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Renewable Subsidies in the Age of Deregulation

Fortnightly Magazine - December 1997

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Steven Ferrey is professor of law at Suffolk University Law School in Boston. He is the author of The Law of Independent Power (10th Ed., 1997), a three-volume text on electric power deregulation. He consults widely as both legal counsel and an expert witness on electric power deregulation for companies including LeBoeuf, Lamb.

Home-Grown Favoritism

A preference for renewable resources produced locally must not run afoul of Constitutional law.

Proprietary Action. Acting as an owner, state bias appears OK. The Constitution's Commerce Clause allows the state in a proprietary mode to marshal state-owned energy resources, even if that might discriminate in favor of in-state interests, or against out-of-state interests or interstate commerce.fn28

Regulatory Action. Regulatory bias raises problems. A state cannot act in a regulatory manner to unduly favor in-state private interests. When states promote private renewable energy, they are acting in a regulatory rather then proprietary role to subsidize or favor these resources. Courts will strictly scrutinize regulatory efforts and will probably invalidate such actions if state regulations or programs appear to unduly favor in-state interests at the expense of interstate commerce.fn29

Site Preferences. Restricting the in-state location of promoted renewable resources likely would run afoul of the Commerce Clause under a "strict scrutiny" test.fn30

Health and Environment. In the alternative, if a state is exercising a traditionally recognized area of state jurisdiction in a manner that does not discriminate against interstate commerce on the face of the rule, yet discriminates nonetheless, the court will balance the burden on interstate commerce against the public interest served by such regulation.fn31

These traditional areas might include protection of health, safety, the environment and natural resources in the diversification of renewable resources in the state energy mix. A balancing test is more deferential to the state policy than the "strict scrutiny" test.

Tax-Funded Subsidies

CAN states use taxes to fund a preference for renewables?

When Levies Are Permissible. The Supreme Court allows a state to tax in-state and out-of-state energy transactions differently if such treatment reflects a rational distinction between differentiated regulated and unregulated entities and commodities.fn32

When Subsidies Are Impermissible. However, the court does not allow a state to tax all transactions in the state for the purpose of using the proceeds to subsidize in-state participants in that market.

Example. An in-state preference will fail to pass judicial review where it appears designed to protect local interests from interstate competition, even if the cost of the subsidy falls entirely on state residents.

In West Lynn Creamery v. Healy,[fn33] the court overturned a tax imposed on all wholesale milk sales in Massachusetts, where proceeds were used to aid troubled in-state dairy farmers. The state claimed it should enjoy discretion to design its own tax policy, so long as the levy fell entirely on in-state consumers, but the court found no legitimate purpose in protecting the local market: "Preservation of local industry by protecting it from the rigors of interstate competition is the hallmark of the economic protectionism that the Commerce Clause prohibits."

The court noted that the tax had allowed in-state wholesalers a