Abstract
How do federal law and regulations of energy infrastructure influence the “energy mix” of a society? This paper explores the national and regional administrative regimes for electricity transmission (commonly referred to as “the energy grid”) in the United States of America. Mandated by the national government and empowered by an interpretation of the “Dormant Commerce Clause” of the US Constitution, these institutions exert control over the domestic market price of energy. Through an analysis of three case studies, this report highlights how the unique juxtaposition of rights delegated to individual states and the intricacies of federal constitutional law can determine the types of American energy production, and indirectly, their impact on the environment.
Introduction
While the United States of America relies on traditional sources for two-thirds of its energy supply (mainly natural gas for electricity generation and industry, and petroleum for transportation), the new millennium has been characterized by a growing interest in renewable sources. Within the electric sector, the traditional fuels of coal and natural gas account for roughly one third of this supply each, with diminishing reliance on coal as natural gas replaces it for a variety of reasons, including lower production costs and lower contributions of emissions associated with climate change. However, in some regions of the U.S., the price of renewable energy has fallen significantly, and can pass below that for natural gas due to economies of scale and technological advances. For instance, a report found that the industrial-scale production costs for utilities of one megawatt-hour of electricity from solar stood at around $50, compared to $60 for natural gas, $102 for coal and $148 for nuclear (James and Pulman).
Given the push toward cleaner energy sources, a combination of factors must be accounted for when integrating these sources. Grid connections play a vital role in electricity generation and transmission, and thus state and federal electric grid policies have come to the forefront of this topic in American energy law and policy. Since the 1970s, the process of “restructuring” in the U.S. has meant greater interconnection between states, as well as new opportunities for smaller and independent power generators to contribute to the grid (Chernyakhovskiy et al., pg. 9). The American energy grid’s jurisdiction, like many other areas of law, observes a federal system arrangement shared between national and state authorities. Two main administrative bodies oversee energy industry regulation within the country, the FERC and NERC, as discussed below (Chernyakhovskiy et al., pg. 9).
Despite what could seem a relatively simple industry and regulatory scheme, the power grid system within the US in fact contains numerous intricate parts, both in terms of the physical set-up of the network, but also in the administration of said system. While the federal government essentially controls the inter-state aspects of transfer and sale of electricity, states may also exert their own influence in this and related realms, such as the incentives for, and limitations provided on specific types of power generation. This federalist tension has proven a catalyst for conflict, especially between state regulators and national electricity administration bodies. The following study will explore three cases of this sort (Energy and Environment Legal Institute v. Epel; Hughes v. Talen Energy Marketing; and Village of Old Mill Creek, et al. v. Anthony Star, et al), with a discussion of the facts and specific details of each case, as well as an analysis of the roles and tensions of different levels of government at the state and federal levels. Ultimately, all three cases provide an opportunity to better understand the continual influence of the American Constitution’s Dormant Commerce Clause as a limitation of the deployment of renewable energy sources across the country.
Background: American Administrative Entities in Electricity Commerce and Transmission
The FERC, or Federal Energy Regulatory Commission, presides over wholesale and interstate energy sales in the U.S. States can have jurisdiction over some connections, but “have limited authority over facilities that provide services across state lines or participate in interstate wholesale electricity markets” (Chernyakhovskiy et al., pg. 10). The landmark 1977 Department of Energy Organization Act designated the FERC as the administrative body competent for the regulation of interstate electricity commerce. Commissioners of the FERC, appointed by the President of the U.S. and who serve for five year mandates, propose and decide “orders,” or regulatory decisions. To legitimize its actions, FERC refers to the U.S. Constitution, specifically Article 1.8, known as the “Interstate Commerce Clause.” This clause retains the authority to regulate commerce across state borders within the powers of the United States Congress.
Table 1: Comparative table of the functions and jurisdictions of the FERC and NERC.
Source: Chernyakhovskiy et al., pg. 11.
