Amicus Curiae Brief — Electric Power Supply Association, et al., Petitioners v. John B. Rhodes, et al.

Nos. 18-868 & 18-879

IN THE

Supreme Court of the United States

__________

ELECTRIC POWER SUPPLY ASSOCIATION, ET AL.,

Petitioners,

v.

ANTHONY STAR, IN HIS OFFICIAL CAPACITY AS

DIRECTOR OF THE ILLINOIS POWER AGENCY, ET AL.,

AND

JOHN B. RHODES, IN HIS OFFICIAL CAPACITY AS

CHAIR OF THE NEW YORK PUBLIC SERVICE

COMMISSION, ET AL.,

Respondents.

__________

On Petitions for a Writ of Certiorari

to the United States Courts of Appeals

for the Seventh and Second Circuits

__________

BRIEF OF ENERGY ECONOMISTS

AS AMICI CURIAE

IN SUPPORT OF PETITIONERS

__________

February 7, 2019

AARON M. PANNER

Counsel of Record

FREDERICK GASTON HALL

KELLOGG, HANSEN, TODD,

FIGEL & FREDERICK,

P.L.L.C.

1615 M Street, N.W.

Suite 400

Washington, D.C. 20036

(202) 326-7900

(apanner@kellogghansen.com)

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ....................................... ii

INTEREST OF AMICI CURIAE ................................ 1

STATEMENT .............................................................. 3

SUMMARY OF ARGUMENT .................................. 10

ARGUMENT ............................................................. 10

I. The ZECs at Issue Have Economic

Effects on Wholesale Prices Indistinguishable from the Subsidy at Issue in

Hughes ............................................................ 10

II. These Petitions Present an Important

Issue Because of the Substantial,

Deleterious Impact These Subsidies

Will Have on Sound, Efficient Energy

Markets .......................................................... 14

A. The ZEC Programs Will Distort

Prices in the Wholesale Energy and

Capacity Markets...................................... 15

B. The Price Distortions Will Influence

Decisions To Exit and Enter the

Market for Wholesale Power Generation............................................................. 16

C. The ZEC Programs May Undermine

Efforts To Transition to Alternative

Energy Resources ..................................... 19

CONCLUSION.......................................................... 23

APPENDIX ............................................................... 1a

ii

TABLE OF AUTHORITIES

Page

CASES

FERC v. Electric Power Supply Ass’n, 136 S.

Ct. 760 (2016) .................................................. 3, 23

Hughes v. Talen Energy Mktg., LLC, 136 S. Ct.

1288 (2016) ....................................................2, 4, 5,

8, 9, 10, 11,

12, 13, 15, 16, 17

Northwest Cent. Pipeline Corp. v. State Corp.

Comm’n of Kansas, 489 U.S. 493 (1989) ........12, 13

NRG Power Mktg., LLC v. FERC, 862 F.3d 108

(D.C. Cir. 2017) .................................................... 16

ADMINISTRATIVE DECISIONS

Commonwealth Edison Co., 113 FERC ¶ 61,278

(2005) ................................................................... 17

Devon Power LLC, 110 FERC ¶ 61,315 (2005) ........ 17

Regional Transmission Organizations, 89 FERC

¶ 61,285, 1999 WL 33505505 (1999) ..................... 3

STATUTES AND RULES

Federal Power Act, 16 U.S.C. § 791 et seq. ........... 1, 7

Sup. Ct. R.:

Rule 37.2(a) ............................................................ 1

Rule 37.6 ................................................................ 1

iii

ADMINISTRATIVE MATERIALS

U.S. Dep’t of Energy, Staff Report to the Secretary on Electricity Markets and Reliability

(Aug. 2017), https://www.energy.gov/downloads/

download-staff-report-secretary-electricitymarkets-and-reliability ..................................18, 19

OTHER MATERIALS

Exelon

Corp.,

http://www.exeloncorp.com/

locations/power-plants/........................................ 14

Free Exchange, Making the second best of it

– What it means to do our second best,

The Economist (Aug. 21, 2007), https://

www.economist.com/blogs/freeexchange/

2007/08/making_the_second_best_of_it .............. 21

R.G. Lipsey & Kelvin Lancaster, The General

Theory of Second Best, 24 Rev. Econ. Stud.

11 (1956) .............................................................. 21

Monitoring Analytics, LLC:

http://www.monitoringanalytics.com/reports/

Market_Messages/Messages/RPM_Must_

Offer_Obligation_20181231.pdf ............................ 8

Impact of New Jersey Assembly Bill 3442

on the PJM Capacity Market (Jan. 6, 2011),

https://www.monitoringanalytics.com/filings/

2011/NJ_Assembly_3442_Impact_on_PJM_

Capacity_Market.pdf ........................................... 16

INTEREST OF AMICI CURIAE 1

Amici curiae are leading economists and experts in

the field of markets for electric power.2 Amici also

serve as professors and teachers of economics; write

on economic issues; advise clients on the economic

impact of legislation, regulations, and other policies;

or previously were employed by an independent

system operator.

Amici leave to others the articulation of the legal

standards governing the Federal Power Act’s allocation of authority between the States and the federal

government to regulate electricity markets. Amici

believe, however, that those standards and their

application should be informed by a sound understanding of the economics of wholesale energy markets.

