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Village of Old Mill Creek v. Star

United States District Court, N.D. Illinois, Eastern Division

July 14, 2017

Village of Old Mill Creek, et al., Plaintiffs,
Anthony M. Star, in his official capacity as Director of the Illinois Power Agency, et al., Defendants. And Electric Power Supply Association, et al., Plaintiffs,
Anthony M. Star, in his official capacity as Director of the Illinois Power Agency, et al., Defendants.



         The state of Illinois created a “zero emission credit” program to effectively subsidize nuclear power generation and corresponding sales of nuclear power in the wholesale market. The Future Energy Jobs Act[1] amended the Illinois Power Agency Act, 20 ILCS 3855/1-1 et seq., and created a new commodity, the ZEC. The statute grants ZECs to certain qualifying energy-generating facilities. Those facilities are likely to be two nuclear power plants owned by Exelon in Illinois. Utilities that sell electricity to consumers must purchase ZECs from the qualifying power plants, and those utilities will pass the costs of ZECs onto their customers. The result is money in the coffers of Exelon from the sale of ZECs that will give it a benefit when pricing its energy in the wholesale market relative to competing energy producers that do not receive ZEC payments.

         Two sets of plaintiffs filed suit to challenge the statute. In one case, the plaintiffs, Village of Old Mill Creek, Ferrite International Company, Got It Maid, Inc., Nafisca Zotos, Robert Dillon, Richard Owens, and Robin Hawkins, are delivery services customers of Commonwealth Edison Company in Illinois. In the second suit, plaintiff Electric Power Supply Association is a national industry association for competitive electric power producers, and plaintiffs Calpine Corporation, Dynegy Inc., Eastern Generation, LLC, and NRG Energy, Inc. are independent power producers that operate generators nationwide and provide wholesale electricity to utilities. Both the consumer plaintiffs and the generator plaintiffs bring claims against Anthony Star in his official capacity as Director of the Illinois Power Agency and the Commissioners of the Illinois Commerce Commission in their official capacities, seeking to invalidate the statute. Exelon intervened in both actions to defend the ZEC program.

         Defendants and Exelon each filed motions to dismiss the complaints. The motions are granted.

         I. Legal Standards

         To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a complaint must contain factual allegations that plausibly suggest a right to relief. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). When analyzing a motion under Rule 12(b)(6), a court must accept all factual allegations as true and draw all reasonable inferences in the plaintiffs' favor, but a court need not accept legal conclusions or conclusory allegations. Virnich v. Vorwald, 664 F.3d 206, 212 (7th Cir. 2011) as amended (Jan. 3, 2012) (citing Iqbal, 556 U.S. at 680-82). Rule 12(b)(6) limits a court's consideration to “allegations set forth in the complaint itself, documents that are attached to the complaint, documents that are central to the complaint and are referred to in it, and information that is properly subject to judicial notice.” Williamson v. Curran, 714 F.3d 432, 436 (7th Cir. 2013); see also Fed. R. Evid. 201(b). A challenge to plaintiffs' standing to bring a claim is a challenge to the court's subject-matter jurisdiction, and as in a Rule 12(b)(6) motion, the facts of the complaint are accepted as true. Silha v. ACT, Inc., 807 F.3d 169, 173-74 (7th Cir. 2015).

         II. Background

         These two lawsuits are companion cases. The complaints are substantially similar, except that the consumer plaintiffs have an additional claim under the equal protection clause. In responding to defendants' and Exelon's motions to dismiss, the consumer plaintiffs largely adopted the generator plaintiffs' arguments.[2]

         A. The Federal Power Act, FERC, and Wholesale Energy Markets

         The Federal Power Act, 16 U.S.C. § 791a et seq., allows both the Federal Energy Regulatory Commission and the states to regulate aspects of the electricity industry. Under the Federal Power Act, FERC has exclusive jurisdiction over wholesale sales of electric energy in the interstate market; it has the power to regulate wholesale electricity rates and any rule or practice that affects such rates.[3]16 U.S.C. §§ 824(b), 824e(a). The states may regulate “any other sale” of electricity, which includes retail electric energy sales. Id. § 824(b).

