Dormant Commerce Clause Challenge to Cap-and-Trade Allowance Distribution
Invenergy Thermal  v. Laura Watson, Director of the Washington State Dept of Ecology
Recent Developments: In March 2025, Invenergy petitioned the U.S. Supreme Court to review a Ninth Circuit decision that affirms a district court’s dismissal of the company’s dormant Commerce Clause and Equal Protection Clause claims.
Case Documents

Case Summary
The owner of the largest gas fired power plant in Washington State filed suit in federal district court to challenge the state’s distribution of cap-and-trade allowances. Invenergy asserted in its December 2022 complaint that its utility-owned competitors receive free allowances from the state, while it spends tens of millions of dollars to purchase allowances. The company claims that the state’s allowance allocation unconstitutionally discriminates under the dormant Commerce Clause and Equal Protection Clause. In December 2024, the Ninth Circuit affirmed the district court’s dismissal of the company’s claims.

The state’s Climate Commitment Act tasks the Department of Ecology with administering and enforcing a greenhouse gas cap-and-trade program. The Act provides free emission allowances to each utility based on the projected emissions associated with generating or purchasing energy to meet ratepayers’ demand. Utilities may use their free allowances to cover emissions from power plants they own. Alternatively, utilities may sell their allowances, although the Act specifies that proceeds from allowance sales must benefit ratepayers and in particular offset low-income consumers’ rate increases.

As an independent generation company, Invenergy sells power in interstate wholesale markets and does not receive free allowances under the Act. Invenergy’s complaint identifies twelve competing generators that must hold allowances during the program’s initial three-year compliance period, which started in January 2023. Each of the twelve plants is owned by a utility that receives free allowances from the state. Invenergy alleges that the benefiting utilities are all “local to Washington” and “all conduct significant commercial and political activities within the state.” Invenergy alleges that it “cannot compete on equal terms with these in-state competitors,” and claims that the state has tailored its program “to benefit Washington economic interests at the expense of their only out-of-state competitor.”

Invenergy argues that the program’s rules “violate the Commerce Clause by discriminating in effect against out-of-state economic interests to the benefit of in-state economic interests.” Anticipating the state’s defense, Invenergy argues that he discriminatory allowance distribution does not further any legitimate state goal. Although the law purports to protect consumers from rate increases and reduce emissions, the market distortion caused by the protectionist allowance distribution will actually raise rates and emissions. Invenergy therefore further claims that the allowance distribution fails under the Supreme Court’s dormant Commerce Clause balancing test that weighs a state law’s in-state benefits against its burdens on interstate commerce. Finally, Invenergy claims that the law’s “distinction between independent power plants owners and utilities is not rationally related to any legitimate governmental purpose” and therefore violates the Equal Protection Clause.

In November 2023, a district court granted the state’s motion for judgment on the pleadings after finding, sua sponte, that the plaintiffs lacked standing. The district court also found that even if Invenergy had standing, the company’s Commerce Clause claims fail on the merits. The court found that an out-of-state owner of a Washington electric utility is entitled to no-cost allowances, and two in-state generating owners that are not entitled to free allowances. The court therefore concluded that “[a]t most,” the Act “discriminates based on an entity’s status as either an electric utility or an electricity generating facility and not based on geography. Moreover, because utilities and independent generators primarily serve different markets, they are not similarly situated” for purposes of the dormant Commerce Clause. For the same reason, the court determined that the Act does not violate the Equal Protection Clause, which “generally requires similarly situated persons to be treated alike.” The court also noted that the allocation of no-cost allowances to electric utilities, but not to electricity generating facilities, is rationally related to a legitimate government purpose.

On appeal, a Ninth Circuit panel affirmed the district court’s decision on the merits but reversed on standing. The panel held that Washington’s law does not discriminate against out-of-state entities because electric utilities and independent power plant owners like Invenergy are not “similarly situated.” Washington utilities, the panel explained, “primarily serve a [ ] captive retail market by distributing power to consumers.” The amount of free allowances utilities receive from Washington is pegged to the amount of electricity they sell to in-state captive ratepayers. Invenergy, by contrast, does not have any captive ratepayers and sells energy exclusively through the wholesale market. While utilities and Invenergy do compete to some extent in the non-captive wholesale market, the panel concluded that the Supreme Court’s decision in General Motors v. Tracy requires courts to prioritize the captive market.

In Tracy, the Supreme Court explained that taxing utilities could subject them to “economic pressure that in turn could threaten the preservation of an adequate customer base to support continued provision of bundled [electricity] services in the captive market even though they also compete [ ] in the noncaptive market.” Because utilities and wholesale-market sellers “serve different markets, and would continue to do so even if the supposedly discriminatory burden were removed, . . . eliminating the . . . regulatory differential would not serve the dormant Commerce Clause’s fundamental objective of preserving a national market for competition undisturbed by preferential advantages conferred by a State upon its residents or resident competitors.” Applying this principle to Washington’s program, the Ninth Circuit panel held that the providing free allowances to utilities does not discriminate against independent generators owned by out-of-state companies on its face, in its purpose, or in its practical effect.

The panel also held that Invenergy failed to allege a viable claim under the dormant Commerce Clause’s Pike balancing test. According to the panel, the Supreme Court “has declined to hold that the incidental effect of mere state regulation on the interstate wholesale energy market is, on its own, a substantial burden on interstate commerce.”

Finally, the panel affirmed dismissal of Invenergy’s Equal Protection Clause claim. As discussed, Invenergy is not “similarly situated” to utilities, which forecloses their equal protection claim. In addition, the “differential treatment rationally reflects Washington’s interest in balancing the rising cost of energy against the State’s desire to reduce greenhouse gases.”

Supreme Court
Invenergy’s Petition for a Writ of Certiorari (Mar. 24, 2025) (Supreme Court Case No. 24-1027)

Ninth Circuit
Decision (Dec. 24, 2024)

Invenergy’s Opening Brief (Feb. 8, 2024)
Washington’s Answering Brief (Apr. 10, 2024)
Invenergy’s Reply Brief (May 10, 2024)

District Court
Decision
Order Granting Washington’s Motion to Dismiss (Nov. 3, 2022)

Filed Briefs
Complaint (Dec. 13, 2022)
Washington Attorney General’s Motion to Dismiss (Feb. 13, 2023)
Invenergy’s Opposition to Washington’s Motion to Dismiss (Apr. 7, 2023)