Legal & Regulatory

The Lurking Threat to State RPSs

The backlash against renewable portfolio standards (RPSs) has begun in earnest. In more than 20 states across the country, efforts are afoot to freeze, water down, or repeal one standard or another.

Some of the attacks are serious. The North Carolina legislature recently considered a bill that would have had the state’s 12.5% requirement expire in 2021. The bill died in committee, though the vote was close. Similar bills have gotten traction in Kansas and Pennsylvania, though so far none have passed.

The campaign is being spearheaded by conservative think tanks such as the American Legislative Exchange Council (ALEC) and the Heartland Institute, which have written model legislation to repeal RPSs and make it much harder to support renewable energy development.

But there is a deeper threat to RPSs that—if successful—has the potential to wipe out every standard in the country in one fell swoop.

Dormant Challenge

The culprit is a lawsuit in Colorado federal court, American Tradition Institute v. Colorado. The case, filed in 2011, argues that Colorado’s RPS unconstitutionally burdens interstate commerce by favoring certain generation resources over others. The Denver-based American Tradition Institute (ATI) is a nonprofit advocacy group largely funded by fossil fuel interests, and it has fought public support for renewable energy since its founding in 2009.

What’s the problem? Article I of the federal Constitution gives Congress the power to regulate commerce with foreign nations, between states, and with the Indian tribes. The Supreme Court (the “Court”) long ago read a negative implication into this section that state laws impairing or regulating commerce with other states are disfavored. This is known as the “Dormant Commerce Clause.”

Federal courts apply one of several tests when considering whether a state law violates the Dormant Commerce Clause. First, if the law discriminates against interstate commerce, it must survive “strict scrutiny” and will only pass muster if the state can show it is protecting a legitimate state interest and the law is the only reasonable means of doing it. In practice, this standard is so high that applying strict scrutiny almost guarantees the law will be invalidated. Where no discrimination is present, and the law treats in- and out-of-state entities equally, it will survive as long as the burdens on interstate commerce are not out of proportion to the in-state benefits. On the other hand, if it unreasonably benefits local interests at the expense of outside competition, then it fails. This has come to be known as the “ Pike test” after a 1970 Supreme Court case. Finally, if a law has the practical effect of regulating commerce outside the state’s borders, it is invalid.

Cases of open discrimination are fairly rare, but they do occur. Perhaps most relevant here is the 1992 case of Wyoming v. Oklahoma, in which the Court overturned an Oklahoma law requiring its utilities to burn at least 10% Oklahoma-sourced coal in their coal-fired plants. Legal scholars who have looked at this issue with respect to RPSs largely agree that in-state “carve-outs” requiring a certain level of in-state renewable generation are vulnerable under the Dormant Commerce Clause. Indeed, Massachusetts in 2010 suspended its in-state requirement in the face of a lawsuit by TransCanada.

Where there is no open discrimination, the analysis gets murkier, as might be expected. A discriminatory effect or purpose may be enough to invalidate the law, or it may not. To make things more complicated, application of the Pike test has become less and less frequent as the Court has expanded the number of things that can trigger a finding of discrimination.

How Great a Threat?

As should be clear, this is a highly fact-specific analysis, and given the many differences in how the various state RPSs operate, it is impossible to know whether all or any would survive Dormant Commerce Clause review. Nevertheless, some RPS elements would appear to be in danger. In-state carve-outs are the most likely to fail. Some RPS schemes prohibit utilities from importing power generated by new nonrenewable sources or entering into power purchase agreements that increase their carbon emissions, even if generated out of state. These provisions arguably attempt to regulate power generation outside that state’s borders. Several renewable energy credit (REC) schemes contain provisions that implicitly or explicitly favor in-state generation; these too may be found discriminatory.

While ATI complains about certain in-state carve-outs and REC provisions in the Colorado RPS, the core of its case is that favoring one generation resource over another places too great a burden on interstate commerce. ATI’s contention is that the variability of wind and solar generation means that generators must invest in nonrenewable resources to balance their output and ultimately incur greater expenses than they would otherwise. Further, it has the effect of regulating the behavior of out-of-state generators, who are less likely to build nonrenewable capacity, thus harming states where coal mining is a major industry.

It’s not clear what ATI’s chances are with this argument (the judge, William J. Martinez, is an Obama appointee), but the threat it poses to RPSs nationwide ought to be clear. Whatever the outcome at the district court level, an appeal is certain. A decision in its favor in the Tenth Circuit, or—should it get a hearing—the Supreme Court, would have important ramifications across the country. Stay tuned.

Thomas W. Overton, JD is POWER’s gas technology editor.

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