Constitutional challenges and RPS programs: what to expect 

States are increasingly facing political and legal opposition to their renewable portfolio standards (RPS), which have been central to wind power development in the U.S. Such opposition has led to lawsuits and to legislation such as the recently passed two-year RPS “freeze” in Ohio. These challenges come at an important time, as RPS policies are likely to play an expanded role under the Environmental Protection Agency’s (EPA) newly proposed draft climate regulations.

A recent federal court decision provides a far-reaching endorsement of the constitutionality of RPS mandates.

In EELI v. Epel, the federal district court in Colorado held that the state’s renewable energy mandate was consistent with the Commerce Clause of the U.S. Constitution. The Commerce Clause was designed by the Framers of the Constitution to promote commerce between the states and avoid protectionist state policies under which one state would erect barriers to interstate business that would favor in-state interests. This article discusses EELI v. Epel, its relationship to current and future challenges elsewhere in the country, and the potential impact of these challenges on wind development.

In the last few years, RPS opponents have challenged the renewable energy mandates in court or before state utility commissions based on the legal claim that the laws violate the Commerce Clause by providing unfair advantages to in-state energy producers or unreasonably burdening the flow of electricity among states. The Commerce Clause states that Congress has the power “[t]o regulate Commerce . . . among the several States.”

While the clause itself says nothing explicitly about restrictions on state power, since the 19th century, the U.S. Supreme Court has followed the principle, known as the “Dormant Commerce Clause,” holding that the Constitution’s grant of authority to Congress to regulate interstate commerce also limits the ability of states to discriminate against other states. The Dormant Commerce Clause has been raised by challengers in at least six state and federal proceedings involving RPS mandates.

Over time, and in non-RPS cases, federal courts have identified three species of Dormant Commerce Clause violations. First, statutes that discriminate against interstate commerce in favor of intrastate commerce are nearly per se invalid. Second, states may not regulate activity that is entirely outside of their territory (the “extraterritoriality” test). Third, a nondiscriminatory state statute may be invalid if the burden imposed on interstate commerce is clearly excessive in relation to the local benefits.

To date, the majority of Commerce Clause challenges to RPS mandates have argued that in-state preferences or similar provisions were invalid because they discriminated against out-of-state generators. Until EELI v. Epel, no court had addressed the broader question of whether the renewable mandates themselves violate the Commerce Clause.

Colorado’s RPS and EELI v. Epel

In 2004, Colorado voters approved a Renewable Energy Standard (RES), an RPS that currently requires investor-­owned utilities to obtain 30% of their retail electricity sales from renewable sources by 2020. The RES allows utilities to meet the renewable energy requirements by generating renewable energy, purchasing renewable energy or purchasing renewable energy credits (RECs). Purchases of renewable energy and RECs are subject to approval from the Colorado Public Utilities Commission (PUC).

Colorado’s RES also includes a carve-out for distributed generation – i.e., renewable energy produced on a customer’s site or in a facility with a capacity of 30 MW or less. Credit multipliers apply for additional categories of projects, including small, locally owned projects. The RES originally provided a 25% REC multiplier for certain in-state projects, but the Colorado legislature removed the in-state preference in 2013.

In 2011, the American Tradition Institute, an entity promoting coal-fired electric generation, and an individual filed suit in the Colorado federal district court challenging the constitutionality of the RES. The complaint alleged that the entire mandate violated the Dormant Commerce Clause, as well as the in-state multiplier, distributed generation carve-outs and specific multipliers. The plaintiffs subsequently amended their complaint in response to the elimination of the in-state preference provisions. In fall 2013, both sides filed motions for summary judgment.

On May 1, the court dismissed all of the counts relating to distributed generation and other carve-outs, holding that the plaintiffs failed to show that they would be injured by these provisions. Shortly thereafter, on May 9, the court issued a second opinion granting a motion for summary judgment against the plaintiffs regarding the core renewables mandate.

The court held that the renewable mandate was neither per se unconstitutional nor unduly burdensome. The court also held that the RES only regulates in-state energy retailers and companies that do business with them and does not impose particular conditions, such as minimum standards or price controls, on the importation of electricity.

The fact that the RES incentive structure might negatively impact out-of-state generators does not invalidate the RES, because it affects in-state generators to the same extent. The court also held that, contrary to the plaintiffs’ claims, the lack of uniformity between various state definitions of what constitutes renewable energy does not invalidate the RES. The Colorado RES does not impose Colorado policy decisions on other states, because only Colorado utilities are required to seek the PUC’s approval for renewable energy purchased to comply with the RES.

Finally, the court held that there was insufficient evidence that the RES imposed an undue burden on interstate commerce. First, the plaintiffs failed to show that the RES burdened interstate commerce more than it burdened intrastate commerce. The plaintiffs also provided no evidence regarding the benefits of the RES, so they did not show how any burden was clearly excessive to the local interests served. Lastly, the plaintiffs did not propose any alternatives to the RES that would promote the same local interests (e.g., environmental benefits, energy independence) with a lesser impact on interstate commerce. Accordingly, the court granted summary judgment and dismissed the constitutional challenge.

Looking forward

EELI v. Epel is the most comprehensive affirmation of an RPS from a federal court to date. Unlike other cases before it, the court focused on the core renewable mandate, rather than just design elements like in-state preferences.

Further, the court contemplated and rejected all of the Dormant Commerce Clause theories, including both per se invalidity based on extraterritorial regulation and invalidity based on undue burdens to interstate commerce. Although EELI v. Epel is binding only in Colorado, as the first major substantive decision, it is certain to influence courts and agencies addressing Commerce Clause challenges elsewhere.

The case is a critical victory for states with RPS mandates, but opponents are expected to continue to press their attacks. The plaintiffs have appealed the decision, and the 10th Circuit is likely to decide the case in 2015. Further, the case did not reach the merits on a number of RPS design issues, including distributed generation requirements and in-state preference provisions. Challengers in other states may ultimately argue that EELI v. Epel should not apply, offering evidence that the RPS in their case negatively impacts commerce.

In the future, the wind industry should expect that in-state preferences and distributed generation requirements will be the focus of Commerce Clause attacks. Although these provisions can be justified under the law based on the need to secure local air quality, grid or other benefits, the strict standard of review applied to discrimination among states will create more risk for these provisions. Challenges to in-state preferences are already pending in Delaware.

While not the last word on Commerce Clause challenges to RPS provisions, EELI v. Epel is a critical first word from federal courts. RPS proponents now have the benefit of being able to tell legislatures that the federal judiciary has upheld the constitutionality of RPS mandates.

John Putnam and Benjamin Israel are partners at law firm Kaplan Kirsch & Rockwell, representing renewable energy developers in a range of development and regulatory matters. Putnam can be reached at (303) 825-7000 or jputnam@kaplankirsch.com. Israel can be reached at (202) 955-5600 or bisrael@kaplankirsch.com.