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Carbon and the Constitution

State GHG policies confront federal roadblocks.

Fortnightly Magazine - April 2009

regional RGGI staff working group state that an expressed objective of the RGGI MOU is to modify the dispatch order and the carbon intensity of the existing portfolio of power generation units. 56 Insofar as the state RGGI regulations are designed to change wholesale pricing of power and thus “modify the dispatch” of generating units in the wholesale market operating pursuant to FERC-approved tariffs, the system raises questions pursuant to the Federal Power Act’s grant of exclusive federal jurisdiction over such wholesale interstate matters under the Supremacy Clause and the filed-rate doctrine. Here again, motive matters. As the Supreme Court articulated in Pacific Gas & Electric Co. v. California Energy Resources Conservation and Development Commission , the stated motive of the agency regulating power resources will be taken at face value as the true motive for purposes of constitutional preemption analysis. 57 The first lawsuit against the East Coast RGGI carbon regulation was initiated by Indeck Energy in 2009, and raises some Constitutional issues.

Sections 205 and 206 of the Federal Power Act empower FERC to regulate rates for the interstate or wholesale sale and transmission of electricity. In doing so, the act bestows upon FERC broad power to shape the energy markets and affect all stakeholders, including generators. The act creates a bright line between state and federal jurisdiction with wholesale power sales falling clearly and unequivocally on the federal side of the line. FERC jurisdiction preempts state regulation of wholesale power transactions and prices. The Federal Power Act defines “sale at wholesale” as any sale to any person for resale. 58 FERC’s exclusive power is even broader than just wholesale power sales. FERC also regulates power transmission in interstate commerce and interstate power sales.

FERC jurisdiction is exclusive and preempts state regulation of the rates for transmission that occurs in interstate commerce. If a utility or independent power producer is subject to FERC jurisdiction and regulation, state regulation of the same operational aspects is preempted as a matter of federal law. 59 Principles of preemption require a state regulatory agency to accept and pass through in retail rates all cost items deemed by FERC to be “just and reasonable,” and which otherwise are allowed. 60

The “filed-rate doctrine” holds that state regulatory agencies may not second-guess or overrule on any grounds a wholesale rate determination made pursuant to federal jurisdiction. 61 The Supreme Court in 1986, and again in 1988 and 2003, articulated and enforced the filed-rate doctrine. 62 Therefore, states may not retain residual authority to alter the wholesale market cost of power, regardless of carbon content of that power. The court found states had no ability to tamper, directly or indirectly, with wholesale market operations approved by a FERC order or operating subject to FERC-approved tariffs.

Moreover, attempts by states indirectly or directly to promote higher wholesale energy prices for certain higher-cost low-carbon renewable energy projects have been stricken by the courts. In 1994, the Ninth Circuit Court of Appeals rejected the CPUC’s claim that it had independent authority to regulate the prices and terms for such low-carbon