Update: On August 17, 2017, in a very short order, the Second Circuit Court of Appeals denied Allco Finance's request for rehearing of the decision. As a result, the Second Circuit's June 28, 2017 decision affirming the legality of the Connecticut RPS remains the law.
States can breathe a sigh of relief. In a groundbreaking decision, a federal appeals court has affirmed the legality of Connecticut’s renewable portfolio standard (RPS) and related clean energy initiatives. In its June 28, 2017 ruling, a three judge panel of the U.S. Court of Appeals for the Second Circuit unanimously decided Allco Finance Limited v. Klee, finding that Connecticut’s policies do not violate the Constitution or federal energy laws. The decision should boost states’ confidence that they can exercise climate and clean energy leadership at a time when the Trump Administration wants to move backwards.
As I explained in late 2016, the crux of the case involved a displeased solar developer’s efforts to invalidate Connecticut’s process for selecting qualifying energy projects for its RPS and related state clean energy goals. To ensure that enough renewable energy projects are developed to meet the state’s goals, Connecticut’s process involved soliciting bids from project developers, and then facilitating a process by which winning bidders could enter into long-term power contracts with the state’s utilities. Allco Finance, a solar developer, was a losing bidder in one of these procurement processes.
The case is significant for at least two reasons. First, it is the first federal court case to interpret the Supreme Court’s landmark 2016 decision Hughes v. Talen Energy Marketing, LLC, which found that a Maryland “contract for differences” scheme to encourage the construction of a new natural gas plant intruded into the Federal Energy Regulatory Commission’s (FERC’s) authority to set wholesale electricity rates under the Federal Power Act. FERC is responsible for ensuring that prices for most sales of electricity from power plants to utilities (which then sell the electricity to homes and businesses) are “just and reasonable.” Contrary to the claims of some generators who would like to see state energy laws invalidated per Hughes, the Second Circuit made clear that Hughes applies only to a narrow class of state schemes that, like Maryland’s, seek to “override” the rate set by the FERC-approved auction and instead guarantee a generator a wholly different rate—not policies like the Connecticut clean energy programs.
Second, it is one of the few decisions to assess the legality of a state RPS under the “dormant” Commerce Clause of the Constitution, which limits the ability of states to favor local commerce over out-of-state competition. The court affirmed that Connecticut’s program, which requires renewables developers to deliver energy into Connecticut, is permissible.
Decision follows Hughes’s narrow ruling
In the Federal Power Act (FPA) claim, Allco Finance argued that Connecticut’s method for facilitating wholesale renewable energy purchases between renewables developers and utilities intruded into FERC’s exclusive jurisdiction under the FPA. The court disagreed, finding that Connecticut’s process for soliciting contracts fell within the state’s traditional authority over energy policy, and did not intrude into FERC’s jurisdiction.
In reaching this conclusion, the court rejected Allco’s argument that Connecticut’s procurement process was “economically identical” to the facts in the Supreme Court’s 2016 decision in Hughes. That decision struck down a Maryland “contract for differences” program because it interfered with a wholesale electricity rate subject to exclusive FERC regulation under the FPA.
The Maryland program required a natural gas developer to sell and clear its power in a regional wholesale power market auction, and it guaranteed that the developer would instead receive a different wholesale rate—not the rate set by the auction. The Supreme Court held that the Maryland program “invade[d] FERC’s regulatory turf” because it adjusted the rate for a wholesale sale that had already been set under a FERC-approved process, thereby overriding FERC’s decision and authority.
The Second Circuit distinguished the Connecticut program from Maryland’s unlawful contract for differences scheme in several respects. Critically, Connecticut’s program facilitated long-term power purchase agreements (called bilateral contracts), rather than adjusting prices arrived at through FERC-regulated regional power auctions. Instead of modifying the price of a FERC-approved wholesale sale after the fact like Maryland’s program, Connecticut left the ultimate regulation of the prices in the contracts up to FERC.
Allco also argued that Connecticut’s process, by adding more energy supply, would exert downward pressure on overall wholesale rates otherwise available to small power producers under the Public Utility Regulatory Policies Act (PURPA). That law authorizes certain power sales between small power producers and utility purchasers. The court rejected this claim as well, finding that “incidental effects” on prices were insufficient to amount to regulation of the wholesale electricity markets.
For these and related reasons, the court found that the Connecticut program did not impermissibly intrude into FERC’s authority and jurisdiction under the FPA as interpreted in Hughes.
No violation of the dormant Commerce Clause
The Constitution’s Commerce Clause gives Congress the power to “regulate commerce with foreign Nations, and among the several States.” Courts have long interpreted this clause to include through negative implication the “dormant Commerce Clause,” which limits states’ power to impose restrictions on interstate commerce.
Why is the dormant Commerce Clause relevant to this case? Because Connecticut’s RPS limits eligibility of renewable energy credits (RECs) to satisfy RPS compliance to those from generators located in the Northeast regional transmission grid or adjacent grid areas. (The Northeast grid is called the New England Independent System Operator (ISO New England), and FERC regulates it and other high-power transmission grid regions.) Connecticut imposed its deliverability requirement to ensure that the renewables procured through its program could be delivered to Connecticut’s customers. Allco Finance argued that this limitation on REC eligibility discriminated against generators from other parts of the country, such as Allco’s Georgia solar facility.
The court found that the limitations imposed on Connecticut’s program were not impermissible under the dormant Commerce Clause. The court first recognized that “RECs are inventions of state property law,” and that “Connecticut has invented a class of RECs that differs from” RECs produced in Georgia. The court held that “the two types of RECs are different products” reflecting different attributes that the state values. Therefore, the court held, “there is no discrimination under the dormant Commerce Clause.”
Further, while the program might have some incidental effects on interstate commerce, the court concluded that Connecticut had an important and “legitimate interest in promoting increased production of renewable power generation in the region, thereby protecting its citizens’ health, safety, and reliable access to power.” Only RECs from renewable generation that is actually connected to the regional grid or adjacent areas serves these legitimate state purposes. Therefore, any “burden imposed by Connecticut’s RPS program is . . . not ‘clearly excessive in relation to the putative local benefits’” of ensuring safe, clean, reliable power for Connecticut residents.
The Second Circuit’s decision is a big win for state RPSs and related energy programs. It makes clear that different state RECs are not similarly situated for purposes of a dormant Commerce Clause challenge, and sets a high bar for allegations of incidental burdens on interstate commerce in the RPS context. It also confirms the narrow scope of the Hughes decision, affirming that state clean energy programs like Connecticut’s do not intrude on federal authority.