A U.S. District Court ruled that a Kentucky statute that requires the State’s Public Service Commission (“PSC”) to compute the reasonableness of the rates that utilities charge consumers by reducing fuel costs by any severance tax imposed by any jurisdiction unconstitutionally discriminates against interstate commerce and, therefore, granted an Illinois utility’s request for a permanent injunction of the law. Foresight Coal Sales LLC v. Chandler, Civil No. 3:21-cv-00016-GFVT (ED KY, Central Div. Frankfort Sept. 24, 2024). This is another example of a company successfully challenging a discriminatory state statute.

Facts: Foresight Coal Sales LLC (“Foresight”) sells coal produced in Illinois and competes with other producers for supply contracts with Kentucky utilities. The Kentucky utilities are regulated by the PSC, which periodically evaluates the reasonableness of the rates that the utilities charge consumers. As the cost paid for coal is a crucial factor considered by the PSC on its reasonableness review, the utilities are incentivized to purchase less expensive coal.

While Kentucky imposes a 4.5% severance tax on its coal producers, Illinois does not impose any severance tax. In 2021, S.B. 257 (codified as Ky. Rev. Stat. Ann. § 278.277) was enacted and directs the PSC to evaluate the reasonableness of fuel costs based on the cost of the fuel less any severance tax imposed by any jurisdiction.

Foresight challenged the statute on the basis that it discriminated against interstate commerce by giving an advantage to Kentucky coal producers over coal producers in Illinois in violation of the Commerce Clause. Foresight first successfully convinced the Sixth Circuit Court of Appeals that it was likely to succeed on the merits of its claim and that court issued a preliminary injunction. (See article discussing this case in the February 2023 issue of Spotlight.) The Sixth Circuit then remanded the case to the District Court.

The Decision: Relying heavily on the Sixth Circuit’s decision, the District Court had little difficulty finding that the statute discriminated against interstate commerce in violation of the Commerce Clause (indeed, the court found that the Sixth Circuit had clearly so held). In doing so, the court rejected the PSC’s assertions that the court should not follow the Sixth Circuit decision both on procedural grounds and as a more recent U.S. Supreme Court decision purportedly rendered the Sixth Circuit’s decision inapposite as “a purposefully discriminatory law does not violate the Commerce Clause unless the law has ‘substantial’ negative effects on interstate commerce.”

The court first held that the Sixth Circuit’s decision is the law of the case and had to be followed here. It then determined that the more recent Supreme Court case did not change the Commerce Clause inquiry which begins with the question of whether the challenged law discriminates. It is only after that question is answered in the negative that the Pike balancing analysis asserted by the PSC applies. Here, the statute discriminated against interstate commerce and, so, the balancing analysis was unnecessary.

While the court acknowledged that although a discriminatory law is virtually per se invalid, it can be sustained upon a showing that it is narrowly tailored to advance a legitimate local purpose. Here, the PSC only asserted that the law was designed to nullify the competitive disadvantages created by Kentucky’s severance tax. The court found that this was not a legitimate local purpose and that the statute unconstitutionally discriminates against interstate commerce.

The court then granted Foresight a permanent injunction enjoining the PSC from enforcing the law against Foresight. When a statute, such as the one at issue here, clearly favors in-state businesses over out-of-state businesses, courts will find the statute unconstitutional.