The Not-So-Dormant Commerce Clause and Coal-Based Electricity

By Paul M. Seby & Matthew B. Miller, Greenberg Traurig, LLP

There is no doubt that coal-based electricity is currently faced with enormous challenges—both at the national level, with the flurry of federal regulations aimed at the coal industry, and at the state level, where local governments are experimenting with dramatic changes in their energy policies. In both instances, federal courts at all levels are being called upon to evaluate the lawfulness and constitutionality of these actions. This short article focuses on that latter evaluation— invoking the most enduring of American documents—our U.S. Constitution. In Coal-Based Electricity our national charter lies an important mechanism that may provide important protections against efforts by one or more states to greatly experiment with dramatic changes to their energy-related laws and regulations that have adverse impacts on coal-based electricity or the movement of coal interstate. One does not have to be a legal scholar to know about the “Commerce Clause,” a provision in the U.S. Constitution that grants Congress the power “[t]o regulate Commerce . . . among the several states.” What may be less known, though, is that the Commerce Clause has a reclusive twin, the “dormant Commerce Clause,” which emerged when the U.S. Supreme Court interpreted the Commerce Clause as including an impliedly inverse—or “dormant”—meaning that restricts states from behaving in such a way that would unduly burden interstate commerce.

Generally, to successfully challenge a state law on the grounds that it violates the dormant Commerce Clause, a party must show one of three things: (1) that the law discriminates against interstate commerce on its face; (2) that the law has a discriminatory purpose; or (3) that the law has a discriminatory effect. For example, in Dean Milk v. Madison, the Supreme Court held that a Madison, Wisconsin ordinance requiring all milk to be pasteurized within five miles of the city limits was an unconstitutional violation of the dormant Commerce Clause because it “erect[ed] an economic barrier protecting a major local industry against the competition” from other states.3 Even if a court determines that a state or local law does not discriminate on its face, it can still invalidate the law on dormant Commerce Clause grounds if the burdens it places on interstate commerce are “clearly excessive” compared to the local benefit of the law. This balancing test is often referred to as the Pike balancing test, named after the case that spawned it.

In the energy sector, the dormant Commerce Clause has been anything but dormant. In recent years, it has been the focus of several constitutional challenges against state laws that improperly discriminate against the use of certain forms of energy—oftentimes coal—in such a way that discriminates against other states and burdens interstate commerce.

In 2007, California enacted the Low Carbon Fuel Standard (LCFS), a widely publicized rule that required that all transportation fuels used in California meet a baseline target for carbon intensity (CI) and established a credit system to trade carbon emissions. Under the rule, the CI would be determined through a lifecycle analysis, measuring the amount of carbon generated during the extraction, production, transportation, and combustion of a given fuel. The LCFS did not require use of any specific fuel, only that regulated parties find a blend of fuels and credits that will meet the declining target each year. Ethanol producers in the Midwest sued California to invalidate the LCFS regulation on the grounds that it violated the dormant Commerce Clause by discriminating against out-of-state ethanol producers and attempting to regulate activities outside of the state’s borders. In 2011, a federal district court struck down the rule, holding that it discriminated against out-of-state ethanol producers. On appeal, the U.S. Court of Appeals for the Ninth Circuit reversed the district court’s decision, but not without a number of dissenting opinions. Notably, one judge found that the rule seeks to control conduct in other states because it penalizes out of state practices, and it threatens to “balkanize” the economy. Ultimately, the majority opinion validated the LCFS rule because, in its view, the rule was based on carbon emissions and not expressly for the purpose of benefitting local companies over out-of-state companies. Moreover, the court hesitated to disrupt the novel rule, because it viewed states as “laboratories of democracy.” The Ninth Circuit remanded the case back to the district court. Subsequently, the district court found that it could not reliably assess the practical discriminatory effects on interstate commerce because the factors needed to do so are “highly data-specific” and vary each year.10 Accordingly, the court concluded that it could not find that it placed an undue burden on interstate commerce. Simultaneous to the California LCFS rule, the State of Minnesota enacted its “Next Generation Energy Act” (NGEA). Among other things, the NGEA mandated that no person shall import power from a new large energy facility built outside the state; and no person shall enter into a long-term power purchase agreement that would contribute to statewide power sector CO2 emissions without a corresponding offset of such emissions. Given that the law exempted natural gas-fired facilities, it was quite plainly targeted at coal-fired power plants built inside as well as outside of Minnesota. In 2011, North Dakota, a state that is home to many coal-fired power plants—including some owned by Minnesota utilities—filed suit alongside a coalition of lignite companies and electric co-ops, to invalidate the law on the grounds that it was unconstitutional. North Dakota alleged that the Minnesota law violated the dormant Commerce Clause because it improperly discriminated against outof-state interests, burdened interstate commerce, and regulated extra-territorially, or beyond its jurisdiction. North Dakota also argued that the law was pre-empted by the Federal Power Act and in conflict with the Federal Clean Air Act. North Dakota prevailed on its dormant Commerce Clause argument in district court. On appeal, the U.S. Court of Appeals for the Eighth Circuit affirmed the lower court’s decision, but only one member of the panel explicitly agreed with the district court that the NGEA violated the dormant Commerce Clause.