How Far Can States Go In Supporting Renewable Energy?: Part II
As discussed in Part I, State renewable energy policies are increasingly being challenged as unconstitutional. Several challenges argue that State policies impermissibly overlap with authority that Congress granted to Federal regulators. When there is tension between Federal and State authority, the Constitution’s Supremacy Clause allows Federal action to preempt State policy. Two Federal courts of appeal are currently considering whether incentives for new generation provided by New Jersey and Maryland are preempted by Federal regulation of PJM’s wholesale markets. Decisions in these cases will have implications for States’ renewable energy policies.
Traditionally, electric utilities were vertically integrated companies, owning generation and distributing energy to customers. In the industry’s early days, a utility’s operations were typically confined within a single State, and they were regulated by that state’s public utility commission. While utilities made some wholesale sales across State lines, the Supreme Court determined that no State had the constitutional authority to regulate those sales.
In 1935, Congress passed the Federal Power Act (FPA) to fill this regulatory gap. The FPA granted federal regulators (now known as FERC) authority to regulate “the transmission of electric energy in interstate commerce and  the sale of electric energy at wholesale in interstate commerce.” States retained their wide-ranging authority over retail rates and generation facilities.
As the industry matured, State regulators became more involved. Through oversight of long-term utility planning and other regulatory processes, States could approve or disapprove of a vertically integrated utility’s plans to build new generation and could decide whether it was environmentally or economically prudent to burn coal, build a dam, or use other fuels to generate energy.
Over the past two decades, many States have required or encouraged their utilities to sell much of their generation and instead rely on FERC-regulated interstate markets for procuring energy. Within this new regional industry structure, States have mandated renewable energy by requiring utilities to procure a certain percentage of sales from renewable sources or through other policies that directly regulate retail sale and distribution, rather than the generation, of electricity.
Meanwhile, in its regulation of interstate sales and transmission, FERC can and does take States’ policies into account. For example, in a 2011 rule about transmission planning, FERC required industry to account for States’ renewable energy goals in evaluating potential projects.
While the industry looks very different today than it did in 1935, the Federal Power Act’s original language still governs. The result is that courts are asked to decide whether State policies fall within the jurisdictional limits that Congress set nearly 80 years ago. Two federal appeals courts will soon decide whether New Jersey and Maryland overstepped their authority.
In New Jersey, the Legislature responded to a warning about grid reliability by passing a law that provided a subsidy for the construction of new gas-fired generators. Rather than paying subsidies from the State’s treasury to the new generators, lawmakers came up with a novel scheme. They required the State’s regulated distribution companies to pay the new generators the difference between prices set in PJM’s auctions and prices approved by State regulators. Faced with similar warnings about reliability, regulators in Maryland created essentially the same scheme, requiring that regulated distribution companies pay a new gas-fired generator the difference between PJM auction prices and prices approved by regulators.
Last fall, two Federal courts ruled that these mandated subsidies are unconstitutional. According to the courts, State regulators were effectively setting rates of wholesale power transactions. Therefore, the courts found that the States were intruding on FERC’s exclusive authority to regulate wholesale sales and violating the Supremacy Clause of the U.S. Constitution. The cases currently before the appeals courts would be appealable to the U.S. Supreme Court.
Although these cases are about gas-fired generation, an overly broad ruling by a court could implicate State renewable energy policies. That’s why the American Wind Energy Association (AWEA) weighed in, and asked the courts to issue narrow decisions that stick to the facts of these two cases. According to AWEA’s briefs, if an appeals court affirms the lower court ruling, it should draw a distinction between State policies that may unconstitutionally set a wholesale rate and policies that merely affect wholesale markets, such as Renewable Portfolio Standards. AWEA’s fear is that a court’s decision limiting State power could erroneously narrow the scope of State authority to promote renewable resources.
AWEA’s concern is far from academic. Since 2010, lawsuits that challenge renewable energy laws or regulators’ decisions approving renewable energy projects based on the Supremacy Clause or the Constitution’s dormant Commerce Clause have been filed in ten States.
In Connecticut, for example, plaintiffs similarly allege State action impermissibly intrudes on Federal authority. A law passed in 2013 allowed Connecticut regulators to conduct an RFP for renewable energy generation, select the winning projects, and then order the State’s electric distribution companies to sign long-term contracts. A solar developer that did not receive a contract alleges that the process is constitutionally flawed. The constitutional problem, according to the plaintiffs, is that by selecting the winning bid and requiring distribution companies to sign contracts according to the winning terms, State regulators effectively set the wholesale price and thus intruded on Federal authority.
At Statepowerproject.org, Harvard Law School’s Environmental Policy Initiative is tracking these cases. The site includes summaries of litigation, background about key concepts, and the judicial decisions and filed briefs. In the restructured and evolving electric industry, these challenges are likely to continue, as States look for new opportunities to reduce emissions and expand production of renewable energy.
Photo Credit: States and Renewables/shutterstock
Ari Peskoe joined Harvard Law School’s Environmental Policy Initiative as its Energy Fellow in January 2014. He has written extensively about electricity regulation, on issues ranging from electric vehicles to Constitutional challenges to states’ energy laws. Prior to the Policy Initiative, Ari was an associate at a law firm in D.C. where he spent most of his time litigating about the ...
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