Although amici do not always agree on economic

issues presented by energy-market regulations and

have not attempted to formulate a standard to

resolve these cases, amici share the concern that the

reasoning of the Second and Seventh Circuits in the

decisions below is not consistent with sound economic

principles and that the energy subsidies those deci1 Pursuant to Supreme Court Rule 37.6, counsel for amici

represent that they authored this brief in its entirety and that

none of the parties or their counsel made a monetary contribution intended to fund the preparation or submission of this

brief. Tenaska, Inc. contributed money to fund this brief.

Pursuant to Rule 37.2(a), counsel for amici also represent that

all parties were provided notice of amici ’s intention to file this

brief at least 10 days before its due date and that the parties

have consented to the filing of this brief.

2 A summary of the qualifications and affiliations of amici is

provided as an appendix to this brief. Amici file this brief as

individuals and not on behalf of the institution with which they

are affiliated. None of amici is being compensated in connection

with this brief.

2

sions upheld will have deleterious effects on the

federally regulated wholesale energy and capacity

markets. Amici have dedicated substantial professional effort to promoting the efficient operation

of wholesale electric markets, sharing a belief that

efficient, competitive markets promote the efficient

supply of electric power for the benefit of the public.

Given the substantial impact of the subsidies at issue

– and the risk that the decisions will encourage other

States to adopt similar subsidies – the courts of

appeals’ rulings should not stand without review by

this Court.

This brief applies economic reasoning to address

two issues. First, amici explain, contrary to the

reasoning of the courts of appeals, that the subsidies

at issue in the decisions under review are tethered to

the wholesale energy markets in a way that is economically equivalent to the subsidy that this Court

found to be preempted in Hughes v. Talen Energy

Marketing, LLC, 136 S. Ct. 1288 (2016). Second,

amici explain that these subsidies will have a substantial impact on the incentives faced by potential

developers of generation resources, with a deleterious

impact on efficient energy markets and the development of alternative resources such as new clean

energy – a factor underscoring the importance of

review.

3

STATEMENT

1. In a series of orders, the Federal Energy Regulatory Commission (“FERC”) restructured the wholesale delivery of electric power throughout the nation

to promote competition. See, e.g., Regional Transmission Organizations, 89 FERC ¶ 61,285, 1999 WL

33505505, at *2 (1999). Broadly speaking, there are

two types of wholesale electricity auction markets

run by “independent system operators” (“ISOs”)

and subject to FERC regulation. Perhaps the more

familiar are the markets for electrical energy for

next-day and same-day delivery needed to serve

present demand. These auctions require generators

to submit the prices at which they are willing to

produce power for the served market3 and electric

distribution utilities or other retail sellers – known

as “load-serving entities” or LSEs – to submit bids

to consume. The ISOs then “stack” the generators’

bids from lowest to highest price, select the amount

of energy required to meet demand, and set the

price for energy at the marginal cost of incremental

demand. This “market clearing” price is “the price

an efficient market would produce” and is paid to all

generators. FERC v. Electric Power Supply Ass’n,

136 S. Ct. 760, 769 (2016) (“EPSA”).

3 These prices can be $0 per megawatt-hour (“MWh”), or even

negative, reflecting a willingness to pay to have their power

accepted into the grid to avoid being asked to reduce production.

Generators can also accept whatever price the auction yields,

known as “self-scheduling.” Generators that “self-schedule” or

make negative bids typically are highly inflexible in terms of

output, like nuclear plants, have high opportunity costs for

changing output, or would lose a subsidy if they did not produce

energy.

4

In addition to wholesale energy markets, the ISOs

also conduct periodic “capacity” auctions. Capacity

auctions are intended to ensure that sufficient

generation capacity is available to meet forecasted

future needs. For example (and simplifying somewhat), PJM, the ISO serving several mid-Atlantic

and mid-western States, holds a yearly auction in

which generators bid to guarantee capacity to be

available three years in the future. As in the energy

auctions, the bids are accepted in order from lowest

to highest until projected demand is satisfied. The

“clearing price” is then paid to all successful bidders

and reflects the marginal cost of supply. See generally

Hughes v. Talen Energy Mktg., LLC, 136 S. Ct. 1288,

1293 (2016). The payments that generators receive

through the capacity auctions are in addition to the

amounts they receive through daily energy auctions.

2. In 2009, the State of Maryland created a

subsidy program to encourage the construction of a

new gas-fired power plant in Maryland. See Hughes,

136 S. Ct. at 1294. After soliciting proposals and

selecting a company (CPV) to construct the new

plant, Maryland required electric utilities to enter

into 20-year contracts – called “contracts for differences” – with CPV. See id. at 1294-95.

The contracts for differences addressed payments

for capacity. They provided that, as long as the

generator successfully sold its capacity into the PJM

capacity auction, the generator would receive the

price in the contract, with the LSEs paying (or

receiving) the difference between the contract and

auction prices. See id. at 1295. Because the new

generator, CPV, “[wa]s guaranteed a certain rate” if

its capacity cleared the auction, “the contract’s terms

encourage[d] CPV to bid its capacity into the auction

at the lowest possible price.” Id.