Since the Federal Power Act of 1935, the Federal Power Commission (the predecessor to FERC) was charged with “provid[ing] effective federal regulation of the expanding business of transmitting and selling electric power in interstate commerce,” (Chernyakhovskiy et al., pg. 10) which guaranteed federal jurisdiction for all actors involved in the generation or transmission of power across state borders. In addition, the Supreme Court may also adjudicate on the authority of FERC in matters of tariffs, transmission plans and interconnection requirements. This said, the powers of FERC remain limited in scope, and cannot relate to the distribution of electricity on a local level, electric retail sales rates, the choice of sites for plants, construction and environmental matters, or the safety requirements for generators, with the sole exception of some hydroelectric facilities (Idem).
A second administrative body, the NERC, or North American Electric Reliability Corporation, focuses its competence on the reliability of the continent’s bulk energy transmission systems. There are three main interconnections, each independent from the others: the Western Interconnection, the Eastern Interconnection, and the Electricity Reliability Council of Texas (ERCOT) Interconnection. Rather than the commerce- and policy-based competence of FERC, NERC ensures the reliability of the systems and can enforce standards “in an ongoing process that is designed to respond to changing market conditions and transmission system properties” (Idem).
Within the national framework, the NERC contains eight regional entities to determine the implementation of policies and ensure standards of reliability. “The eight regional reliability entities in North America are: Florida Reliability Coordinating Council (FRCC), Midwest Reliability Organization (MRO), Northeast Power Coordinating Council (NPCC), ReliabilityFirst (RF), SERC Reliability Corporation (SERC), Southwest Power Pool, Inc. (SPP RE), Texas Reliability Entity (Texas RE), and Western Electricity Coordinating Council (WECC).” (See Annex 2 for a map of their jurisdictions.)
These entities include members from federal agencies, utility companies, energy cooperatives, power sales and marketing agents, independent producers and customer advocates. The eight entities bear some autonomy over the strictness of requirements concerning regional reliability. For example, the Texas Reliability Entity created the “Primary Frequency Response in the ERCOT Region” policy, which mandates a steady-state frequency in ERCOT’s jurisdiction (Chernyakhovskiy et al., pg. 11).
In other states with robust renewable energy resources, a new plan overseen by the NERC for the creation of ‘intelligent’ transmission infrastructure began development in 2004. For example, the Kansas Development Finance Authority shows success in the promotion of renewable energy sources and new transmission infrastructure within the state, thanks to great flexibility to create taxes and issue bonds with tax exemptions. On the other hand, the Clean Energy Development Authority of Colorado serves as example of a weak authority in this field, because of a lack of budget to hire a sufficient workforce, or to offer significant financial incentives. Other regional efforts are currently underway to coordinate transmission and renewable energy planning. For instance, the non-partisan Western Governors’ Association (which represents 19 states and three territories in the Western part of the United States) is spearheading one such program, called the WREZ (Western Renewable Energy Zones) project (Chernyakhovskiy et al., pg. 27).
Figure 1: “NERC Regional Entities,” Source: Chernyakhovskiy et al., pg. 12.
Case Study Discussion: The Power and Limits of Energy Regulation in a Federal System
First, the aforementioned example of Colorado’s rudimentary renewable energy industry offers an excellent illustration of the tensions between federal and state governments in this industry. The 2004 election proved a pivotal moment in the history of energy policy for the State of Colorado. Voters approved the RES, or Renewable Energy Standard, which requires “electricity generators to ensure that 20% of the electricity they sell to Colorado consumers comes from renewable sources,” defined in the legislation as renewable and recycled energy sources (Sanchez-Secor, pg. 101). The legislation also sought progressive goals, with this proportion of renewable energy set to rise in future years, with the goal of 30% in 2020.
Rod Lueck of the Energy and Environment Legal Institute, or EELI, brought a case to challenge the RES policy, claiming that it violated the doctrine of the Dormant Commerce Clause of the US Constitution. EELI, formerly called the American Tradition Institute, describes itself as “a non-profit organization… dedicated to the advancement of rational, free-market solutions to land, energy, and environmental challenges in the United States,” according to the Second Amended Complaint of the Plaintiffs for Injunctive and Declaratory Relief (Idem).