         FERC regulates wholesale rates of electric energy via interstate auctions. [1] ¶¶ 29-30. For most of Illinois, wholesale electricity is exchanged through auctions conducted by the Midcontinent Independent System Operator, Inc.[4] Id. ¶ 30. In Chicago and parts of northern Illinois, wholesale electricity is exchanged through auctions conducted by PJM Interconnection, L.L.C.[5] Id. Gaps between the supply and demand of electric energy can cause “uncontrolled widespread blackouts.” Id. ¶ 32. To prevent such gaps, MISO and PJM continuously run two types of wholesale auctions, “energy” and “capacity, ” because electricity cannot be stored economically or in sufficient quantities. Id. ¶¶ 31-32.

         Both MISO and PJM run day-ahead and real-time energy auctions. Id. ¶ 31. In the day-ahead energy auction, generators submit a bid for a price at which they are willing to generate a particular quantity of electricity to be delivered the next day. Id. ¶ 34. In the real-time energy auction, MISO and PJM each increase or decrease the prices of electric energy every five minutes to signal the need for generators to produce more or less electricity as conditions change in real time. Id. “In contrast to the energy auctions, where electricity itself is bought and sold, capacity auctions are for the purchase and sale of options to purchase electricity.” Id. ¶ 38 (emphasis original). MISO and PJM calculate the generating capacity needed for the electric grid to run reliably each year and they establish the amount of capacity that retail electric suppliers, known as load serving entities, must purchase to meet customer demand in their territory each year.[6] Id. ¶ 37. To satisfy capacity obligations, load servicing entities may either enter into bilateral contracts with generators or they may participate in an auction market conducted by MISO or PJM. Id. “Each generator that sells capacity in the MISO and PJM capacity markets is required to participate in the day-ahead energy market, and to respond in real-time, if conditions warrant.” Id. ¶ 38.

         For both energy and capacity auctions, MISO and PJM use a process called “stacking” to accept generators' bids. Id. ¶¶ 41-42. The generators' bids are stacked from lowest to highest in price, and MISO and PJM accept bids in that order until the demand has been met. Id. ¶ 41. Each bid that is accepted is said to “clear the market.” Id. The price of the highest-accepted bid is called the “market clearing price”; all generators receive that price for each bid they submitted that cleared the market, even if a generator submitted a bid at a lower price. Id. ¶¶ 35, 41. Since nuclear generators run continuously at maximum output and have no alternative to selling their output in MISO and PJM auctions, they submit conservative bids in the hopes of clearing the auction.[7] Id. ¶ 36. During times of oversupply, nuclear generators will even pay to offload their energy output onto the grid, by submitting a bid for a negative price, so that they have room to generate more energy in the future. Id. This bidding strategy results in lower market clearing prices. Id.

         B. Illinois's Future Energy Jobs Act and the ZEC Program

         Exelon Corporation announced that it would shut down two of its nuclear generator facilities, Clinton and Quad Cities, unless the Illinois General Assembly passed “adequate legislation.” [38-4] at 2-3. The two plants had lost more than $800 million over the last six years; but closing the plants would result in the estimated loss of 4, 200 direct and secondary jobs, as well as approximately $1.2 billion in economic activity within four years. Succumbing to that pressure, the Illinois General Assembly created the zero emission credit program in the Future Energy Jobs Act.[8] The statute amends the Illinois Power Agency Act. See 20 ILCS 3855/1-1 et seq. When the governor signed the legislation into law, Exelon confirmed that Clinton and Quad Cities would operate for another ten years due to the new legislation. [38-11] at 2-3.

         According to plaintiffs, the legislature's asserted goal for the statute, “environmental protection, ” was mere pretext for a bailout for Exelon's Clinton and Quad Cities plants. [1] ¶ 58. The actual purpose of the statute-to save jobs and local tax revenues-was clear from its title, “Future Energy Jobs Act.” Id. Plaintiffs also noted that when the governor signed the bill into law, he said, “The Future Energy Jobs bill protects taxpayers, ratepayers, and the good-paying jobs at the Clinton and Quad Cities' plants.” Id. ¶ 61.

