Proactive States and a Dormant Federal Government: Do State Energy Regulations Violate and the Dormant Commerce Clause?

Posted By: Nicholas Ward, William Weber, Andrew Wenker, Alicia Wheeler, Evan Woodham, Chang Wu, and Brian Yee

coal-fired-power-plant-499908_960_720Introduction

In the absence of effective Congressional action addressing global warming and climate change, states have chosen to take matters into their own hands by enacting regulatory measures. State regulatory regimes are designed to create less carbon-dependent energy production by forcing energy companies, and sometimes developers, to explore new ways to promote energy conservation, energy efficiency, and use of renewable energy sources. These new state-implemented energy regulations, however, are not without controversy. Some argue that the regulations violate the doctrine of the Dormant Commerce Clause due to the national, and interstate nature of the country’s energy grid. When considering current state regulations light of the origin and development of the Dormant Commerce Clause, state regulatory measures do not violate the Dormant Commerce Clause so long as the benefits of the regulation outweigh any substantial burden on interstate commerce and are non-facially discriminatory in nature.

The Dormant Commerce Clause Defined

The Dormant Commerce Clause, also known as the Negative Implications of the Commerce Clause, was refined throughout the history of courts’ interpretation of the Commerce Clause, found in Article 1, Section 8, Clause 3 of the U.S. Constitution. While the Commerce Clause is an explicit grant of power permitting Congress to regulate interstate commerce, the Dormant Commerce Clause is a judicially imposed restriction on states’ power to enact legislation that interferes with interstate commerce. The Dormant Commerce Clause acts as an implied restriction on states’ power, and serves to prevent states from enacting legislation that either excessively burdens or discriminates against interstate commerce. A statute may fall outside the Dormant Commerce Clause’s power if it is rationally related to a legitimate state concern, and if the burden imposed on interstate commerce is outweighed by the benefit to the state interest the statute seeks to further. So, while the Commerce Clause deals with the federal government’s affirmative power to regulate commerce, the Dormant Commerce Clause suggests a restriction on individual states’ ability to enact regulatory statutes. Additionally, if there happens to be a direct conflict between a proposed state statute and a federal statute, the Supremacy Clause, allows the federal statute to trump, i.e. preempt, the state statute.

Jurisprudential Development of the Dormant Commerce Clause

Interstate Commerce and the Supremacy Clause

The Supreme Court developed and refined the doctrine of the Dormant Commerce Clause through its decisions regarding the separation of federal and state power as it relates to interstate commerce. To understand the Court’s modern view of the doctrine, one must look to the development of Commerce Clause jurisprudence, which was first famously addressed in Gibbons v Ogden. In Gibbons v Ogden, the Court held that a New York state regulation, giving the exclusive right to operate steamboats within the state of New York to two individuals, was invalid because of its interference with Congressional power. The Court held that the regulation of the steamboats was a reserved power of Congress as a product of interstate commerce. Therefore, Justice Marshall assumed, without deciding, that the states could regulate commerce using specific statutes if there was no direct conflict between the state regulation and an act of Congress.

After Gibbons, in Cooley v. Board of Wardens, the Court shifted its analysis to determine the scope of a valid regulation; the Court examined whether the commerce being regulated in this case was “local” or “national” in nature. In Cooley, the Court looked at whether a state-enacted interstate commercial regulation, which required all ships leaving or entering the port of Philadelphia to use a local pilot or pay a fine, violated the Dormant Commerce Clause. The Court held that the regulation did not violate the Commerce Clause because the regulation was local in nature. The Court reasoned that the states were free to regulate those aspects of interstate commerce that were of such a local nature as to require different treatment from state-to-state. However, the Court noted that states were not permitted to regulate aspects of interstate commerce which, by its nature, required the type of uniform national treatment only Congress could provide.

Formalism and the Direct/Indirect Test

After Cooley, the jurisprudence of the Supreme Court justices shifted, and the Court began to interpret constitutional questions primarily using a Formalist approach. Under the Formalist approach, the Court developed a rigid direct/indirect effects test to determine whether a state’s statute was constitutional under the Dormant Commerce Clause. Under the direct/indirect test, the Court examined whether a particular state regulation had a direct impact on interstate commerce, or if it only indirectly impacted interstate commerce. If a statute had a direct effect, it would be ruled unconstitutional even if Congress remained silent on the subject of the statute. However, state regulations that had an indirect effect on interstate commerce would be permissible if it was of such a local nature that the state would be better suited to regulate it.

