PacifiCorp v. Watson

In a 2-1 decision, the Ninth Circuit Court of Appeals affirmed the dismissal with prejudice of a dormant Commerce Clause challenge to the Washington State Department of Ecology’s (Ecology’s) enforcement of the Washington Climate Commitment Act’s (CCA’s) decarbonization requirements. The plaintiff, which owns and operates a natural gas-fired electric generation facility in Chehalis, Washington, argued that Ecology impermissibly discriminated against out-of-state customers that consumed electricity generated at the facility by allocating no-cost allowances for greenhouse gas emissions associated with electricity sent to Washington utility customers while requiring the purchase of allowances at auction for emissions associated with electricity sent to other states. The Ninth Circuit concluded that the in-state and out-of-state customers were not “similarly situated entities” as required to establish a violation of the dormant Commerce Clause because Washington’s Clean Energy Transformation Act (CETA) independently imposed decarbonization obligations on in-state power generation that did not apply to exported electricity. The dissenting judge wrote that the majority’s application of the “similarly situated entities” test to exclude Ecology’s regulation from dormant Commerce Clause scrutiny would improperly allow “state regulation that increases the costs of intrastate commerce to justify facial discrimination against interstate commerce, without requiring any assessment of the degree to which interstate commerce is burdened.” He wrote that “the proper course here is to remand this case for factual development as to whether CETA’s compliance costs and the CCA allowances are ‘roughly equivalent’ in a way that would justify Washington’s otherwise discriminatory treatment of interstate electricity sales.”

The federal district court for the Western District of Washington dismissed with prejudice an electric utility’s lawsuit challenging the allocation of “no-cost” allowances under Washington’s Climate Commitment Act to electric utilities that were already subject to the decarbonization mandate of an earlier statute. The utility argued that the requirement that it purchase allowances for emissions generated by its gas-fired power plant in Washington for power serving out-of-state customers while receiving no-cost allowances for power serving Washington consumers violated the dormant Commerce Clause. The court ruled that the utility could not state a cognizable dormant Commerce Clause claim because the categories of in-state and exported energy were not “substantially similar” since the energy produced for use in state was “subject to a preexisting, comprehensive regulatory regime” to which exported energy was not. The court also rejected the utility’s argument that it stated a dormant Commerce Clause claim based on the application of the Pike balancing test, which “generally stands for the principle that ‘a law’s practical effects may also disclose the presence of a discriminatory purpose.’” The court found that a Pike-based claim failed because the utility failed to allege a substantial burden on interstate commerce since “retail electric customers do not compete in a national marketplace, and any increased costs to [the utility’s] out-of-state customers must be approved by their own state’s regulatory commissions.” The court also rejected the utility’s arguments that the Climate Commitment Act discriminated against out-of-state companies or that the state regulations allocating no-cost allowances misinterpreted the statute.