California, Climate Change, and the Commerce Clause: Ninth Circuit Expresses Skepticism in Argument Involving Low-Carbon Fuel Standard

October 25, 2012

The U.S. Court of Appeals for the Ninth Circuit last week heard oral argument in a challenge brought by a number of out-of-state biofuel producers who assert that California's Low-Carbon Fuel Standard ("LCFS") violates the Commerce Clause of the U.S. Constitution because it discriminates against out-of-state producers and artificially favors in-state producers. The three-judge panel appeared, at times, perplexed, and at other times, to be highly skeptical of the LCFS.

For example, Senior Judge Dorothy Nelson, citing comments from California officials stating the LCFS will increase employment and tax revenue in California, asked, "Isn't this unambiguous evidence that the board was motivated by protectionism?" Similarly, observing that electricity is a major factor in the carbon intensity calculations used by California and that biofuels producers have no control over how the electricity they use is produced, "isn't this the equivalent of discriminating against producers with the 'dirtiest' electricity," who are generally located in the Midwest. Similarly, Judge Mary Murguia, seemed particularly troubled with LCFS regulations that, on their face, apply a higher carbon intensity score to Midwestern biofuels producers than to California producers. The third judge, Senior Judge Betty Fletcher, did not participate heavily in the argument, but observed that she followed the argument closely and, found some of the answers provided by the attorneys "very satisfactory, others not so much." An audio tape of the argument is available here.

(Sadly, Judge Fletcher passed away just five days after the argument. A native of Tacoma, Judge Fletcher had a highly successful legal career here in Seattle, where, among other achievements, she became the first female partner at a major Pacific Northwest law firm. She was appointed to the Ninth Circuit by President Carter in 1979. She will be missed.)

The Ninth Circuit appeal arises from a successful challenge brought by Midwestern biofuels producers in the U.S. District Court for the Eastern District of California. As we reported in January, in a case entitled Rocky Mountain Farmers Union v. Goldstene, District Judge Lawrence O'Neill held the LCFS regulations to be unconstitutional because they impose a higher carbon intensity score on out-of-state producers than in-state producers, and are therefore facially discriminatory and a violation of the dormant Commerce Clause.

Rocky Mountain Farmers Union, and the subsequent Ninth Circuit appeal, have strong implications for renewable energy producers in the Pacific Northwest and elsewhere in the Western Interconnection who have found themselves effectively barred from the lucrative California market. Since the California legislature formalized California's 33% Renewable Portfolio Standard ("RPS") in 2011, out-of-state producers have found themselves increasingly locked out of the California markets for electricity and renewable energy credits ("RECs"). These problems have arisen because the California legislature imposed difficult-to-meet delivery requirements on bundled electricity/REC transactions originating outside the state and also imposed stringent limits on the amount of REC-only purchases California utilities can use to comply with the RPS standards.

Rocky Mountain Farmers Union raises serious doubts about the validity of California's approach, which many outside producers believe has been used purposefully to favor California's influential in-state renewables producers. If anything, the RPS rules are a more obvious violation of the Commerce Clause than the LCFS rules because the RPS rules place specific, geographically-based restrictions on renewable generators, while there is at least a good argument that the LCFS rules are based on carbon intensity, not the producer's geographical location.

If you have any questions about the Ninth Circuit appeal, please contact a member of GTH's Energy, Telecommunications and Utilities practice group. We have years of experience in renewable energy production, the Northwest's energy industry, complex administrative matters, appellate litigation, and related fields.