Realism and the Reasonability Test

The political and economic turmoil brought about by the Great Depression resulted in legislation like the New Deal. President Roosevelt, in an attempt ensure the passing of these legislative initiatives, threatened to pack the Supreme Court with justices he perceived would be more favorable to the New Deal legislation. In order to preserve the nine member Supreme Court, individual justices shifted away their Formalist principles, in an event now called the “switch in time that saved nine.” This change ushered a new era of jurisprudence known as realism. The realist framework rejected the formalist belief that authoritative legal rule provides determinative outcomes. Instead, realists relied on the notion that if one applied the proper deductive logic to the right sources, it would bring about the correct conclusion. Thus, for realists, decisions became a choice between competing alternatives. Under these principles the Court largely abandoned the direct/indirect effects test and implemented a less rigid and mechanic, reasonability test. Under the reasonability test, if a state can offer a valid reason for a more restrictive statute affecting commerce, the statute can be found valid. The Court later refined this reasonability test into the “least restrictive” balancing test in which the Court balanced the restrictive statute’s alleged burden on interstate commerce against the purported state interests, discounted by the state law’s actual likelihood of success.

Modern Approach – Facially and Non-Facially Discriminatory Analysis

However, the “least restrictive” balancing test faced issues because members of the court believed it functioned as a form of judicial legislating. The Court attempted to interpret the Dormant Commerce Clause to prohibit states from enacting discriminatory statutes that burdened other surrounding states’ participation in interstate commerce. This attempt developed into the Modern Approach where the court would distinguish state statutes as being facially discriminatory and statutes being non-facially discriminatory. After that process is complete, the court will weigh the outcomes of facially discriminatory statutes to see if the possible health and safety measure will outweigh the burden placed on interstate commerce and can be found as valid. The court will also look and weigh the outcomes on the economy of non-facially discriminatory statutes to see if they are still substantially burdening interstate commerce, and will be found as invalid.

Under the modern approach, a facially discriminatory statute is virtually per se invalid under the Dormant Commerce Clause. A facially discriminatory statute is a law that appears to favor the state enacting the regulation in some way. In order to determine whether a statute is facially discriminatory, the Court examines whether the law facially discriminates against out-of-state actors within interstate commerce. For example, in City of Philadelphia v. New Jersey the Court examined whether a New Jersey statute that prohibited the import of out-of-state trash violated the Dormant Commerce Clause. In that case, the Court held that the statute was facially discriminatory because it was a purely economic protectionist measure, which only served to benefit the economy of New Jersey. Furthermore, the Court reasoned that the state could accomplish the state interest purported by the statute in another, less restrictive way.

In contrast, if a statute is facially discriminatory, but the main objective of a statute is the protection of the health and wellness of a state’s citizens, and there are no other alternatives for achieving this goal, then the virtual per-se rule of invalidity will not be applied. For example, In Maine v. Taylor, the Court examined the constitutionality of a Maine statute that forbade the importation of live baitfish in order to protect fisheries from parasites. The Court upheld the statute, because although it burdened interstate commerce, the state had a legitimate reason for the statute. The State argued that the statute was imposed because baitfish were contributing to the spread of disease and it was virtually impossible to test the baitfish for contamination. Therefore, because this was the only way the state could protect the health and wellness of its citizens, the Court held that the statute was a legitimate exercise of state power, despite its being facially discriminatory.

However, if a statute is non-facially discriminatory, the Court will engage in a balancing test to determine whether the statute violates the Dormant Commerce Clause. Under this balancing test the Court will weigh the alleged burden on interstate commerce against the alleged state interests, discounted by the state law’s actual likelihood of success. In regards to the state interest, the Court considers the availability of less restrictive options. For example, in the case of West Lynn Creamery, Inc. v. Healy the Court was asked to determine whether Massachusetts state tax on all milk sales from both in-state producers and out-of-state producers violated the Commerce Clause. The Court held that, although the statute was not facially discriminatory, it violated the Dormant Commerce Clause. The Court reasoned that the tax violated the Dormant Commerce Clause because, while the tax was aimed at all dairy producers, the in-state producers received a benefit from the tax that was greater than the tax cost to them. As such, the Court found that the tax functioned more similarly to a tariff than a straight tax, and thus, harmed the interstate commerce. Therefore, although the statute was facially non-discriminatory, it violated the Dormant Commerce Clause because the alleged state interest did not outweigh the burden on interstate commerce.

