When Commissioner Daniel C. Esty of the state’s Department of Energy and Environmental Protection thinks of his agency, he often says, there’s a third “E” in its name – for the economy.
But Esty’s department recently adopted a conservative tack in its choice of energy projects for more than $1 billion in state-directed energy purchases. The state, in short, decided that economic development – state jobs created, for example – could not be a factor in its decision.
Ninety percent of the power from the program will be from a massive wind farm in northern Maine, a plan that received its final approval from regulators this week.
But clean energy companies whose bids were passed over ask why the state failed to take into account the economic benefits from the ample number of in-state bids for the contracts, many offering added taxes and jobs in Connecticut. They cite the state’s energy plan, which calls for economic development to play a larger role in the state’s energy decisions, and the words of Gov. Dannel P. Malloy and Esty, who rarely fail to highlight how energy can play a role in jobs and the economy.
State energy officials, however, cite the U.S. Constitution, specifically the Commerce Clause, which gives the federal government, not the states, authority to regulate interstate commerce. Specifically, the energy department’s reading of that clause says that valuing in-state economic development could count as discrimination, leaving the state open to a host of legal challenges.
“While, of course, adding jobs is always helpful … limiting a major energy procurement program to in-state providers could be prohibited by the Commerce Clause of the United States Constitution,” the department said in response to questions about its scoring of bids.
In another filing, the department said, “Boosting employment in the state was not an objective of this procurement.”
But whether the Commerce Clause does, in fact, give states a hard stop when looking at economic development in such large-scale decisions is a sensitive legal question. Most agree that a strong in-state requirement, similar to the one that caused Massachusetts trouble in 2010, is unconstitutional. But there’s a lot of gray area, too.
And the state recently took a different approach in a similarly sized request for energy bids from biomass, hydropower and landfill gas projects. It said that it would account for, in whatever small way, economic benefits from the projects’ development and operation.
That request asks for the number of jobs created, both directly and indirectly, as well as any other economic development “such as property tax revenues or … capital equipment” purchased from Connecticut companies.
“The biomass RFP [request for proposals] does specifically mention ‘economic development’ as a non-price factor. It is listed because it was specifically included in the authorizing legislation,” an energy department spokesman said.
The part of the Commerce Clause that worries state officials isn’t really in the text of the Constitution at all.
The dormant Commerce Clause, a corollary to the written text, states that because the federal government regulates interstate commerce, the state’s cannot nose in and make laws that affect those markets.
Because laws mandating clean power are relatively new, there isn’t an incredible amount of case law governing how states would fare in valuing in-state economic development benefits with programs like Connecticut’s.
The closest and most recent challenge to a clean energy law that cited the Commerce Clause occurred in Massachusetts.
In that 2010 case, TransCanada successfully challenged a Massachusetts law that limited some of its clean energy bidding to in-state projects. The case quickly settled, with the Massachusetts bid being opened to out-of-state projects.
Danbury’s FuelCell Energy, the world’s largest manufacturer of fuel cells, which submitted an unsuccessful bid for one of Connecticut’s recently awarded contracts, said there is no merit to the claim that the Constitution limits the state’s ability to count in-state economic development. In fact, for other state programs, in-state economic development plays a sizable part.
In a letter to regulators, the company said, “Numerous bids and solicitation have provided for scoring of bids with credit given to in-state technologies and manufacturers,” including the state’s low- and zero-emissions program, which gives in-state technologies a 10 percent bid discount.
According to Thomas Melone, chief executive of Allco Energy, a New York clean energy firm that offered a Connecticut project into the first-round procurement, there’s no clean constitutional limit on taking into account all the benefits of a transaction.
“Taking into account all economic effects is simply a basic requirement of a cost-benefit analysis,” he said. He added: “If the out-of-state project is still the most economic and cost-effective project after such an analysis, then it should be selected.”
Melone also says that in this case, the Commerce Clause might not be an issue at all. If the state, in actively choosing which contracts are best, is considered a “participant” in the process rather than just a regulator of an energy market, it is exempt from Commerce Clause restrictions and has considerable latitude in deciding what counts.
‘A Balancing Act’
In a statement, state energy department spokesman Dennis Schain said: “Our procurement process allows for consideration of the well being of Connecticut and its residents to the maximum extent possible under the federal Commerce Clause.”
“This focus on price is in keeping with Governor Malloy’s vision and our legislative mandate to bring down the cost of power. When you talk about ‘economic benefit,’ there is nothing better than cheaper power.”
And the process did take into account some local benefits. For example, in the first procurement, 15 percent of the scoring was based on the reliability of projects, a metric that helped Connecticut developments.
“If we didn’t rank reliability, the first 10 projects would have all been wind projects in Maine,” said Mark Quinlan, the energy department’s director of energy supply.
But energy lawyers say the law gives states a few options, based on whether its rules serve a legitimate local purpose, which could include environmental benefits, transmission concerns – and economic development.
“They have more room than they think,” said Paul Michaud, an energy and utilities lawyer with Hartford-based Murtha Cullina. “The state is seeking cheaper, cleaner energy, and perhaps they believe they can get cheaper, cleaner energy outside the state.”
What’s important, he said, is how the state goes about valuing the local economic development benefits. The lesson of Massachusetts is that restrictions are out, but transparently scoring economic benefits as it would any other benefits – such as decreased air pollution or less transmission congestion – would be best.
“As long as the program is designed with that in mind, you can usually fashion a program that can withstand a [legal] challenge,” said Michaud. “It’s always a balancing act.”
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