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Appeals Court says Ky. law discounting in-state coal is likely unconstitutional

Coal stacks at Mill Creek Generating Station.
Ryan Van Velzer
Kentucky utility regulators at the Public Service Commission are legally obligated to ensure rates are fair, just and reasonable for customers and utilities.

A federal appeals court judge has ruled the Kentucky Legislature likely discriminated against certain out-of-state coal producers when it “artificially” discounted coal prices for in-state utilities.

The 6th U.S. Circuit Court of Appeals ruled Friday that the 2021 law gave Kentucky coal an unfair competitive advantage by excluding severance taxes from regulatory cost considerations.

“Recognizing the problem, the Kentucky Legislature decided to have its cake and eat it, too,” said Judge Joan Larsen, who wrote the majority opinion for the court. “In practice, the policy makes coal from states with severance taxes, like Kentucky, cheaper for the utilities by the amount of the severance tax.”

Kentucky utility regulators at the Public Service Commission are legally obligated to ensure rates are fair, just and reasonable for customers and utilities. Part of that means directing utilities to buy the most cost-competitive coal.

But Kentucky imposes a 4.5% severance tax on coal extracted from the state. This tax ensures that a portion of the wealth derived from coal mining is re-invested in the state with some of it going to mining communities and the state’s general fund.

Compared to states that don’t have severance taxes, Kentucky’s coal is relatively expensive, Larsen wrote.

“Predictably, this combination of measures, along with the fact that many coal-producing states don’t impose a severance tax, makes Kentucky utilities less likely to buy Kentucky coal,” she wrote.

Larsen argues that with the 2021 law, utility regulators essentially lowered the price of Kentucky coal by 4.5%, creating a competitive disadvantage for out-of-state coal companies that don’t have severance taxes.

“Kentucky artificially discounts its own coal, and coal from other severance-tax states, by the amount of the tax. Because non-severance-tax state coal gets no such discount, the effect is to make Illinois coal relatively more expensive,” she said.

The backstory

In 2019, the Public Service Commission published a rule discounting a utility’s fuel costs by the amount of the severance tax paid.

The Illinois-based company Foresight Coal Sales wrote a letter to utility regulators arguing the regulation violated the commerce clause of the U.S. Constitution, which implicitly prohibits states from passing legislation that discriminates against interstate commerce.

Regulators briefly suspended enforcement until Ky. Attorney General Daniel Cameron issued an opinion saying he believed the rule was legal. Foresight Coal Sales sued in 2020, and the Public Service Commission eventually rescinded the regulation.

Then in 2021, the Gov. Andy Beshear signed Senate Bill 257 into law. It requires the Public Service Commission to ignore coal severance taxes when considering fuel contracts and competing bids.

As a result, the Illinois-based company Foresight Coal Sales sued the Public Service Commission in the U.S. District Court’s Eastern District of Kentucky and sought a preliminary injunction to nullify the law’s effect.

The commission, which declined to comment, has defended the law saying it wasn’t discriminating against interstate commerce, but leveling the playing field because of the state’s own severance tax.

“Twice the district court bought this argument. We do not,” Larsen wrote.

The court case continues

Foresight Coal Sales attorney Joshua Hammack told LPM News that Kentucky has subsidized in-state coal producers for years through manipulation of regulated utilities’ coal purchases.

“Foresight has consistently maintained, for years, that these attempts to reshape the market ran afoul of the Constitution. The 6th Circuit's order confirms what we've said all along — Kentucky is not free to discriminate in the interstate marketplace for coal,” Hammack said.

The 6th Circuit’s decision found in practice that the state law likely discriminated against interstate commerce — Foresight Coal Sales in this case — and redirected the case to lower courts to consider remaining arguments.

Ryan Van Velzer is the Kentucky Public Radio Managing Editor. Email Ryan at rvanvelzer@lpm.org.

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