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: Invenery filed its complaint in December 2022. The state responded with a motion to dismiss in February 2023.
The owner of the largest natural gas fired power plant in Washington State filed suit in federal district court to challenge the state’s distribution of cap-and-trade allowances. Complainant Invenergy asserts that all of its utility-owned competitors receive free allowances from the state, while it anticipates spending 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.
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 electric 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. The company expects to pay “tens of millions of dollars” in 2023 for allowances for its 650 megawatt Grays Harbor facility. 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 benefitting utilities are all “local to Washington” and “all conduct significant commercial and political activities within the state,” although it notes that one utility (Pacificorp) is based in another 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 the 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 plant owners and utilities is not rationally related to any legitimate governmental purpose” and therefore violates the Equal Protection Clause.
Washington’s attorney general responded last week with a motion to dismiss the suit. The state says that its allowance distribution does not discriminate in effect as a matter of law. First, the state notes that an out-of-state utility receives free allowances, which defeats any claim that the law treats in-state and out-of-state economic interests differently. Second, the state argues that as an independent generator selling power in interstate commerce, Invenergy is not similarly situated under the dormant Commerce Clause doctrine to monopolist utilities that deliver power to in-state consumers. Because the dormant Commerce Clause forbids discrimination only as between similarly situated entities, Invenergy’s claim fails. Washington urges the court to dismiss Invenergy’s claims about excessive burdens on interstate commerce as “speculative” and cautions the court not to “second guess the empirical judgments of lawmakers concerns the utility of legislation” (quoting the Ninth Circuit).
Finally, the state summarizes that Invenergy cannot meet the “extraordinary burden to establish an equal protection claim.” The Act explicitly states that providing free allowances to utilities will protect consumers from rate increases. The state argues that this “rational explanation is all that is required” for the court to dismiss Invenergy’s equal protection claim.
Complaint (Dec. 13, 2022)
Washington Attorney General’s Motion to Dismiss (Feb. 13, 2023)