Litigation Will Drive Some State and Local Energy Policies, Hold Back Others

by Michael B. Gerrard

Energy projects and policies attract lawsuits like lightbulbs attract insects. Some of the litigation swarming around the energy world will push state and local governments to move their energy policies toward greater use of renewables and efficiency. Other cases will pull in the opposite direction.

On June 25, President Obama directed the U.S. Environmental Protection Agency (EPA) to use its existing authority under the Clean Air Act to regulate greenhouse gas emissions from stationary sources such as power plants. The statutory section that is relevant to existing sources (as opposed to new ones) gives the states the principal role in devising plans to reduce emissions. Thus the states will be required to adopt and carry out plans, and if the EPA is dissatisfied with them, it can then impose its own federal plans.

The Clean Air Act gives the states much flexibility in what these plans may include. Among the authorized methods are “economic incentives such as fees, marketable permits, and auctions of emissions rights,” such as carbon taxes and cap-and-trade regimes. States may also adopt a wide variety of other energy policies if they will yield emissions reductions, such as by reducing the demand for electricity or substituting renewables for fossil fuel sources. The states will have until June 2016 to adopt their new plans. It is certain that all of the EPA’s efforts here, and the states’ responses, will become the subject of multiple lawsuits. These cases (together with whatever happens in the next congressional and presidential elections) will determine the fate of these rules.

Another driver of state energy policies will be Order 1000, issued by the Federal Energy Regulatory Commission (FERC) in 2011. It directs the entities that run the electricity transmission networks (such as the regional transmission organizations and the independent system operators) to look at “non transmission alternatives” to building new power lines. Here, too, renewables and efficiency will play key roles; and here, too, litigation will surely follow.

Coal now provides about 37% of the electricity generated in the United States, down from about 50% just a few years ago (due mostly to the increased abundance and lower price of natural gas). Because coal use is the largest source of greenhouse gases in the United States, the environmental community has mounted a large legal and political effort (aided by a $50 million gift from Mayor Michael Bloomberg to the Sierra Club’s Beyond Coal campaign) to block the construction of new coal-fired power plants and eventually shut down the existing ones. Dozens of lawsuits have resulted. This campaign and other environmental regulations are adding to the pressure exerted on coal by inexpensive natural gas, and are leading to increased use of natural gas and, to a lesser extent, renewables and efficiency.

As a final litigation driver of state and local energy policies, nearly 20 states have adopted laws (modeled on the National Environmental Policy Act) requiring the preparation of environmental impact statements for many kinds of decisions, especially project approvals. California is the leader here (as in many areas of environmental policy) and numerous lawsuits are aimed at forcing state and local governments to adopt more climate-friendly energy policies.

Some litigation is moving in the other direction, inhibiting state and local governments from adopting certain kinds of energy policies. These cases tend to fall into the following three categories.

Preemption

Under the Supremacy Clause of the U.S. Constitution, a federal statute or regulation can supersede an inconsistent law from a lower level of government.

One prominent example is the federal government’s exclusive say in emissions and fuel economy standards for motor vehicles; the states cannot adopt their own. The big exception is that Congress allowed California to adopt its own standards if EPA-approved, and other states could adopt the California standards. This meant a maximum of two kinds of vehicles must be manufactured for the U.S. market—those meeting the federal standards, and those meeting the California standards. This was all very straightforward until 2008, when the Bush administration took the unusual step of denying California’s request for a waiver; until then, those waivers had been routinely granted. This move sparked extensive litigation that ended in 2009 when the Obama administration struck the “car deal” with California and the major automakers, agreeing to one unified standard nationwide through model year 2016. As that year approaches, new disputes may break out over what will happen for subsequent model years.

Another energy flashpoint for preemption is feed-in tariffs (i.e., requirements that electric utilities purchase a certain amount of electricity from renewable energy providers for a set period at predetermined rates). The Federal Power Act gives FERC exclusive authority to set wholesale electric rates, while the states set retail rates. FERC has ruled that certain types of feed-in tariffs imposed by the states can have such an effect on wholesale rates as to be preempted. FERC’s rulings specifically concern California, but they are also holding back other states. The rulings only concern investor-owned utilities—not municipal utilities or federal entities such as the Tennessee Valley Authority or the Bonneville Power Administration, which are not covered.