         The statute created a new commodity called a zero emission credit. A ZEC is a tradeable credit that represents the environmental attributes of one megawatt hour of energy produced from a zero emission facility (a nuclear power plant interconnected with MISO or PJM). 20 ILCS 3855/1-10. The Illinois Power Agency confers ZECs on those facilities that are “reasonably capable of generating cost-effective zero emission credits in an amount approximately equal to 16%[9] of the actual amount of electricity delivered by each electric utility to retail customers in the State during calendar year 2014.”[10] 20 ILCS 3855/1-75(d-5)(1). Utilities are required to enter into contracts to purchase the ZECs from the winning zero emission facilities. Id. § 1-75(d-5)(1)(C-5). The contracts will have a term of ten years, ending May 31, 2027. Id. § 1-75(d-5)(1).

         The retail suppliers must purchase all of the ZECs conferred on the selected zero emission facilities in each delivery year. Id. The price for each ZEC is the Social Cost of Carbon[11]; but, it may be reduced according to a “Price Adjustment, ” which is “the amount [. . .] by which the market price index[12] for the applicable delivery year exceeds the baseline market price index[13] for the consecutive 12-month period ending May 31, 2016.” Id. § 1-75(d-5)(1)(B). The purpose of the price adjustment is “to ensure that the procurement remains affordable to retail customers in this State if electricity prices increase.” Id.

         To receive ZECs, facilities must participate in a procurement process and submit eligibility information, such as annual power generation and cost projections, to the Illinois Power Agency. Id. § 1-75(d-5)(1)(A). The IPA will publish its proposed zero emission standard procurement plan, which will explain how bids will be selected based on “public interest criteria, ” such as minimizing carbon dioxide emissions that result from electricity consumed in Illinois, and minimizing sulfur dioxide, nitrogen oxide, and particulate matter emissions that adversely affect the citizens of Illinois. Id. § 1-75(d-5)(1)(C). The procurement plan will also provide a detailed explanation about how the IPA will consider and weigh each public interest factor. Id. In developing the plan, the IPA will review “any reports issued by a State agency, board, or commission [. . .], as well as publicly available analyses and studies performed by or for regional transmission organizations that serve the State and their independent market monitors.” Id.

         C. Effects of the ZEC Program

         The sale of ZECs will provide those selected nuclear plants with out-of-market payments for each megawatt hour of electricity they produce, “effectively replacing the auction clearing price received by these plants with the alternative, higher price preferred by the Illinois General Assembly.” [1] ¶ 4. This will affect the FERC-approved energy market auction structure not only because the nuclear plants will not retire as scheduled, but also because they will continue to bid into the wholesale market auctions at artificially lower prices. Id. ¶¶ 6, 10.[14] Lower auction prices lead to lower revenues for all generators. Id. ¶ 10. In turn, low revenues could cause generators that are more efficient than the ZEC recipients to exit the market or it could deter potential new generators from entering the market. Id. Additionally, “artificially suppressed wholesale market prices are likely to result in higher energy bills for retail ratepayers as they are forced to pay the nuclear subsidy as a charge on their retail electric bills.” Id. ¶ 11. ZECs are estimated to cost Illinois' ratepayers $235 million per year over ten years. Id. ¶ 3.

         The generator plaintiffs believe that they will incur millions of dollars in damages because they will lose auctions they otherwise would have won and they will receive less revenue from auctions they do win. Id. ¶ 66. Meanwhile, the consumer plaintiffs will face higher utilities bills as Commonwealth Edison Company and Amaren Illinois increase retail charges pursuant to the automatic adjustment tariffs.[15] 17-cv-1163, [28] ¶ 2 (citing 20 ILCS 3855/1-75(d-5)(1)(B) and (d-6)(6)).

         Plaintiffs seek to invalidate the ZEC program by arguing that it is preempted by the Federal Power Act and that it violates the dormant commerce clause. See [1] ¶¶ 76-93. The consumer plaintiffs also allege that the program denies them the equal protection of federal laws governing the wholesale electricity markets, in violation of the Fourteenth Amendment. 17-cv-1163, [1] ¶¶ 88-94.