5

This Court found that Maryland’s “contract for

differences” was an impermissible intrusion into

FERC’s exclusive authority over the wholesale electricity market. It reasoned that “Maryland’s program

set[ ] an interstate wholesale rate” for capacity

because the subsidy, though in form “requir[ing] CPV

to participate in the PJM capacity auction,” in fact

“guarantee[d] CPV a rate distinct from the clearing

price for its interstate sales of capacity to PJM.” Id.

at 1297.

The Court found that the fact that “Maryland was

attempting to encourage construction of new in-state

generation” – a matter ordinarily within the States’

regulatory purview – did not “save its program.” Id.

at 1298. States “may not seek to achieve ends,

however legitimate, through regulatory means that

intrude on FERC’s authority over interstate wholesale rates.” Id. And the Court emphasized that

“States interfere with FERC’s authority by disregarding interstate wholesale rates FERC has deemed

just and reasonable, even when States exercise their

traditional authority over . . . in-state generation.”

Id. at 1299.

The Court stated that its holding was “limited” and

that it was not addressing subsidies “untethered to a

generator’s wholesale market participation,” which

would “not condition payment of funds on capacity

clearing the auction.” Id.

3. In 2016, Illinois created a subsidy program for

two nuclear power plants whose owners represented

that the plants would cease operation without

government intervention. Star Pet. App. 17a-19a &

n.9. These two nuclear power plants receive a “zero

emission credit” (“ZEC”) for each MWh of electricity

generated. Id. at 18a. LSEs must pay for all of the

6

ZECs. Id. at 19a, 74a. The costs are then passed on

to electricity consumers in the form of higher retail

electricity prices.

The price of each ZEC is tied to the wholesale market price for electricity through a complicated pricing

formula. The ZEC was initially set at $16.50/MWh –

based on an adjustment from the “Social Cost of

Carbon” according to the U.S. Interagency Working

Group on Social Cost of Carbon. Id. at 19a & n.11.

The ZEC payments are adjusted, however, depending

on the wholesale market price of electricity. In brief,

the Illinois program established a “baseline market

price index” of $31.50, based on the average of PJM’s

daily, day-ahead auction prices and capacity prices

set in auctions conducted by PJM and the Midcontinent Independent System Operator (“MISO”),

the other ISO serving Illinois. Each year, a “market

price index” is calculated, based on the results of

the previous year’s wholesale energy and capacity

auctions. If the market-price index exceeds the baseline, the ZEC subsidy is reduced by the excess.

Once the dust settles, the program effects a price

guarantee similar to the guarantee established by

the Maryland contract for differences. The two

nuclear power plants receive a minimum price of

$47.90 per MWh generated as long as the auction

price remains above $31.40/MWh. If the index rate

falls below $31.40, the program guarantees $16.50 of

additional revenue for every MWh generated. Id. at

19a-20a & n.13.

4. Also in 2016, New York created a ZEC subsidy

program for three nuclear power plants in western

7

New York. Rhodes Pet. App. 7a-8a.4 Like the Illinois

credit system, the nuclear power plants receive ZECs

for every MWh of electricity generated, and LSEs

(and ultimately consumers) must buy the ZECs,

regardless of existing power purchase contracts. Id.

at 8a, 10a.

As in Illinois, the ZEC price in New York is

purportedly based on an adjustment from the “social

cost of carbon” and set for the program’s first two

years at $17.48 per MWh generated (subject to a

possible cap) “in addition to the price the facility

receives for the sale of the electricity and capacity

in the [New York Independent System Operator

(‘NYISO’)] market.” Id. at 9a.

The New York ZEC subsidy may be reduced if

“the New York energy market experiences ‘additional

renewable energy penetration.’ ” Id. In addition,

prices are tied to wholesale market prices in a

manner similar to the market-price-index adjustment in Illinois. Every two years, the New York

Public Service Commission will calculate a “reference

price” based on the forecast sum of energy and capacity prices during the period. To the extent that

reference price exceeds a benchmark price (based on

historical wholesale prices), the ZEC price is reduced

accordingly.

5. Plaintiffs challenged the ZEC programs,

including on the basis that they were preempted by

the Federal Power Act. District courts in Illinois and

New York rejected those challenges, and the Seventh

Circuit and the Second Circuit affirmed.

4 Although

there are eligibility criteria for the New York

ZECs, they were designed to ensure that these three facilities,

and not others, would qualify.

8

a. The Seventh Circuit (in a strikingly brief

opinion) found that this subsidy program did not

regulate the prices of capacity or energy auctions

because (the court incorrectly concluded) the Illinois

ZEC program was “ ‘untethered to a generator’s

wholesale market participation.’ ” Star Pet. App. 5a6a (quoting Hughes, 136 S. Ct. at 1299). The court

stated that, “[t]o receive a credit, a firm must

generate power, 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 to sell power through

bilateral contracts with users (such as industrial

plants) or local distribution companies that transmit

the power to residences.” Id. at 6a. In so concluding,

the court ignored the allegation (which no one

disputes) that, because of the manner in which they

operate, nuclear generators invariably deliver the

power they generate into the interstate grid and

therefore must participate in the ISO energy auctions as price takers – that is, “at the lowest possible

price.” Hughes, 136 S. Ct. at 1295.5

The Seventh Circuit also reasoned that the subsidy

“can influence the auction price only indirectly, by

keeping active a generation facility that otherwise

might close and by raising the costs that carbonreleasing producers incur to do business.” Star Pet.

