December 7, 2016 by John Moore, Senior Attorney, The Sustainable FERC Project
A federal appeals court is reviewing whether Connecticut’s renewable portfolio standard (RPS) violates the Federal Power Act and the Commerce Clause of the U.S. Constitution. On November 22, NRDC and several allied groups filed a “friend of the court” brief in defense of the RPS, which requires an increasing amount of electricity to be generated from wind, solar, and other renewable resources in the region. We are confident that the state’s clean energy program will pass muster because it is well within legislative and constitutional boundaries. A ruling against the RPS would be unprecedented, and could frustrate Connecticut’s and possibly other states’ clean energy goals, increase pollution, and stymie progress in fighting climate change.
The case, Allco Finance v. Klee (Klee is the Commissioner of the Connecticut Department of Energy and Environmental Protection), involves an unhappy solar developer’s effort to invalidate the state’s RPS. In October, the Second Circuit Court of Appeals granted the plaintiff’s motion to enjoin Connecticut from signing any electricity contracts to implement the RPS until the court decides the case.
Concerned by the threat to the state’s clean energy law, and wanting to provide useful guidance to the court, NRDC, Acadia Center, Conservation Law Foundation, Environmental Defense Fund, and Sierra Club filed a brief in support of Connecticut today. The Court has expedited the appeal schedule and will hear oral argument on December 9, 2016 (For more information, Harvard Law School’s State Power Project website has copies of all of the relevant case filings and orders.)
The legal nitty-gritty
The Connecticut RPS requires each of the state’s retail utilities to obtain an annually increasing percentage of their electricity supply from eligible renewable energy resources. Connecticut’s environmental agency, the Department of Energy and Environmental Protection, implemented the RPS in part by soliciting proposals from renewable generators. Pursuant to the RPS law, the state can issue requests for proposals, select winning projects, and direct utilities to negotiate long-term contracts to purchase electricity or renewable energy credits (RECs) from those projects.
The energy and RECs must be supplied from a renewable generator located either in the New England Independent System Operator (ISO-NE) region including Connecticut and five other northeastern states, or imported into ISO-NE from an adjacent region.
The plaintiff, Allco Finance Limited, claims that the Federal Power Act (FPA) forbids (or “preempts,” in legalese) Connecticut from directing utilities to enter into long-term contracts with generators except pursuant to the Public Utility Regulatory Policies Act (PURPA), a federal law that encourages the development of small renewable generating facilities. That is a breathtakingly sweeping argument. If Allco were right, Connecticut would face the extremely restrictive choice between soliciting proposals only from small generation facilities that (like Allco’s) meet PURPA’s criteria for “Qualifying Facilities,” or not soliciting proposals at all.
Allco bases its claim primarily on the U.S. Supreme Court’s Hughes decision earlier this year. In Hughes, the court rejected Maryland’s effort to help finance new in-state natural gas generation, ruling that Maryland’s program had impermissibly intruded into the exclusive wholesale power rate-setting authority of the Federal Energy Regulatory Commission (FERC).
We believe Allco’s preemption claim is incorrect. Unlike in Hughes, Connecticut does not dictate or otherwise set the price to be established through the contracts, which is to be determined by arms-length negotiations between the utility and renewable energy generator. And, unlike in Hughes, the contract is not linked in any way to a FERC-regulated market price. In managing its RPS, Connecticut simply is exercising a state’s traditional authority to oversee utility procurement, resource planning, consumer protection, and environmental and public health preferences.
FERC’s January 2016 brief to the Supreme Court in Hughes highlighted the Connecticut RPS as the kind of program that the FPA did not preempt. FERC told the Supreme Court that Connecticut’s law does “not directly distort the wholesale market because Connecticut required the electric distribution companies to purchase renewable energy directly from the selected generators, rather than requiring the generators to sell their capacity to a FERC-approved wholesale-market operator through its auction” (as was the case in Hughes). Case closed.
Hughes was a self-avowedly “limited” decision that turned on facts specific to Maryland’s program. It left states with wide latitude to control their environmental and clean energy destiny, and Connecticut’s RPS design comes nowhere close to the Hughes boundaries. Nor does Connecticut question that FERC still has the final say over whether the utility contracts with the power generators meet FPA requirements.
No Commerce Clause violation
Allco also challenges the Connecticut RPS on the grounds that it violates the “dormant” Commerce Clause of the U.S. Constitution. The Commerce Clause gives power to Congress to regulate commerce among the states. The dormant Commerce Clause stands for the inverse proposition: states cannot discriminate against interstate commerce in order to protect state interests.
The threshold question in any dormant Commerce Clause legal analysis is whether the state is discriminating against comparable products. If they are not comparable, there is no “discrimination” under the dormant Commerce Clause.
In this case, the “product” is the renewable energy credit. While electricity itself might be a fungible product, the REC’s attributes and the energy supporting the RECs are not. Among other things, RECs purchased from within New England and the surrounding region (New York, northern Maine, Quebec, and New Brunswick) reflect the benefits of fuel security and price stability that result from zero fuel cost wind and solar power in the regional mix. In the words of the Connecticut Comprehensive Energy Strategy, over-reliance on fossil fuel “exposes the State . . . to potential electricity rate increases and reliability risks if natural gas-fueled generation costs spike.” Connecticut’s RPS aims to address that risk by encouraging renewable energy development in the New England region where it will benefit Connecticut users. The Commerce Clause does not require Connecticut to promote renewable energy generation in faraway states where it offers no such benefits to Connecticut users.
The Second Circuit has expedited its consideration of this case: All briefs will be filed within the next two weeks, and the court will hold oral argument on December 9, 2016. Look for an update when the court issues its ruling.