The Legal Case for a Clean and Competitive Energy Sector — Episode 152 of Local Energy Rules

And we are in a situation right now is really like a pinnacle where we have stalled Congress on climate action. We have to face and wean ourselves off of fossil fuels, given the geopolitical security issues that are now very front and center in our Zeist and press on executive powers that the president has. One of the executive powers that we are very bullish about is the defense production act, which we’ve been writing about for many years now. And the way that I was actually introduced to the defense production act, which I think many of us were in a more kind of recent vintage, is through its use towards COVID 19.

So traditionally the act is a war time statute that was passed in the 1970s, but there was a preceding statute that was the same piece of legislation. And it basically is allowing for the president to command private industry to build the weapons needed for the national defense. So when it was first passed in the 1970s, it was for the purpose of manufacturing tanks, manufacturing guns, bombs for the Korean war. But since then we have seen that the DPA can actually be used for peaceful means. And one of the you know, exemplary examples was how the Biden administration itself has actually used it to manufacture on war time footing, the COVID 19 vaccines and the PPE, the personal protective equipment that was needed to combat COVID 19 when he reached office.

Interestingly enough, I was exposed to it during the Trump administration because the Trump administration had also called for the use of the DPA, but actually his secretaries who he delegated it to were not using it for its full power. I ended up representing over 50 million workers and 15 labor unions to sue the Trump administration to force them to use the DPA in all of its power in order to produce the amount of PPE needed to protect our essential workers here on the ground. So having said all of that, we’re in a position now where again, the DPA is a powerful executive tool that president Biden has. He’s actually used it already and that he can use it towards renewable energy manufacturing, which arguably we absolutely need in our national defense right now to wean ourselves off the fossil fuels and really combat the climate crisis.

One thing that the DPA does is that it first gets the president in a room with private manufacturers and says, Hey, let’s make a game plan. We have a grave need for these types of technologies. We are facing grave threat from them. Let’s figure out how much we need and how much you can make that’s number one, like let’s get this game plan on. Number two, if by declaring a national defense issue, the president can actually release finances. So there are financial instruments that are tied to the PPA. This opens up the ability to create loans, loan guarantees, direct grants to manufacturers to help them expand their manufacturing, reform their manufacturing plants, and build new plants in order to get this supply up need.

And then finally what’s interesting about it is that it allows the president to allocate where these technologies should go. So a lot of this can, first of all, be purchased through government contracts. And this is a place where we’ve heard time and time again, that manufacturers in the United States are reticent to jump into green manufacturing. They have been waiting for clean energy incentives for the Build Back Better act that may not come to pass any time soon. So what the security they need comes in the form of the financial instruments I just talked about, but also guaranteed government contracts where the government will be buying these goods and then deploying them accordingly. And so this is where we have a very interesting opportunity for president Biden to figure out where this makes most sense in the national defense.

On the one hand advocates right now, because the war in Ukraine is, you know, first and foremost on our minds, they believe that, you know, maybe the best thing we can do is export energy conservation materials over to Europe to help our European allies out. That that’s definitely one way to think about it. The other way that I would like to think about it though, is we have a lot of suffering in this country right now from our fossil fuel system. So this is also the opportunity to deploy accordingly in our own country. And in particular, get it to those that are on the front lines of climate and fossil fuel violence. Those are communities that are hit in the Gulf Coast, the heat domes in the Pacific Northwest, the Texas freezes. And they are disproportionately our BIPOC communities. Let’s get it to them first because they are actually going to be suffering the most from a national security standpoint on climate and fossil fuels.

How are we going to get enough funding to do this? And there are different ways to do that. You know, one obvious part is obviously Congress can sit down and come together as they did for the Russia oil ban and basically direct funding again, to new types of manufacturing for this wartime effort, essentially. So that’s one thing, but as we know, we’re not sure what the Republicans are going to do on this. So there’s other streams of funding that the Biden administration has available. One of the pieces that I think is really important is for the Biden administration to actually leverage its federal procurement program. So right now there’s been all this talk about agencies becoming green, but all of budget essentially has been used abroad to try to get supplies from China to get here in terms of our renewable energy. Actually, if you just use that same amount of money, that can create a new set of government contracts that are worth 650 billion a year to our domestic manufacturers to get them going, to expand their manufacturing and to meet our demands. So this is actually a way to pair existing budget that the Biden administration has and pair it with the DPA to meet supply and demand both at once.