         III. Analysis

         A. Standing

         Article III of the United States Constitution limits federal court jurisdiction to “cases” and “controversies.” U.S. Const., art. III, § 2. To establish constitutional standing, plaintiffs must show an “injury in fact” that is “fairly traceable” to the defendant's conduct and that is “likely to be redressed by a favorable judicial decision.” Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1547 (2016), as revised (May 24, 2016). At the pleading stage, the plaintiffs must clearly allege facts that demonstrate each element. Id. To establish “prudential”[16] or statutory standing, plaintiffs must show that the statutory cause of action encompasses the plaintiffs' claim. Bank of Am. Corp. v. City of Miami, Fla., 137 S.Ct. 1296, 1302 (2017). The presumption is that “a statutory cause of action extends only to plaintiffs whose interests ‘fall within the zone of interests protected by the law invoked.'” Lexmark Int'l, Inc. v. Static Control Components, Inc., 134 S.Ct. 1377, 1388 (2014). Courts use “traditional tools of statutory interpretation” to decide whether a plaintiff is within the zone of interests and therefore has statutory standing. Bank of Am., 137 S.Ct. at 1303. The inquiry is not whether Congress should have authorized the plaintiff's cause of action, but whether Congress in fact authorized it. Lexmark, 134 S.Ct. at 1388 (“Just as a court cannot apply its independent policy judgment to recognize a cause of action that Congress has denied, [. . .] it cannot limit a cause of action that Congress has created merely because ‘prudence' dictates.”).

         1. The Generator Plaintiffs Do Not Have Article III Standing to Challenge the Price Adjustment

         The generator plaintiffs take issue with the price adjustment feature of the ZEC program. [1] at ¶ 63. The plaintiffs argue that the state has tied, or tethered, its subsidies to auction prices and participation in a manner that is preempted by federal law. The price adjustment is characterized as a “price collar, ” since it ensures that the ZEC price decreases if wholesale market prices increase, up to a limit, and it increases if wholesale market prices decrease. [83] at 24, 27 (citing [38-3] ¶ 40).[17] A price collar insulates ZEC recipients from changes in wholesale market prices, the generator plaintiffs argue. As Exelon points out, though, eliminating the price adjustment feature would leave in place a fixed ZEC price that is equal to the Social Cost of Carbon. This would create a larger subsidy for ZEC recipients, which would cause more harm to the generator plaintiffs, under their theory. The injury caused by the ZEC subsidy is not traceable to the price adjustment, because that injury would exist even if the statute were cured of its ties to wholesale auction prices. See Johnson v. U.S. Office of Pers. Mgmt., 783 F.3d 655, 661-62 (7th Cir. 2015).

         The generator plaintiffs argue that Johnson is distinguishable from their case because the plaintiffs in Johnson were injured by amendments to a different rule than the one they were challenging, whereas the generator plaintiffs challenge the same regulation that they allege injured them. What the generator plaintiffs gloss over, however, is that the court rejected the argument that a plaintiff has standing to challenge a rule as a whole simply because that rule is “indivisible” and one part of the rule injured the plaintiff. Id. at 662-63. The court reasoned that “demonstrating an injury caused by one aspect of a legislative action [is] not sufficient to give [. . .] standing to challenge other aspects of that action.” Id. at 662. The generator plaintiffs do not have standing to challenge the ZEC program's price adjustment.

         But the generator plaintiffs have alleged an injury by a ZEC priced at the Social Cost of Carbon, and that injury is traceable to an aspect of the challenged statute-the creation of a minimum subsidy that rewards a nuclear power plant and leads to subsidized participation in the federally regulated market. A court order prohibiting enforcement of the ZEC program altogether would redress that injury. See Allco Fin. Ltd. v. Klee, No. 16-2946, 2017 WL 2782856, at *8-9 (2d Cir. June 28, 2017). The generator plaintiffs present a case or controversy over the ZEC program.

         2. The Consumer Plaintiffs Do Not Have Prudential Standing for Preemption Claims

         The states have the power to regulate retail sales of electricity and to impose charges on retail bills. Nevertheless, the consumer plaintiffs challenge the ZEC program on preemption grounds, arguing that they will be harmed by the resulting charges on their utility bills and that their payments will be used by utilities to purchase ZECs. 17-cv-1163, [1] ¶¶ 9, 11-12. Since the ZEC program authorizes utilities to recover its costs from all retail customers through an “automatic adjustment clause tariff, ” the consumer plaintiffs note that even customers who purchase electricity from competitive suppliers and not the utilities will see increased charges. Id. ¶¶ 52, 62.