App. 6a. This holding betrayed a basic misunderstanding of the ZEC program. The court thought

that carbon-releasing producers pay for ZECs, but

they do not; LSEs pay and pass the costs along to

5 Furthermore, the generators may be subject to obligations

that require them to offer their capacity in relevant capacity

auctions and, if successful, to participate in energy auctions.

See, e.g., Monitoring Analytics, LLC, http://www.monitoring

analytics.com/reports/Market_Messages/Messages/RPM_Must_

Offer_Obligation_20181231.pdf.

9

consumers. More important, the subsidy in Hughes

affected wholesale auction prices in the same

supposedly “indirect” way – that is, by ensuring that

a favored generator, guaranteed a price different

from the price set at auction, would bid its capacity

into the auction at a lower price than representative

of its actual costs.

b. The Second Circuit likewise found that “the

ZEC program regulates production” rather than

wholesale prices, and therefore “skirt[ed]” this

Court’s decision in Hughes. Rhodes Pet. App. 16a,

25a. The court stated that the subsidy “avoids

setting wholesale prices and instead regulates the

environmental attributes of energy generation and in

the process considers forecasts of wholesale pricing.”

Id. at 17a. Moreover, the court concluded that the

ZEC program does not “compel generators to make

wholesale sales” because “a generator’s decision to

sell power into the wholesale markets is a business

decision.” Id. at 18a. Thus, like the Seventh Circuit,

the Second Circuit ignored the fact that, in the real

world, the nuclear plants receiving the subsidy

always sell the power they generate into the wholesale market.

The Second Circuit also reasoned that, unlike the

contract for differences at issue in Hughes, the ZEC

program in New York did not guarantee generators

any particular price: instead, the ZEC program is

fixed for two-year periods and, because the subsidy

is capped, exposes generators to “market risk in

the event that energy prices fall.” Id. at 16a. The

court thus disregarded the fact that the ZEC was

calculated based on predicted wholesale market

prices and adjusted to provide three favored generators wholesale prices different from those set in the

FERC-regulated auctions.

10

SUMMARY OF ARGUMENT

I. The distinctions the Second and Seventh

Circuits drew between the ZEC programs and the

subsidy found preempted in Hughes are insubstantial. Both courts wrongly assumed that a subsidy on

generation is meaningfully different from a subsidy

on the sale of power at wholesale. There is no such

distinction in fact. Moreover, like the preempted

subsidy in Hughes, the ZEC programs replace FERCregulated, just-and-reasonable prices for capacity

and/or energy.

The Second Circuit incorrectly

compared the ZEC programs to a state requirement

to maintain production, but the subsidies here create

different prices for different market participants,

undermining the fundamental mechanism of competitive markets.

II. The ZEC programs have kept five generators

in the markets for capacity and energy that otherwise would have left, distorting supply.

These

distortions will encourage generators that are more

efficient than the favored generators to leave the

market, and will likewise discourage entry by more

efficient generators. Blocking entry and encouraging

early exit may impede the ostensible goal of the

programs – to promote low-emissions power.

ARGUMENT

I. The ZECs at Issue Have Economic Effects on

Wholesale Prices Indistinguishable from the

Subsidy at Issue in Hughes

The courts of appeals sought to distinguish the

ZEC subsidies adopted by Illinois and New York

from the contract-for-differences subsidy adopted in

Maryland. From an economic point of view, however,

those distinctions are without substance. As with

the Maryland program, the ZECs pay favored gener-

11

ators a subsidy based on their wholesale market

participation, thereby guaranteeing them a price

that is different from the price set in the auction.

Although there are differences in the details of the

price-setting mechanisms employed by the subsidy

programs, those differences are largely irrelevant to

their basic design and purpose.

First, both courts distinguished Hughes based on

findings that the ZEC programs do not require

participation in interstate energy markets. See Star

Pet. App. 6a (“a firm must generate power, but how it

sells that power is up to it”); Rhodes Pet. App. 18a (“a

generator’s decision to sell power into the wholesale

markets is a business decision”). But in the real

world – as a matter of both physics and tariff

requirements – nuclear generators such as the ZEC

recipients in Illinois and New York must inject the

power they generate into the electric grid. And injection of energy into the electric grid constitutes a sale

into the relevant ISO’s energy market. Even if the

amount injected may fulfill elements of a bilateral

agreement, the pricing of the wholesale market

based on such injections remains unchanged. Thus,

from an economic perspective, the ZEC subsidies are

contingent not only on the generation of power, but

also on its sale into wholesale markets.

In these circumstances, a subsidy that is

conditioned on the generation of power (as this one

admittedly is) is also conditioned on the sale of that

power into a federally regulated wholesale market.

There are no two ways about it. Thus, the distinction

from the subsidy found preempted in Hughes that

both decisions below made is not meaningful from

the perspective of economics.

