Northeast Plan To Extend Climate Cap Raises Constitutional Questions

July 19, 2006
(c) Inside Washington Publishers

Northeast states are considering expanding a regional cap on carbon dioxide (CO2) emissions to cover companies that import electricity from states not subject to the mandate, in order to curb emissions "leakage" that could result if the climate change program displaces power generation into other areas of the country.

 But the states may face challenges in crafting the program, including legal questions that it could violate the Commerce Clause of the Constitution by regulating electricity in other states. At the same time, a similar initiative pending in California to limit out-of-state greenhouse gas emissions is also facing legal hurdles.

The question of emissions leakage in other states has been a key issue dogging the Northeast regional greenhouse gas initiative (RGGI), because power plants could simply increase electricity production outside the state to offset limits on power generation prompted by the regional cap on emissions. Seven states signed a memorandum of understanding that launched the program late last year, and also set up a working group to
explore options for addressing greenhouse gas (GHG) leakage.

At a meeting the workgroup held last month at the Vermont Law School, officials involved with RGGI noted that even a small increase in emissions outside the region could "swamp the program's benefits," according to one presentation from Tim Profeta, director of the Nicholas Institute for Environmental Policy Solutions at Duke University.

"RGGI is an extremely important initiative on the world stage," Profeta argued. "Success is vital. Leakage control will be a large part of that success or failure. If RGGI does not reduce global GHG emissions, or if it is seen as harmful to the states' economic interests, it will be cited as a negative precedent."

Officials at the meeting discussed extending the program -- which is limited to power plants -- to cover all CO2 emissions associated with load-serving entities (LSEs), which purchase electricity to deliver to customers under the Northeast's deregulated electricity market.

Under one proposal outlined in a presentation, from Richard Cowart of the Regulatory Assistance Project, the states could require LSEs to participate in the regional cap-and-trade program. The states would measure current levels of these emissions prior to the onset of the program. LSEs that increased imported emissions above that baseline would have to buy allowances, and those with decreased emissions could sell allowances to other companies.

Sources note the effect would be to discourage power plants outside the region from increasing the output of electricity they could sell to RGGI states. For example, coal-fired power plants in Pennsylvania, which is not part of RGGI, would not have an incentive to provide more electricity for New Jersey, which plans to join the program.

State officials also discussed several other options, including measuring emissions imports but not capping them; increasing energy efficiency within RGGI states; and lowering the cap on emissions to account for any leakage. But according to one environmentalist who attended the meeting, regulating LSEs emerged as the only "real
alternative" because it directly regulated electricity imports.

An industry source says that a new requirement would be unlikely to burden LSEs because they would simply pass the cost of the emissions allowances on to power wholesalers. The real impact would be on generators outside the region that lost the opportunity to sell more power, the source notes.

But any proposal to control leakage could complicate the process for states developing regulations to implement RGGI, which is slated to take effect in 2009. In particular, the states are concerned that a proposal could prompt constitutional challenges because of the impact on interstate commerce.

Profeta argued in his presentation that one key factor is whether the economic burden of the program falls equally on all states -- which means the states would likely have to initiate any regulation to address leakage from the very beginning of the program.

"[States] need to persuade [the] court to take the larger view -- regulations impose identical burdens on the electricity market, but only in two different places," he said. To maximize chance that program will be seen as one greater whole, all components of the program should be imposed at one time."

An expert involved in the program says it is still unclear how states will resolve the constitutional question, but it partly depends on the technical issue of crafting policy language rather than any substantive changes. "This is not an easy question," the source says. "It has to be designed so it treats all power companies on an evenhanded basis."

While it is unclear what groups could mount any legal challenge to regulations on leakage, the Edison Electric Institute raised this concern in March 20 comments on the memorandum of understanding. The group cited language in the memorandum to address leakage as imposing "a vague and uncertain mandate and certainly a threat to the electric utilities in and outside of the region and to commerce."

Apart from constitutional concerns, the states also face practical obstacles including the difficulty of tracking CO2 imports associated with a particular LSE. Companies "don't really have a complete fix on where that power is coming from," the environmentalist says.

A state official says that the workgroup will prepare a draft report by the end of this year outlining options on the leakage issue. Any mandate to address leakage would likely require action by state public utility commissioners (PUCs) and a public notice and comment process.

Meanwhile, California officials and legislators are discussing a series of proposals to limit greenhouse gases from out-of-state generation, which could involve strategies similar to measures in RGGI states to control leakage. Limiting out-of-state emissions is likely to be a key focus of any California climate change rule, because of the high levels
of electricity imported by coal-fired power plants outside state lines.

The California Energy Commission is taking comment on a proposal to establish a greenhouse gas performance standard, which would state that utilities cannot contract for power generation that exceeds the emissions of an existing combined cycle natural gas plant. The performance standard is seen as an interim step toward an eventual
"load-based cap" on emissions from power providers in the state.

Industry groups have submitted comments in recent months charging that the performance standard could violate the Commerce Clause or Supremacy Clause of the Constitution by interfering with the interstate market for power. The Wyoming Infrastructure Authority, which the state's legislature created in 2004 to grow and manage energy transmission, argued in an Oct. 5, 2005, letter to the commission that it could discourage power generation from out-of-state.

"Although the standard purports to be fuel-neutral, in fact it is not, since of the likely sources of generation that could serve California in significant quantities, only coal generation cannot meet the standard," the group wrote. "The standard thus discriminates against a source of generation and a fuel that does not exist in-state in favor of generation and fuels that do. This discrimination against commerce would be sufficient by itself to place the GHG standard in legal peril."

The commission has scheduled workshops on the performance standard for Aug. 21 and Sept. 25, and expects to make a final decision by Dec. 14.

The state's legislature is also considering a bill, SB 1368, that would write the performance standard into law.

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