Electric Power Supply Association v. ANTHONY M. STAR , Director of the Illinois Power Agency

In the
United States Court of Appeals
For the Seventh Circuit
____________________
Nos. 17‐2433 & 17‐2445
ELECTRIC P OWER SUPPLY A SSOCIATION, et al.,
Plaintiffs‐Appellants,
v.
A NTHONY M. STAR , Director of the Illinois Power Agency, et
al.,
Defendants‐Appellees.
____________________
Appeals from the United States District Court for the
Northern District of Illinois, Eastern Division.
Nos. 17 CV 1163 and 17 CV 1164 — Manish S. Shah, Judge.
____________________
A RGUED J ANUARY 3, 2018 — D ECIDED SEPTEMBER 13, 2018
____________________
Before EASTERBROOK and SYKES , Circuit Judges, and
R EAGAN, District Judge*
EASTERBROOK , Circuit Judge. Regional transmission organ‐
izations manage the interstate grid for electricity. See, e.g.,
Benton County Wind Farm LLC v. Duke Energy Indiana, Inc.,
* Of the Southern District of Illinois, sitting by designation.

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2 Nos. 17‐2433 & 17‐2445
843 F.3d 298 (7th Cir. 2016); MISO Transmission Owners v.
FERC, 819 F.3d 329 (7th Cir. 2016). Midcontinent Independ‐
ent System Operator (MISO) and PJM Interconnection han‐
dle the grid in and around the Midwest. Many large genera‐
tors of electricity sell most if not all of their power through
auctions conducted by regional organizations, which are
regulated by the Federal Energy Regulatory Commission.
States must not interfere with these auctions. Hughes v. Talen
Energy Marketing, LLC, 136 S. Ct. 1288 (2016).
Illinois has enacted legislation subsidizing some of the
state’s nuclear generation facilities, which the state fears will
close. 20 ILCS 3855/1‐75(d‐5). These favored producers re‐
ceive what the state calls “zero emission credits” or ZECs.
(We call them credits.) Generators that use coal or gas to
produce power must purchase these credits from the recipi‐
ents at a price set by the state. The price of each credit is
$16.50 per megawatt‐hour, a number Illinois derived from a
federal working group’s calculation of the social cost of car‐
bon emissions. (Coal and gas plants emit carbon dioxide;
nuclear, wind, solar, and hydro plants don’t.) The price per
credit falls if a “market price index” exceeds $31.40 per meg‐
awatt‐hour. Illinois derives this index from the annual aver‐
age energy prices in the auction conducted by PJM and the
prices in two of the state’s regional energy markets. The ad‐
justment is designed “to ensure that the procurement [of
electricity] remains affordable to retail customers … if elec‐
tricity prices increase”. 20 ILCS 3855/1‐75(d‐5)(1)(B).
Plaintiffs (an association representing electricity produc‐
ers, plus several municipalities) contend that the price‐
adjustment aspect of the state’s system leads to preemption
by the Federal Power Act because it impinges on the FERC’s

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Nos. 17‐2433 & 17‐2445 3
regulatory authority. They concede that a state may take
many steps that affect the price of power. It may levy a tax
on carbon emissions. It may tax the assets and incomes of
power producers. It may use tax revenues to subsidize some
or all generators of power. It may create a cap‐and‐trade sys‐
tem under which every firm that emits carbon must buy
credits in a market (firms that emit less carbon, or none, will
be the sellers). As plaintiffs see matters, although such sys‐
tems affect the price in the PJM and MISO auctions, they do
not regulate that price. But the zero‐emission‐credit system,
plaintiffs insist, indirectly regulates the auction by using av‐
erage auction prices as a component in a formula that affects
the cost of a credit. The district judge did not agree with this
argument and granted summary judgment to the defend‐
ants. 2017 U.S. Dist. LEXIS 109368 (N.D. Ill. July 14, 2017).
The parties’ briefs address a number of procedural ques‐
tions. These include whether a claim of preemption may be
presented directly under the Supremacy Clause of the Con‐
stitution and whether relief under the theory of Ex parte
Young, 209 U.S. 123 (1908), would be appropriate against the
state defendants in light of remedies potentially available
under the Federal Power Act. See Armstrong v. Exceptional
Child Center, 135 S. Ct. 1378 (2015); Verizon Maryland, Inc. v.
Public Service Commission of Maryland, 535 U.S. 635 (2002).
But none of the procedural disputes concerns subject‐matter
jurisdiction, which rests on both 28 U.S.C. §1331 (federal‐
question jurisdiction) and 16 U.S.C. §825p (authorizing suits
in equity to enforce the Federal Power Act). Because the dis‐
trict court’s jurisdiction is secure, we can go straight to the
merits—for, if we decide that federal law does not preempt
the state statute, none of the procedural issues matters.

