State Energy Policy and the Commerce Clause: Spotlight on Colorado and Minnesota

Within the past month, two federal district courts—one in Colorado and one in Minnesota—have issued important decisions on the constitutionality of state clean energy policies. Both cases raised the same legal issue, namely, whether the state laws in question regulate extraterritorially in violation of the dormant Commerce Clause of the U.S. Constitution. But the courts reached different results in each case and, more importantly, the Minnesota and Colorado policies reviewed by each court were quite different from each other even though both involved efforts to promote clean energy within the state. Some of the recent commentary on the two cases has downplayed the significant differences between the two state policies in question, leading to confusion about the implications of the courts’ rulings.

First, a bit about the dormant Commerce Clause. The Commerce Clause of the U.S. Constitution grants Congress the authority to regulate interstate commerce. But the Supreme Court has also interpreted that provision to contains a “dormant” aspect that limits states from interfering with the free flow of commerce among the several states. A law can violate the dormant Commerce Clause if: (1) it facially discriminates, has a discriminatory purpose, or is discriminatory in effect; (2) the law is facially neutral and there is no evidence of discriminatory intent or effect but the burdens of the law on interstate commerce outweigh the in-state benefits; or (3) the law attempts to control conduct completely outside its borders and thus regulates “extraterritorially.” The dormant Commerce Clause has been applied to state laws for over 100 years, including laws banning or limiting out-of-state imports of goods or services, out-of-state exports of goods or services, minimum pricing laws tied to prices in other states, laws attempting to regulate trucks and trains in interstate transportation, and a variety of other state laws intended to promote in-state businesses as well as environmental, health and safety interests over similar out-of-state interests.

Now, onto the recent state energy policy cases. Both cases involve efforts by states to encourage the use of renewable electricity resources in the state and limit the generation of electricity that emits significant amounts of CO2 in an effort to address climate change. But the two state policies under constitutional challenge involve very different ways of reaching that goal. The Colorado lawsuit involves a challenge to a state renewable energy mandate. Such laws, known as renewable portfolio standards, renewable energy standards, clean energy mandates, or renewable energy mandates, have been adopted in over half the states. Such laws require utilities and other electricity providers in the state to generate or purchase a certain percentage of their electricity for retail sale from renewable energy sources by a particular date, often 15%, 20%, or 30% by 2020 or 2025, with lower amounts mandated between now and the targeted date. Such laws encourage the use of wind, solar, geothermal, or hydropower energy with significant variation among the states with regard to what resources “count” and the percentages required.

By contrast, the Minnesota lawsuit does not involve a challenge to the state’s renewable energy mandate, even though Minnesota has one of the most aggressive renewable energy mandates in the nation. Instead, the lawsuit involves a challenge to another Minnesota energy policy that limits the construction, use, or import of new coal-fired power in the state by prohibiting the construction of facilities that emit a certain amount of CO2 each year or imports from such facilities. Only a few states (New York, Oregon, California) in addition to Minnesota have such limits on coal-fired power. All of those states impose those limits on coal-fired electricity in addition to imposing a renewable energy mandate on electricity providers in the state.

The Colorado case

In Energy and Environmental Legal Institute v. Epel, __ F. Supp. 2d __, 2014 WL 1874977 (D. Colo., May 9, 2014), a non-profit organization representing and promoting coal energy interests along with one of its members challenged the state’s renewable energy standard, which requires Colorado electric utilities and other retail electricity providers in the state to provide up to 30% of their retail electricity sales from renewable energy sources by a certain date. Electricity providers can meet their renewable energy mandate by either generating or buying renewable power directly or by purchasing renewable energy credits. The plaintiffs argued on summary judgment that the renewables mandate places a restriction on how out-of-state goods are manufactured, and requires out-of-state electricity to be generated according to Colorado’s terms. Thus, according to the plaintiffs, by projecting Colorado’s policy decisions onto other states, the law regulates extraterritorially in violation of the dormant Commerce Clause.

The court rejected this argument and held that the law did not impact wholly out-of-state transactions. If a Wyoming coal company generates electricity and sells it to a South Dakota business, the Colorado law does not apply. Instead, the court found that the law applies only to energy generators that choose to do business with a Colorado utility and, even then, the law only applies in determining whether the energy the Colorado utility purchases counts towards its renewables mandate. The court agreed that the Colorado law would influence the profits of out-of-state companies whose electricity could not be used to fulfill the mandate, but held that the dormant Commerce Clause “neither protects the profits of any particular business, nor the right to do business in any particular manner.” The court also found that the law did not discriminate against interstate commerce or unduly burden interstate commerce.