Actually a judicially-mandated doctrine, the Dormant Commerce Clause originated from the interpretation of the 8th Section of the First Article of the U.S. Constitution, Clause 3, which allows Congress “to regulate commerce… among the several states.” Courts have cited this passage to apply to any regulation of commerce that affects more than one state, on an interstate basis, giving Congressional acts direct preemptive status over any local or state regulation with regard to interstate commerce. However, the ability of judicial officials to overrule state or local acts that provide an undue burden to interstate commerce lacks federal regulation in this sense. Thus, judges employ two modes of examination to local and state laws: The first, a discrimination test, intends to show if a state or local law provides discriminatory conditions toward entities of another state. Second, the Pike balancing test assesses if the possible benefits from the local legislation could exceed the potential burdens of the act on interstate commerce. Finally, a third and more rare test, based on legal precedent from the case of Baldwin v. F. A. F. Seelig, Inc., maintains that state laws cannot regulate business affairs entirely outside their own jurisdiction (Sanchez-Secor, pg. 102-103).
In EELI’s original complaint, filed on July 12, 2011; Lueck outlined the fact that the citizens, and thus energy consumers of Colorado participate in an interconnected grid of sale and purchase of energy, which includes eleven states and some parts of Mexico and Canada. Given the interstate nature of the electrical grid, EELI maintained that Colorado’s new RES policy would cause damage to out-of-state traditional energy producers, such as coal suppliers and coal-fired power plants, which participate in the grid, via the sale of their products and energy. A preliminary ruling from the US District Court of Colorado, the first level of federal court for that jurisdiction, rejected the claim on the basis of a violation of the Dormant Commerce Clause (DCC). EELI appealed this decision to the 10th Circuit of the United States Court of Appeals, the second level of federal court available in Colorado, with the added allegation that the RES infringed on the extraterritoriality principle of the DCC. Again, the Tenth Circuit rejected EELI’s claim, refusing a violation of the extraterritoriality principle “because Colorado’s RES mandate (1) was not a price control statute, (2) did not link Colorado utility prices to prices paid out of state, and (3) did not discriminate against out-of-state businesses” (Idem, citing Energy & Environnmental Legal Institute v Epel, 793 E3d 1169, 1174, 1177 – 10th Cir. 2015).
In the end, the 10th Circuit Court agreed with the earlier decision of the District Court, rejecting EELI’s arguments that Baldwin’s extraterritorial principle applied since EELI failed to demonstrate how the RES could cause disproportionate harm to out-of-state businesses. The Court also denied EELI’s request for an additional period of discovery, for its failure to demonstrate why this additional period could be necessary.15 One could consider this decision a victory for the renewable energy industry, as Colorado could maintain the RES policy without challenge. Unsatisfied with the result of both of the hearings, EELI appealed once again, this time to the ultimate level of judicial jurisdiction in the US, the Supreme Court, on October 9th, 2015 (Sabin Center).
The final, a certiorari petition to the Supreme Court from EELI focused on a review of the previous decisions of the District Court and 10th Circuit Court, arguing that the Circuit Court did not consider a wide enough definition of previous precedents from the Supreme Court in matter of state regulation of extraterritorial conduct. EELI attempted to claim that the classic “conceptual trap” of “pigeon-holing” cases into the context of the Dormant Commerce Clause was due to ignorance of the structure of the electric transmission system itself, as inherently interstate in nature. EELI also maintained that the Supreme Court should decide the case, given the dangers it posed as setting a precedent for energy transmission policy nationwide (Idem).
Several industry-supported think-tanks and lobby groups, such as the Cato Institute and the U.S. Chamber of Commerce filed Amicus Curiae briefs in support of the original petition. First, in Cato’s introduction to its brief, the organization claims that while the grid that supplies Colorado with electricity includes eleven states, Canada, and Mexico; that the “electricity used anywhere within this grid can come from any source that services it and, once loaded onto the grid, this electricity is identical, regardless of how it was produced or the fuel used to generate it.” Indeed, once turned to electrons, electrical current is identical, no matter the source. However, the consequences of the activity employed to generate that electricity can be quite diverse, from the pollution-intensive burning of coal to the relatively clean use of renewable sources. Cato failed to recognize any difference in this regard, simplifying their arguments without any consideration for the environmental externalities involved in power production. Cato continued that Colorado’s law sought an extraterritorial application, to regulate economic activity with effects outside of the state, which would be in violation of the Dormant Commerce Clause (François).
