Can states constitutionally regulate the carbon content of imported electricity?  A recent decision by federal district court in Minnesota may curtail such state regulation, at least in states that are part of pooled transmission systems and organized markets, such as those operated by the Midcontinent ISO (MISO).  North Dakota v. Heydinger, Case No. 11-ev-3232 (D. Minn., Apr. 18, 2014), can be found here

In this case, Minnesota enacted a statute that prohibits the construction of new coal-fired power plants in Minnesota and the import into Minnesota of electricity from a new coal-fired power plant outside the state.  The statute also prohibits any person from entering into a long-term power purchase agreement for the import of electricity for consumption in Minnesota that entails increased carbon dioxide emissions associated with the imported power.  While Minnesota’s regulation of in-state power plants was not questioned, the State of North Dakota and several electric cooperatives claimed that Minnesota was violating the dormant Commerce Clause of the U.S. Constitution by regulating the carbon content of electricity transactions in MISO markets.  The plaintiffs also claimed that the Minnesota statute was preempted by both the Clean Air Act and the Federal Power Act.

Without reaching the preemptive force of the federal statutes, the District Court of Minnesota struck down Minnesota’s statute on the ground that it constituted per se prohibited extraterritorial regulation of out-of-state transactions in MISO markets between non-Minnesota entities, in violation of one prong of the dormant Commerce Clause.

The District Court reasoned that the sale and transmission of electricity in the MISO markets “does not recognize state boundaries.”  Therefore, when a non-Minnesota entity sells or transmits electricity over the MISO grid to satisfy obligations to non-Minnesota participants in MISO markets, there can be no assurance that the electricity will not pass through Minnesota, triggering applicability of the Minnesota carbon regulations.  The District Court held that the possibility that Minnesota’s carbon content regulations would reach MISO transactions between non-Minnesota entities sufficed to invalidate the entire statute, even as to its applicability to electricity imported through MISO to serve Minnesota load.

The District Court’s decision poses obstacles to other state statutes and regulations that seek to reduce and regulate carbon emissions associated with imported electricity consumed in the regulating state.  In particular, this decision casts new doubt on the constitutionality of California’s cap and trade regulations that require electricity imported into the California Independent System Operator’s (CAISO’s) markets to carry emission allowances based on the carbon content of out-of-state electricity sources.  Especially now that the CAISO energy imbalance market will extend beyond California borders, any regulations of the carbon content of transactions in CAISO markets might be challenged as possibly entailing extra-territorial regulation of electricity transactions between non-California market participants. Even though California’s existing regulation of the carbon content of imported electricity may be distinguishable from Minnesota’s regulation, California’s cap and trade regulations must also survive the other  two prongs of the dormant Commerce Clause (which, additionally, prohibit discrimination in and undue burdens on interstate commerce), as well as possible preemption by either or both the Federal Power Act and the Clean Air Act.  The Federal Power Act raises untested issues of preemption because it vests FERC with exclusive jurisdiction over the terms and conditions of wholesale electricity sold in ISO/RTO markets (even as to the CAISO, were it to remain a single-state system).  The Clean Air Act will present knotty preemption issues when states become obligated, under Section 111(d) of that Act, to regulate in-state carbon emissions from the power sector under state implementation plans to be approved by EPA.

Stay tuned for further updates regarding the constitutionality of state regulation of the carbon content of imported electricity.