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Carbon and the Constitution

State GHG policies confront federal roadblocks.

Fortnightly Magazine - April 2009

series of legal paradigms that, for contractual, tort, and other commercial purposes, make assumptions about how electricity is transacted commercially. 42 In New England Power Co. v. New Hampshire , the Supreme Court overturned a New Hampshire PUC regulation that restricted the export of privately-owned hydroelectric energy produced within the state by a multi-state wholesale company. 43 The New Hampshire regulation of the benefits of in-state hydroelectric power, based exclusively on its point of origin, attempted to reserve cheaper hydroelectric power for consumers within the state. The Supreme Court held such discriminatory pricing of interstate power through state regulation to be facially discriminatory and a violation of the dormant Commerce Clause, in spite of the states’ traditional power to regulate the retail electric market. It’s also clear that regulation in one state can’t affect the actual physical flow of power from, or in, another state.

Federal Preemption and State Regulation

Even putting aside regulatory mechanisms to address leakage that triggers dormant Commerce Clause concerns, carbon regulatory schemes can trigger other constitutional issues involving federal preemption. This is a function of how state regulators choose to implement state carbon regulation programs by electing to auction allowances necessary to operate power plants, rather than provide them as per all other historical allowance regimes. Terry Tamminen, an energy advisor to California Governor Schwarzenegger, stated that the “potential legal challenges could pose the biggest stumbling block” to California’s climate-change initiatives. 44

The RGGI Guiding Principles Agreement provided that “[t]he initial phase of the cap and trade program will entail the allocation and trading of carbon dioxide allowances to and by sources in the power sector only.” 45 However, the RGGI states now include an auction of available allowances to the highest bidder, not an allocation to affected facilities requiring allowances as contemplated in the Guiding Principles Agreement.

Auctioning 100 percent of allowances will impose higher costs (via the requirement to purchase allowances) on certain high-carbon coal and oil-fired power plants. This will change the trading price of all wholesale power in the region. Because power prices are set in the three control regions of the RGGI states [New York Independent System Operator (ISO), ISO-New England, and Pennsylvania-New Jersey-Maryland ISO, also known as PJM] and in California (Cal-ISO) through a second-price auction where the highest accepted bid price for wholesale power supply for a given hour determines the price of all power (including lower bid power), 46 the marginal, highest-cost unit sets the price for all power. That highest-cost unit for many hours of the day likely will come from the higher-carbon units that have to buy more allowances per kilowatt of power produced than other units.

However, this higher price will be earned by all wholesaling power suppliers under the controlling regulations, and the resulting price impact will reverberate through all power sales. 47 This clearing price will be paid to every power plant that is dispatched during the hour. The marginal cost of the most expensive power purchased determines the price paid for all power at each hour, with the second price auction system employed