Seventh Circuit Ruling Supports Transmission Of Renewable Energy And Questions State Renewable Portfolio Standards That Discriminate Against Out-Of-State Renewables

by Perkins Coie
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Two important factors affecting the growth of renewable energy infrastructure in the United States are impacted by a recent federal court decision.  First, transmission line congestion has been a big obstacle to moving renewable energy from rural resource areas to urban demand centers.  Second, state renewable portfolio standards (RPS) affecting utility investment in renewable energy have often favored renewable power generated in state, limiting incentives for interstate transactions.

The U.S. Court of Appeals for the Seventh Circuit delivered a victory for the Federal Energy Regulatory Commission (FERC) in its recent decision in Illinois Commerce Commission v. FERC, No. 11-3421 et al., 2013 WL 2451766 (7th Cir. June 7, 2013), which validates innovative transmission cost-sharing methods and calls into question state RPS provisions that discriminate against out-of-state renewable resources.

At its core, this case asked whether utilities participating in regional transmission organizations (RTOs) that share transmission lines can be forced to pay for new high-voltage lines to transmit renewable power throughout the region.  As noted in the Seventh Circuit's decision, RTOs like Midcontinent Independent Transmission System Operator, Inc. (MISO) and PJM Interconnection, L.L.C. are not-for-profit, voluntary regional associations that control more than half of the nation's electric grid.  At issue here were the fees charged by MISO for transmission system upgrades to move electricity from remote wind farms to urban consumption areas.

State utilities and regulators challenged FERC's 2011 order approving rates charged by MISO, disputing the cost allocation on six separate grounds.  In general, these challengers claimed that the financing mechanism should be allocated based on proximity to new lines rather than the utility's share of the region's total wholesale consumption of electricity.  The effect of MISO's cost allocation is that urban areas likely to consume new wind power would pay more than rural areas where the wind resources are located.

FERC has power under section 205 of the Federal Power Act (Act) to determine if fees charged by RTOs are "just and reasonable."  In a decision authored by Judge Richard Posner, the Seventh Circuit found the cost allocation did not violate the Act by unjustly requiring utilities to bear costs disproportionate to benefits received.  The court also ruled that overall costs of the projects did not exceed benefits in violation of the Act.  Judge Posner called the challengers' Tenth Amendment argument "frivolous," finding that states were not coerced into participating because "there is nothing to prevent a member of MISO from withdrawing from the association and joining another [RTO]."

State RPS mandates served as an impetus for the proposed transmission line improvements within MISO.  While RPS vary from state to state, most of the states within MISO expect or require utilities to obtain between 10 percent and 25 percent of their electricity needs from renewable resources by 2025.

The State of Michigan asserted that the in-state element of its RPS system would cause Michigan utilities to pay a share of the tariff rates greatly disproportionate to the benefits derived from the projects.  The Michigan statute forbids Michigan utilities from counting renewable energy generated outside the state toward that state's RPS that requires utilities to obtain at least 10 percent of their electricity needs from renewable sources by 2015.  Michigan argued that its utilities would unfairly be paying MISO for out-of-state resource development that would not help the state’s utilities meet their targets under the Michigan RPS.  The Seventh Circuit found Michigan's argument "trips over an insurmountable constitutional objection.  Michigan cannot, without violating the commerce clause of Article I of the Constitution, discriminate against out-of-state renewable energy."

Although the issue of Michigan's RPS was not the focus of this case, this language will nevertheless be likely to resurface in the next case challenging the constitutionality of a state RPS that favors in-state renewable energy.  Michigan's program is not unique.  Many other states, including Arizona, California, Colorado, Delaware, Maine, Massachusetts, Missouri, Nevada, North Carolina, Ohio and Washington, have adopted RPSs that may be susceptible to a constitutional challenge.  Attorney Generals of four states—Alabama, Texas, Nebraska and North Dakota—have threatened to challenge California's RPS on Commerce Clause grounds because the state's laws provide favorable treatment to renewable energy projects that are directly connected to the state's grid or that meet complex procedures for moving electricity onto the state's grid.  Other challenges have included a challenge of Massachusetts's Green Communities Act and state RPS, which initially required that utilities solicit long-term renewable power sales contracts from only in-state resources.  TransCanada Power Mktg. Ltd. v. Bowles, No. 4:10-cv-40070-FDS (D. Mass. Apr. 16, 2010) (no decision on the merits was reached because Massachusetts issued emergency rules dropping its in-state requirement for long-term renewable energy contracts).  In Colorado, a lawsuit was filed challenging the state's RPS because the state mandate provided certain economic benefits to in-state renewable generators that are not available to out-of-state generators and also imposed burdens on interstate electricity generators.  Am. Tradition Inst. v. Colorado, No. 1:11-cv-00859 (D. Colo. filed Apr. 22, 2011).  To comply with the Commerce Clause, the RPS statutes in certain states may need to be amended to remove protectionist regulations that favor in-state businesses.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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