Does a Kentucky utility regulation that deducts coal severance taxes when comparing fuel bids violate the Commerce Clause?

Plain-English summary

The Kentucky Public Service Commission asked whether one of its own regulations was unconstitutional. The regulation, 807 KAR 5:056 § 3(5), is part of the "Fuel Adjustment Clause" process, the mechanism the Commission uses to review what utilities pay for fossil fuel and to set the fuel surcharge that shows up on customers' monthly bills. The regulation directs that, in judging whether a utility's fuel costs are reasonable, the Commission compare contracts and competing bids using the cost of the fuel "less any coal severance tax imposed by any jurisdiction." The question was whether deducting severance taxes this way unconstitutionally favored Kentucky coal under the so-called "dormant commerce clause."

The Attorney General concluded the regulation was not unconstitutional. The dormant commerce clause forbids states from discriminating against out-of-state commerce, but this regulation deducts severance taxes "imposed by any jurisdiction," so it treats coal from inside and outside Kentucky the same. That makes it facially neutral. The opinion then turned to the harder question of whether a neutral rule nonetheless imposes a burden on interstate commerce that is "clearly excessive" compared to its local benefits (the Pike balancing test). Without a factual record, the opinion found no clear burden: states set their own severance tax rates, and deducting them could help Kentucky coal against some states while hurting it against states with higher taxes. So the office concluded the regulation does not violate the dormant commerce clause.

Currency note

This opinion was issued in 2020. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

The dormant commerce clause is a judicial gloss on the Commerce Clause (U.S. Const. art. I, § 8, cl. 3) that, as the opinion put it quoting Or. Waste Sys., "denies the States the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce." A facially neutral law with only incidental effects on interstate commerce is valid unless the burden is "clearly excessive in relation to the putative local benefits," the standard from Pike v. Bruce Church. The regulation at issue, 807 KAR 5:056 § 3(5), applies to contracts entered on or after December 1, 2019, and tells the Commission to evaluate fuel-cost reasonableness "based on the cost of the fuel less any coal severance tax imposed by any jurisdiction." The opinion noted Kentucky's 4.5% coal severance tax under KRS 143.020, severance taxes in Ohio, Tennessee, and West Virginia, and the absence of such taxes in Indiana and Illinois, and that the 2019 House Resolution 144 had urged the Commission to amend the regulation. Applying the facial-neutrality test and Pike balancing (citing Davis, Bendix Autolite, Tenn. Scrap Recyclers, and C & A Carbone), the opinion concluded the regulation was even-handed and not shown to clearly burden interstate commerce.

Citations and references

Regulations and statutes:

• 807 KAR 5:056 § 3(5); KRS 143.020; Ohio Rev. Code Ann. 5749.02; Tenn. Code Ann. 67-7-103; W. Va. Code 11-13A-3

Cases:

• Or. Waste Sys., Inc. v. Dep't of Envtl. Quality, 511 U.S. 93 (1994); Tyler Pipe Indus., Inc. v. Wash. State Dep't of Revenue, 483 U.S. 232 (1987); Pike v. Bruce Church, Inc., 397 U.S. 137 (1970); Dep't of Revenue of Ky. v. Davis, 553 U.S. 328 (2008); Bendix Autolite Corp. v. Midwesco Enters., Inc., 486 U.S. 888 (1988); Tenn. Scrap Recyclers Ass'n v. Bredesen, 556 F.3d 442 (6th Cir. 2009); C & A Carbone, Inc. v. Town of Clarkstown, N.Y., 511 U.S. 383 (1994)

Source

• Landing page: https://www.ag.ky.gov/Opinions/Pages/default.aspx
• Original PDF: https://www.ag.ky.gov/Resources/Opinions/Opinions/OAG%2020-04.pdf

Original opinion text

The full opinion as issued by the Office of the Kentucky Attorney General:

Commonwealth of Kentucky
Office of the Attorney General
Daniel Cameron, Attorney General
Capitol Building, Suite 118, 700 Capital Avenue, Frankfort, Kentucky 40601

March 4, 2020

OAG 20-04

Subject: Whether 807 KAR 5:056 § 3(5) violates the dormant commerce clause.

Requested by: J.E.B. Pinney, Acting General Counsel, Public Service Commission

Written by: Carmine G. Iaccarino, Executive Director; Brett R. Nolan, Special Litigation Counsel

Syllabus: 807 KAR 5:056 § 3(5) does not violate the dormant commerce clause.

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." (NCSL, 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."

Daniel Cameron
ATTORNEY GENERAL

Brett R. Nolan, Special Litigation Counsel
Carmine G. Iaccarino, Executive Director