7. Federal Preemption Issues

In Section 4.8.3 above we address federal preemption arguments with respect to applying the EPS to QFs. In its Phase 1 legal brief, CEED raises a second federal preemption issue, namely whether adoption of the EPS conflicts with United States foreign policy. In its comments on the Proposed Decision, CEED raises, for the first time, other federal statutory preemption arguments.

CEED argues that "the President has articulated a federal policy of not mandating unilateral reductions in CO₂ emissions from United States sources because responsibility for committing to and implementing any binding emission controls to address global climate change must be shared by all nations, including developing nations. Moreover, Congress has endorsed the President's policy against requiring CO₂ emission reductions only from the United States and other developed countries."²²⁸ However, the authorities they do cite (a letter and statements from the President and S. Res. 98, 105^th Cong. (1997)) only establish, at most, a much less sweeping proposition concerning U.S. foreign policy: namely, that the United States has a foreign policy of not entering into treaties that do not require the curbing of C0₂ emissions from developing nations.²²⁹ It is unclear how California, which is not proposing to sign any international agreement here, could be undermining such a policy. Ultimately, CEED's argument seems to be that because the President does not wish to do anything about climate change until he can get recalcitrant developing countries to agree to curb their GHG emissions, that states are precluded from taking actions that can ameliorate the impacts of climate change on their citizens; because the President wants developing nations to do their share, therefore California cannot do its share. In short, we conclude that there is no conflict between California's adoption of an EPS and a federal foreign policy of not agreeing to international GHG treaties unless they include reductions by developing countries.²³⁰

In support of its argument, CEED cites to Am. Ins. Ass'n v. Garamendi (2003) 539 U.S. 396 and Hines v. Davidowitz (1941) 312 U.S. 52.²³¹ The situations in both of those cases are entirely different from the situation here. Garamendi involved a clear conflict between a state law and federal foreign policy expressed in an executive agreement that the President had entered into with foreign governments. Furthermore, the executive agreement concerned a matter traditionally within the scope of the President's federal foreign policy power. In addition, the state law was not in an area of traditional state jurisdiction. Indeed, the state law was aimed at insurance policies issued in Europe during the Holocaust era. Hines involved conflicting state and federal statutes for the registration of aliens. The Court in Hines recognized the treatment of aliens as being distinctly a matter handled by the federal government in the arena of international affairs. The state law was directed at foreign citizens and was thereby, like the situation in Garamendi, not in an area of traditional state jurisdiction.

In its comments on the Proposed Decision, CEED cites to a third case, Crosby v. Nat'l Foreign Trade Council (2000) 530 U.S. 363.²³² Like both Garamendi and Hines, Crosby involved a clear conflict between differing state and federal statutory schemes. In Crosby, the conflicting state and federal laws involved sanctions regarding relations with Burma. Again, as in Garamendi and Hines, the state law in Crosby was aimed at regulating foreign relations and was therefore not in an area of traditional state regulation.

Here, in contrast, there is no conflict between: (1) policy statements by the federal government that it does not intend to enter into treaties with foreign governments that would require the United States to reduce GHG emissions unless developing countries do so as well; and (2) California law requiring that new long-term financial commitments, by California-regulated entities, for the production of electricity to be consumed in California, meet a GHG emissions standard. Furthermore, the regulation of air emissions is not traditionally within the exclusive parameters of the president's foreign policy powers. On the other hand, states traditionally have authority to: (1) reduce emissions to protect their own populations; and (2) protect ratepayers of state-regulated utilities.

Nowhere does CEED refer to any specific foreign policy statement, treaty or international agreement that clearly evidences the intent to preempt state regulation of electric utilities selling electricity within the states' own borders. Instead, CEED argues that the EPS adopted in the Proposed Decision is preempted because it would purportedly conflict with the federal government's foreign and domestic policies on global climate change. However, with regard to foreign policy matters, the specific terms of a treaty or bilateral agreement must indicate that the state has been preempted on a specific subject. See Wardair Can. Inc. v. Fla. Dep't of Revenue (1986) 477 U.S. 1, 9-11 (State tax on foreign airlines' purchase of aviation fuel in state was not preempted by Chicago Convention's prohibition of local taxes for fuel on board an arriving foreign aircraft or by 70 bilateral agreements' prohibition of national taxes on aviation fuel).

In addition, when a treaty or agreement has not been signed or passed by the Executive Branch or Legislative Branch, it cannot preempt state law. Ibid. at 11. (Resolution of international organization endorsing exemption for international aircraft from all taxes does not have the force of law to preempt states' taxes even though the United States is a member of the organization). It is noteworthy that Garamendi, Hines, and Crosby all involved either federal statutes or executive agreements that had the force and effect of law. CEED has not cited to any statute, treaty or executive agreement that has the force and effect of law regarding the states' ability to regulate GHG emissions.

