Request By:
J.E.B. Pinney, Acting General Counsel
Public Service Commission
Opinion
Opinion By: Daniel Cameron,ATTORNEY GENERAL;Brett R. Nolan,Special Litigation Counsel;Carmine G. Iaccarino,Executive Director
Opinion of the Attorney General
The Kentucky Public Service Commission requests this Office's opinion on whether 807 KAR 5:056 § 3(5) (the "Regulation") is unconstitutional under the "dormant commerce cause" of the United States Constitution. For the reasons that follow, the Office finds that the Regulation is not unconstitutional.
"The Commerce Clause provides that the Congress shall have Power to regulate Commerce among the several States."
Or. Waste Sys., Inc. v. Dep't of Envtl. Quality of State of Or. , 511 U.S. 93, 98 (1994) (quoting Art. I, § 8, cl. 3) (cleaned up). Despite its name, the so-called "dormant commerce clause" is nowhere found in a clause to the United States Constitution.
Tyler Pipe Indus., Inc. v. Wash. State Dep't of Revenue , 483 U.S. 232, 265 (1987) (Scalia, J., dissenting) ("[T]he Court for over a century has engaged in an enterprise that it has been unable to justify by textual support[.]"). Regardless, it "denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce." Or. Waste Sys., Inc. , 511 U.S. at 98. Thus, states may not engage in "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." Id. at 99. On the other hand, "nondiscriminatory regulations that have only incidental effects on interstate commerce are valid unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits." Id. (citing
Pike v. Bruce Church, Inc. , 397 U.S. 137, 142 (1970)). Despite the negative thrust of the Commerce Clause, the Supreme Court has recognized that "the Framers' distrust of economic Balkanization was limited by their federalism favoring a degree of local autonomy."
Dep't of Revenue of Ky. v. Davis , 553 U.S. 328, 338 (2008) (citing The Federalist Nos. 7 (A. Hamilton), 11 (A. Hamilton), and 42 (J. Madison), and 51 (J. Madison)).
According to the Commission, "807 KAR 5:056 is the Commission's regulation addressing the Fuel Adjustment Clause ('FAC'). The FAC is a mechanism by which the Commission . . . reviews fossil fuel and power purchases of utilities in Kentucky that generate their own electricity, making adjustments to the utilities' FAC surcharges recovered from a monthly surcharge on customers' bills." Relevant to this Office's inquiry, the Regulation provides:
For any contracts entered into on or after December 1, 2019, the commission shall, in determining the reasonableness of fuel costs in procurement contracts and fuel procurement practices, evaluate the reasonableness of fuel costs in contracts and competing bids based on the cost of the fuel less any coal severance tax imposed by any jurisdiction.
807 KAR 5:056 § 3(5).
"Severance taxes are excise taxes on natural resources 'severed' from the earth." https://www.ncsl.org/research/fiscal-policy/2011-state-severance-taxcol… ns.aspx (last accessed Feb. 27, 2020). Kentucky's severance tax is 4.5% on coal severed or processed in Kentucky. KRS 143.020. Ohio, Tennessee, and West Virginia have also enacted their own severance taxes for coal mined in those states. See Ohio Rev. Code Ann. 5749.02; Tenn. Code Ann. 67-7-103; W. Va. Code 11-13A-3. Indiana and Illinois have not enacted coal severance taxes.
In the 2019 Regular Session of the General Assembly, the Kentucky House of Representatives passed House Resolution 144, which "urg[ed] the Public Service Commission to amend its administrative regulations to consider all costs, including fossil fuel-related economic impacts within Kentucky, when analyzing coal purchases under the fuel adjustment clause." House Resolution 144 prompted the Commission amend 807 KAR 5:056 § 3(5).
Based on the plain text of the Regulation, this Office agrees with the Public Service Commission that the Regulation "is not facially discriminatory." Request at 3. The Regulation provides that coal severance taxes "imposed by any jurisdiction" should not be considered when evaluating the reasonableness of fuel costs. 807 KAR 5:056 § 3(5) (emphasis added). This does not require the "differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." Or. Waste Sys., Inc. , 511 U.S. at 99. Rather, it requires treating all economic interests the same by deducting the coal severance tax imposed by any jurisdiction when evaluating "the reasonableness of fuel costs in contracts and competing bids." 807 KAR 5:056 § 3(5). Because the Regulation treats coal sourced from within the Commonwealth the same as coal sourced from outside its borders, it is not facially discriminatory.
Laws that are facially neutral might nevertheless violate the dormant commerce clause if "the burden imposed on [interstate] commerce is clearly excessive in relation to the putative local benefits." Or. Waste Sys., Inc. , 511 U.S. at 99; see also Pike , 397 U.S. at 137 ("Where the statute regulates even-handedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits."). But this is a narrower kind of claim that often involves weighing factual issues that are difficult to balance. See
Bendix Autolite Corp. v. Midwesco Enters., Inc. , 486 U.S. 888, 897 (1988) (Scalia, J., dissenting) ("Weighing the governmental interests of a State against the needs of interstate commerce is, by contrast, a task squarely within the responsibility of Congress . . . ."). So "[s]tate laws frequently survive this Pike scrutiny," Dep't of Revenue of Ky. , 553 U.S. at 339 (collecting cases), in part because it requires high deference to the state's policy choices. See
Tenn. Scrap Recyclers Ass'n v. Bredesen , 556 F.3d 442, 450 (6th Cir. 2009) (explaining that any challenge under Pike must demonstrate that the burden on interstate commerce is "clearly excessive") (quoting
C & A Carbone, Inc. v. Town of Clarkstown, N.Y. , 511 U.S. 383, 390 (1994)).
Though this Office's analysis is necessarily limited without a factual record to consider, it is not clear that the Regulation will burden interstate commerce. States are free to enact coal severance taxes at a chosen rate. An adjustment to offset coal severance taxes would cause Kentucky coal to be priced more competitively in comparison to some states and less competitively with respect to other states, depending on which states have chosen to enact severance taxes and at what rate. Kentucky has enacted a coal severance tax of 4.5% on coal severed or processed in Kentucky, but states like Indiana and Illinois have not enacted a coal severance tax. So while the Regulation might arguably benefit coal producers in Kentucky relative to those in Indiana or Illinois, the same logic would mean that it could hurt Kentucky coal producers relative to those states where the severance tax may be higher. Either way, nothing prevents states from altering their severance tax if they believe it will provide their coal producers with a competitive advantage in Kentucky. Thus, there is no merit to the argument that discounting severance taxes in the Commission's consideration will favor Kentucky coal producers to the detriment of all out-of-state interests.
For these reasons, this Office concludes that the Regulation does not violate the so-called "dormant commerce clause."