Colo. Ruling Bolsters State Green Energy Mandates

Source: By Keith Goldberg, Law360 • Posted: Friday, May 16, 2014

Law360, New York (May 14, 2014, 6:28 PM ET) — A federal judge’s recent dismissal of a suit challenging the constitutionality of Colorado’s renewable energy mandate will give officials in other states confidence that their clean energy requirements can survive similar challenges, though experts say it’s unclear how strict the mandates can be without tripping over the dormant commerce clause of the Constitution.

Fossil fuel advocates Energy and Environment Legal Institute had claimed Colorado’s Renewable Energy Standard, which requires state-regulated utilities to draw a percentage of their power from renewable sources, unlawfully regulates out-of-state, nonrenewable energy in violation of the dormant commerce clause — but that argument didn’t fly with U.S. District Judge William J. Martinez.“A finding that these statutory incentives for renewables raise commerce clause issues would have had a major ripple effect,” said Arnold & Porter LLP partner Matt Douglas, who is based in Denver.

For the 29 other U.S. states that have RES — also known as a renewable portfolio standard — programs of their own, along with the District of Columbia, Friday’s ruling means they can breathe a little easier, experts say.

In granting summary judgment to Colorado, Judge Martinez said Friday, “Out-of-state companies are free to generate electricity using whatever method they choose, can sell that electricity to whomever they choose — inside or outside of Colorado — and can do so at whatever price they choose. The RES does not control any aspect of a transaction between two out-of-state entities; it governs only whether electricity purchased by a Colorado utility counts towards that utility’s renewables quota.”

The judge also rejected the institute’s argument that Colorado’s RES violates the dormant commerce clause by shrinking the market for fossil fuels and, as a result, burdens interstate commerce.

“The decision offered fairly resounding support for renewable portfolio standards,” said Michael B. Gerrard, director of Columbia Law School’s Center For Climate Change Law. “It acknowledged that electricity flows in interstate commerce, but just because a program has an adverse effect on energy companies in other states, that does not necessarily make it invalid.”

Douglas said the dismissal “won’t have quite the same effect as a federal court of appeals ruling, but it will be cited in future challenges.”

But while the ruling says that RPS programs on their face don’t run afoul of the dormant commerce clause, experts say the question of what is a constitutionally acceptable RPS program remains unclear.

“The Colorado case was a pretty direct attack on RPS programs,” Sullivan & Worcester LLPpartner Elias Hinckley said. “I don’t think that this case is going to provide the level of authority and clarity to the overall discussion over RPS construction.”

Last year, Seventh Circuit Judge Richard A. Posner indicated at least one constitutional limit for RPS programs, saying that in-state generation requirements baked into the programs discriminated against out-of-state energy in violation of the dormant commerce clause. But that view was buried in an opinion deciding another issue, and the constitutionality of in-state generation requirements hasn’t been fully litigated yet.

If in-state generation requirements don’t pass the commerce clause test, what about provisions that merely incentivize in-state generation? Several states, including Colorado, place a higher value on renewable energy generated or renewable energy credits purchased by utilities in order to meet the RPS requirements when the energy comes from within state borders.

“That was not before the court in the Colorado case,” Douglas said. “We’ll have to wait for another case.”

That could happen sooner rather than later, especially as some states look to beef up their RPS programs, according to Patton Boggs LLP partner Josh Greene.

“As the RPS standards get more and more stringent, there will come a point in time where you’re not going to be able to show compliance with the renewable energy credits or in-state generation requirements and there will have to be out-of-state generation for compliance,” Greene said. “Are you now impacting interstate commerce? Are you artificially benefiting stakeholders and other businesses within the state to the exclusion to out-of-state providers of that underlying renewable energy?”

In the meantime, experts say some clarity on the RPS issue could come from the Tenth Circuit, to which Energy and Environment Legal Institute has vowed to appeal Judge Martinez’s ruling. The group claims the decision conflicts with a federal judge’s recent rulingthat Minnesota’s Next Generation Energy Act, the climate change law that contains the state’s RPS, violates the dormant commerce clause.

However, that decision by U.S. District Judge Susan Richard Nelson resolved a dispute over the law’s barring of any new power source that supplies 50 or more megawatts and increases carbon emissions, unless the emissions are offset by reductions elsewhere. The state’s RPS program was never mentioned in her ruling.

“I suppose you could tack between the two [decisions], but I think the expectation is that this is going to get pushed up to the Tenth Circuit and likely decided there,” Hinckley said.

But even if the Tenth Circuit upholds Judge Martinez’s decision, the challenge — and other constitutional challenges to RPS programs and their provisions — could discourage the adoption of programs in additional states, or the expansion of existing programs, according to Hinckley.

“If you don’t know how far you can go, it’s difficult for a state legislator to say, ‘OK, let’s do this,’” Hinckley said. “Expansion gets harder against an environment of uncertainty.”

The plaintiffs are represented by David W. Schnare of the Energy & Environment Legal Institute and Michael D. Pepson of Cause of Action.

The defendants are represented by Assistant Attorneys General Todd Lundy, Will V. Allen and Kathleen L. Spalding of Colorado Department of Law.

The Interwest Energy Alliance, which intervened in the suit on Colorado’s behalf, is represented by John Putnam of Kaplan Kirsch & Rockwell LLP.

The case is Energy and Environment Legal Institute et al. v. Joshua Epel et al., case number 1:11-cv-00859, in the United States District Court for the District of Colorado.