The Dormant Commerce Clause forbids state regulations that would substantially burden interstate commerce, or that facially discriminate against other states participating in interstate commerce. However, the courts will look beyond this facial discrimination if the regulation serves to protect the public safety and wellness, or is purely a localized and unique to the individual state. Furthermore, if a regulation is non-facially discriminatory, the Court analyzes the burden the regulation places on interstate commerce in order to ensure that it is not merely aimed to benefit the enacting state. The Court also weighs the state interest in regulating its local affairs against the national interest in uniformity and in an integrated national economy.

Whether Current State Energy Policies Violate the Dormant Commerce Clause Depends Largely on the State’s Legislative Purpose

Advancements in technology have debunked many of the myths surrounding global warming, showing the detrimental impact human activities, like the burning of fossil fuels and deforestation, have had one the environment. More specifically, advancements have proven global warming is caused by carbon dioxide and pollutants in the atmosphere, which prevent the sun’s radiation from escaping to outer space. The radiation that is trapped in the atmosphere builds overtime to warm the planet. In the United States alone, fossil fuels used in electricity production add about two billion tons of carbon dioxide a year to the atmosphere. Due to the immense amount of carbon dioxide production, its adverse effects on the environment, and the absence of federal legislation attempting to curb this, states like California, Colorado, Minnesota, and North Dakota, have started implementing energy regulation policies in order to ensure a less carbon-dependent future.

These state energy regulations, however, have proved troublesome for some people. The regulations have received resistance due to their effects on interstate commerce. As previously mentioned, a state is allowed to impose facially or non-facially discriminatory statutes that interfere with interstate commerce as long as the benefits of public health and wellness outweighs the burdens placed on interstate commerce. At first glance, it appears that states implementing these statutes are facially discriminatory due to the substantial burden placed on interstate commerce. Yet, after examining a sampling of various states’ regulations that were implemented to curb global warming and increase sustainable energy production, the policies do not appear to violate the Dormant Commerce Clause.

windmills-984137_960_720California

Due to California’s size and diverse environment, California has taken aggressive standards for energy regulation. Historically, energy regulation in California has been regulated by the California Energy Commission (“CEC”). The CEC was directed by the California legislature to adopt regulations, specify procedures, and verify eligible renewable energy resources. Additionally, the CEC and the California Public Utilities Commission (“CPUC”) worked collaboratively to implement a standard that would bring uniformity throughout California. Through the work of both programs, the Renewable Portfolio Standard (“RPS”) standard was established in 2002 and adopted under Senate Bill 1078.

Although the goals of the RPS were initially aggressive, they continued to become more rigid in the following years. In 2008, Executive Order S-14-08 was enacted, requiring all retail sellers of electricity to serve 33% of their load with renewable energy by 2020. Senate Bill X1-2 was then enacted in 2011, which expanded the prior order, and applied the 33% renewable energy standard to all electricity retailers in the state. This included publicly and investor owned utilities providers, electricity service providers, and community choice aggregators. Furthermore, all California producers were required to adopt the RPS goals of 20% renewable energy standard by 2013, 25% by 2016, and 33% by 2020. Failure to comply with the rates that the CEC set forth resulted in penalties, supported by an extensive state administrative system designed to enforce the RPS.

Consequently, California’s RPS carries significant regional implications. An Arizona report published in 2012 stated that California’s RPS mandate will affect the amount of renewable energy other states can export to California. According to studies by the Western Electricity Coordination Council (“W.E.C.C.”), 66% of the incremental renewable energy in the Western United States grid will go towards meeting California’s RPS requirement. In fact, it is expected that California’s RPS regulations will shape much of the renewable energy development in the Western United States.

Public utilities are also struggling to adapt to the California RPS requirements. A 2010 P.N.U.C.C. report that focused on wind power operations stated that meeting the regulatory demands would require a coordinated balancing of resources, creating regional operational challenges never before encountered.