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4 Nos. 17‐2433 & 17‐2445
At oral argument we expressed concern that the Federal
Energy Regulatory Commission had not decided whether
Illinois has interfered with its authority over auctions for in‐
terstate power. After receiving submissions from the liti‐
gants addressing the possibility of invoking the doctrine of
primary jurisdiction (another non‐jurisdictional doctrine, de‐
spite its name) and waiting for the FERC to act on petitions
pending before it, we decided to ask the agency to give us its
views as an amicus curiae. The Commission and the United
States then filed a joint brief concluding that Illinois’ pro‐
gram does not interfere with interstate auctions and is not
otherwise preempted. More briefs from the parties followed,
and the appeals are at last ready for decision.
The Federal Power Act divides regulatory authority be‐
tween states and the FERC. The Commission regulates the
sale of electricity in interstate commerce (including auctions
conducted by regional organizations), while states regulate
local distribution plus the facilities used to generate power.
16 U.S.C. §824(b)(1). This allocation leads to conflict, because
what states do in the exercise of their powers affects inter‐
state sales, just as what the FERC does in the exercise of its
powers affects the need for and economic feasibility of plants
over which the states possess authority. For decades the Su‐
preme Court has attempted to confine both the Commission
and the states to their proper roles, while acknowledging
that each use of authorized power necessarily affects tasks
that have been assigned elsewhere. See, e.g., Federal Power
Commission v. Southern California Edison Co., 376 U.S. 205
(1964); FERC v. Electric Power Supply Association, 136 S. Ct.
760 (2016).

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Nos. 17‐2433 & 17‐2445 5
Hughes, the most recent of these decisions, draws a line
between state laws whose effect depends on a utility’s par‐
ticipation in an interstate auction (forbidden) and state laws
that do not so depend but that may affect auctions (allowed).
136 S. Ct. at 1297. The FERC has a policy that offers some
price protection to new producers for the first three years of
their participation in an auction. Maryland, concluding that
three years is too short to encourage the addition of genera‐
tion capacity, asked the Commission to increase the price‐
protection window to a decade. It declined. Maryland then
decided to create price protection on its own by requiring
older utilities to sign 20‐year contracts with new entrants
guaranteeing them a price floor, provided they sold their
power in FERC‐regulated auctions. As long as an entrant bid
a price low enough to prevail in an auction, other producers
had to make up the difference between that price and the
guarantee. Because it is always possible to sell power in an
auction by making a sufficiently low bid (PJM allows even
negative bids, under which a producer offers to pay custom‐
ers to take power off its hands), the Maryland system effec‐
tively allocated to new entrants a long‐term right of first sale
in the auction and in the process depressed the price that
other producers would receive. This feature—that the subsi‐
dy depended on selling power in the interstate auction—is
what led the Justices to conclude that Maryland had trans‐
gressed a domain reserved to the FERC.
The Court stressed that its decision covers only state
rules that depend on participating in the interstate auction,
stating: “States, of course, may regulate within the domain
Congress assigned to them even when their laws incidental‐
ly affect areas within FERC’s domain.” Hughes, 136 S. Ct. at
1298. “Nothing in this opinion should be read to foreclose

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6 Nos. 17‐2433 & 17‐2445
[states] from encouraging production of new or clean gener‐
ation through measures ‘untethered to a generator’s whole‐
sale market participation.’” Id. at 1299. And that’s what Illi‐
nois has done. To receive a credit, a firm must generate pow‐
er, but how it sells that power is up to it. It can sell the power
in an interstate auction but need not do so. It may choose in‐
stead to sell power through bilateral contracts with users
(such as industrial plants) or local distribution companies
that transmit the power to residences.
If a producer does offer power to an interstate auction,
the value of a credit does not depend on its bid. True, the
outcome of all PJM auctions, averaged over a year, may
affect the value of a credit (if the average exceeds $31.40), but
what (indeed, whether) a producer bids in the interstate auc‐
tion does not determine the amount it receives. Every suc‐
cessful bidder in an interstate auction receives the price of
the highest bid that clears the market. Hughes, 136 S. Ct. at
1293. The owner of a credit receives that market‐clearing
price, with none of the adjustments that Maryland law re‐
quired. The zero‐emissions credit system can influence the
auction price only indirectly, by keeping active a generation
facility that otherwise might close and by raising the costs
that carbon‐releasing producers incur to do business. A larg‐
er supply of electricity means a lower market‐clearing price,
holding demand constant. But because states retain authori‐
ty over power generation, a state policy that affects price on‐
ly by increasing the quantity of power available for sale is
not preempted by federal law. “So long as a State does not
condition payment of funds on capacity clearing the [inter‐
state] auction, the State’s program [does] not suffer from the
fatal defect that renders Maryland’s program unacceptable.”
Id. at 1299.

