Will Commerce Clause Challenges to State RPS Remain Dormant After FERC Order No. 1000?

by Carolyn Elefant on October 19, 2011

in FERC Order 1000

[Note - minor editorial updates as of 6 pm ET, 10/19/2011]

Last year, I co-authored a report for the Clean Energy States Alliance (CESA) that analyzes the commerce clause implications for state renewable portfolio standards (RPS) that grant preference to in-state renewables. The Report laid out the criteria under which a court would evaluate constitutional challenges, but did not opine on whether or not a particular state program would survive scrutiny.  FERC’s recent Order No. 1000 and its requirement to consider state public policy in transmission planning has made me wonder whether we’ll see revived interest in the issue of the constitutionality of state RPS standards. Let me explain.

By way of background, under the Commerce Clause of the United States Constitution, Congress is vested with broad authority to regulate interstate commerce. The flip side of the Commerce Clause – or the dormant Commerce Clause as it’s been termed by the courts – is that states are precluded, with limited exceptions, from passing laws that discriminate against sales by out of state producers because to do so would impede commerce across state lines and encroach on Congress’ constitutional powers.  Thus, several commentors conclude that a state renewable portfolios standard (RPS) which can only be satisfied by purchases of renewable power generated by in-state projects might violate the Commerce Clause since such a requirement would discriminate against out-of-state suppliers and impede the free flow of commerce across state lines. By contrast, RPS standards based on neutral locational requirements — such as power sales into the state — are generally assumed to pass muster since any generator, whether in-state or out-of-state is at least theoretically capable of satisfying an in-state sales requirement.

The Report that I co-authored outlined different strategies by which states could capture the benefits of RPS programs without running afoul of the Commerce Clause. Further, the Report noted that states could take comfort in the fact that up until 2010, none of the 27 state RPS programs some of which had been in effect for two decades or more, had ever been the subject of judicial challenge.  The Report reasoned that many out of state renewable developers declined to challenge RPS programs either due to lack of resources to raise a constitutional challenge or because the state program offered enough opportunities to make sales, albeit fewer than afforded in-state developers.

But will states continue to enjoy the holiday from RPS constitutional litigation in the aftermath of FERC Order No. 1000? As a result of FERC’s order, state public policies, in particular RPS requirements, will assume a more dominant role as states angle for transmission policies best suited to support their policy goals.

These questions came to mind in my review of testimony from last week’s House Energy Committee hearing on FERC Order No. 1000. Witnesses included Commissioner Greg White, who testified that under MISO’s proposed cost allocation proposal (which would likely be formally adopted under FERC’s new cost allocation rule), Michigan would “realize minimal benefits from distant transmission expansion projects constructed in the other twelve MISO states” in part because Michigan’s RPS program encourages development of in-state renewable resources and transmission upgrades needed to support renewable projects. Put another way, because Michigan’s state policy focuses on creation of a domestic renewable energy industry (a policy in part necessitated by Michigan’s unique peninsular geography, suggests Commissioner White), it does not derive any benefits from cost of transmission built to support renewable projects in other parts of the MISO planning region.

But how much consideration must MISO give to Michigan’s RPS program if it raises Commerce Clause questions by limiting (but not fully restricting) eligibility for RECs to power generated from in-source and in-territory projects? (The full Michigan statute is here) If Michigan claims that it derives no benefits from a proposed transmission development because the transmission does not help further its own public policy, can the RTO or other stakeholders counter by arguing that Michigan’s RPS standard doesn’t deserve consideration because of potentially constitutional deficiencies? (to be clear, I’m not suggesting that’s the case here, I’m just raising the issue hypothetically). And ultimately, who makes the call on whether a state’s RPS or other public policy is constitutional? Would the issue go to FERC to resolve in the context of reviewing the justness and reasonableness of a cost allocation proposal? Would the state defending the constitutionality of its policy take the offensive, perhaps bringing a declaratory action in state or federal court? Or does the issue matter at all? In other words, can transmission planners create a procedure for considering state or federal public policy that relies on a vote by stakeholders (e.g., policy will be considered if X number of stakeholders believe it should be taken into account in a given case) rather than the substance of the policy itself?

FERC didn’t offer much guidance on Order No. 1000 compliance at its informational sessions (to be fair, though, there’s not much that FERC staff can say when a rule is pending rehearing). And RPS programs aren’t the only state policies that implicate constitutional concerns; federal-state questions like Commerce Clause and preemption arise all the time when it comes to energy and renewables programs. But in the aftermath of FERC Order No. 1000, it seems that maybe, these once somewhat obscure questions that are sometimes bypassed with a wink and a nod may now command a broader audience.

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