Preemption also arises in the context of appliance standards. A federal statute provides that where the federal government has issued energy efficiency standards for a particular type of appliance or other device, states and municipalities may not impose their own. One federal court in Albuquerque, New Mexico, found that this doctrine also applied to certain “green building” standards that gave a preference to certain kinds of heating and cooling equipment, and on this basis it annulled the city’s green building law. A federal court in Washington State ruled the opposite way in a similar case, so the issue remains unresolved.

Dormant Commerce Clause

Another legal doctrine that has led to litigation that restrains state and local energy policies is the Dormant Commerce Clause. The basic idea is that no state can restrain interstate commerce by, for example, barring or unduly burdening the import or export of goods (or wastes) to or from other states.

Because electricity crosses state lines, this doctrine complicates state efforts to control emissions from power plants. If a state (or group of states) imposes a fee on emissions from power plants within the state or region, electricity customers may attempt to keep their bills down by buying power from generators in nearby states that do not have to pay this fee. Thus the in-state fee will not have accomplished its goal of reducing emissions because some of the electricity will instead be generated out-of-state. This is known as “leakage.” To address the leakage problem, states may attempt to impose the fees on imported power, but doing so in a way that does not violate the Dormant Commerce Clause presents challenges. The two places in the United States that impose fees on greenhouse gases from power plants—California and the nine northeastern and mid-Atlantic states in the Regional Greenhouse Gas Initiative—are now grappling with this issue, and whatever solution they ultimately select will surely be litigated by entities seeking to avoid the fees.

Litigation is already tripping up one aspect of state renewable portfolio standards (the programs under which electric utilities must purchase a certain percentage of their electricity from renewable sources). These programs, too, have a problem with electricity generated out of state. Michigan adopted a rule under which only renewable energy that is generated within the state counts toward the required percentage. The U.S. Court of Appeals for the Seventh Circuit ruled in 2013 that Michigan’s rule is unconstitutional. Colorado’s program is currently in court on these issues, and a suit against California’s is anticipated.

A similar problem arises with motor vehicle fuels. California requires that fuels sold in the state must contain a certain percentage of non-fossil content, such as ethanol derived from agricultural products. California’s Low Carbon Fuel Standard imposes extra charges on this non-fossil fuel imported from other states, so as to reflect the energy cost of transporting the fuel into California; this is part of the life-cycle energy analysis that is necessary to ensure that the practice actually reduces emissions. Because this standard treats imported fuels differently than those produced in-state, however, it was challenged in federal court by out-of-state farmers’ groups, and the court found the standard violated the Dormant Commerce Clause. An appeal from this decision is now pending before the U.S. Court of Appeals for the Ninth Circuit. Several other states are considering similar programs and are awaiting the Ninth Circuit ruling before acting.

Siting Challenges

Efforts by states to encourage the development of renewable energy facilities have sometimes run afoul of litigation by a wide variety of challengers, such as neighbors who do not like the sight of wind turbines, property owners who do not want power lines or natural gas pipelines crossing their land, and environmentalists who are worried that solar arrays or wind farms will harm birds or other animals. The most celebrated of these cases, the Cape Wind project in Massachusetts’ Nantucket Sound, was first proposed in 2001. It has survived a long series of legal and political fights, but in 2013 is still not yet under construction.

Some of these cases are of the “not in my backyard” variety. Some are brought out of genuine environmental concern, and some may be instigated or financed by economic or ideological opponents of renewable energy. Whatever the motivations of those filing suit, they are making it more difficult for states and for the nation as a whole to realize the massive shift toward a renewable energy economy that is an essential component of efforts to combat climate change.

Michael B. Gerrard is Andrew Sabin Professor of Professional Practice and Director of the Center for Climate Change Law at Columbia Law School, and Senior Counsel to Arnold & Porter. He is editor of The Law of Clean Energy: Efficiency and Renewables (American Bar Association 2011).