In its comments on the Proposed Decision, CEED also relies on a ruling in the Eastern District of California (Central Valley Chrysler-Jeep v. Witherspoon, E.D. Cal. Case No. 1:04-CV-6663- AWI-LJO, dated September 22, 2006). CEED claims that this ruling holds "that a state program that requires mandatory reductions in greenhouse gas emissions conflicts with United States foreign policy addressing climate change."²³³ However, as the Attorney General points out in its Reply to CEED's comments, the Central Valley Chrysler-Jeep ruling was, in fact, merely a preliminary ruling allowing the claim to go forward. The ruling was not on the merits of whether mandatory state greenhouse gas emissions programs conflict with United States foreign policy.²³⁴

The Attorney General further addresses CEED's comments by providing copies of express statements made by the federal government, which clearly establish that federal and domestic policy do not preclude states from taking measures to reduce GHG emissions.²³⁵ As James L. Connaughton, Chairman of the White House Council on Environmental Quality, testified before the U.S. House of Representatives Committee on Government Reform (on July 20, 2006), "Domestically, in 2002, President Bush set an ambitious national goal to reduce the greenhouse gas intensity (emissions per unit of GDP) of the U.S. economy by 18 percent by 2012."²³⁶ Also in 2002, "the President called for action at all levels of government and across all sectors. Many of our states and cities are experimenting with . . . portfolios of voluntary measures, incentives, and locally relevant mandatory measures. Many of these build on or partner with related federal programs." (p. 4) In a quote in the New York Times, regarding several states' efforts to decrease emissions by powerplants, Mr. Connaughton stated that the federal government "welcome[s] all efforts to help meet the president's goal for significantly reducing greenhouse gas intensity by investing in new, more efficient technologies."

In terms of foreign policy, Harlan Watson, State Department Senior Climate Negotiator, during international climate treaty negotiations (December 2003), stated in support of state policies:

Finally, I would like to highlight the efforts being made by State and local governments in the United States to address climate change. Geographically, the United States encompasses vast and diverse climatic zones representative of all major regions of the world - polar, temperate, semi-tropical, and tropical - with different heating, cooling, and transportation needs and with different energy endowments. Such diversity allows our State and local government to act as laboratories where new and creative ideas and methods can be applied and shared with others and inform federal policy - a truly bottom-up approach to addressing climate change.²³⁷

During the same negotiations, Mr. Watson also stated that:

At the State level, 40 or 50 States have prepared GHG inventories, 27 States have completed climate change action plans, and 8 States have adopted voluntary GHG emissions goals. In addition, 13 States have adopted "Renewable Portfolio Standards" requiring electricity generators to gradually increase the portion of electricity produced from renewable resources such as wind, biomass, geothermal, and solar energy. And, at the local level, more than 140 local governments participating in the Cities for Climate Protection Campaign are developing cost-effective GHG reduction plans, setting goals, and reducing GHG emissions.²³⁸

Contrary to CEED's claims, far from preempting states through foreign policy or otherwise, the federal government recognizes the role of states in helping to reduce greenhouse gas emissions.

In its Comments to the Proposed Decision, CEED also claims that the EPS is preempted under the following federal statutes: the Global Climate Protection Act of 1987 (GCPA), the Energy Policy Acts of 1992 and 2005, and the Federal Power Act.

The fundamental inquiry in any preemption analysis is whether Congress intended to displace state law. Without express preemption in the statute or an actual conflict between prescriptions under the federal and state laws, there must be evidence of Congress' intent to preempt the specific field covered by the state law.  Wardair, 477 U.S. at 6. Under preemption analysis the assumption is "that the historic police powers of the State were not superseded by the Federal Act unless that was the clear and manifest purpose of Congress." Medtronic, Inc. v. Lohr (1996) 518 U.S. 470, 485 (1996) (internal citations omitted); see also Pacific Gas & Elec. Co v. Cal. (9^th Cir. 2003) 350 F.3d 932, 943. Furthermore, when Congress has contemplated, but chosen not to create a federal scheme, there is no reason to infer from Congress' silence that states would be preempted from regulating that matter.²³⁹

CEED relies on the GCPA, the Energy Policy Act of 1992 and the Energy Policy Act of 2005 for the proposition that because Congress did not require nationwide standards on greenhouse gases, California is preempted from regulating in the area of greenhouse gases. However, CEED does not specify any provision of these Acts that preempts states from requiring its utilities to take actions to decrease GHG emissions.  Indeed, in EPAct 2005, in the climate protection provisions involving electric utilities (Title XVI - Global Climate Change & Title XVII - Incentives for Innovative Technologies), only one provision mentions states. In the one place where Congress addresses state government activities, Congress explicitly recognizes the state commissions' authority to approve procurement contracts by their electric utilities and the states' rights to set emission standards. Energy Policy Act of 2005 § 1703(c)(1)(A)(iii) (One of the eligibility criteria for certain projects for the reduction of GHG emissions requires approval of a procurement contract by the "the relevant State public utility commission.") & (d) (Emission levels for projects must meet "applicable Federal or State emission limitation requirements."), Pub. L. No. 109-58, 119 Stat. 1120-22.