12

Second, the manner in which the ZEC subsidies

interfere with FERC-regulated wholesale market

price-setting is likewise equivalent to the subsidy at

issue in Hughes. The Second Circuit was of the view

that, because “the fixed ZEC price is capped based on

. . . the social cost of carbon,” generators are exposed

to market risk in the event energy prices fall.

Rhodes Pet. App. 16a. But CPV was likewise subject

to market risk: the contract for differences affected

CPV’s payments for capacity, but the amount that

CPV would receive for the energy or electric power it

generated remained uncertain and subject to market

fluctuations. ZEC recipients are guaranteed a price

for the power they sell into the wholesale market

that is higher than the auction price (except in the

event average wholesale prices rise to a level far

higher than the rates that prevail today). To be sure,

the amount ZEC recipients ultimately receive for the

power they generate is not entirely insulated from

market variations. Nevertheless, the whole point of

the ZEC program is to pay the recipients more for the

power they deliver in the wholesale market than the

prices other generators receive.

The Second Circuit was also wrong to equate the

ZEC program with the regulatory scheme at issue in

this Court’s decision in Northwest Central Pipeline

Corp. v. State Corp. Commission of Kansas, 489 U.S.

493 (1989). In that case, Kansas provided that a

natural gas lease would terminate if the lessee failed

to extract enough gas to prevent an imbalance in

a natural gas field. Id. at 503. The effect of that

regulation was to require producers to extract more

natural gas than they would have otherwise, which,

by increasing supply, affected interstate rates. Id. at

512. This Court found the Kansas scheme to be a

13

permissible regulation on the production of gas, not

an impermissible regulation of interstate rates.

Unlike the subsidies at issue here, however, the

producers subject to the use-it-or-lose-it requirement

confronted the same market price as other producers

and therefore had the same economic decision to

make: whether to stay in the market for production

of natural gas given the market price. In contrast,

the subsidies here create different prices for the

subsidy recipients and all other generators. These

targeted subsidies, unlike the regulatory scheme in

Northwest Central, attack the fundamental purpose

of the wholesale electricity markets, which is to

provide price signals to market participants and

potential market participants.

To be sure, as discussed below, many of the policy

concerns implicated by the ZEC programs reflect that

the result of the program is to preserve uneconomic

generation resources, discouraging development of

competing and more efficient alternative resources.

And this Court has indicated that preserving even

uneconomic in-state generation resources is within

the power of the States. See Hughes, 136 S. Ct. at

1298. At the same time, the Court has held that

a State cannot pursue even permissible ends by

employing “regulatory means that intrude on FERC’s

authority over interstate wholesale rates.” Id. By

guaranteeing ZEC recipients a rate for the wholesale

power sold in FERC-regulated markets that is different from the rate set at auction, the ZEC programs

have the same economic characteristics as the

program found to be preempted in Hughes.

14

II. These Petitions Present an Important Issue

Because of the Substantial, Deleterious

Impact These Subsidies Will Have on

Sound, Efficient Energy Markets

Because the nuclear plants receiving ZECs would

otherwise shut down, the subsidies will increase the

supply of energy and capacity relative to the levels

without the subsidies and therefore will reduce the

market-clearing prices of energy and capacity. These

programs are massive, promising billions of dollars

in subsidies and preserving 6,290 MW of uneconomic

generating capacity.6 Furthermore, the decisions

offer other States a roadmap to evade federal

preemption. Such a development in the regulatory

landscape should not be permitted without this

Court’s review.

Moreover, the ZEC programs cannot be justified

by purported environmental benefits. Current and

expected market prices serve as the primary signal to

potential and existing market participants, affecting

their willingness to enter or stay in the market.

Lower prices will dampen or prevent the entry of

new resources directly and undermine trust in

competitive markets’ ability to reward efficient

new investment. For example, the ZEC program

subsidies could force retirement of more efficient

low-emissions generators, block the entry of more

efficient zero-emissions generators, or displace other,

lower-cost zero-emissions resources.

The ZEC program subsidies thus may not only

discourage more efficient alternative resources but

6 Information for the Quad Cities, Clinton, Fitzpatrick, Ginna,

and Nine Mile power plants sourced from Exelon Corp.,

http://www.exeloncorp.com/locations/power-plants/.

15

also impede the transition to a zero-emissions future.

Without careful study, there can be no assurance

that the ZEC programs will promote reduction in

carbon emissions, especially when only five nuclear

generators have been approved to receive them and

the subsidies may force out or block the entry of more

efficient, lower-cost zero-emissions generators. The

economic reality is that the ZEC programs may

create barriers to the rapid, efficient, market-driven

deployment of lower-cost, clean-energy systems.

A. The ZEC Programs Will Distort Prices

in the Wholesale Energy and Capacity

Markets

Paying a subsidy for each MWh generated and sold

by the ZEC-eligible nuclear power plants in Illinois

and New York influences pricing in the energy

and capacity markets operated by MISO, PJM, and

NYISO – three of the largest and most significant

ISOs in North America – in two ways.

First, the ZEC-eligible nuclear power plants

were represented as planning on shutting down and

exiting the markets for capacity and energy. See

Star Pet. App. 17a; Rhodes Pet. App. 42a n.5, 108a.

