FIT in the USA

Deck: 

Constitutional questions about state-mandated renewable tariffs.

Fortnightly Magazine - May 2010

The attempt by many U.S. states to copy verbatim the European model of feed-in tariffs (FIT) to promote renewable power will not fit through the eye of the needle regarding requirements of the U.S. Constitution. Feed-in tariff rates are set by the state above the already-set mandatory federal wholesale price of energy and above avoided cost rate levels. With U.S. states now advancing FIT, Constitutional impediments will complicate the exercise of this state regulatory authority. As many as 10 states have introduced actual FIT legislation, while others are considering FIT policies: Arkansas, California, Florida, Hawaii, Illinois, Indiana, Iowa, Maine, Michigan, Minnesota, New Jersey, New Mexico, New York, Oregon, Rhode Island, Vermont, Virginia and Washington.

The Supremacy Clause of the U.S. Constitution creates a legal barrier to certain state-mandated regulatory actions. 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 challenger to the state of New York.

How U.S. courts decide challenges yet to come will determine whether feed-in tariffs become part of the American energy-policy landscape.

FIT are the most widely employed renewable energy policy in Europe and, increasingly, the rest of the world. Forty-five countries as well as 18 states, provinces or territories have implemented FIT. This includes some form of FIT in approximately 28 developing countries. Germany, Denmark, and Spain, while only a small fraction of the size of the United States in square miles, were responsible for more than half of total installed global wind power capacity between 1990 and 2005.

EES North America

European nations’ penchant for mandating that utilities and their ratepayers pay more for renewable power through FIT, if attempted in the United States, would run afoul of four U.S. Supreme Court precedents interpreting energy and environmental state regulation permissible under the Constitution. These Constitutional limitations on state authority affect only regulation of investor-owned utilities, which collectively serve approximately three-quarters of American consumers; they don’t affect government-owned utilities that aren’t subject to the Federal Power Act (FPA). However, several states have enacted, or are considering using, their regulatory powers to mandate that in-state private investor-owned utilities pay higher-than wholesale power FIT for renewable power.

There still can be powerful renewable energy incentives that pass legal muster. Aside from global warming emission-reduction requirements, other green-power policies include tax incentives, renewable trust funds, and carefully sculpted renewable portfolio standard (RPS) requirements. RPS programs exist in 29 states plus the District of Columbia; six more states have nonbinding RPS goals. Because the legal systems of European nations and the United States are distinct, what’s permissible in one doesn’t always seamlessly translate legally to the other.

Federal Preemption

Sections 205 and 206 of the FPA empower FERC to regulate rates for the interstate and wholesale sale and transmission of electricity. The FPA creates a bright line between state and federal jurisdiction, with wholesale power sales falling on the federal side of that line. This preempts state regulation of wholesale power transactions and prices: State regulators are not allowed to veto the regulatory scheme of a superior level of government.

The so-called filed-rate doctrine of federal and Constitutional law holds that state regulatory commissions may not second-guess or overrule on any grounds a wholesale rate determination made pursuant to federal jurisdiction. The Supreme Court in 1986 and again in 1988, 2003, and 2008, upheld the filed-rate doctrine.1 FIT raise issues under the Supremacy Clause of the United States Constitution. If a state orders or approves a wholesale power sale rate above the federally-approved wholesale power rate pursuant to the FPA, or above the PURPA avoided cost, it not only crosses the no-state-jurisdiction line, but specifically contradicts the federal wholesale rate determination and raises power costs.

Federal courts have struck down state regulatory action when it either raised or lowered the federally jurisdictional rate paid for power to wholesale renewable energy projects. California provides just one example. In Independent Energy Producers Association v. CPUC, the California state utility commission authorized utilities to suspend payment to renewable power-selling qualifying facilities (QF) if the utility found that the QF didn’t comply with federal standards, and substitute a 20-percent lower, alternative rate, which the court found impermissible.2 Going in the opposite direction, regulations that raise renewable energy prices as an incentive to the power producer also were stricken in a FERC case involving Southern California Edison.3 The federal Court of Appeals agreed in deciding a third recent California case.4

The FPA creates a bright line between state and federal jurisdiction, with the wholesale price determination, which involves every FIT for wholesale sale of renewable power to utilities, reserved exclusively to federal authority.5 Under Constitutional principles of federal preemption, state FIT legislation covering investor-owned utilities can’t mandate a wholesale electric purchase at a rate above the federally established wholesale price or the avoided cost. The prompt recent settlement by the state of New York of all demands raised in the lawsuit pursued on Constitutional bases against New York’s carbon regulatory scheme, the Regional Greenhouse Gas Initiative (RGGI), gives voice to the gravity of Constitutional issues surrounding careful state regulation of renewable energy.

 

Endnotes:

1. Nantahala Power & Light Co. v. Thornburg, 476 U.S. 953, 966–67 (1986); Miss. Power & Light Co. v. Miss. ex rel. Moore, 487 U.S. 354, 371 (1988) (“FERC has exclusive authority to determine the reasonableness of wholesale rates.”); Entergy La., Inc., v. La. Pub. Serv. Comm’n., 539 U.S. 39, 47 (2003) (noting that the filed-rate doctrine applies to the states through federal preemption); Pub. Util. Dist. No. 1 of Snohomish County Wash. v. Fed. Energy Regulatory Comm’n., 471 F.3d 1053, 1066 (9th Cir. 2006), aff’d. in part and revs’d. in part, Morgan Stanley Capital Group v. Pub. Util. Dist. No. 1 of Snohomish County Wash., 128 S.Ct. 2733 (2008).

2. Indep. Energy Producers Ass’n. v. Cal. Pub. Utils. Comm’n., 36 F.3d 848, 853 (9th Cir. 1994).

3. S. Cal. Edison Co., 70 F.E.R.C. ¶ 61,215 (1995).

4. Pub. Util. Dist. No. 1 of Snohomish County Wash. v. Fed. Energy Regulatory Comm’n., 471 F.3d 1053, 1066 (9th Cir. 2006).

5. Fed. Energy Regulatory Comm’n. v. Mississippi, 456 U.S. 742, 765 (1982).