The Minnesota case

In North Dakota v. Heydinger, __ F. Supp. 2d __, 2014 WL 1612331 (D. Minn., Apr. 18, 2014), the State of North Dakota, North Dakota lignite coal interests, and multi-state electric cooperatives in the upper Midwest sued the State of Minnesota over limits on coal-fired power in its Next Generation Energy Act. The provisions of the law at issue state that after a certain date, no person shall, without CO2 offsets: (1) construct a new “large energy facility” (defined to encompass coal-fired power plants but not most natural gas-fired plants) in the state; (2) import power from a new large energy facility from outside the state; or (3) enter into a long-term power purchase agreement that would contribute to statewide power sector CO2 emissions. The plaintiffs argued on summary judgment that the limits on imports of coal-fired power from outside the state regulated extraterritorially in violation of the dormant Commerce Clause and discriminated against interstate commerce. Notably, even though Minnesota has a renewable energy mandate that is also part of the state’s Next Generation Energy Act, the plaintiffs in the Minnesota case did not challenge Minnesota’s renewable energy mandate at all. As a result, the state energy policy at issue in the Minnesota case is quite different from the state energy policy at issue in the Colorado case, even though both state policies are intended address climate change by imposing requirements on state electricity providers.

In an April 2014 decision, the U.S. District Court for the District of Minnesota agreed with the plaintiffs that the limits on coal-fired electricity imports regulated extraterritorially. Because the court struck down the import limits on those grounds, it did not reach the claims that the law also discriminated against interstate commerce. In reaching its decision, the court adopted an extremely broad interpretation of the law, finding that it applied to any electric power provider selling electricity on the multi-state, regional electric grid (encompassing more than 10 states), rather than applying only to persons located in or operating in Minnesota. The court pointed to statements made by the Minnesota Department of Commerce in earlier regulatory proceedings that indicated the agency might apply the law to multi-state electric cooperatives based outside the state but with members in Minnesota if the cooperative generated coal-fired power outside the state and sold it into the multi-state grid. Because electrons cannot be tracked once they have entered the electric grid, the court found such a transaction could apply where the buyers and seller were all outside of Minnesota because some of the electricity might enter the state of Minnesota. Because such an application of the law would apply even when no party to the transaction was based in Minnesota, the court found that the law regulated extraterritorially in violation of the dormant Commerce Clause. The court rejected the argument that it should not interpret the law so broadly to encompass all sales of electricity into the multi-state grid even though the state had never actually applied the law to these types of out-of-state transactions that did not directly involve a Minnesota-based actor intending to import coal-fired power to the state.

Conclusions

So what should we take away from these two decisions? First, it is important to keep in mind what wasnot at issue in either case. For some time now, there has been concern among policymakers and scholars regarding state renewable energy mandates that preference in-state renewable resources over out-of-state renewable resources through multipliers and other provisions that encourage the use of in-state wind, solar, or hydropower. Many state laws contain such a preference for in-state renewable resources because such preferences allowed legislators to argue that a renewable energy mandate would not only promote the use of clean energy but would also help promote new, in-state industries. While this is certainly good politics and may be good policy, such preferences raise dormant Commerce Clause concerns because they expressly benefit in-state industries over identical out-of-state industries. But the Colorado renewable energy mandate at issue does not contain such preferences and thus treats in-state and out-of-state renewable and non-renewable electricity resources alike. Likewise, even though the Minnesota renewable energy mandate was not even at issue in the Minnesota litigation, it is important to point out that Minnesota, like Colorado, does not preference in-state renewable resources over out-of-state renewable resources.

Second, states attempt to meet clean energy and climate change goals through a variety of policies. States have significant authority to regulate electricity sales, transportation, and industrial facilities and in recent years have used that authority to enact renewable energy mandates, place bans on coal-fired power, and impose other regulatory requirements on industrial facilities, fuel providers, electricity providers, and other businesses that contribute to CO2 emissions. Each type of policy has a different impact on in-state businesses and out-of-state parties that do business in the state. As a result, each type of policy raises different legal issues. Thus, the fact that the courts in the Colorado and Minnesota cases reached different results is significant, but it is also important not to lose sight of the fact that each court reviewed state energy policies that have similar goals, but were designed in completely different ways and have very different impacts on in-state and out-of-state actors.

Last, each court’s decision relied in large part on how broadly it found the state law to apply. In the Colorado case, the court stated that the law applied only to Colorado electricity providers and thus did not impact electricity generators in other states except when they chose to do business with electricity providers in Colorado. By contrast, in the Minnesota case the court interpreted the law limiting the use of new-coal fired power to apply to any party selling electricity into the multi-state electricity grid if there was some chance that those electrons could flow into Minnesota. Whether the language of the statute supports such a broad interpretation of the law remains to be seen and will likely be an issue on appeal. The fact remains, however, that how broadly courts interpret the reach of state energy policies will impact significantly whether those laws can withstand dormant Commerce Clause scrutiny.

For more information on the dormant Commerce Clause, its potential application to state energy policy, and recent litigation, see Alexandra B. Klass & Elizabeth Henley, Energy Policy, Extraterritoriality, and the Dormant Commerce Clause, San. Diego J. of Climate & Energy L. (forthcoming 2014), at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2376411.

This blog is cross-posted on Energy Law Professors' blog.