(If they were not planning to shut down, the ZEC

subsidy would be a pure windfall.) The subsidies will

keep these ZEC-eligible nuclear power plants in the

market. See Star Pet. App. 18a; Rhodes Pet. App.

95a. This artificially increases supply relative to the

level that would result in the absence of the subsidy.

Through this greater supply and the dynamics of

supply and demand, the ZEC program subsidies

therefore suppress the market-clearing price for

energy in the wholesale market. FERC-sanctioned

auctions are designed to produce just-and-reasonable

rates. See Hughes, 136 S. Ct. at 1291-92. This just-

16

and-reasonable result, however, can happen only if

price signals provide accurate information leading

excess or uneconomic generation to exit the market

in response to prices that are too low to justify their

continued operation.

Second, continued operation of these ZEC-eligible

plants also results in an excess supply of capacity

eligible to bid into the MISO, PJM, and NYISO

capacity markets. The greater supply relative to

demand for capacity has the potential to artificially

depress prices in the capacity markets relative to the

operation of the market in the absence of the ZEC

programs. See NRG Power Mktg., LLC v. FERC,

862 F.3d 108, 111 (D.C. Cir. 2017) (explaining that

“below-cost bidding in capacity auctions” – which

“state subsidies” make possible – “may reduce the

supply of electricity in the long run”).7

B. The Price Distortions Will Influence

Decisions To Exit and Enter the Market

for Wholesale Power Generation

Distorting equilibrium pricing has consequences:

the ZEC programs will interfere with efficient

market entry and exit decisions. The clearing price

has functions outside of simply setting the amount

paid and received by buyers and sellers. The auction

system “identif [ies] need for new generation.” Hughes,

7 A January 2011 report by the PJM Independent Market

Monitor concluded that “adding 1,000 MW of capacity in New

Jersey, paying it through an out of market subsidy, and requiring it to offer at zero shows that the result would be a reduction

in capacity market revenues to PJM suppliers of more than one

billion dollars per year.” Monitoring Analytics, LLC, Impact of

New Jersey Assembly Bill 3442 on the PJM Capacity Market 1

(Jan. 6, 2011), https://www.monitoringanalytics.com/filings/2011/

NJ_Assembly_3442_Impact_on_PJM_Capacity_Market.pdf.

17

136 S. Ct. at 1293. “A high clearing price in the

capacity auction encourages new generators to enter

the market, increasing supply and thereby lowering

the clearing price . . . ; a low clearing price discourages new entry and encourages retirement of existing

high-cost generators.” Id. If a generator’s marginal

cost is above the expected market-clearing price,

the owner should take that as a signal to exit the

market; if a prospective generator believes its marginal cost will be below the expected market-clearing

price, the investor-developer should take that as a

signal to enter.

The pricing signals of the markets for wholesale

electric power are no accident. For many years,

Congress and FERC have sought to foster competition in wholesale electric markets. The cornerstone

of that policy has been access to all generators on

nondiscriminatory terms. As FERC has explained,

nondiscriminatory auction pricing “has the benefit of

encouraging all sellers to place bids that reflect their

actual marginal opportunity costs.” Commonwealth

Edison Co., 113 FERC ¶ 61,278, at 62,121 (2005).

By contrast, “paying different amounts to different

generators based on the level of compensation needed

to keep the generator in operation would create a

unit-specific cost-based system and undermine the

advantages of a market for capacity.” Devon Power

LLC, 110 FERC ¶ 61,315, at 62,227 (2005).

Prior to the creation of the ZEC programs, market

signals indicated that the five nuclear power plants

receiving ZECs were not economical and should

retire. The plan to close those plants was not the

result of a market failure. On the contrary, it reflected

the reality of competition among generators to meet

energy demand and reliability needs in the wholesale

18

power market. In particular, lower gas prices have

reduced costs broadly in electricity markets – which

pressures all sellers and benefits consumers.8 But

had these five nuclear power plants retired, the

resulting reduction in supply would have tended

to raise near-term energy prices, encouraging

new generators to enter the market if they could be

profitable at the new prices.

In contrast, the ZEC programs keep the five

nuclear power plants in the market, maintaining

excess capacity and insulating these noncompetitive

resources from market pressures faced by other

participants. The lower market equilibrium price

created by the ZEC subsidies acts as a barrier to

entry for new resources, including (perversely) more

efficient, renewable resources and the flexible generation needed to support them. The artificially lower

market-clearing price discourages investment in

new generators that would be more efficient than the

nuclear plants. With the ZEC programs, more efficient new generators are signaled to stay out of the

market because they cannot recoup their operating

costs. Similarly, existing, more efficient generators

that would be profitable at the competitive market

price may not be profitable at the artificially lower

market price created by the ZEC programs and

be forced from the market. The power of market

incentives to drive innovation is muted.

In the view of amici, the ZEC programs select

specific winners – and inevitably create losers among

the remaining generators. Selecting winners and losers

8 See U.S. Dep’t of Energy, Staff Report to the Secretary on

Electricity Markets and Reliability 35-39 (Aug. 2017) (“DOE

Staff Report”), https://www.energy.gov/downloads/downloadstaff-report-secretary-electricity-markets-and-reliability.