Additionally, California’s RPS impact on regional production has given rise to new legal issues. One such issue concerns the extent to which California can coerce other states into conforming to its RPS standards. A utility district in Washington State has already called for a rehearing of a decision made by the California Public Utilities Commission that ruled in favor of California’s supposed coercion of its RPS standards. The Federal Energy Regulatory Commission responded to this issue by launching an investigation on the impact of California’s RPS standards in the region. Despite such attention from the federal government, California further looks to continue its stringent regulation by aiming for a 50% RPS mandate by 2030.

Due to these state mandates, some might argue the RPS and its mandates significantly burden interstate commerce such that it violates the Dormant Commerce Clause. Although the intended targets of regulation are intra-state, the standards have resulted in serious regional impacts. As previously stated, a study by the W.E.C.C. stated 66% of the incremental renewable energy in the Western United States grid will go towards meeting California’s RPS requirement. This will severely impact other state’s commercial renewable energy transactions with California, and may coerce policy reforms in other states to facilitate the transition. Given its purported adverse impact on regional production, California’s RPS may appear to impose a severe burden on interstate commerce.

However, it seems likely that California has placed a substantial burden on interstate commerce with their aggressive RPS regulations. These burdens might not be substantially outweighed by California’s strong state interest in protecting its natural resources and promoting efficient energy use for the welfare of its citizens. Though the regulations of RPS do not unilaterally target out-of-state utilities and is applied in a uniform manner, the regional impact in the surrounding states of California have been felt negatively. The negative impacts stated above, like litigation, and having California’s renewable energy program take over almost two-thirds of all the western states renewable energy, thus taking away the other states development of renewable energy. This all gives rise to believe that the burden on interstate commerce, and California’s renewable energy programs benefit at the expense of the other states in the western region, will have California’s regulation statutes to be in violation of the Dormant Commerce Clause.

Colorado

Colorado was the first state to pass voter-led Renewable Energy Standard (“RES”) in 2004. Under the RES program, electricity providers were required to produce a certain amount of power from renewable energy sources. Since the the passing of the voter approved ballot initiative, it has been expanded three times. Specifically under HB 10-1001, investor-owned utilities were required by 2020 to generate 30% of their electrical power from renewable energy sources and at least 3% of that 30% must come from distributed energy resources. RES was expanded again under SB 13- 252 which required 20% of cooperative utilities electricity to be from renewable energy sources.

Additionally within the state’s executive branch, the Governor’s Energy Office (“GEO”) also actively promotes energy conservation. The GEO wants to enable a new energy economy by promoting energy efficiency and renewable energy through new state and federal programs. One such program is ENERGY STAR, a voluntary federal Environmental Protection Agency (“EPA”) program that helps businesses and individuals save money and protects the environment by promoting energy efficiency. Another is the Federal Energy Regulatory Commission (“FERC”), which regulates Colorado’s power providers at a national level. Furthermore, the Public Utilities Commission (“PUC”) operates within the Colorado Department of Regulatory Agencies to provide regulatory oversight over public utilities and fixes utility rate

Although Colorado RES was voter-led, it has been faced several enactment issues. Certain aspects of the regulations such as transmission constraints for wind projects, has affected neighboring states, leading to interstate friction. Additionally, the current program is also not cost effective. Studies show that the Colorado RES only benefits specific industries, and will more heavily benefit those outside the state while in-state residents bear the brunt of costs. However, despite the efficiency concerns, the RES has been generally viewed to benefit the state because new wind power initiatives supports up to 7,000 well-paying Colorado jobs. The promotion of renewable energy has also attracted $7.8 billion in capital investment to the state’s economy.

Like other states with renewable energy standards, Colorado is also facing legal challenges to its program implementation. A recent 2015 10th Circuit Court of Appeals decision held that Colorado’s mandate did not violate the Dormant Commerce Clause. There, the court found the mandate did not impose burdens on interstate market for renewable energy. The court reasoned that the renewable energy requirement was not a price control statute, and did not link prices paid in Colorado with those paid out-of-state. Therefore, it did not discriminate against out-of-state corporations and did not burden interstate commerce. Other courts have not been uniform in their response: a recent 7th Circuit case held that the renewable mandates violate the interstate commerce clause, while the issue is still being debated before the 8th Circuit.

Minnesota

Minnesota state regulation may not violate the Dormant Commerce Clause because the significant environmental interest that it serves far exceeds the mild burden it places on interstate commerce.

