially the competitive generators).

The principal challenge to the Act was that the Act and the ZEC program conflict with (and thus are preempted by) the exclusive jurisdiction of FERC over wholesale electricity rates. As the Court notes, the boundaries of FERC’s “exclusive” jurisdiction have been tested recently in three U.S. Supreme Court cases as well as one FERC decision. While the Court addresses at length those four precedents, the Court’s ultimate decision comes down to one point—the parallel between ZECs and so-called Renewable Energy Credits (“RECs”). As Judge Shah notes (Memorandum Opinion at 8, n.10): “The [Act] modeled the ZEC program on REC programs, which many states, including Illinois, have enacted.” As is essentially the case with the ZEC program, “’qualified renewable generators (such as solar, wind and biomass) earn RECs for each MWh of electricity they generate’ and retail suppliers ‘are required to acquire a certain number of RECs each year or make an Alternative Compliance Payment.’” Id. Judge Shah goes on to say that “RECs are similar to ZECs, and the parties do not suggest that RECs are preempted.” Memorandum Opinion at 32.

Despite the terminology, the ZEC and REC “credits” are in fact subsidies, which provide ratepayer support to compensate for the fact that certain climate-friendly power generation technologies cannot compete on their own, at least not today. In short, the ZEC and REC subsidies are examples of the social cost of the climate change agenda. The extension of this social cost to aging nuclear power plants (as opposed to emerging technologies) is a recent development, and the legal challenges are not surprising. Whether the parallels between ZECs and RECs will withstand scrutiny at the appellate level, or at FERC, remains to be seen, but it is clear that the climate change agenda, whether pursued aggressively or with greater measure, will inevitably involve social costs that are real, not imaginary.

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