         The consumer plaintiffs are injured by the ZEC charges on their bills, which are traceable to the Illinois statute and would be redressed if the charges were prohibited. They have Article III standing, but that does not mean that they can bring preemption claims under the Federal Power Act. Courts look to the provision upon which the plaintiff relies, not the overall purpose of the legislation in question, to determine if the plaintiffs' interest is within the statute's zone of interests. Bennett v. Spear, 520 U.S. 154, 175-76 (1997). The consumer plaintiffs' complaint refers to 16 U.S.C. §§ 824 and 824d. Section 824 states that “the business of transmitting and selling electric energy for ultimate distribution to the public is affected with a public interest, ” and that while federal regulation “of the transmission of electric energy in interstate commerce and the sale of such energy at wholesale in interstate commerce” is necessary, it should not extend to matters that are subject to regulation by the states. 16 U.S.C. § 824(a). The consumer plaintiffs' claim is expressly excluded from § 824's interests because the states have the power to regulate retail sales of electricity and impose retail charges that are subject to state regulation.

         Although § 824d is titled, “Rates and charges; schedules; suspension of new rates; automatic adjustment clauses, ” it refers only to FERC's authority and obligation to ensure that wholesale electricity rates, and the rules and regulations affecting them, are “just and reasonable.” 16 U.S.C. § 824d. It describes what public utilities may and may not do with respect to charges, but those directives refer to FERC as the enforcer. Id. § 824d(b)-(e). Section 824d also provides that FERC must review public utilities' practices under automatic adjustment clauses and, after an evidentiary hearing, FERC may order a public utility to modify the terms or practices in connection with an automatic adjustment clause. Id. § 824d(f). Section 824d does not grant similar authority or establish any such obligation on public utilities or retail consumers. Given that the consumer plaintiffs' injury involves the retail surcharge, their interests are outside of the zone of interests of the federal statutes. See Nw. Requirements Utils. v. F.E.R.C., 798 F.3d 796, 809 (9th Cir. 2015).

         3. Plaintiffs Do Not Have Article III Standing for Dormant Commerce Clause Claims

         “[A] plaintiff must demonstrate standing for each claim he seeks to press. This means that, for each claim of wrongdoing alleged, a plaintiff must demonstrate [. . .] that he has suffered (or is imminently threatened with) an injury that is traceable to the wrongdoing alleged in that particular claim.” Johnson, 783 F.3d at 661 (internal citations omitted) (emphasis original). The dormant commerce clause challenges raise a standing issue distinct from the other claims. The injuries are similar-the market impact on wholesale prices and increased rates passed onto consumers-but if those harms are not traceable to discrimination against the commerce of other states, then plaintiffs do not present a case or controversy under the dormant commerce clause.

         The generator plaintiffs say the ZEC program favors the Clinton and Quad Cities nuclear plants (because of the weighted factors in the ZEC procurement process), and thereby discriminates against non-Illinois nuclear generators. [1] ¶ 90. But the injury to the generator plaintiffs is from the ZEC subsidy, not the identity of the ZEC recipient.[18] If the procurement process were non-discriminatory, the out- of-state, non-nuclear plaintiffs would still be injured. Similarly, the general market-distorting effects on non-nuclear plants outside of Illinois would still be felt if the ZEC procurement process subsidized nuclear plants without favoring in-state interests. Finally, the retail surcharges passed onto the consumer plaintiffs would be the same even if the utilities purchased ZECs from out-of-state facilities.

         The generator plaintiffs respond that they have alleged an inability to compete “on equal footing” in the interstate market and that courts have found Article III standing for similarly injured plaintiffs. See All. for Clean Coal v. Miller, 44 F.3d 591, 594 (7th Cir. 1995) (quoting Ne. Florida Chapter of Associated Gen. Contractors of Am. v. City of Jacksonville, Fla., 508 U.S. 656, 666 (1993)). But in these cases, the discrimination against out-of-state plaintiffs caused the injury; here, favoritism for Clinton and Quad Cities is a feature of the overall legislation, but it is not the source of the injury. The plaintiffs' “injur[ies] would continue to exist even if the [legislation] were cured” of the alleged discrimination. Johnson, 783 F.3d at 662. Regardless of whether ZEC recipients are in Illinois or not, the generator plaintiffs' injury from ...

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