Putting the dormant Commerce Clause back to sleep: adapting the doctrine to support state renewable portfolio standards.

Author:Lee, Daniel K.
Position:V. Challenging California's RPS and AB 32 Implementation through VI. Implications and Prescription, with footnotes, p. 330-364
  1. Challenging California's RPS and AB 32 Implementation

    Perhaps learning from the TransCanada litigation, California has strived to protect its renewable standards from constitutional invalidation by removing location classifications from its RPS. Initially, California largely prevented use of renewable energy credits generated out-of-state to meet its RPS. (267) This changed in 2006 when California amended its RPS to allow energy suppliers to use renewable energy that was generated out-of-state. (268) In 2010, California passed legislation specifying that 25% of a supplier's RPS obligations could be met using unbundled RECs. (269) California created three categories of energy resources that could be used to satisfy the RPS. (270) Category 1 includes energy that either has its first point of interconnection with a California balancing authority (271) or uses a dynamic transfer (272) from another balancing authority. (273) Because dynamic transfers are uncommon, complicated processes, most out-of-state renewable energy projects are unlikely to qualify for this first category. (274) This is problematic because Category 1 comprises a large portion of the energy eligible to satisfy California's RPS-utilities must obtain 50% of their RPS compliance from this category by 2013 and 75% by 2017. (275) Category 2 is for firmed and shaped energy. (276) By 2016, utilities must obtain between 15% and 25% of their RPS compliance from renewable energy in this category. (277) Finally, under Category 3, other renewable energy products, including unbundled RECs, may comprise no more than 10% of RPS compliance after 2016. (278)

    In a recent decision, the California Public Utility Commission (CPUC) determined that unbundled or transferable RECs (TRECs) would not qualify for meeting Category 1 (from which 75% of RPS compliance must be obtained by 2017); instead, only energy that was bundled together with its associated renewable energy would qualify. (279) Thus, just as with the Missouri case, (280) California prohibits TRECs from being used to meet the largest required category for RPS compliance. (281) Utilities must instead meet this energy category by providing credits associated with renewable energy that is actually used inside California. The CPUC decision also provided that RECs associated with distributed generation would be characterized as unbundled, and therefore ineligible for Category 1 status, if the energy is consumed on the site and not sold along with the renewable energy credit. Thus, because distributed generation RECs (which are typically generated in-state) are considered unbundled, they will be competing for Category 3 compliance with other out-of-state unbundled RECs.

    1. Cowlitz County's Claim Before the California Public Utilities Commission

      Public Utility District No. 1 of Cowlitz County, Washington (Cowlitz County) recently challenged the constitutionality of the California three-category RPS structure and the CPUC rules implementing it. (283) Cowlitz County is both a preference wholesale customer of the Bonneville Power Administration and a project developer that has spearheaded several wind projects to export energy to meet California's RPS. The County claims it was harmed when it lost a contract with Pacific Gas & Electric to provide wind energy to California. (284) Cowlitz County alleged that this harm was caused by the uncertainty inherent in the California RPS and exacerbated by the CPUC's failure to provide standards for out-of-state generators to qualify for Category 1 compliance. (285)

      First, Cowlitz County attacked the overall RPS structure directly because of its differential treatment of in-state and out-of-state projects:

      Since the vast majority of out-of-state facilities will be unable to connect directly to the California grid and the protocols and procedures for dynamic transfers of intermittent renewable resources are still under development, few out-of-state transactions are likely to be able to qualify for Category L Most instate facilities will be connected directly to the California grid, however, and will easily qualify for Category l. (286) Although Cowlitz County acknowledged that neither the legislation nor the decision used state-based criteria in defining the categories, the County claimed that the legislation and decision had the practical effect of imposing "very different burdens to the disadvantage of out-of-state generators and to the benefit of in-state generators." (287)

