In Climate Test, Court Grapples With Extraterritorial Effect Of Colorado’s RES

Source: By Dawn Reeves, Inside EPA • Posted: Thursday, February 12, 2015

A federal appellate court is grappling with whether Colorado’s renewable energy standard (RES) unconstitutionally limits power generation and other commercial activities in other states in a case that could be a key test for whether states can adopt similar requirements in order to comply with EPA’s greenhouse gas (GHG) rule for power plants.

During oral arguments late last month, a three-judge panel of the U.S. Court of Appeals for the 10th Circuit focused almost all of its questions on whether the RES — which imposes a 30 percent renewable energy requirement on in-state utilities — violates the Constitution’s dormant Commerce Clause by wholly regulating utilities outside the state that sell power into Colorado, according to a recording of the proceedings recently obtained by InsideEPA/climate.

The court heard Jan. 21 arguments in the case, Energy & Environment Legal Institute (EELI) v. Joshua Epel, where the free-market institute is seeking to overturn the Colorado RES on constitutional grounds — a move that if successful could undermine EPA plans to allow states to comply with its GHG rule for existing power plants by adopting similar renewable energy standards.

According to EPA, as many as 29 states and the District of Columbia have enforceable renewable portfolio standards (RPS) or other mandatory renewable capacity policies, while nine states have voluntary goals.

This case was heard as a similar fight is playing out in the 8th Circuit, which is hearing Minnesota’s appeal of an adverse ruling striking down its law that requires local generation of carbon-free electricity. North Dakota successfully challenged the law as unconstitutional in district court but Minnesota’s appeal is now pending.

The constitutionality of state renewable energy requirements is going to become a more heated issue, according to legal expert Jonathan Adler, who told a Jan. 21 Environmental Law Institute event that the dormant Commerce Clause “is going to be increasingly important when we talk about state efforts to regulate energy, state efforts to regulate greenhouse gases, within their own borders.”

Adler referenced both the Colorado and Minnesota cases, and noted if the issue reaches the Supreme Court, its outcome is unpredictable. He said it has been “quite some time since we’ve had a Supreme Court decision striking down something based on the Pike [balancing] test,” which grants courts leeway to uphold state laws that may have discriminatory effect if the local benefit outweighs the interstate burden.

“I would not be at all surprised to see the court say the Pike test is too subjective,” and could even narrow the range of statutes considered “discriminatory” and thus trigger the Commerce Clause at all. “I’m not sure there are five votes to maintain the sort of restrictive [commerce clause] jurisprudence” of past high court cases,” Adler said.

In the Colorado case, EELI is arguing that the RES is barred by the Constitution’s dormant Commerce Clause because the requirement unlawfully regulates out-of-state utilities that may export power to Colorado.

But the state and its supporters say the law is constitutional and has no extraterritorial effect. “The RES regulates only the Colorado market. . . . Out-of-state entities are free to generate electricity in whatever manner they wish, and can sell electricity to whomever they choose,” the state said in a brief.

In the midst of the legal fight, Colorado’s new Republican-controlled Senate gave initial approval Feb. 4 to a bill that would roll back the RES, cutting in half the 30 percent renewable requirement, according to the Denver Post.

Extraterritorial Effects

The 10th Circuit panel, consisting of Judges Timothy Tymkovich, David Ebel and Neil Gorsuch, appeared to struggle with how to determine whether the Colorado RES had the effect of wholly regulating out-of-state utilities that sell power into the state.

The judges asked many questions of both sides, particularly addressing whether the state RES harmed out-of-state coal interests in the region.

Arguing for petitioners EELI, which is appealing a lower court ruling upholding the RES, attorney David Schnare told the court that the Commerce Clause’s extraterritorial prohibition applies “even where a [state law] has only indirect effects, if a burden has a nationwide reach,” which he said the Colorado RES does.

He relied largely on a 1935 Supreme Court ruling, Baldwin v. G. A. F. Seelig, Inc., which overturned a New York law barring Vermont from selling unpasteurized milk into the state. He also argued that the line between direct and indirect effects “is not so crisp, nor does it need to be.”