19

constitutes discrimination that is fundamentally

incompatible with any efficient wholesale market

design. In a recent FERC technical conference, a

number of economists expressed concern that stategovernment intervention in wholesale markets –

including, in particular, the creation of ZEC programs

to keep nuclear plants in operation – is putting the

operation of competitive wholesale markets at risk.9

Such discrimination damages wholesale markets

where they are perhaps most vulnerable by undermining the ability of wholesale markets to send

accurate signals regarding investment and retirement

decisions. Day-ahead and same-day energy markets

have done an effective job, at least at times of

moderate demand, of matching wholesale prices

to marginal costs. Dealing with high-demand and

scarcity situations is a focal point of current reforms.

Furthermore, it has been apparent – in part because

of well-intended regulatory interventions – that

short-term market prices do not allow generators

to recover their fixed costs; capacity markets are

intended to help to address that problem and provide

appropriate incentives for needed resources to remain

in or to enter the market.10 By keeping uneconomic

capacity in the market, ZEC programs undermine

capacity markets and severely distort investment

decisions.

C. The ZEC Programs May Undermine Efforts To Transition to Alternative Energy

Resources

The States’ selection of winners and losers in the

electricity generation market was ostensibly to

9 See DOE Staff Report 116-17.

10 See id. at 108-11.

20

reduce carbon emissions. Star Pet. App. 18a; Rhodes

Pet. App. 8a. However, as a result of the distortions

to pricing signals, there can be no assurance that the

ZEC programs will have that intended effect.

Economic analysis helps to explain why subsidies

like the ZEC programs may delay, rather than

promote, achievable, beneficial, and cost-effective

carbon-emissions reductions. The subsidies here are

based loosely on the “social cost of carbon,” and, at

first blush, that might seem to make some sense.

But it does not. For one thing, there is no assurance

that the generating resources that the nuclear

generators will displace are carbon-emitting: on the

contrary, the distorted market may discourage entry

of clean energy sources and thereby perpetuate

carbon emissions. It also may discourage conservation,

and indeed encourage greater consumption, due to

lower wholesale prices, resulting in greater amounts

of generation from less “clean” resources.

More fundamentally, the “social cost of carbon” is

an economic externality – a cost of carbon-emitting

electricity generation that is not properly incorporated into the price that consumers of electricity pay.

The proper way to account for this cost is to incorporate it into the price of electricity, raising the price

of carbon-emitting resources. (This can be done

through a carbon tax or a cap-and-trade system, for

example.) The ZEC programs do not even approximate such a principled market intervention; instead,

they provide a selective subsidy to five low-carbon

resources out of all suppliers.

The “theory of the second best” states that achieving an efficient price (such as by fully internalizing

an externality) for one good or service in a market

with multiple inefficient prices for goods and services

21

without also setting efficient prices for those other

goods and services cannot be relied on to remove the

overall efficiency of the market.11 Rather, correcting

only a single inefficient pricing problem may make

the overall market less efficient.

Further, if one necessary condition to produce an

optimal or “first best” allocation of resources is

absent, it is not necessarily true that the rest of

the necessary conditions, if they exist, will lead to a

beneficial “second best” allocation. The result instead

may involve multiple distortions from the optimal

conditions, and the true “second best” allocation may

look very different from the “first best” allocation.

In more familiar terms, if one is baking cookies,

and the best possible cookie contains both chocolate

chips and coconut, it is not necessarily true that

the second-best cookie contains either chocolate chips

or coconut. The second-best cookie may be a gingersnap, something completely different from the firstbest cookie.12

The theory of the second best is not a reason to

eschew incremental progress, but it does counsel

careful consideration of the collateral impact of such

partial achievements. The theory is at play here.

Rather than implement the first-best solution of a

price on carbon-emitting resources, Illinois and New

York chose a selective subsidy to five low-carbon

resources. This cannot be counted on to improve the

efficiency of the Illinois and New York power sectors,

11 See generally R.G. Lipsey & Kelvin Lancaster, The General

Theory of Second Best, 24 Rev. Econ. Stud. 11 (1956).

12 Example taken from Free Exchange, Making the second

best of it – What it means to do our second best, The Economist

(Aug. 21, 2007), https://www.economist.com/blogs/freeexchange/

2007/08/making_the_second_best_of_it.

22

to result in lower costs over time, to provide the

least-cost “bridge” to carbon-emissions reductions, or

even to reduce net carbon emissions at all.

For example, the ZEC programs could force

retirement of low-emissions generators that are more

flexible in operation than the ZEC-eligible nuclear

power plants and that would have survived had

the ZEC-eligible plants retired. Similarly, beyond

removing the necessary flexible units, the artificially

suppressed price of power may also simply prevent

the entrance of new zero-emissions generators that

the ZEC programs nominally support. Overall price

suppression also encourages greater consumption

and, in turn, could result in higher demand for

resources that are not “clean.” Other unforeseen

consequences might be to discourage new transmission that would bring clean power from outside the

ISOs. If markets are allowed to operate, market

participants can use their own initiative (and

investments) to figure out the best response to the

changes in market prices that have rendered the

nuclear units noncompetitive.