      The County also argued that the CPUC had discriminated against interstate commerce in its decision because the CPUC's failure to clarify how out-of-state projects could comply with the rules exacerbated the larger burdens on out-of-state renewable energy projects. (288) Although the CPUC had specified how in-state transactions could qualify for Category 1 treatment, it failed to specify standards for out-of-state renewable energy projects to qualify for Category 1 RPS compliance. (289) The County contended that this failure created additional uncertainty in the ability of out-of-state energy to meet Category 1 compliance, and therefore constituted discrimination against out-of-state commerce. (290) Specifically, Cowlitz County argued that there is "no clear underetanding" regarding how an out-of-state generator could be scheduled "into a California balancing authority without substituting electricity from another source" or complete a "dynamic transfer," which were the only statutory options for generators to qualify for Category 1 if they could not connect directly to California's grid. (291) Indeed, the CPUC admitted that "the techniques and protocols for dynamic transfer are evolving." (292) Finally, Cowlitz County argued that additional requirements for Category 2 compliance, such as the bundling requirement for firmed and shaped energy, further reduced the ability of out-of-state energy to qualify for California RPS compliance. (293)

      Although Cowlitz County references the bundling requirement for Category 2 compliance, Cowlitz interestingly does not refer to the bundling requirement for Category 1 compliance. Still, the bundling requirement could, in and of itself, constitute a dormant Commerce Clause violation because it prohibits the use of RECs associated with energy sold out-of-state. This prohibition could constitute discrimination against interstate commerce on its own. The requirement that the energy associated with the REC must also be sold in the state is arguably facial discrimination. Although the RPS does not mention whether the energy is sold in the state, the terms "bundled" and "unbundled" have this same effect. California cannot avoid facial discrimination simply by using synonyms for in-state requirements. Indeed, the Supreme Court has stated that discrimination is forbidden "whether forthright or ingenious." (294) And even if the requirement of bundling is not facially discriminatory, it nevertheless causes a discriminatory effect, which can on its own violate the dormant Commerce Clause.

      Still, California could make at least two arguments in support of its RPS. First, the state could argue that its RPS does not prohibit interstate commerce because an energy producer can still comply by keeping RECs bundled with the energy and making sure the energy is used in California. Second, California could point out that some unbundled RECs are accepted for compliance purposes under Category 3.295 Thus, the state's RPS arguably does not cause a 100% discriminatory effect because out-of-state renewable energy producers can avoid the prohibition by simply bundling the RECs and the energy and can still compete for Category 3 compliance.

      However, the first argument--that discrimination is not present because out-of-state generators can meet the requirement by bundling--relies heavily on the assumption that bundling is possible for out-of-state generators. Bundling requires that the energy be used in the state. (296) For a generator that is out-of-state but extremely close to the border, it can guarantee that its energy will be used in the state by connecting directly into the California grid from transmission lines that do not lead to another state's grid. (297) However, for generators that are more than one state away and must transmit energy through several other state grids, it is difficult to guarantee that this energy ultimately connects to California's grid. Thus, a bundling requirement may effectively prevent interstate commerce if it is too difficult to prove that the energy and the REC are still bundled; in other words, it is too difficult to prove that the energy was used in the state. (298)

      The second argument ignores that the only category for which unbundled credits would be permitted will comprise no more than 10% of RPS compliance. Although some court precedent indicates that less than a 100% discriminatory effect must be accompanied with evidence of discriminatory purpose for a dormant Commerce Clause violation to be present, (299) California's RPS places this absolutist language under great strain and shows the absurdity of such a test. Surely, a 99.9% discriminatory effect would also lead to a dormant Commerce Clause violation. Such line drawing is not administrable. A 90% discriminatory effect may be permissible in some instances when it is due to noninstitutional factors. However, California's RPS specifies the exact percentages of bundled and unbundled RECs necessary for compliance--percentages that can be more easily met by instate, as opposed to out-of-state, providers. Further, considering that out-of-state providers would be supplying the vast majority of unbundled RECs, a 90% ban on such RECs would also carry considerable weight when analyzing the violation under the Pike balancing test for excessive burdens on interstate commerce.

      On the other hand, a state surely need not award compliance credit for energy used in another state. An attempt to do so...

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