But the judges asked how they were to distinguish between direct and indirect effects, and what legal test they should use. “Is Colorado exporting its renewable policy here?” one of the judges asked, and questioned how the state RES was different than any other state regulation of a product sold within its borders.

Schnare said that Colorado is seeking to “carve out a piece of the interstate market” and require those products to meet state standards. “The carve out deals with electricity in interstate commerce.” He gave the example of a coal mine in Wyoming that sells coal to a Wyoming power plant, which sells electricity to Colorado. “Because of the carve out, they’re not able to sell as much coal-fired power, and [the coal company] is not able to sell as much coal. This is the impact on interstate commerce.”

He also argued that there is no difference in the “quality” of electricity that comes from renewable energy and that which comes from coal. Electricity is a measure of voltage and cycles per second, no more, he said.

However, another judge noted that one effect of the RES is that Colorado “frees up a fair amount of carbon-based energy that consumers in other states would not get more cheaply,” which he called the “law of economics” and an “inevitable” outcome of state regulation.

Schnare said that was not the issue before the court, and that the claim is not true because on a megawatt-hour basis the coal energy market has shrunk in the region while wind energy has risen. “Coal companies have lost the opportunity to sell coal for the purpose of electricity generation.”

William Allen of the Colorado attorney general’s office told the court that EELI’s arguments fail because the extraterritorial doctrine “only reaches laws that affect transactions that occur entirely out of state,” and he noted the Colorado RES does not regulate the import of electricity in any way, as the burden is entirely on in-state utilities.

But the judges noted that the practical effect of the law could impact out-of-state utilities.

Allen conceded that the law does provide “an incentive, perhaps, for out-of-state renewable energy producers.”

Also arguing in favor of the state law was John Putnam of Interwest Energy Alliance, which intervened on behalf of Colorado. He said that the way electricity is produced, or the “quality,” is critical here because it affects the price paid by Colorado consumers. “So the notion that there is this big electron market . . . is not the way things work in the real world,” he said, citing a court precedent upholding a rejection of nuclear energy due to local waste concerns.

He added that the state RES does not regulate other states, and gave as an example a contract signed by Colorado utility regulators to purchase out-of-state coal power or wind power. That “has no effect” on that utility’s ability to sell power to Wyoming or Nebraska, “so it doesn’t create the effect of regulation in those other states.”

Mixed Reactions

Sources following the case had mixed reactions after the arguments, with one source familiar with the petitioner’s views saying the decision is likely to be “in the weeds” and focus on which test to use to determine if the RES violates the Constitution. The source also notes it was important that Allen conceded that there were practical out-of-state effects from the rule.

The source also points out that the judges did not ask any questions about whether EELI had standing to bring the claim — a major issue at the lower court.

A source familiar with Colorado’s views agreed the panel had “hard questions” for both sides but said the petitioner’s examples of extraterritorial regulations were “distinguished” from the Colorado RES. “It was helpful to our side that they didn’t have concrete examples” of how the Colorado law wholly regulated out-of-state commerce, the source said, while stopping short of predicting the court would side with the state.

The source also notes that any decision could be appealed to the Supreme Court because, for example, a ruling against the law “by its nature would implicate public utility commissions’ ability to regulate interstate activities regarding electricity.”

One environmentalist following the case was “cautiously optimistic” about the case based on the arguments, especially because the judges “seemed to grasp” that the law does not reach entirely out-of-state commerce. “If a Wyoming wind farm sells to a Montana utility, the Colorado law doesn’t have any impact on such transaction,” the source says, calling that a “key fact.”

The source did concede that a loss here “has the potential to be disruptive” for EPA’s rule, while adding, “We are confident that the Colorado law does stand on firm constitutional grounds, and frankly . . . each state’s renewable requirements are different in the details, so even if one state’s law is struck down, I don’t know [that would] necessarily spell doom for other [state renewable laws] across the country.”

A second environmentalist following the case says, however, that EPA’s proposed rule shows “that the federal government is enacting policies that are supportive of the existence of these types of programs” and could be used in a future defense of a state renewable energy law.

A renewable energy source following the case said the arguments showed “a fair amount of skepticism from the judges that there was any kind of regulatory effect outside of the state.”

A ruling is expected in four to eight months.