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So let, putting, putting that aside, there is a very interesting doctrine called the state action immunity doctrine, which was specifically carved out by the courts for antitrust law and what this, the whole purpose behind this in was that the courts believed that if the state really wanted to do an anti-competitive thing, it thought that it was in the best interest of the public to do that. They should have the right to do that. And so therefore they should be protected. And I think we can see that for instance, in the very early case of the electricity sector itself, that the, you know, different states carved out territorial service territories, so that you wouldn’t have duplicative lines and being built, you know, to serve a certain neighborhood. And so the state, or, you know, whatever local government entity made a call that, Hey, it’s actually okay to be anti-competitive, we’re going to give, you know, these types of monopoly territories solely for the purpose of serving the public interest and not having to with. So I, I think that’s like, you know, one, one lens to view that that’s the whole principle behind state action doctrine.

What’s happened since then, and what muddies the waters, is when you look at different bodies that are sub state, essentially different bodies that the state has delegated out, you know, certain regulatory duties to and in the electricity sector, we have a few manifestations of these bodies. So one of the bodies obviously is a municipality itself. So we have the state, the state that has local governments and municipalities. And so there there’s a tighter nexus, arguably between municipality making these decisions. And because they’re closer to the state, then on the opposite end of it, you actually have private utilities who have nothing to do with the state. They’re just pure companies, but they are regulated by another sub state body, a public commission, which has its own set of obstacles with this. And then Salt River Project is this funky character in the middle that actually, there are many utilities like the Salt River Project, which have its origins in state statute. For instance, like the, you know, actually the state created this thing. But over time it has become like a private beast in and of itself. The Supreme Court actually found that Salt River Project was a private enterprise and, and it was a business enterprise.

So it’s, it’s helpful to characterize in those three different buckets of the sub state categories that, that we’re looking at. So how does the state action immunity apply to these three different state categories? There’s a test that the courts made up. It’s a, it’s called the Midcal test. And there’s two prongs that need to be essentially meant to accurately put up a good state action immunity defense. The first prong is that the state is required to clearly articulate, a principle that they approve of this type of anti competition. So it has to be like a very straightforward state policy that we are okay with rooftop solar being totally eliminated. And there’s no need for competition against, kind of centralize it in normal utilities. So that, that that’s prong one, specifically applied to these types of pattern. Prong two is active supervision, is the state, is the sub state entity actively supervising or, I’m sorry, is the state actively supervising the sub state body to carry this out? So those are the two prongs, the private utilities, anything they do is subject to the two prong tests. On the other end, the municipalities are actually only subject to the first prong. And then depending on where your middle hybrid character is, depending on whether the state sees that more as muni or more as a private entity will depend on whether the two prongs apply to them. Sorry for that kind of lesson. But that’s, that’s kind of where the case law is.

There’s a bunch of different stuff on the books right now. And it may be confusing and that’s where the argument can lie. Let’s say they, you know, don’t allow for competition generally. But they do allow for net metering, which allows for some amount of competition. How does that actually, you know, how do those two policies actually come together? I think an advocate can actually make an argument on both sides that, that one actually out competes the other. And there’s certainly arguments on both sides. So that’s where this can get a little pretty complicated, very quickly under those circumstances for the second prong active supervision. Absolutely. If the PUC approves this, yeah. You actually have a pretty, you have a pretty good defense that there is active supervision on this. The question, but the way to argue against that are, are two different ways. One is that the whole premise of the state action immunity doctrine was that was assumed that the state would be like good regulators, like good regulators for the public interest. Let’s say we can make a pretty good argument that actually the commission has a pretty high level of regulatory capture. Are they actually still fulfilling the public interest responsibilities that they have?

So these, there’s also a way to argue along those lines that actually the principles or the reasons why we have state action immunity don’t necessarily apply anymore in these contexts. The other kind of goal thing that you know, you and I have been talking about for a long time, are actions that are not actively supervised by the PUC, but are still anti-competitive. So these are things like interconnection fees, for example, which the times for instance are sometimes regulated, but they’re actually not enforced. So is that active supervision? No, not necessarily. If the utility commission is not actively saying yes, you can delay this for like X amount of time. And therefore the, the private utility, again, cannot assert at state action immunity. Cause it’s not actually actively being supervised.

Obviously another body that can bring these types of cases is the federal government, John, and I and some other folks are looking into this alternative as well and urging the department of justice and the FTC who is now headed by Kahn to investigate this, absolutely investigate these utilities and their anti behavior. They have the resources to bring these cases. They have the investigatory, you know, duty to do it. So let’s make that also happen on a federal level.

And, and within that, it requires a real, almost soul searching for the country in terms of asking whether this system still works, which is something that John and I talk a lot about, does this private utility monopoly system work for electricity, if it is putting obstacles to climate progress, if it is really stifling people’s ability to have energy freedom, to have more affordable energy, to not be choked to death by the natural gas plant in their backyard anymore. Like these are fundamental energy questions that are at the center right now of our geopolitical, that we’re seeing as well as the climate emergency. So utility industry raises a lot of these super complex questions. I don’t think we should shy away from it. I think we should use antitrust to actually break it open and figure out the new types of systems that this country needs to survive.