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Nos. 17‐2433 & 17‐2445 7
This does not imply that PJM, MISO, and the Commis‐
sion are unconcerned about the effect of state programs de‐
signed to subsidize producers of electricity. PJM has asked
the Commission to approve changes to its auction design in
order to improve the system’s price‐discovery and output‐
allocation effects in the wake of laws such as the one Illinois
enacted. Recently the FERC declined to approve PJM’s pro‐
posal and opened a new proceeding so that the Commission
may determine for itself what changes, if any, should be
made to auctions for interstate sales of electricity. Calpine
Corp. v. PJM Interconnection, L.L.C., 163 FERC ¶61,236 (June
29, 2018). Plaintiffs insist that the need to revamp the auction
system shows that the Illinois statute must be preempted.
But that’s not what the Commission said. Instead of
deeming state systems such as Illinois’ to be forbidden, the
Commission has taken them as givens and set out to make
the best of the situation they produce. It wrote: “We empha‐
size that an expanded [Minimum Offer Price Rule] in no way
divests the states in the PJM region of their jurisdiction over
generation facilities. States may continue to support their
preferred types of resources in pursuit of state policy goals.”
Order at ¶158. As the Supreme Court remarked in Hughes,
the exercise of powers reserved to the states under §824(b)(1)
affects interstate sales. Those effects do not lead to preemp‐
tion; they are instead an inevitable consequence of a system
in which power is shared between state and national gov‐
ernments. Once the Commission reaches a final decision in
the ongoing proceeding, the adequacy of its adjustments will
be subject to judicial review; the need to make adjustments
in light of states’ exercise of their lawful powers does not
diminish the scope of those powers.

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8 Nos. 17‐2433 & 17‐2445
A few words about the Constitution and we are done.
Plaintiffs invoke the dormant Commerce Clause and its rule
that states may not discriminate against interstate transac‐
tions. See, e.g., United Haulers Association, Inc. v. Oneida‐
Herkimer Solid Waste Management Authority, 550 U.S. 330
(2007). Plaintiffs observe that the credits are bound to help
some Illinois firms and contend that this condemns them.
But this amounts to saying that the powers reserved to the
states by §824(b)(1) are denied to the states by the Constitu‐
tion, because state regulatory authority is limited to the
state’s territory. On this view, whenever Illinois, or any other
state, takes some step that will increase or reduce the state’s
aggregate generation capacity, or affect the price of energy,
then the state policy is invalid. That can’t be right; it would
be the end of federalism. The Commerce Clause does not
“cut the States off from legislating on all subjects relating to
the health, life, and safety of their citizens, [just because] the
legislation might indirectly affect the commerce of the coun‐
try.” General Motors Corp. v. Tracy, 519 U.S. 278, 306 (1997).
The commerce power belongs to Congress; the Supreme
Court treats silence by Congress as preventing discriminato‐
ry state legislation. Yet Congress has not been silent about
electricity: it provided in §824(b)(1) that states may regulate
local generation. In Prudential Insurance Co. v. Benjamin, 328
U.S. 408 (1946), the Court rejected a constitutional challenge
to a statute that permits states to close their borders to insur‐
ance written in other states—a statute that even permits
states to supersede national legislation on the topic of insur‐
ance. Section 824(b)(1) does not go that far; it does not au‐
thorize express discrimination. But it does mean that the
balancing approach of decisions such as Pike v. Bruce Church,
Inc., 397 U.S. 137 (1970), which ask whether a state’s interest

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Nos. 17‐2433 & 17‐2445 9
is strong enough to justify an interstate effect, does not apply
to a state’s regulation of electric capacity or a cross‐subsidy
between carbon‐emitting generation and carbon‐free genera‐
tion.
Illinois has not engaged in any discrimination beyond
what is required by the rule that a state must regulate within
its borders. All carbon‐emitting plants in Illinois need to buy
credits. The subsidy’s recipients are in Illinois; so are the
payors. The price effect of the statute is felt wherever the
power is used. All power (from inside and outside Illinois)
goes for the same price in an interstate auction. The cross‐
subsidy among producers may injure investors in carbon‐
releasing plants, but only those plants in Illinois (for the
state’s regulatory power stops at the border). The combina‐
tion of §824(b)(1) and the absence of overt discrimination de‐
feats any constitutional challenge to the state’s legislation.
A FFIRMED

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