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Commerce Clause Conflict

In-state green mandates face Constitutional challenges.

Fortnightly Magazine - December 2010

Renewable power will continue to play—and some would say must continue to play—a leading role in America’s energy and climate policies.

Important and essential as that role will be, filling it will be neither easy nor cheap. The electric power sector is the most capital-intensive industry in the world, and renewable power plants are expensive to construct. Although the cost of renewable power plants should continue to fall in absolute terms as more plants are built—and will fall also in relative terms once carbon costs are included in the nation’s resource choices—the cost of building a utility-scale renewable plant today typically ranges from hundreds of millions to billions of dollars.

On top of that, renewable power development today involves complex, confusing, and overlapping skeins of preferences, tax incentives, and mandates. At the federal level, these include the investment tax credit, the production tax credit, various grant and loan guarantee opportunities, the regulatory exemptions available since 1978 under PURPA, 6 and the steroidal benefits provided by the Stimulus Act, 7 which are time-limited but provide in some instances cash-equivalent Treasury grants for up to 30 percent of the capital cost of a renewable power project.

Twenty-nine states and the District of Columbia each have adopted an RPS that mandates the development of renewable power resources. The 30 pieces of this regulatory puzzle have only one thing in common: a legal requirement that jurisdictional utilities within the state have a certain percentage of renewable power within their generation portfolios by a date or dates certain. Everything else in the programs differs dramatically, and in every conceivable way. For example:

• What resources qualify as “renewable” under state law;

• What portfolio percentages are mandated, and by when;

• Whether there are “set-asides” for certain favored technologies;

• Who (as between the utilities themselves and third-party providers) will be expected to build these resources;

• The compliance and enforcement regimes established to ensure adherence to the mandates; and

• How to deal with cross-border sales of renewable power—and the renewable energy credits associated with renewable power resources.

The U.S. Congress has tried, and to date failed, to enact a federal RPS law that would end this balkanized regime and replace it with a unitary, national template.

States have begun to address the material costs associated with these requirements—including the necessary ancillary capital expenditures, such as new transmission lines and supplementary generation to balance intermittent resources such as solar and wind power—with the limited arsenal of regulatory and financial tools available to the sector as a whole. With the filing of the TransCanada suit, the question has become whether the Dormant Commerce Clause might limit the states’ ability to utilize some of these tools.

The Dormant Commerce Clause

As more than one court has noted with exasperation, “[h]armonizing the guidance set out in the Supreme Court’s many dormant Commerce Clause opinions is not a simple task.” 8

A few principles, however, can readily be derived. The threshold question in any Dormant Commerce Clause inquiry is: Does the law discriminate? In this context, “discrimination simply means differential