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Commerce Clause Conflict

In-state green mandates face Constitutional challenges.

Fortnightly Magazine - December 2010

risk for companies that want to build it. And companies will have to finance these projects at a time of unprecedented capital constraint.

The electricity industry has existed for more than a century, but stills relies chiefly on only two financing mechanisms to pay for its larger infrastructure needs: utility rate-basing and long-term PPAs between a power project and a load-serving utility that provide the foundation for project financing. The challenged GCA Section 83 relies on the latter. Section 83 requires in-state regulated utilities—the only ones over which the Commonwealth has legal authority—to buy their renewable power only from in-state facilities under long-term PPAs.

Under current economic conditions, executed PPAs are necessary for sponsors to obtain project financing of non-utility facilities. Commerce Clause attacks on RFPs for new renewable power resources accordingly pose a potential threat to states’ ability to meet their renewable portfolio objectives, to make resource decisions outside the purview of the organized markets, to participate proactively in environmental markets such as RGGI, and to develop in-state assets that are ready to compete in the emerging green economy. Without executed PPAs capable of defeating Commerce Clause attacks, these resources, if developed at all, will instead be developed outside the competitive process, most likely by traditional utilities. That outcome, ironically, would be the exact opposite of what Trans-Canada seeks in its lawsuit against Massachusetts. 25

What, then, can a state do to inoculate itself against such attacks? To begin with, the state should approach the development of these power plants much as it approaches more traditional economic development: by making explicit at the outset the incentives it’s offering to convince developers to build facilities in the state. The opportunity to enter into a long-term PPA should be one of the benefits offered to successful bidders as part of the state’s development initiative, not the starting point. As noted above, the state is on its firmest ground, and least vulnerable to Commerce Clause assault, when approaching economic development in this way. Massachusetts is by no means the only jurisdiction that views the development of green businesses within its borders as not just an environmental objective, but a business opportunity that the state can make attractive, if not impossible to resist, by offering financial incentives to a company if it chooses to build the plant within its borders.

Second, the state should highlight the specific reasons why it seeks to develop a particular resource at a unique site. For example, from a Commerce Clause vantage point, it’s wholly appropriate for a state to take steps to solicit companies to develop power plants at either brownfield sites within its borders, or offshore wind resources in the waters off its coastline within its jurisdiction. So long as these objectives are explicit and transparent, the state should be able to defend against arguments such as those made by TransCanada that there is no functional difference between a power plant in an adjoining state, and a power plant that Massachusetts is seeking to develop within the Commonwealth.

Finally, the state, in encouraging in-state development, should make explicit