Buried in a court ruling that largely upholds challenged transmission-funding provisions of the Midwestern Independent System Operator (MISO) Open Access Transmission Tariff is a single sentence that could imperil state programs promoting renewable energy.   Writing for the three judge panel, Judge Richard Posner wrote that “Michigan cannot, without violating the commerce clause of Article I of the Constitution, discriminate against out-of-state renewable energy.”   While the sentence was dicta—not essential for the court’s holding—it marks the first time a federal appeals court has found that a state renewable portfolio standard (RPS) violates the Constitution’s commerce clause.

The commerce clause empowers Congress “to regulate commerce . . .  among the several states.”  Under a long line of Supreme Court cases, the clause prohibits states from enacting laws or regulations that benefit in-state economic interests by burdening out-of-state competitors without justification.  For example, as authority for its statement that Michigan’s RPS, which mandates that utilities purchase energy from in-state renewables, violates the Commerce Clause, the court cited two Supreme Court cases.  In Oregon Waste Systems, the Court held that a surcharge by the state of Oregon on out-of-state waste that was three times higher than the surcharge on in-state waste was discriminatory and failed to advance a legitimate local purpose.  In Wyoming v. Oklahoma, the Court struck down an Oklahoma law that required at least 10% of coal burned in the state’s power plants to come from Oklahoma. 

In this case, petitioners challenged portions of the MISO Tariff, which allocated costs among members for regional Multi-Value Projects, or MVPs.  Amendments to the MISO Tariff, approved by FERC in 2010, allocate costs to member utilities in proportion to each utility’s share of the region’s total wholesale consumption, a departure from the prevailing methodology that allocates costs of new transmission to the nearest utilities, regardless of electricity consumption.   

Among several challenges to the MISO Tariff, Michigan utilities and the state’s Public Service Commission claimed that the state would not receive benefits commensurate with their increased cost allocation because it draws little power from outside of Michigan and because the state’s RPS does not allow out-of-state power to count towards meeting the renewable energy mandate.  The Court quickly dismissed both arguments.  With regard to the first, it noted that one of the MVP projects is specifically designed to bring more power into Michigan.  The court wrote that the second challenge “trips over an insurmountable constitutional objection” and determined that Michigan’s RPS violates the commerce clause.

Numerous state RPS statutes have in-state requirements.  Only Texas has an in-state requirement as severe as Michigan’s.  Other states, including Ohio, require that a certain percentage be from in-state generation, and some states require that energy be capable of being delivered in-state.   Other states, including Montana and Wisconsin, require that the energy actually be delivered in-state.  Several states, such as New Mexico and Oregon, require that a relatively small percentage come from in-state distributed resources, and other states have several classes of renewable resources, which can include in-state requirements.

A state’s economic development alone is unlikely to provide a sufficiently compelling state interest to win commerce clause approval.  But there are a number of other state interests not addressed in the Seventh Circuit’s perfunctory dicta that could make out a compelling state interest.  These include grid reliability, transmission congestion, environmental protection, and fuel diversity.  These justifications are likely to be raised in future Commerce clause challenges to RPS statutes, which the Seventh Circuit’s decision will likely precipitate.  In 2010, a Canadian energy company challenged solar carve-out and in-state long-term contracting regulations in Massachusetts.  The parties settled and the state rewrote its regulations before the case went to trial.  In 2011, a self-described think tank challenged Colorado’s RPS.  That litigation is still pending in federal district court.  Also in 2011, North Dakota sued Minnesota over its requirement that any new coal-fired plants selling to the state offset its greenhouse gas emissions.  That suit is also pending in federal district court.