California Clean Energy Laws Do Not Violate Commerce Clause

This blog post was also co-authored by John Bullock, Legal Intern.

In the wake of a decision by the U.S. Court of Appeals for the Eighth Circuit striking down a Minnesota law that banned “importing” electricity into Minnesota from newly constructed coal-fired power plants, and forbid any entity from entering into a long term power purchase agreement that would increase statewide emissions, we have received inquiries regarding whether the Dormant Commerce Clause analysis by one of the opining Eighth Circuit judges could have adverse implications for California’s emissions performance and renewable portfolio standards. Fortunately, it does not. While we don’t necessarily agree with the opinion’s Dormant Commerce Clause analysis, these California programs would be upheld even if one were to apply the opinion’s analysis to them, because they are structured differently than the Minnesota statute and unlike that statute cannot be interpreted to regulate entirely out-of-state actions.   

Dormant Commerce Clause Background

The Commerce Clause of the U.S. Constitution gives Congress supreme authority to “regulate commerce . . . among the several states.” The Supreme Court has held that in granting Congress this power, the Constitution implicitly prohibits states from taking certain actions that interfere with interstate commerce. Under this implied (i.e. “dormant”) prohibition, a state may not enact a law that “discriminates” against out-of-state commerce in favor of in-state commerce, or that exerts “extraterritorial control” over commerce that takes place entirely outside its borders.  

The 8th Circuit’s Decision

In the recently decided case North Dakota v. Heydinger, the U.S. Court of Appeals for the 8th Circuit invalidated a Minnesota law that prohibited imports of and long-term power purchase agreements for electricity from newly-constructed coal-fired power plants located outside the state. The three judges deciding the case all agreed to invalidate the law, but they did not agree on the rationale for doing so. In an opinion not joined by the other two judges, Judge James Loken grounded his reasoning in the Dormant Commerce Clause. In his view, the Minnesota law violated the Dormant Commerce Clause because it exerted control over conduct that occurs “wholly outside of Minnesota.” He based his reasoning on the fact that Minnesota is located in a transmission system region controlled by the Midcontinent Independent System Operator (MISO). Electricity sent into any point within the MISO system may flow freely to any part of that system (electricity does not stop at state lines).

Judge Loken reasoned that under the law, the potential for physical (i.e. non-contractual) electricity flow into Minnesota would prohibit non-Minnesota utilities from sending some coal-fired electricity into the MISO system at all, even where they contracted to send electricity only to non-Minnesota customers located in other states within the MISO region. His opinion concluded that this flow reality must nullify the law due to its impermissible extraterritorial effect.

Notably, Judge Loken’s conclusions are not binding on any court because they were not joined by the other judges on the panel, who focused on the Federal Power Act and Clean Air Act rather than the Dormant Commerce Clause. Even if the other judges did agree with him, his 8th Circuit opinion would not directly affect California, which is located in the 9th Circuit.

California’s Emissions and Renewable Portfolio Standards

While Judge Loken's opinion may raise some issues for consideration in state clean energy policy design, even if the 9th Circuit were to adopt his reasoning in a future case, it would not implicate California’s power plant emissions standard or its renewable portfolio standard, because they are narrower in reach than the Minnesota law.

California’s emissions performance standard, commonly referred to as SB1368, is designed to “encourage the development of cost-effective, highly-efficient, and environmentally-sound supply resources,” to combat the impending harms of climate change. Specifically, SB1368 establishes an emissions limit for power plant investments by California utilities, preventing them from “enter[ing] into a long-term financial commitment" for resources that do not meet the emissions standard set by the commission.

California’s Renewable Portfolio Standard requires that retail sellers and publically owned utilities procure 50% renewable energy by 2030. Like SB1368, the RPS requirements are specifically limited to “entit[ies] engaged in the retail sale of electricity to end-use customers located within the state.” (emphasis added).

Differences between the Minnesota and California Programs

Where Judge Loken was particularly concerned about the control that the Minnesota statute would exert on “non-Minnesota entities and transactions,” SB1368 and the California RPS only regulate transactions entered into in order to serve California customers. Accordingly, these statutes do not have an impermissible extraterritorial effect. Unlike the Minnesota statute which applied to any “person” (which Judge Loken reasoned effectively included both in-state and out of state utilities and generators), SB1368 only applies to utilities serving California customers, and the law specifically exempts the state’s only utility that serves both California and out-of-state customers from its requirements. Similarly, the RPS standard is limited to regulating the make-up of electricity that is provided to California retail customers, and does not regulate how utilities that serve both California and other customers serve those customers in other states.

While Judge Loken’s analysis was focused on impermissible “extraterritorial effect” under the Dormant Commerce Clause, it is worth noting that California’s emissions performance standard and RPS also withstand scrutiny under the other prong of Dormant Commerce Clause analysis, which looks at whether a state law discriminates against other states. The California Public Utilities Commission found that neither program is discriminatory because neither program draws distinctions between in-state and out-of-state generators and, in the case of the RPS, the distinctions based on electric grid oversight are directly related to ensuring benefits and minimizing costs to California customers. Further, because these California programs are specifically tailored to regulate only transactions entered into to serve in-state customers, the formation of a regional Western Grid Operator serving multiple states including California would not create any Dormant Commerce Clause issues, even applying Judge Loken’s analysis.

Conclusion

While we are likely to continue to see more judicial decisions discussing the authority of states and the federal government with regard to the electricity system, Judge Loken’s Dormant Commerce Clause analysis poses no threats to the continued viability of the California RPS and SB1368.