Likewise, the legislative history for the Energy Policy Act of 1992, which CEED refers to, does not make any specific references to states. The Energy Policy Act of 1992, itself however, expressly recognizes state action, again, indicating no intent on the part of Congress to preempt states. See Energy Policy Act of 1992 § 1602(a) (The federal government is required to "take into account . . . relevant Federal, State, and local requirements" in developing a least-cost energy strategy.) & ibid. at § 1605(b)(1)(C) (The federal government shall establish procedures for the accurate voluntary reporting of greenhouse gas emissions reductions achieved through state or federal requirements.), Pub. L. No. 102-486, 106 Stat. 2999-3000, 3003. (Title XVI - Global Climate Change).

For the GCPA, CEED cites to 15 U.S.C. §§ 2901, et seq. as support for preemption of states from regulation of GHG emissions. None of these sections deals with states except for 15 U.S.C. § 2904, which states that the National Climate Program Office shall "work with the National Academy of Sciences and other private, academic, State, and local groups in preparing and implementing [plans for the National Climate Program]." 15 U.S.C. § 2904(c)(2)(F). The Program may provide for various "State and regional services and functions . . ." 15 U.S.C. § 2904(d)(7). Instead of evidencing the intent to preempt states, all three of these Acts expressly provide for state activity and recognize state authority over, and participation in, regulation for the reduction of greenhouse gas emissions.

In CEED's comments on the Proposed Decision, it also claims that the EPS is preempted by the Federal Power Act, because of a purported "implied conflict" resulting from an alleged barrier to entry into the wholesale market. CEED points out that the FERC has exclusive authority over the wholesale market under the Federal Power Act.

The EPS, however, is not regulating wholesale generators or marketers. The EPS is regulating LSEs, which sell electric energy in the retail market in California. Under section 201(b) of the Federal Power Act, 16 U.S.C. § 824(b), Congress preserved the States' authority over such retail sales service and the public utilities which provide such retail sales service.²⁴⁰

As part of this regulation of the retail sales service, the Commission has historically regulated procurement practices of the California public utilities. The EPS is an essential component of the Commission current regulation of the procurement practices of the retail sellers of electric energy in California. However, the Commission is not regulating coal-fired generators or any other generators selling in the wholesale market. Wholesale generators or marketers may continue to sell electric energy to California LSEs under: existing contracts, new contracts of less than five years, or new contracts with powerplants that have capacity factors of less than 60%. In addition, wholesale generators or marketers have the opportunity to sell to California LSEs under new baseload contracts of five years or greater to the extent that they meet the EPS. Generators or marketers utilizing high GHG-emitters, such as coal-fired generation plants, would have to use technology that reduces GHG emissions to be eligible under the EPS program. Of course, generators utilizing coal-fired generation plants and all other wholesale marketers are also free to sell their electric energy to purchasers outside of California. The EPS only applies to purchasers of electric energy for consumption in California.

CEED has not cited any FERC decision mandating the California LSEs to enter into new baseload contracts for electric energy from coal-fired generation plants, because there are no such decisions. Under section 201(b) of the Federal Power Act, 16 U.S.C. § 824(b), FERC does not have jurisdiction over retail sellers of electric energy, including their procurement decisions. FERC regulates the wholesale sellers, not the resource portfolios, including procurement choices, of the buyer. As FERC has stated in numerous decisions, FERC leaves the reasonableness of the procurement decisions to the state commissions, because FERC does not view its "responsibilities under the Federal Power Act as including a determination that the purchaser has purchased wisely or has made the best deal available."²⁴¹

Indeed, FERC has acknowledged that with regard to the retail electric market, "state regulatory commissions and state legislatures have traditionally developed social and environmental programs suited to the circumstances of their states. ... Nothing in [FERC's Order No. 888] is inconsistent with traditional state regulatory authority in this area."²⁴² In New York v. FERC, which upheld FERC's Order No. 888, the United States Supreme Court explicitly relied upon and quoted FERC's statement that:

`This Final Rule will not affect or encroach upon state authority in such traditional areas as the authority over local service issues, including reliability of local service; administration of integrated resource planning and utility buy-side and demand-side decisions, including DSM [demand-side management]; [and] authority over utility generation and resource portfolios.'²⁴³

The FERC is well aware that certain states require that the resource portfolios of their state-regulated utilities include generation and procurement from sources that will cause minimal damage to the environment. For example, in American Ref-Fuel Co., et al., FERC referred to 13 states that have programs with renewable energy credits (RECs) premised on promoting goals, such as improved air and water quality and reduction of greenhouse gas emissions.²⁴⁴ FERC held that its avoided cost regulations for QFs under PURPA did not contemplate the existence of RECs, and, therefore, the determinations concerning state-created RECs must be based upon state law.²⁴⁵ Thus, FERC recognized the authority of the states to regulate in the area of greenhouse gas reductions. In short, there is no implied or actual conflict between FERC and the CPUC concerning the EPS.

It is therefore clear that the Federal Power Act does not preempt state regulation of procurement choices by retail sellers of electric energy, including programs designed to reduce GHG, such as the EPS in the State of California. The Federal Power Act explicitly preserved the states' regulation of the retail market. As the Supreme Court has stated, this may well have been because "the `insulated chambers of the states' are still laboratories where many lessons in regulation may be learned by trial and error on a small scale without involving a whole national industry in every experiment."²⁴⁶

For all of the foregoing reasons we conclude that there is no conflict between SB 1368 and our implementation of it, on the one hand, and federal law or foreign policy on the other hand.

²²⁸ CEED's Opening Brief on Jurisdictional and Other Legal Issues, June 30, 2006, p. 10.

²²⁹ Ibid., footnotes 23, 24 and 26.

²³⁰ CEED's speculation that there might be some conflict in the future ignores the fact that if the U.S. does sign a GHG treaty or otherwise promulgate a GHG policy that is binding on the states, California will be required to bring its program into compliance if there is a conflict. Ibid., p. 11.

²³¹ Ibid., p. 9, footnote 21.

²³² CEED's Comments on Draft Interim Decision on Phase I Issues: Greenhouse Gas Emissions Performance Standard, January 2, 2007, p. 21, fn. 28.

²³³ Ibid. at p. 21.

²³⁴ Attorney General's Phase I, Draft Interim Decision: Greenhouse Gas Emission Performance Standard Reply Brief of the People of the State of California, January 8, 2007, p. 5. Central Valley Chrysler-Jeep, p. 40.

²³⁵ The Attorney General requests that the Commission take official notice of statements of the following representatives of the federal government: James Connaughton, Chairman of the White House Counsel on Environmental Quality; and Harlan Watson, State Department Senior Climate Negotiator. We note that since these statements were attached to the Attorney General's Reply brief they are already part of the record of this proceeding. Nonetheless, we grant the request to take official notice of these statements. The Attorney General's documentation of these statements was submitted in support of its Motion for Summary Judgment to the court in the Central Valley Chrysler-Jeep case, subsequent to the ruling discussed above.

²³⁶ Testimony of James L. Connaughton, Chairman, White House Council on Environmental Quality, Before the United States House of Representatives Committee on Government Reform, July 20, 2006, p. 2.

²³⁷ Statement to the Second Meeting of the Plenary, Ninth Session of the Conference of the Parties (COP-9) to the UN Framework Convention on Climate Change, Milan, Italy (December 4, 2003), available at http://www.state.gov/g/oes/rls/rm/2003/26894.htm.

²³⁸ Ibid.

²³⁹ See In re World Auxiliary Power Co.( 9^th Cir. 2002) 303 F.3d 1120, 1131.

²⁴⁰ See New York v. FERC (2002) 535 U.S. 1, 20, 23, 28; see also Connecticut Light and Power Co. v. FPC, (1945) 324 U. S. 515, 523-531.

²⁴¹ See, e.g., Ameren Energy Marketing Company (2001) 96 FERC ¶ 61,306 at 62,189 & n. 18 (and cases cited therein).

²⁴² See Order No. 888, FERC Stats. & Regs., Regs. Preambles, Jan. 1991-June 1996, ¶ 31,036, p. 31,782 (1996).

²⁴³ See New York v. FERC , 535 U.S. at 24, quoting Order No 888 at 31,372, n. 544.

²⁴⁴ See American Ref-Fuel Co., et al. (2004) 107 FERC ¶ 61,016 at PP 2-3.

²⁴⁵ See ibid. at PP 6, 16.

²⁴⁶ See Connecticut Light and Power Co. v. FPC, 324 U. S. at 530.