A panel of the Second Circuit recently enjoined Connecticut regulators from proceeding with awarding contracts under a renewable energy program. The Second Circuit’s order puts the procurement on hold pending the court’s decision on an appeal taken by Allco Finance, a solar power developer. Although the order does not identify what part of Connecticut’s renewable energy auction troubles the panel, if the panel ultimately were to adopt some or all of the legal theories advanced by Allco, the ruling could force the restructuring of several renewable energy programs, as well as the nascent effort to support nuclear power plants launched by New York.

Allco is challenging two parts of Connecticut’s renewable energy program. To encourage development of green energy, a Connecticut statute authorizes the state Department of Energy to conduct an auction in which qualifying renewable energy sources compete to supply green energy to the state’s two utilities. The Department directs the utilities to enter into long-term bilateral contracts with the winning bidders. Connecticut conducted an auction in 2015 as part of a multi-state renewable energy solicitation with Massachusetts and Rhode Island. In September 2016, Connecticut announced that the winning bidders from that auction were ready to be awarded contracts with state utilities.

Allco alleges that the 2015 auction and 2016 award of contracts intrude on FERC’s exclusive jurisdiction to set wholesale energy rates in interstate commerce, in contravention of the Supreme Court’s holding in Hughes v. Talen Energy Marketing, LLC, 136 S.Ct. 1288 (2016). Notably, Allco is not alleging that the contracts awarded under the Connecticut program have prices tethered to the New England ISO market or require suppliers to submit bids that clear the New England ISO market. Indeed, renewable resources are not even required to bid into the New England ISO market under the Connecticut program. Not surprisingly, FERC has never claimed that the Connecticut procurement intrudes on FERC’s exclusive jurisdiction or impairs the functioning of the New England ISO market.

None of that matters under Allco’s theory. According to Allco, any state mandate for the purchase of renewable energy interferes with the FERC-established markets. Allco contends that a state cannot direct utilities to make wholesale energy purchases unless the state acts under the limited authority granted by PURPA. Under Allco’s theory, Connecticut’s auction cannot be viewed as authorized by PURPA because the state allows renewable resources that are not qualifying facilities under PURPA to participate in the auction.

Allco also is contesting the legality of Connecticut’s renewable portfolio standard. Connecticut requires utilities that sell to Connecticut consumers to include a certain percentage of renewable energy in their portfolios. Utilities can satisfy that requirement by purchasing clean energy and an associated renewable energy certificate from a generator, by buying RECs through NEPOOL, or by owning renewable energy resources. Allco argues that the renewable portfolio standard violates the dormant Commerce Clause because only generators that are either in the New England ISO or immediately adjacent to the New England ISO can satisfy the standard. Allco’s solar units are located in Georgia and thus do not qualify under the standard.

In an earlier appeal contesting a 2013 auction, the Second Circuit upheld the district court’s dismissal of Allco’s claims, finding that Allco should have filed a complaint with FERC, as required by PURPA. Allco later did so, leading to a FERC notice of intent not to act that gave Allco the right to proceed in federal court. The district court agreed that with the issuance of the FERC order, Allco had exhausted its administrative remedies for both the 2013 and 2015 auctions. The district court nevertheless held that Allco lacked standing to challenge the 2015 auction, particularly when Allco had declined to participate in it. The 2013 auction results were stipulated to be moot, and the court dismissed the dormant Commerce Clause challenge for failure to state a claim.

Allco took a second appeal to the Second Circuit. After filing its brief Allco moved for a preliminary injunction to stop the award of the contracts to the winning bidders in the 2015 auction. The Second Circuit granted the motion, and enjoined any award of contracts during the pendency of the appeal. The court also accelerated its consideration of the case, with oral arguments to be held in early December.

The Second Circuit panel may be focused primarily on the district court’s ruling that Allco had no standing. The panel may view Allco as having done exactly what an earlier panel instructed Allco to do—exhaust its administrative remedies. But Allco ultimately may be unable to demonstrate sufficient injury from the Connecticut auction, since it retains the ability to force Connecticut utilities to buy power from it no matter the result of the auction. Earlier this year, FERC declared that Allco has the right under PURPA to compel Connecticut utilities to enter into a legally enforceable obligation with Allco at avoided cost rates, even if Allco did not participate in the Connecticut-sponsored auction. Windham Solar LLC, 156 FERC ¶ 61,042 at P 5 (2016).

Establishing standing is only half the battle for Allco; it would also have to show that the Connecticut program is unconstitutional. There is a chance that if the Second Circuit panel finds that Allco has standing, it would remand the case so the district court can first address the constitutional issues. There is a better chance, however, that the panel would reach the constitutional issues, particularly since those issues would have been fully briefed. And the panel evidently thought the constitutional challenges had sufficient merit to enjoin Connecticut from proceeding with the contract award.

The consequences of a ruling in Allco’s favor could be far-reaching. A holding by the panel that the Connecticut auction infringes on FERC’s exclusive right to regulate wholesale energy markets would force a major restructuring or outright abandonment of the auction process. Such a ruling also could jeopardize Massachusetts’ and Rhode Island’s programs. Adoption of Allco’s theory that renewable energy procurements are permissible only if conducted under PURPA could call into question the legality of renewable energy programs in several other states. Modifying such programs to limit participation to only those resources that fit within the definition of qualifying facilities under PURPA would exclude a large number of renewable resources, making the programs untenable for many states.

A finding that Connecticut’s renewable portfolio standard violates the dormant Commerce Clause would have even broader implications. Connecticut’s program does not attempt to regulate prices or facially discriminate against out-of-state generators. Indeed, the state has drawn what many would view as a reasonable line—allowing participation by renewable energy producers anywhere within the New England ISO or within regions that connect to the New England ISO. Allco claims otherwise, asserting that regional favoritism is just as prohibited as discrimination in favor of in-state renewable resources.

Forcing states to allow any generator, wherever located, to participate in their RPS programs could make the programs far less attractive to them. States that are more restrictive than Connecticut—by limiting renewable energy credits to sources within their borders—could be in even more of a bind should the Second Circuit adopt Allco’s dormant Commerce Clause argument. A broad reading of the dormant Commerce Clause also could have implications for pending challenges to New York’s Zero Emission Credit program, which aims to support nuclear generators located within New York. Those states could try to distinguish their programs from Connecticut’s by asserting that they are acting as market participants rather than as regulators, but they have no assurance that courts will agree with their characterization.

We expect a ruling from the Second Circuit in early 2017.