Minnesota Appeals Ruling Against Carbon Offset Provision

Should states be able to set their own parameters for how energy is purchased and produced within their borders?

That question is at the heart of a judicial appeal that was filed by the state of Minnesota recently, concerning the outcome of the state of North Dakota's challenge to its Next Generation Energy Act (Energy Act).

Minnesota's carbon offset provision

Last April, the U.S. District Court for the District of Minnesota struck down a provision in Minnesota's Energy Act requiring new power plants that purchase coal-generated power to demonstrate carbon offsets. The state law was designed to complement Minnesota's clean energy goals.

The court ruled that the state law essentially conflicted with the commerce clause of the Constitution of the United States, which regulates interstate commerce.

"Over the years," says the executive director of the Minnesota Center for Environmental Advocacy, Scott Strand, "the courts have interpreted (the powers of the commerce clause) as not only a grant of authority to Congress, but (as) taking away some of the authority of the states."

Dormant commerce clause versus state law

What is often called the "dormant commerce clause" was implemented to keep states from competing and imposing tariffs against each other, such as is often done in the international arena. The commerce clause also prohibits extraterritoriality: the ability of one state to regulate what another state does within its own borders.

For example, in 2008, California imposed new caging standards for egg producers. Although the state was allowed to enforce new standards for egg producers within its borders, federal law restricted it from requiring out-of-state producers to upgrade their caging procedures because it could unduly restrict interstate commerce -- even if those egg producers did business with California suppliers.

In the case of Minnesota's carbon offset standards, however, the state law isn't intended to regulate what other state facilities do, Strand said. It is designed to regulate how Minnesota facilities purchase and supply electricity to their customers. It puts the onus on the Minnesota facility to ensure that the location it purchases power from either produces power from designated "green" sources (i.e., not high carbon-producing coal) or has carbon offsets in place to compensate for those emissions.

Still, the District Court of Minnesota found that a section Minnesota's New Generation Energy Act did exactly that by suggesting that out-of-state energy providers could be affected by the state's regulation of what could come across its borders.

"Part of that, I think, is based on the notion that because utility generators essentially put electricity on a regional grid, you can’t really know where your (electricity is) going," said Strand. When you plug in a light, "you could be getting your electricity from any number of different utilities. You pay one utility, but we sort of have this fiction that they are the ones providing the electricity, because basically that’s where the commitment comes from."

The Minnesota connection

And that commitment, or contract, said Strand, is what really should determine whether this law constitutes extraterritoriality, not whether the electrons are on a regional grid. States regulate how electricity is charged and supplied within their borders, and they should be able to regulate how they get the power they supply to their customers, said Strand. "Once you accept ... that it’s the contracts you regulate, not the movement of electricity, then the notion that Minnesota would be regulating something completely outside of the state really breaks down.

"If you’ve got Minnesota buyers, then obviously you don’t have a completely extraterritorial regulation. You’ve got a Minnesota connection. And that is what states have always had the authority to regulate," explained Strand.

"My view is that the court totally got it wrong," said Michael Noble, who serves as the executive director of the Minnesota advocacy group, Fresh Energy. He said the statute is specifically designed to regulate how Minnesota utility providers buy their power, not how power producers sell their product. "That same offset requirement applied to a coal plant built in Iowa or Minnesota, or Manitoba or Wisconsin," said Noble. "We called it the principal that if you’re down in the hole you stop digging. We were just going to agree that we weren’t going to increase carbon emissions from coal power any more."

Noble said he felt the reason North Dakota launched the suit in the first place was that it was hoping to maintain its footing as a coal-based power producer for nearby states like Minnesota.

"And the reason I think that is absurd is no Minnesota electric utility has any interest in buying power from new coal, ever again," said Noble. "So, there truly is no market for them [in Minnesota]. That is why this lawsuit is sort of silly. Even if this law weren’t in place, there would be no market for coal."

Noble admitted that there is some risk in the outcome of this appeal. If the District Court's finding were to stand, it could possibly set a precedent that could affect how utility company purchase of power is regulated and make it harder for states to enforce clean energy standards in the purchase of non-carbon-based power supplied to a regional grid.

"[The] national [climate groups] are very, very interested and concerned that this could be cited by other courts or other legislatures as [a] reason why you can’t have a state energy policy or state environmental policy or a state carbon policy," said Noble.

Still, Minnesota utility companies aren't looking toward coal sources anymore.  "That is another reason why this is a little bit water over the dam now," he said. Minnesota-based Xcel Energy has already released its graduated 2030 goals, and they are all based on the increasing supply of renewable energy, a projection that dovetails not only with the state's mandates for increasing the supply of reliable renewable energy, but the Environmental Protection Agency's mandates as well.

"It gets back to my argument that history has moved on. Coal isn’t in the game," said Noble.

The federal Clean Energy Plan

It also raises a question about the real intention of North Dakota's suit, which came just months before the EPA was to unveil its Clean Power Plan, a program that was first hinted at in 2009 during President Barack Obama's inaugural address.

"We will harness the sun and the winds and soil to fuel our cars and run our factories," President Obama said, giving a clear indication that the days of high carbon-emission power were numbered. Since that time, federal energy guidelines have also moved away -- not closer -- to supporting coal-based power. The Clean Power Plan is designed to encourage states to move away from carb0n-based power sources, notes Strand.

"[The] irony is that, at the same time that we’ve got challenges to the state authority in this area, you’ve got the EPA and the federal government trying to give the authority right back to the states. They are asking for the states to generate their own plans, and something like a carbon offset could very well be a part of those state plans."

For now, Strand said, it's a matter of waiting to see the outcome of the appeal that Minnesota filed on May 19 of last year. North Dakota filed its brief in response on Jan. 20, but received a deficiency notice from the court, requiring it to refile the following day. Both states will have an opportunity to respond one more time before the case is reviewed by a three-judge panel of appeals for the 8th Circuit court.

From there, any further appeals could be heard by the full 8th Circuit court, although the losing party also has the option of petitioning a writ of certiorari to the Supreme Court. Given the fact that this is an issue that, to date, hasn't really generated a conflict with other circuit courts decisions, it's unlikely that the Supreme Court would hear an appeal, said Strand.That, however, could change.

What is likely is that the shift to renewable energy will also require states to look more guardedly at ways to insulate their hard-fought legislation from lawsuits. The lessons from Minnesota's foray into this battleground, say analysts, may result in more restrained and less encompassing state provisions whose restrictive language can weather a Constitutional challenge.

Image of wind turbines: Nic McPhee

Image of St. Paul, steam plant in the distance: Michael Hicks