The ZEC programs may be particularly pernicious

because of their impact on flexible generation

resources. By far the lowest cost, new, zero-carbon

resources are variable wind and solar power generators. The least-cost path to a low-carbon future is

virtually certain to include significant increases in

their deployment. These renewable resources, however, are variable; they cannot guarantee to match

their power injections with consumption, which

system operators require for reliability. “Suppliers

must generate – every day, hour, and minute – the

exact amount of power necessary to meet demand

from the utilities and other [LSEs] that buy power at

23

wholesale for resale to users.” EPSA, 136 S. Ct. at

768. Otherwise, massive outages could occur.

To integrate these variable renewable resources

into the power grids effectively requires flexible

generation resources (in addition to flexible loads) –

generators that can come online quickly, ramp up to

meet demand that wind and solar cannot meet, and

go offline quickly when supply rises or demand falls.

But because current markets do not do a good job of

assigning value to such flexibility – even absent state

intervention – current energy markets may provide

inadequate incentives to invest in flexible generation.

In this regard, the ZEC programs and associated

price suppression make things worse, acting as a

barrier to entry and (what amounts to the same

thing) an inducement to exit to flexible generators.

Instead, the ZEC programs preserve expensive,

inefficient, and inflexible generation that must

operate even when there is ample wind and solar

energy to meet demand.13

For these reasons, the ZEC programs distort the

efficient market dynamics on which FERC relies to

produce wholesale market prices that are just and

reasonable and act as a barrier to the entry of new,

less costly, and more efficient generation, including

the efficient zero-carbon resources and complementary flexible resources needed to achieve reasonable

carbon-reduction goals. And, in doing so, they may

impair progress toward a zero-carbon electric grid.

CONCLUSION

The petitions for a writ of certiorari should be

granted.

13 See DOE Staff Report 114-16.

24

Respectfully submitted,

February 7, 2019

AARON M. PANNER

Counsel of Record

FREDERICK GASTON HALL

KELLOGG, HANSEN, TODD,

FIGEL & FREDERICK,

P.L.L.C.

1615 M Street, N.W.

Suite 400

Washington, D.C. 20036

(202) 326-7900

(apanner@kellogghansen.com)

APPENDIX

1a

List of Amici Curiae*

Mark Cooper, Ph.D., holds a doctorate from Yale

University. He is a former Yale University and

Fulbright Fellow, a recipient of the Esther Peterson

Award for Consumer Service, and a fellow at the

Institute for Energy and the Environment at Vermont

Law School and Silicon Flatirons at the University of

Colorado School of Law. He has published six books

and hundreds of articles and papers on energy, media,

telecommunications, and high-technology industries.

Most recently, he is the author of The Political

Economy of Electricity: Progressive Capitalism and

the Struggle to Build a Sustainable Power Sector

(Praeger, 2017). He has provided expert testimony

more than 400 times for public interest clients

including attorneys general, people’s counsels, and

citizen interveners before state and federal agencies,

courts, and legislators in dozens of jurisdictions in the

United States and Canada.

William W. Hogan, Ph.D., is Research Director of

the Harvard Electricity Policy Group and the

Raymond Plank Professor of Global Energy Policy

at the John F. Kennedy School of Government at

Harvard University. He has been actively engaged in

the design and improvement of competitive electricity

markets in many regions of the United States, as well

as around the world, from England to Australia.

His activities include designing the market structure

and market rules by which regional transmission

organizations, in various forms, coordinate bid-based

markets for energy, ancillary services, and financial

transmission rights.

* Affiliations provided for informational purposes only.

2a

Mark Z. Jacobson, Ph.D., is a professor of Civil and

Environmental Engineering and a senior fellow at

the Woods Institute for the Environment and at the

Precourt Institute for Energy at Stanford University.

His career has focused on better understanding air

pollution and global warming problems and

developing large-scale clean, renewable energy

solutions to them. He has written more than 155

peer-reviewed papers and three textbooks.

Andrew N. Kleit, Ph.D., is a Professor of Energy

and Environmental Economics and MICASU Faculty

Fellow in the Department of Energy and Mineral

Engineering at the Pennsylvania State University.

Robert J. Michaels, Ph.D., is a Professor of

Economics at California State University Fullerton,

and Adjunct Scholar at the Cato Institute and the

Institute for Energy Research. He has published

extensively in these topic areas and testified before

the Federal Energy Regulatory Commission, state

utility commissions, and congressional committees.

Byron Schlomach, Ph.D., is Director of the 1889

Institute in Oklahoma and has served as chief

economist at the Texas Public Policy Foundation

and Director of the Center for Economic Prosperity at

the Goldwater Institute. He has coauthored and

supervised research on electric competition in Arizona

and Oklahoma.

Roy J. Shanker, Ph.D., has been an independent

consultant in energy markets since 1980 and

consultant on electric industry matters since 1973. He

has been actively involved in the design, development,

and conduct of the PJM and New York Independent

3a

System Operator markets since 1995. He has been

an invited speaker at the Federal Energy Regulatory

Commission and testified on numerous occasions as

an expert witness.