In 1980, Minnesota established the Public Utilities Commission (“PUC”) for the purpose of regulating the state’s utilities. Meanwhile, the Minnesota Statute Annotated 216A.01 gave the PUC that authority to regulate.

The PUC shares responsibilities with the Minnesota Department of Commerce. In that regard, Minnesota’s utility standards are regulated differently than most other states, where agencies are charged with oversight of the legislative, judicial, and administrative functions. Minnesota Statute 216A.05 allocates the legislative and judicial functions of regulating utilities to the PUC. Meanwhile, both the PUC and the Department of Commerce share in the administrative duties.

The Minnesota Statute 216A.05, gives the PUC the power over utility ratemaking. However, in 2007 the Minnesota Legislature passed a statute requiring 25% of the state’s energy to come from renewable energy by 2025. Under the statute 216B.1691 subsection 2a, the increases in renewable energy use were to be gradual. The target for 2012 was 12%, 17% in 2016 target, 20% in 2020, and 25% in 2025. In 2013, the state legislature expanded M.S.A. § 216B.1691 to require all electricity utilities in the state to produce 1.5% of the electricity by solar energy. With the addition of the solar energy requirement, 26.5% of energy produced in 2025 must be from renewable sources.

These regulations are similar to those imposed in California. Minnesota’s PUC imposes increasingly rigid mandates on energy producers and aims to encourage renewable energy. These burdens, however, are not significant. Like in California, Minnesota places a heavy focus on public interest for the environment, which may negate the burden it imposes. As a result, Minnesota’s statutory regulation may not violate the Dormant Commerce Clause despite its regional impact.

North Dakota

In addition to the aforementioned states, North Dakota has also enacted environmental regulations that may not violate the Dormant Commerce Clause.

In 2007, the state legislature passed passed H.B. 1506, which was designed to monitor the amount of electricity sold in the state from renewable resources. The bill established a voluntary non-binding objective that by 2015, 10% of electricity produced would come from renewable resources. The law is codified in the North Dakota Century Code Section 49-02-24. Although the objective is voluntary, electricity providers are still required to report on how they are complying with the objective. The bill is not applicable to energy being sold out-of-state, which makes the regulation non-facially discriminate. Moreover, there is no penalty against the in-state companies for failing to reach the statutory objectives goal. So, the bill cannot be said to substantially burden interstate commerce either.

The foregoing reasons suggest that the North Dakota energy regulations do not violate the Dormant Commerce Clause.

Conclusion

The answer to whether state energy regulations violate the Dormant Commerce Clause depends on how the statute is written and implemented. If the state’s regulatory statute is non-facially discriminate and does not impose a substantial burden on interstate commerce, it will be permissible. If the statute is facially discriminatory it will not be permissible, unless there is considerable evidence demonstrating that the statute was imposed to promote the health and safety of the citizens and the environment.

Specifically, in regards to environmental law, regulations that are designed to shift states’ energy usage from fossil fuels to renewable sources often result in a substantial burden being placed on states with energy companies that do not produce renewable energy. This could be viewed as being discriminatory towards those non-renewable energy companies and, thus, the states. However, the health and safety of the people and of the environment will be weighed against this burden. Therefore, it is likely that the courts will uphold the environmental regulation statutes and find that the statutes do not violate the Dormant Commerce Clause because the overall greater good to preserve the environment will be found more substantial than the burden placed on interstate commerce.

Although states have imposed heavy energy utility rates by their own agencies in the past, this does not necessarily set a precedent for the future regulation. Some weight might be given to the state’s argument that since they have historically regulated energy rates in their state, that they should be allowed to continue to do so. Yet, it is important to remember that the Commerce Clause in the United States Constitution gives the exclusive power to Congress to control interstate commerce, and if there is a conflict between state and federal laws, the Supremacy Clause yields authority to federal law. The Dormant Commerce Clause is an implied limitation on state powers to not excessively burden interstate commerce, and the Constitution does not give exclusive power to Congress to regulate energy rates. Therefore, because states are allowed to make laws that do not violate the Dormant Commerce Clause, it is likely that the fact that states have historically set energy rates will have a minimal impact on the future of environmental regulation.

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Proactive States and a Dormant Federal Government: Do State Energy Regulations Violate and the Dormant Commerce Clause?