The U.S. Chamber of Commerce also filed an Amicus Curiae brief, which focused on two questions: First, whether the Tenth Circuit Court committed an error in deciding to limit to price control and affirmation statutes the Constitution’s ban on extraterritorial legislative or regulatory acts by states. Second, they posed the more precise question of whether or not Colorado could prohibit the sale of electricity from other states, with regard to source or price. The Chamber argued that Colorado’s RPS would have the effect of extraterritorial regulation of commerce by applying quotas to power supply source. In addition, they claimed that the legislation discriminated against, and creates disproportionate burdens on, out-of-state energy companies. As a testament to the bias of its interests, the Chamber clarifies that the brief was filed jointly with American Fuel and Petrochemical Manufacturers Association (U.S. Chamber Litigation Center).
After less than two months of consideration, the Supreme Court ruled on the case in December 7th, 2015. The Court outright denied the a certiorari petition, upholding Colorado’s RES standard yet again. The decision makes a clear statement in defense of the State policy, showing no direct violation of the Dormant Commerce Clause (Sabin Center). Since the EELI v. Epel ruling, federal courts (including the Supreme Court) have heard several other cases on the subject of renewable electricity transmission. In January, 2016, the Supreme Court ruled in a 6-2 decision to support the FERC’s authority to regulate the wholesale energy market, even when this regulation indirectly affects the conditions of energy sales on a consumer level. In the FERC v. Electric Power Supply Association, the Court backed Order 745 of the Commission, which gives suppliers of demand response current a fair price for their product. A second case from 2016, Hughes (Chairman of the Maryland Public Service Commission) v. Talen Energy Marketing, arose from a complaint of FERC about officials from the State of Maryland who had effectively limited the price of power at an inter-state level by guaranteeing a price rate for electricity from a new natural gas plant, even before it entered the electricity market (Walton).
The above cases highlighted the capabilities and limitations of states in the determination of the prices and production methods of their energy supplies. While states can normally exert the right to determine energy policy, the FERC via the Federal Power Act, retains the right to ensure that the energy market exhibits fair and equal conditions. Supporters of renewable energy backed the side of Maryland in the second case, arguing that states should be allowed more freedom to choose energy supply modalities(Walton). In the end, the Court ruled that Maryland’s subsidy of the power producer did not take account of the FERC’s preemption in the wholesale energy market, and thus overruled Maryland’s intervention. Any price guarantee for a new producer could be overruled on these grounds, as prices remain a competence of the federal government through the FERC (LII Cornell).
The Commission argued in its Amicus Curiae brief for the case that a decision of the court to strike down Maryland’s program “would not disable states from taking any action that has an effect on supply or demand in the wholesale market… If the court holds that the specific Maryland program at issue here is preempted, the states will retain significant authority to promote new generation of clean energy within their reserved jurisdiction” (FERC, 2016). In addition, FERC claimed that states can provide incentives for new (including renewable) electricity plants, implement limits on the type of energy produced within their borders, and also force older plants to retire, which can all have indirect effects on the electricity market. States may also grant tax-free bonds, offer discounts on property tax, create site leases on public lands that favor producers and recycle “brownfield” properties that were previously polluted for new projects (Walton).
However, advocates of renewable energy supported Maryland’s claim, even though it concerned a natural gas plant (a non-renewable energy source) because they believe greater delegation of energy policy to states could be beneficial for their industry. The American Wind Energy Association filed an Amicus Curiae brief to that effect, arguing that “New renewable energy facilities, like other sources of generation, cost in the millions of dollars, and any practical investor requires a dedicated income stream prior to breaking ground. Long-term contracts and other state-mandate programs are often essential to the financing and construction of new renewable energy facilities” (Grace, pg. 16). Indeed, the AWEA also argued that a decision by the Court against Maryland’s authority could lead to additional cases of renewable energy programs weakened by the federal push for deregulation of prices, leading states to lack control of the type of energy generated internally.
