United States: Second Circuit Upholds Connecticut's Renewables Solicitation Program And RPS Against Preemption, Dormant Commerce Clause Challenges

Last Updated: July 20 2017
Article by Adrienne Thompson and Jasmine C. Hites

On June 28, 2017, the United States Court of Appeals for the Second Circuit ("Second Circuit") affirmed a district court's dismissal of challenges to Connecticut's renewable energy solicitation program and Renewable Portfolio Standard ("RPS") law.  The Second Circuit rejected arguments from the plaintiff-appellant, Allco Finance Limited ("Allco"), that the solicitation program was preempted by the Federal Power Act ("FPA") and the Public Utility Regulatory Policies Act of 1978 ("PURPA") and that the RPS law unduly burdens interstate commerce, in violation of the "dormant commerce clause."

The case originated in the United States District Court for the District of Columbia where Allco challenged a 2013 state law authorizing the Connecticut Department of Energy and Environmental Protection ("DEEP") to solicit proposals for renewable energy, select winners of the solicitation process, and "direct [Connecticut's utilities] to enter into" power purchase agreements with the chosen winners.  However, DEEP's final 2015 Request for Proposal ("RFP") stated that the "RFP process, including any selection of preferred projects, does not obligate any [utility] to accept any bid."  At that time, Allco also challenged the state's RPS law, which requires Connecticut's utilities to acquire an increasing percentage of their energy generation from renewable energy sources—a requirement that can be met either by the utilities directly generating renewable energy themselves or purchasing renewable energy certificates ("RECs") from third-party generators.  Under the law, RECs will only count toward a utility's RPS requirement if they come either from a source within the ISO New England Inc. ("ISO-NE") footprint (which covers Connecticut, Massachusetts, Vermont, New Hampshire, Rhode Island, and most of Maine), or if they come from an adjacent control area, such as New York Independent System Operator, Inc. ("NYISO"), which primarily encompasses the state of New York.

Before both the district court and on appeal to the Second Circuit, Allco argued first that DEEP's obligation to "direct" utilities to enter into contracts with generators violates the FPA and PURPA because it essentially allows DEEP to "compel" utilities to enter into wholesale energy contracts—transactions that are regulated by FERC under the FPA, except as provided for in PURPA with regard to smaller co-generation and renewable energy facilities under 80 MW.  Allco argued that this case was "economically identical" to Hughes v. Talen Energy Marketing, LLC ("Hughes"), in which the Supreme Court held that the FPA preempted a Maryland regulatory scheme seeking to guarantee revenue for generators outside of the regional FERC-regulated capacity market (see April 27, 2016 of the WER).

Second, using two of its generators in New York and Georgia as examples, Allco argued that Connecticut's RPS law unduly discriminates against similarly-situated generators by rendering their RECs either uneconomical to purchase due to import surcharges, in the case of the New York generator, or outright ineligible if they come from generators outside of ISO-NE or an adjacent control area, as with the Georgia generator.  This discrimination, according to Allco, places a burden on interstate commerce—a realm that Congress has exclusive control over—thereby running afoul of the so-called "dormant commerce clause" of the Constitution.  The district court dismissed Allco's complaints with prejudice, holding that Allco lacked standing to assert its preemption claims and that the dormant commerce clause did not apply because there was no burden on interstate commerce.

On appeal, the Second Circuit held that Allco did have standing to assert its preemption claim, but nonetheless affirmed the district court's dismissal of Allco's two challenges on their merits.  With regard to the solicitation program, the Second Circuit rejected any notion that Connecticut utilities were "compelled" to enter into wholesale contracts, as the latest RFP clearly stated that utilities were not "obligate[d]...to accept any bid."  The Second Circuit was unconvinced by Allco's analogies to Hughes because, among other reasons, Connecticut's solicitation process results in the types of bilateral contracts that are normally subject to FERC's "just and reasonable" review under the FPA, which was not the case with the Maryland program in Hughes.  Moreover, the Second Circuit determined, Connecticut's solicitation process was well within the scope of states' traditional power to regulate their utilities, and any impact on wholesale market prices was purely incidental and did not infringe on FERC's jurisdiction.

With regard to the RPS law, the Second Circuit held that there was no dormant commerce clause problem.  Referring to various Supreme Court precedent, the Second Circuit found, among other things, that the Connecticut law did not unduly discriminate against RECs from generators in states like Georgia because those RECs are different products, and treating them as similarly situated would make local projects less favorable, thereby undermining the electric system reliability, fuel diversity, and clean air policy goals underpinning Connecticut's RPS law.  Applying the balancing test used for facially nondiscriminatory laws, the Second Circuit held that the burden on interstate commerce imposed by Connecticut's RPS law was not "clearly excessive in relation to [its] putative local benefits" and, thus, did not run afoul of the commerce clause restrictions impliedly imposed on states through the dormant commerce clause doctrine.

A copy of the Second Circuit's Decision can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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