State Programs to Encourage Renewable Energy Are Constitutional (In Case You Were Worried)

Last week, the 2nd Circuit Court of Appeals affirmed a District Court decision rejecting a challenge to Connecticut statutes intended to encourage renewable energy development in Connecticut.  It’s a critical win, not just for Connecticut, but for many renewable energy programs in other states across the country as well.

(Important caveat.  These cases are bloody complicated and no blog could possibly summarize them without omitting important details.  Hold your criticism!)

Allco Finance develops small renewable energy facilities that are considered “qualifying facilities” under Public Utility Regulatory Policies Act.  PURPA guarantees QFs the right to sell energy to utilities at the utilities’ avoided costs.

In 2013 and 2015, Connecticut enacted legislation to encourage use of renewable energy in Connecticut.  The legislation authorized the Department of Energy and Environmental Protection to solicit renewable energy proposal and to “direct” utilities to enter into bilateral contracts with the winners.  Allco alleged that DEEP was “compelling” utilities to enter into contracts and thus encroached on FERC’s exclusive regulatory authority over wholesale prices.

Even though the case was at the motion to dismiss stage, the Court was able to reject Allco’s arguments, because, notwithstanding the “direct” language, documents referenced in Allco’s complaint made clear that:

[t]his RFP process, including any selection of preferred projects, does not obligate any [utility] to accept any bid,” and (b) that the winning bidders “will enter into separate contracts with one or more [utilities] at the discretion of the [utilities].

Thus, the Court concluded that the statute did not encroach on FERC authority and was not preempted.  Importantly, the Court distinguished the Supreme Court’s recent decision in Hughes v. Talen Energy Marketing.  Rather than interfering with a FERC-approved auction, as was the case with the Maryland program in Hughes, the Connecticut RFP actually required FERC approval of any contracts between utilities and renewable power producers.

Allco also challenged Connecticut’s Renewable Portfolio Standard, alleging that it violated the dormant Commerce Clause, because it disadvantaged owners of out-of-state renewable energy certificates.  The Court found that, because Connecticut is only served by electricity generated within ISO New England and certain adjacent areas:

we here recognize the importance of Connecticut’s interest in protecting the market for RECs produced within the ISO-NE or in adjacent areas. Connecticut’s RPS program serves its legitimate interest in promoting increased production of renewable power generation in the region, thereby protecting its citizens’ health, safety, and reliable access to power.

Significantly, we note that Connecticut’s RPS program makes geographic distinctions between RECs only insofar as it piggybacks on top of geographic lines drawn by ISO-NE and the NEPOOL-GIS, both of which are supervised by FERC—not the state of Connecticut.

Thus, the Connecticut program did not violate the Commerce Clause.

Klee’s importance almost cannot be overstated.  It is not just that it gives necessary backing to Connecticut’s renewable energy program and similar programs in other states.  It also provides a fairly clear roadmap for what states must do in order to ensure that their programs pass constitutional muster.

Big sigh of relief in green states.

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