Demystifying the DCC: Where circuit courts draw the line on energy protectionism

The Dormant Commerce Clause (DCC) is a headache for students and professionals alike. The doctrine’s applicability is notoriously nuanced. In recent decades, however, its application has become slightly less muddled in another complex area: electricity.

More specifically, doctrinal clarity may be emerging on the bounds of state renewable portfolio standards (RPSs). These standards vary by state, but they require a specific percentage of electricity sold by utility companies to come from renewable sources.

Typically, RPSs utilize Renewable Energy Credits (RECs) to track compliance with these standards. For every 1 megawatt hour of electricity generated, renewable generators earn a corresponding credit. These credits represent the severed renewable attributes of generation and can be sold to utility companies which then may claim the electricity came from a renewable source.

Through this mechanism, utility commissions can track the generation mix of the grid while the renewable generators receive a market incentive for producing clean electricity. Some states have started regionally restricting their credit markets. Limiting eligible credits increases scarcity while maintaining demand, naturally increasing credit value. This, in turn, creates a greater incentive for renewable generators to operate in the area.

However, the Dormant Commerce Clause prohibits state laws that discriminate against interstate commerce on their face, in purpose, or in practical effect. Such laws are subject to strict scrutiny. To survive, the state must demonstrate that the law advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.

By contrast, when a law regulates evenhandedly and imposes only incidental burdens on interstate commerce, the Pike test, established by Pike v. Bruce Church, Inc., generally applies. Under that test, the law will be upheld unless the burden imposed on interstate commerce is clearly excessive in relation to the law’s putative local benefits.

Two circuit court decisions may become the guiding rationale when it comes to DCC limits on RPS programs. First, in Allco Finance Ltd. v. Klee,the Second Circuit was asked whether limiting eligible credits to a regional market violated the DCC. Allco owned renewable generators outside the region and claimed Connecticut was interfering with interstate commerce by barring these facilities from producing eligible credits.

The court disagreed, ruling that the facilities were not similarly situated to in-region producers, precluding their claim. The court recognized that the line drawn was not arbitrary; it was limited to RECs issued by the NEPOOL-GIS for energy imported into ISO-NE boundaries; a region created by the federal government to ensure energy reliability in the area.

It also noted the intention of RPS programs, which is to improve local environmental conditions. Because credits from outside the region do not directly serve this purpose, the court ruled they are different products, and therefore the generators were not similarly situated in the market.

However, states that race to draw regional boundaries should not be too hasty. In Energy Michigan, Inc. v. Michigan Public Service Commission, the Sixth Circuit faced an analogous issue. Michigan sought to create capacity sourcing requirements that effectively created a “near perfect proxy” to state boundaries.

Michigan claimed the purpose of the policy was to improve grid reliability in the energy market. The court’s ruling showed that boundaries in the electricity market, even when no explicit discrimination exists, may still face strict scrutiny if their implementation creates disparity along state lines.

These cases clarify the boundaries of RPS programs. When drafting limiting policies, legislatures should not justify credit restrictions with good intentions. The statute in Allco only prevailed because its rationale was supported by the federally created structure of the energy market. Energy Michigan serves as a warning, showing that appeals to reliability by themselves are not enough to avoid strict scrutiny. Lawmakers can pursue their local goals, but they must be substantiated by the actual makeup of the market.