Like a good neighbor…: the Supreme Court must enforce limits on state regulation of interstate commerce

We’ve filed a brief in the Supreme Court, on behalf of PLF, the Cato Institute, National Federation of Independent Business Small Business Legal Center, and Reason Foundation, asking it to take up a case challenging state regulations of commerce occurring wholly beyond their borders. In this case, Colorado has adopted a law that regulates how electricity sold within it is generated, regardless of where it’s generated or whether it has any impact on the quality of the electricity imported into the state.

Our Constitution enshrines a system of competitive federalism that ensures government accountability and experimentation by pitting states against each other for voters, taxpayers, and industry. As the Supreme Court has explained, this competition:

assures a decentralized government that will be more sensitive to the diverse needs of a heterogenous society; it increases opportunity for citizen involvement in democratic processes; it allows for more innovation and experimentation in government; and it makes government more responsive by putting the States in competition for a mobile citizenry.

For this competition to endure, courts must enforce the Constitution’s structural protections for it.

One of these structural protections is the Dormant Commerce Clause. Although the Commerce Clause is primarily a grant of power to the federal government to regulate interstate commerce, the courts have recognized for centuries that it also restricts state laws that frustrate interstate commerce.

Extraterritorial state laws — those that regulate commercial activity occurring wholly outside of a state’s borders — are a particularly odious example of laws that are unconstitutional under the Dormant Commerce Clause. They allow states to shift the burden of their regulatory regimes onto their neighbors and avoid competition from states that regulate differently or more efficiently. As a consequence, the Supreme Court has repeatedly struck down extraterritorial state laws.

The challenged Colorado law runs afoul of the Constitution. It requires electricity generators whose power is used within the state to produce an increasing percentage of their power from renewable sources. Although the Constitution permits Colorado to impose this requirement on its own businesses, the state was not content with that. Instead, it regulates all electricity generation, regardless of where it occurs and whether emissions have any discernible impact on the state or the quality of electricity imported into it.

If allowed to wield such power, states could erect all sorts of barriers to interstate commerce. They could, for instance, forbid the importation of any products that were made with labor that was paid less that the state’s minimum wage (even if compliant with the exporting state’s minimum wage). There’s no end to the types of regulations a state could foist on its neighbors’ industries (to whom it’s not accountable).

As our brief explains, this question has severe practical consequences, in addition to the constitutional concerns. Allowing extraterritorial state laws would simultaneously expose people to the regulatory regimes of several states.

The problems caused by extraterritorial regulations like these compound as more states adopt them. To see why, consider a power plant that feeds electricity into one of the interconnected regional grids. A North Dakota power plant’s emissions can certainly be regulated by North Dakota. But, under the logic of the decision below, it could also be regulated by all of the other states serviced by the regional transmission organization that it sells power to… Since that regional transmission organization connects to a grid that covers nearly all of the country east of the Rockies, it could potentially be regulated by dozens of other states as well.

The Constitution requires courts to consider how one state’s regulation “may interact with the legitimate regulatory regimes of other States and what effect would arise if not one, but many or every, State adopted similar legislation. A rule that allows all of these states to impose their own design standard on a North Dakota power plant, i.e. requiring it to use particular methods to reduce emissions, would result in redundant regulations with little to no benefit, and much higher costs. The only way to avoid this problem … would be to balkanize the interstate electricity market by preventing electricity generated within a state from leaving its borders.