Another case from the US District Court for the Northern District of Illinois (a federal court, under the jurisdiction of the Supreme Court) cited the Maryland decision heavily in its own decision. (The list of plaintiffs and defendants on the case is rather long. Commonly known as “Village of Old Mill Creek et al. v. Anthony Star, et al,” the original claim includes the following: “VILLAGE OF OLD MILL CREEK,et al., Plaintiffs, v. ANTHONY M.STAR ,in his official capacity as Director of the Illinois Power Agency, et al., Defendants. and No. 17 CV 1163 and No. 17 CV 1164 Judge Manish S. Shah ELECTRIC POWER SUPPLY ASSOCIATION,et al., Plaintiffs, v. ANTHONY M.STAR, in his official capacity as Director of the Illinois Power Agency, et al., Defendants.”)
In the end, the Court dismissed the challenge from fossil fuel companies, who sought to overturn the Illinois Future Energy Jobs Act. The Act, supported by environmental NGOs such as the Natural Resource Defense Council, includes a set of policies to increase efficiency and provide incentives for renewable energy producers. Nuclear energy producers were included in the Act, because they would be awarded subsidies in exchange for “Zero Emissions Credits,” which symbolize their carbon neutrality. The NRDC acknowledges the dangers and risks associated with nuclear power, but also clarifies that this portion of the Act represents a small minority of the total funding, the majority of which was destined to improve clean energy production and reduce pollution in Illinois. Thus, the Amicus Curiae brief filed by the NRDC was not to support the nuclear industry, but rather to defend states’ rights to determine their own energy supply policy (Farmer, 2017).
The plaintiff, the Village of Old Mill Creek, used the Supreme Court’s decision in Hughes v. Talen Energy Marketing LLC as a key part of its argument. However, the Court ruled that a key difference existed between the two cases, in that the Maryland program involved a direct contractual agreement between the State of Maryland and a potential power producer to fix the price of the producer’s product to a certain level, which would have impeded on the authority of the FERC. The Northern District Court underlined the limits of this case, pointing out that it could not apply this logic to Illinois’ program (Farmer, 2017).
Conclusion
One could anticipate clear or distinct regulatory methods for the creation of unified, cohesive energy policy in the US, given the crucial importance of energy supply to the infrastructure and economy of the country. However, the federal nature of the American Constitutional governmental structure transposes the complications of the US’ system of laws on to the nation’s power grid system. Although two formalized structures exist to regulate the sale and transmission of electricity (the FERC), and to ensure the quality of the grid system (the NERC), both lack dynamic planning power for future energy system development, or the ability to enforce strategic decisions on a territorial basis. This, the federal government may control interstate sale and transfer of electricity, but it lacks the power that states can place “on-the-ground,” in promoting or limiting certain types of electricity industries and sources.
As displayed in all three of the cases mentioned (Energy and Environment Legal Institute v. Epel, Hughes v. Talen Energy Marketing, and Village of Old Mill Creek et al. v. Anthony Star, et al), the federal government and public regulatory authorities have found themselves in conflict with state regulators over the policy choices made by the states, and their effects on the national energy system’s structure. All three cases show the delicate interplay between the judicial interpretation of the Constitution’s Dormant Commerce Clause, which federal agencies have used essential in attempts to limit the implementation of renewable energy policies, often given industry pressures to conform to traditional electric generation methods. Clearly, a more cohesive, centralized energy policy for the adoption of renewable energy standards would alleviate the tensions so common to this field between national and state agencies. Under the leadership of the current administration, the prospect and chances of such a transformation seem unlikely. However, as with many areas of policy, often a change in political climate and representation can signify a pendulum shift in public and administrative policy.
Note: This report was written as part of a final term project on the subject of “Administrative procedures for the authorization of renewable energy plants,” for the LLM in Sustainable Development course entitled, Administrative Law:The Role of Public Administration in Enhancing Equitable and Sustainable Development.
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