The energy law community is abuzz with the news that the Federal Energy Regulatory Commission (FERC) weighed in on a high-profile case challenging a state-level support program for nuclear generators. In a May 29 amicus brief joined by the U.S. Government, FERC argues that the Seventh Circuit should not resort to the “extraordinary and blunt” remedy of preempting Illinois’ nuclear subsidy program.

Some are now celebrating the brief’s apparent defense of state environmental policies, but that reaction is premature. Rather than defend state programs, FERC has asked the court to let it decide what’s right. If the Commission follows its recent practice in approving capacity market reforms that shift costs to generators that receive state environmental policy support, that could spell bad news for state-supported clean energy.

The case at hand, Village of Old Mill Creek v. Star, concerns a challenge to Illinois’ zero-energy credit (ZEC) program. Under state law, utilities in Illinois must buy ZECs from qualified nuclear power plants, which receive extra revenue from ZEC sales that is necessary to keep these clean energy generators in business. Energy law experts are watching this case — and a companion case challenging a similar program in New York — for clues to the evolving landscape of state and federal authority.

Critical for nuclear and renewable energy

The outcome is critical for nuclear and renewable energy alike. New Jersey recently implemented its own ZEC program, bringing a third state into the mix; and some 29 states and the District of Columbia have Renewable Portfolio Standards, which require utilities to buy renewable energy certificates (RECs) from renewable generators. If the courts preempt or otherwise restrict states’ ability to regulate environmental attributes from power production, this would constitute a transformative shift in the balance between state and federal authority.

On this point, there is some unambiguously good news in FERC’s brief. First of all, the Commission calls on the courts not to preempt ZEC policies, appropriately reading a recent Supreme Court case, Hughes v. Talen Energy Marketing, as narrowly prohibiting only those state policies that directly interfere with federal energy market operations. (One of us — Welton — signed an energy law professors’ amicus brief that made a similar argument.)

In addition, FERC approvingly cites a 2012 Commission decision called WSPP Inc. in which FERC declared that so-called unbundled RECs — that is, renewable credits sold separately from wholesale electricity — are outside the Commission’s authority and therefore are not preempted by federal law.

But it would be a mistake to rely on these important statements as the final word on FERC’s approach to state clean energy policy. For one thing, FERC’s WSPP Inc. decision remains subject to re-interpretation — including, potentially, in the ZEC-related matters currently before the Commission. More noteworthy, however, is the actual request FERC makes of the court, and the troubling precedent it draws on to support it.

Agency deference

To be clear, FERC did not indicate its support for state-level environmental policies. Rather, FERC asked the Seventh Circuit to let it decide whether or not state policy support results in “just and reasonable” rates in the wholesale energy markets FERC regulates. And the Commission explicitly indicated that if it concluded that ZECs cause wholesale market rates to be “unjust and unreasonable,” then FERC would have the authority to remedy the situation under the Federal Power Act.

As a reading of its statutory power, that position is sound. Moreover, there are plenty of good reasons to let expert agencies like FERC resolves technically complex issues, such as the economic interaction between state clean energy policies and federal wholesale energy markets.

Nevertheless, FERC’s recent willingness to approve regional market reforms that punish state-supported clean energy gives serious reason to be concerned about the direction it may take in responding to ZECs. In short, FERC seems to be misreading its “just and reasonable” authority to allow markets to prioritize providing profits to fossil fuel generators, at the expense of consumers and state clean energy preferences.

After declaring FERC as the proper venue for the dispute over nuclear subsidies, the Commission cites two recent capacity market proposals that address the same tension over state policies and federal markets. In its recent ISO New England Inc. Order, FERC approved a capacity market design that forces state-subsidized resources to compensate retiring legacy generators in order to receive capacity market compensation.

FERC is now reviewing a similar proposal from the mid-Atlantic PJM market operator, which offered the Commission two options: first, a “Capacity Repricing” proposal that aims to increase market prices to prop up fossil generators, and second, a “minimum offer price rule” (or MOPR) that punishes state-supported resources. Remarkably, most of the PJM states oppose the market operator’s two proposals, on which FERC is expected to decide soon. (FERC had previously imposed a MOPR in its ISO New England Order, as well, which has caused some clean energy advocates to express serious concern.)

Balancing state and federal interests

So what should the energy community make of all of these details?

It’s great news that FERC has asked the federal courts not to preempt state clean energy policy. That’s the right approach to balancing state and federal interests on today’s fast-evolving grid. And there is a solid argument for letting expert agencies, like FERC, manage the technically complex balancing of economic outcomes when multiple policy systems interact.

But FERC has also made clear in its recent actions — which the Commission cites explicitly in its amicus brief — that it can and will make life difficult for state-supported clean energy resources, at least when regional market operators demand those changes. That’s a very bad sign for states that support nuclear or renewable energy yet participate in regional energy markets.

Time will tell what FERC decides. FERC has the means to ease tensions between state clean energy policies and effective wholesale market designs. The open question now is whether it will seek to create robust markets for clean energy or use its statutory authority to promote fossil generators. Here’s hoping the Commission lets states retain their historical right to choose their own mix of generating resources without federal interference and finds ways to build smart markets around those preferences.