6th Circuit strikes down local energy generation requirement

By Nick Smith
Gongwer News Service

A Michigan requirement that utilities and alternative electric suppliers generate a portion of their electricity locally violates the U.S. Constitution’s Commerce Clause, a divided federal appeals court ruled Thursday in a victory for the alternative suppliers.

The 6th U.S. Circuit Court of Appeals reversed a district court ruling that past orders issued by state regulators allowing for a local clearing requirement for energy suppliers were constitutional and remanded the case back to the lower court.

Judge Chad Readler with the 6th Circuit was joined by Judge Richard Suhrheinrich in a 2-1 ruling published Thursday in Energy Michigan v. Scripps (USCOA Docket Nos. 23-1280/1323/ 1324) that the district court erred in ruling that the plaintiffs had not met their burden in establishing that the commission’s individual local clearing requirement discriminates against interstate commerce. Judge Danny Boggs dissented.

“At issue here are Michigan electricity market regulations that expressly restrict where Michigan’s electricity retailers may procure their capacity,” Readler wrote. “Accordingly, that regulatory regime must be evaluated through the lens of strict scrutiny. To allow the district court to engage in that analysis with the benefit of our views here, we reverse and remand.”

The ruling stems from the Public Service Commission issuing orders to establish local clearing requirements on September 15, 2017, and June 28, 2018. A lawsuit was filed in the U.S. District Court for the Eastern District of Michigan in September 2020 by Energy Michigan, Incorporated and the Association of Businesses Advocating Tariff Equity, or ABATE.

In its suit, the groups objected to a requirement that they meet a load generating requirement in local areas, stating that the PSC ruled incorrectly through Section 6w of PA 341 of 2016 that they could impose a local clearing requirement on individual load serving entities.

This, the groups argued, would undermine alternative electric suppliers (AESs) in their ability to sell as well as Michigan’s retail open access customers from buying electric capacity resources generated from outside of the state.

Readler pointed out that the Midcontinent Independent System Operator (MISO) covers parts of 15 states, including almost all of the Michigan wholesale electricity market. Of its 10 zones within its jurisdiction, Zone 7 is in the Lower Peninsula while Zone 2 covers most of the Upper Peninsula.

Under MISO rules, load serving entities can acquire all of its electricity outside of a local resource zone without penalty so long as the total in-zone capacity from all load serving entities is sufficient.

Michigan law was restructured in 2000 to allow alternative energy suppliers to operate and in 2008 enacted restrictions on what they could provide to the grid. Later, PA 341 of 2016 enacted operating requirements for load serving entities.

Readler noted that Michigan’s individual local clearing requirement echoes the MISO local clearing requirement in that it contemplates that some electric capacity be derived locally for reliability purposes. Michigan also is like the MISO local clearing requirement in that it is based on MISO’s total capacity forecasts and MISO’s local resource zones.

A key difference in Michigan’s individual local clearing requirement is that it requires load serving entities to plan four years into the future, not just one year like MISO requires. The Michigan rule also requires load serving entities to produce or purchase a certain amount of locally generated energy.

“The MPSC did not apply the ILCR’s local generation requirement uniformly. Instead of applying the mandate throughout Michigan, the MPSC set Zone 2’s (the Upper Peninsula’s) local capacity metrics at zero percent of its total needed capacity,” Readler wrote. “And within Zone 7, the MPSC adopted an “incremental need approach,” wherein each LSE would initially need to have 2.7% of the amount of electrical capacity necessary to serve peak customer demand located in the zone, with that percentage increasing over time.”

This means, Readler wrote, that the PSC orders require each load serving entity serving Zone 7 to increase gradually the amount of its electrical capacity generated locally in that zone and
guarantee that capacity for four years.

He wrote there are three ways a state law can violate the antidiscrimination rule: facially, purposefully or in practical effect, with the first and third ways being at issue in the case.

Facial discrimination occurs when a law “expressly” differentiates to favor in-state “commerce or entities” at the expense of out-of-state comparators. Effects-based discrimination, Readler wrote, concerns seemingly neutral state laws that necessarily create new market conditions that depend on geography.

“Measured against these principles, the ICLR is facially discriminatory. Whether a capacity requirement “count[s]” toward the ICLR hinges on the “zonal location” of the LSE’s resources. And that “zonal location,” in turn, depends on the whether the resource is in a particular MISO Zone,” Readler wrote. “By requiring electricity to be generated from that zone, the ILCR relies on almost a “near perfect proxy” for the State’s Lower Peninsula.”

Writing in dissent, Boggs said he believed the case falls beyond the scope of the Commerce Clause and under the 1997 General Motors Corporation v. Tracy case was exempt from constitutional scrutiny on the basis that the PSC’s orders impermissibly discriminate against interstate commerce. The 1997 case involved Ohio’s regulation of its retail natural gas market.

“The dormant Commerce Clause is implicated only when eliminating the state law at issue would improve competition in a market. … Energy Michigan and ABATE argue that utilities and AESs are similarly situated because “[e]lectricity sold in the interstate wholesale market is comparable where a watt is generated,”“ Boggs wrote. “’A watt is a watt, and electricity is fungible,’ they argue,” he wrote. “But this is the exact argument that the Court rejected in Tracy – there, the Court made clear that two entities that provide ostensibly the same end product are not necessarily similarly situated under the Commerce Clause.”


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