Briefing Report: At What Point Does California's Regulatory Reach Become Overreach

Wednesday, February 1, 2012

California’s Global Warming Solutions Act of 2006 (Assembly Bill 32[1]) charges the state’s Air Resources Board (ARB) as the lead agency for implementing dramatic greenhouse gas emission (GHG) reduction goals. In that context, the ARB determined a broad slate of recommended measures to reach those goals.

In its scoping plan addressing the challenge, the ARB strategizes that the best way to reduce the emissions would entail “a cap-and-trade program along with a mix of complementary strategies,” such as (1) a 33-percent statewide renewables energy mix for electricity generation and (2) a low carbon fuel standard to reduce the carbon intensity of transportation fuels sold in California.

Renewables Portfolio Standard

In April 2011, California Governor Jerry Brown and the Legislature upped the ante on renewable energy by dramatically accelerating the existing 20 percent Renewables Portfolio Standard (RPS) by enacting Senate Bill 2x[2]. The new law dictates that at least one-third of the state’s electricity supplies must be generated from “green” renewable energy sources, such as solar, wind and geothermal, by 2020.

(The Legislature successfully implemented a 20-percent standard in 2002 and narrowly failed expanding it to 33 percent in 2009[3] and again in 2010[4] before succeeding in 2011.)

One of the expanded program’s key components concerns how utilities’ renewable energy contract portfolios must be balanced in terms of in-state vs. out-of-state generation.

All future electricity contracts must meet a “loading order” that mandates a specified proportionality among three prioritized product categories, colloquially referred to as “buckets”. Ultimately, 75 percent of the state’s power must qualify for top-priority “Bucket 1.” That electricity must come from renewable resources located either within California or else so closely outside the state’s borders that they interconnect directly with the California grid and interact with it in real time. The remainder of the RPS mandate may be met by specified amounts of eligible renewable power delivered into California by out-of-state generators that are not interconnected with the California grid . . . or by specified amounts of unbundled renewable energy credits (RECs).[5]

The built-in favoritism for in-state power was justified economically by the promise of the jobs from the generating facilities – temporary construction jobs and long-term operations and maintenance jobs. Politically, California unions demanded it.

And yet in 2009 former Governor Arnold Schwarzenegger vetoed a very similar bill[6] for having too great a reliance on in-state power at the expense of the vast potential of out-of-state renewable power. Schwarzenegger’s veto message said that measure “would make it more difficult and costly to achieve this very important goal . . . (in part, due to its) limiting the importation of cost-effective renewable energy from other states in the West.”

Artificially excluding the bulk of potential out-of-state renewable generators – even as California’s population and energy demand continues growing – is a supply-and-demand recipe for ever-soaring electricity costs. But this economic argument was trumped in the version of the bill enacted in 2011.

Ironically, many environmental activists expressed concern that forcing the majority of renewable power to be built in the state would place undue stress on California’s delicate desert habitats that rank among the most efficient of utility-scale solar sites. That argument was trumped, too.

But one issue that may yet challenge the RPS in-state/out-of-state balance is still lurking on the horizon.

Dormant Commerce Clause

In a 2007 federal report surveying the development of RPS programs among the states, the authors opined:

According to the so-called dormant commerce clause of the U.S. Constitution, no state can favor an in-state commodity over an out-of-state equivalent. Specifically, ‘The U.S. Supreme Court consistently strikes down as unconstitutional [programs] involving interstate goods taxed by states so as to provide local subsidy.’ The dormant commerce clause thus raises questions as to the legality of RPS rules that limit out-of-state eligibility.

To date, no state RPS policies have been challenged on the basis of the dormant commerce clause. Clearly, however, state rules that require eligible facilities to be physically located in-state or directly interconnected into the state are at risk. Less clearly at risk are rules that require power to be delivered to the state or regional control area and rules that favor distributed or on-site generation.[7]

Although barely mentioned during the legislative hearings, drafters of California’s new 33% RPS law allegedly took great care in crafting the bill language to avoid such a legal challenge.

Rocky Mountain Regulation

Several days before Governor Brown signed SB 2x, two organizations filed a civil action against the State of Colorado in U.S. District Court, seeking injunctive and declaratory relief from Colorado’s 30-percent Renewable Energy Standard (RES), which includes its own prioritization of in-state resources at the expense of out-of-state generators.

The plaintiffs center much of their case on Colorado’s alleged violation of the dormant commerce clause, relying heavily on a U.S. Court of Appeals decision in an Oklahoma case, which says a state may violate the clause by:

  • Discriminating against interstate commerce in favor of intrastate commerce – unless ‘the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism’; or

  • Imposing ‘a burden on interstate commerce incommensurate with the local benefits secured’; or

  • Creating mandates with the ‘practical effect of extraterritorial control of commerce occurring entirely outside the boundaries of the state in question.’[8]

The Colorado case is alive and currently pending a procedural ruling from the presiding judge. The decision in this case, particularly regarding the in-versus-out-of-state framework, might prompt similar challenges to the various RPS/RES standards of other states.

