Complicating "Coal By Wires" Regulation, Minnesota Court Strikes Down Greenhouse Gas Regulation

April 21, 2014

In a ruling with potentially far-reaching consequences for state-level attempts to regulate greenhouse gases, the U.S. District Court for the District of Minnesota on April 18 issued a ruling striking down key elements of Minnesota's Next Generation Energy Act ("NGEA"). For the Pacific Northwest, in particular, the ruling could complicate efforts by Washington, Oregon, and California to limit "coal by wires" -- the importation of coal-generated electricity from plants located in states like Montana and Arizona. State of North Dakota et al. v. Heydinger et al., No. 11-cv-3232 (SRN/SER) (issued April 18, 2014).

Passed by Minnesota's legislature in 2007, the NGEA is aimed at reducing the carbon footprint of electricity consumed in the state. The statute prohibits new power plants within Minnesota that "would contribute to state power sector emissions." To address the "coal by wires" problem, the statute also broadly prohibits importing power generated outside Minnesota if that generation "would contribute to statewide power sector carbon dioxide emissions," and also prohibits long-term power purchase contracts from facilities larger than 50 MW that would contribute to Minnesota's power sector carbon dioxide emissions.

These importation provisions of the Minnesota statute were challenged by the State of North Dakota, a coalition of coal producers, and several coal-generating utilities in neighboring states. While the challengers asserted a number of legal theories, including federal preemption and a variety of constitutional claims, the April 18 opinion strikes down the law on a single theory, that the NGEA improperly extends Minnesota regulation to cover purely out-of-state transactions. The legal theory arises from the Commerce Clause of the U.S. Constitution, which reserves the power to regulate interstate commerce to the federal government. Under the so-called "dormant Commerce Clause," the courts have long construed the Commerce Clause to prohibit the states from imposing discriminatory restrictions on interstate commerce that favor in-state producers at the expense of out-of-state producers.

One corollary of the dormant Commerce Clause prohibits "extra-territorial" application of state regulation. The bar on extra-territorial application of state regulation is aimed at ensuring that transactions between out-of-state actors are not impeded by regulation from a state without a connection to the transaction. The bar also protects interstate markets against the "balkanization" that might result if multiple states impose competing or inconsistent regulatory regimes on interstate transactions.

In its April 18 decision, the Minnesota federal court found that the Minnesota statute results in improper extra-territorial application of the NGEA because, once power is placed on the interstate grid, it is not possible to trace where the power is delivered. This is especially true in the Upper Midwest, where the Midwest Independent System Operator, a Regional Transmission Organization, operates interstate markets and controls grid flows. As a result, utilities with customers in multiple states, including Minnesota, cannot determine whether electricity generated from coal will cross Minnesota's borders and "contribute to statewide power sector carbon dioxide emissions," thus violating the NGEA, even if the power is generated outside Minnesota and is ultimately delivered to consumers outside Minnesota. As a result, the Minnesota court concluded, the NGEA improperly inserts Minnesota regulation into purely out-of-state transactions, where power is both produced and delivered outside Minnesota, and the statute therefore violates the prohibition on extra-territorial application of state laws arising from the dormant Commerce Clause.

The decision has potentially serious implications for state-level regulations aimed at climate change and renewable energy. For example, it casts yet another constitutional cloud on California's renewable portfolio standard legislation, which effectively bars out-of-state competitors from California's markets. In addition, the decision underscores the fact that any attempt to limit greenhouse gas emissions by addressing "coal by wires" must be squared with the requirements of the dormant Commerce Clause and even statutes, such as the NGEA, that appear neutral on their face may nonetheless run afoul of the dormant Commerce Clause in light of the unique nature of electric transmission.

Presumably, the Minnesota decision will be appealed to the U.S. Court of Appeals for the Eight Circuit. With the number of recent decisions from other Circuit Courts, including the Seventh and Ninth Circuits, addressing application of the dormant Commerce Clause to state-level energy legislation aimed at controlling greenhouse gases and promoting renewable energy, it is likely the issue will ultimately be addressed by the U.S. Supreme Court.

If you have any questions about the matters discussed in this post, greenhouse gas regulation, the Commerce Clause, renewable energy development, or other matters related to the energy industry, natural resources or the environment, please contact a member of GTH's Energy, Telecommunications, and Utilities practice group, Environment & Natural Resources practice group, or Appellate practice group. We're proud that practice group members Jim Waldo, Don Cohen, Sal Mungia, Bill Lynne, and Brad Jones were all recently named 2014 Best Lawyers in America.