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Allco Fin. Ltd. v. Robert J. Klee

Court of Appeals for the Second Circuit
861 F.3d 82 (2017)
ELI5:

Rule of Law:

A state renewable energy program that directs, but does not compel, utilities to enter into bilateral wholesale contracts with selected generators is not preempted by the Federal Power Act if the contracts are not tethered to a FERC-regulated auction. Furthermore, a state's Renewable Portfolio Standard that limits qualifying renewable energy credits to those produced by generators that can transmit power into the regional grid does not violate the dormant Commerce Clause because in-region and out-of-region credits are not similarly situated products.


Facts:

  • Connecticut enacted public acts authorizing its Department of Energy and Environmental Protection (DEEP) to solicit proposals from renewable energy generators.
  • The acts empowered DEEP to select winning bids and then "direct" Connecticut's utilities to enter into wholesale power purchase agreements with the winners.
  • Allco Finance Limited, a solar project developer, submitted proposals for a 2013 and a 2015 Request for Proposals (RFP) but was not selected.
  • The 2015 RFP excluded bids from generators smaller than 20 megawatts, which included some of Allco's facilities.
  • Separately, Connecticut established a Renewable Portfolio Standard (RPS) program requiring utilities to obtain a certain percentage of their electricity from renewable sources.
  • Utilities could satisfy the RPS requirement by purchasing Renewable Energy Certificates (RECs), but only RECs from generators located within the regional ISO-NE grid or adjacent areas capable of transmitting power into that grid would qualify.
  • Allco owned solar facilities in Georgia and New York whose RECs either could not qualify for Connecticut's RPS program or faced additional transmission costs to qualify.

Procedural Posture:

  • Allco Finance Limited filed two related complaints against the Commissioners of Connecticut’s energy regulators in the U.S. District Court for the District of Connecticut.
  • The defendants moved to dismiss both complaints for lack of standing and for failure to state a claim.
  • Allco opposed the defendants' motions and filed its own motion for preliminary injunctive relief.
  • The district court granted the defendants' motions to dismiss the complaints with prejudice and, as a result, denied Allco's motion for injunctive relief as moot.
  • Allco, as appellant, filed a timely appeal of the district court's judgment to the U.S. Court of Appeals for the Second Circuit.

Locked

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Issue:

1. Is a state renewable energy procurement program, which directs but does not compel state utilities to negotiate bilateral contracts with winning bidders, preempted by the Federal Power Act? 2. Does a state's Renewable Portfolio Standard program, which limits qualifying Renewable Energy Certificates to those produced by generators that can transmit power into the regional grid, violate the dormant Commerce Clause by discriminating against out-of-region generators?


Opinions:

Majority - Calabresi, J.

1. No, the state's procurement program is not preempted by the Federal Power Act because it does not compel wholesale energy transactions or impermissibly regulate wholesale rates. The court reasoned that while the authorizing statute allows the state to "direct" utilities, the actual RFP documents clarify that utilities are not obligated to accept any bid and retain discretion in negotiations. This distinguishes the program from the one struck down in Hughes v. Talen Energy Mktg., LLC, where a state program was tethered to a FERC-regulated auction and guaranteed a rate different from the auction's clearing price. Connecticut's program results in traditional bilateral contracts that are subject to FERC's own review for justness and reasonableness, a practice that Hughes explicitly stated was permissible. 2. No, the state's Renewable Portfolio Standard (RPS) program does not violate the dormant Commerce Clause. The court applied the framework from General Motors Corp. v. Tracy and found that RECs from generators that can deliver power to the regional grid and those that cannot are not "similarly situated" products for constitutional purposes. The former serves Connecticut's legitimate local interests in improving regional grid reliability and air quality, while the latter does not. Because the products are different, the program does not facially discriminate against interstate commerce. Applying the more deferential Pike balancing test, the court concluded that the program's substantial local benefits are not clearly excessive in relation to any incidental burden on interstate commerce.



Analysis:

This decision provides a significant legal roadmap for states seeking to promote renewable energy development without running afoul of federal law. By distinguishing Connecticut's program from the one invalidated in Hughes, the court clarifies that states retain substantial authority to influence utility procurement decisions, so long as they avoid direct compulsion and do not interfere with FERC-regulated wholesale auctions. The application of the Tracy "similarly situated" products analysis to Renewable Energy Certificates (RECs) provides a powerful defense for state RPS programs that favor regional energy sources for non-protectionist reasons, such as grid stability. This ruling strengthens the ability of states to pursue climate and energy reliability goals through policies that have a regional focus, potentially insulating such programs from future dormant Commerce Clause challenges.

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