Low Carbon Fuel Standard

Also as part of its AB 32 scoping plan, the California ARB approved for adoption the Low Carbon Fuel Standard (LCFS) regulation, which became fully effective in April 2010. The LCFS requires oil refiners and distributors to guarantee that the mix of transportation fuels they sell within California help lower greenhouse gas emissions by reducing the fuels’ carbon intensity by at least 10 percent by 2020.

Usually, a fuel is analyzed in terms of the emissions released as the fuel is used, such as when natural gas is actually burned in a power plant or gasoline combusted in a vehicle.  But carbon intensity measures all greenhouse gases emitted during the entire “life cycle” of a transportation fuel as it is produced, transported, distributed, and used.

This means, for example, that the carbon intensity measurement for ethanol produced from Iowa corn would include the emissions from all the corn-farming activity, the corn-to-ethanol conversion process, and the interstate transportation of the corn and fuel between farms, conversion sites, storage locations, and markets – even the unintended consequences of GHG emissions related to land-use changes driven by the expansion of croplands for ethanol or biodiesel production in response to increased global demand for biofuels.

In late December 2011, a federal judge blocked implementation of the LCFS regulation, ruling that it unconstitutionally discriminates against out-of-state energy producers, attempting to regulate activities – that take place entirely outside California’s boundaries – from producers’ choice of farming methods to refiners’ use of coal-fired electricity.[9]

The ethanol industry had sued California, claiming that the LCFS would “(raise) gasoline and diesel fuel costs for all Californians, who already pay the highest fuel prices in the nation. . . (and that, if) fully implemented, the standards would have hurt consumers by discriminating against their use of renewable fuels from the Midwest and crude oil from our neighbor and ally Canada.”[10]

New Conflict Between Old Friends

Meanwhile, back on the RPS front – in November 2011, the State of North Dakota sued neighboring Minnesota over the latter’s “Next Generation Energy Act,” which requires Minnesota utilities to procure 25 percent of their electricity from renewable resources by 2025.

North Dakota’s coal-fired power plants have long provided much of Minnesota’s electricity needs, but the new law prevents the utilities from building new coal-fired power plants or entering into new long-term contracts to buy coal generated electricity unless they offset their new carbon emissions with reductions elsewhere.

Filed in U.S. District Court in Minneapolis, the lawsuit contends the Minnesota law generally imposes unconstitutional restrictions on interstate commerce and infringes on Congress' power to regulate carbon dioxide pollution and interstate power sales.[11]

Conclusion

The separate lawsuits against the Colorado RES law and Minnesota’s Next Generation Energy Act continue wending their ways slowly through the federal courts. Meanwhile, the California ARB has filed an appeal to overturn the federal judge’s ruling against its Low Carbon Fuel Standard.

The results of these and federal cases yet to come – such as an almost certain constitutional challenge to the ARB’s master plan, the cap-and-trade scheme approved late in 2011 – could seismically reshape the legal landscape.

And, if so, that landscape could slow the ongoing Gadarene rush into green energy and interstate environmental regulation that increasingly mark California energy policy making.

For more information on this report or other Energy issues, contact Wade Teasdale, Senate Republican Office of Policy at 916/651-1501.

 


[1] AB 32 (Nuñez/Pavley), Chapter 488, Statutes of 2006.
[2] SB x1 2 (Simitian), Chapter 1, Statutes of 2011-12 First Extraordinary Session
[3] SB 14 (Simitian), passed by the Legislature, vetoed by the governor in 2009.
[4] SB 722 (Simitian), approved by the Assembly in 2010, did not receive a vote in the Senate.
[5] RECs reflect the environmental value of the power’s “green attributes.” They can be separated from the underlying power and sold or traded as independent products.
[6] SB 14 (Simitian).
[7] Cory, K.S. and B.G. Swezey, “Renewable Portfolio Standards in the States: Balancing Goals and Implementation Strategies,” Technical Report NREL/TP-670-41409, December 2007, National Renewable Energy Laboratory, Office of Energy Efficiency and Renewable Energy, United States Department of Energy, Page 9.
[8] Amended Complaint in American Tradition Institute v. Colorado, Civil Action No. 1:11-cv-00859-WJMKL (Dist. Colorado)
[9] Barringer, Felicity. “Judge Blocks A California Fuel Regulation.” New York Times. December 29, 2011.
[10]NPRA Welcomes Court Victory for California Consumers.” December 29, 2011. News Release by National Petrochemical & Refiners Association.
[11] Wetzel, Dale. “ND Sues Minnesota Over Coal Power Restrictions.” (The Associated Press in Bloomberg Businessweek. November 3, 2011.