What are some approaches to regulation adopted in recent decades by national governments, and the implications for management making international investment decisions?
FIT in the USA
Constitutional questions about state-mandated renewable tariffs.
There’s a schism between the needed expedited transition to renewable resources and the requirements of the U.S. constitutional system. The attempt by states to copy the European model of feed-in tariffs (FIT) to promote renewable power is running afoul of U.S. constitutional requirements. With 10 states now moving forward to implement or consider FITs, they will face the long reach of the U.S. Constitution, which controls states acting in a regulatory rather than proprietary manner, and which could set back state implementation efforts. The legal gauntlet already was thrown; Recently, the first legal challenge to state regulation of carbon emissions from power plants was filed and settled in favor of the challengers. In May 2010, California’s PUC and its three major investor-owned utilities took their battle over the constitutionality and legality of California’s FIT to FERC adjudication.
For the past two centuries, the Constitution has limited both good ideas and bad. And even in the interests of abating global warming and promoting renewable energy, the Supremacy Clause of the Constitution remains a legal backstop that might become a barrier to certain state mandatory regulatory actions. In a federalist system, there are limits on what the states may do without preemption. European nations’ penchant for mandating that utilities and their ratepayers pay more for renewable power through FIT would run afoul of precedent interpreting energy and environmental state regulation permissible under the U.S. Constitution. The ways in which the United States and Europe can attack global warming mark a major legal divide.
Nonetheless, 10 states now are considering the adoption of European-style FITs to mandate that their electric utilities pay more for renewable power than for all other power. This likely will invoke a confrontation over the Supremacy Clause that will call into question state discretion over such mandatory renewable power initiatives. These constitutional limitations can’t be overcome by passing a state statute. The Constitution remains the ultimate law of the land, and its Supremacy Clause embodies an essential element of the United States’ legal system. A European-style FIT could be implemented by states as a requirement for their regulated utilities in the United States only via prior amendments to the Public Utility Regulatory Policies Act (PURPA), the Federal Power Act (FPA) and/or the U.S. Constitution.
But renewable energy resources still can be incentivized in a variety of ways that pass legal muster. Primarily, aside from global-warming emission reduction requirements, other incentives include tax incentives, renewable trust funds, and carefully sculpted renewable portfolio standard requirements.