The US Court of Appeals for the Sixth Circuit reversed a lower court decision that had denied an Illinois’ coal producer’s motion for a preliminary injunction. The coal producer sought to stop the enforcement of a Kentucky law that directed the agency that regulates Kentucky utilities – the Kentucky Public Utility Commission (PUC) – to evaluate the reasonableness of coal prices only after subtracting severance taxes paid on the coal.
The PUC is tasked with ensuring that energy rates remain “reasonable” for Kentucky consumers, and conducts reviews of each Kentucky utility. One of the factors examined during the PUC’s review is the price the utility paid for raw materials, including coal. As such, Kentucky utilities are encouraged to buy the most competitive coal. Kentucky also imposes a severance tax on coal extracted within its borders and, when compared to coal-producing states with no severance tax, Kentucky coal is relatively expensive.
In 2021, recognizing that this combination of measures resulted in Kentucky utilities being less likely to buy Kentucky coal, the Kentucky legislature enacted a law that required the PUC to “evaluate the reasonableness” of coal costs after subtracting coal severance taxes imposed by any jurisdiction. The Illinois coal producer challenged the law on the grounds that it violated the Commerce Clause. The Sixth Circuit agreed with the coal producer, and determined that the law impermissibly discriminates against interstate commerce because it requires the PUC to treat coal on which severance taxes have been paid (to Kentucky or other states that impose them) better than it treats coal on which severance taxes have not been paid – and that coal from severance tax states is artificially discounted by the amount of the tax, while other coal is not discounted at all.
Ultimately, the Court remanded the case to determine whether the coal producer met the remaining requirements for a preliminary injunction.