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Sixth Circuit revives challenge to Kentucky coal law

Opponents of the law known as SB 257 argue it unfairly favors in-state coal producers when it comes to bidding on utility contracts.

CINCINNATI (CN) — Siding with an Illinois company, the Sixth Circuit held Friday that a Kentucky coal law likely discriminates against out-of-state sellers.

Foresight Coal Sales LLC argued its case before the Sixth Circuit last year, claiming that Senate Bill 257 creates a framework that favors in-state coal sales by allowing those producers to use a “phantom price” when making bids for contacts offered by regulated utilities in the Bluegrass State.

Kentucky charges a 4.5% severance tax for nonrenewable natural resources like coal that are sold or consumed in other states. SB 257 requires a deduction of any charged severance tax from bids on coal contracts even though the tax is still paid, which Foresight claims allows in-state bidders to make their bid seem more attractive than those from companies in a state like Illinois, which does not charge a severance tax on coal.

U.S. District Judge Gregory Van Tatenhove denied Foresight's motion for a preliminary injunction in late 2021, prompting the company's appeal to the Sixth Circuit.

In its ruling issued Friday, the Cincinnati-based appeals court sided with the challenger and rejected the Kentucky Public Service Commission's argument that SB 257 did not technically favor Kentucky, only states in general that charge a severance tax on coal.

“The Commission responded that it wasn’t discriminating against interstate commerce because it was only leveling the playing field tilted against Kentucky coal by its own severance tax. Twice the district court bought this argument. We do not,” wrote U.S. Circuit Judge Joan, a Donald Trump appointee.

Larsen echoed in writing statements she made during oral arguments last June, when she accused the state of wanting to keep the revenue from its tax without affecting its coal market.

Finding that Foresight had shown that the law is likely discriminatory, the Sixth Circuit also ruled Kentucky had not provided a valid reason for such discrimination.

“Here, the Commission has proffered no explanation for SB 257 except that it is designed to nullify the competitive disadvantages created by Kentucky’s severance tax,” Larsen wrote. “Because Kentucky may not level the playing field in this way, Foresight Coal is likely to succeed on the merits.”

U.S. Circuit Judge Alice Batchelder concurred with the panel in result, but offered her own analysis as to why the law was discriminatory.

“SB 257 is discriminatory in effect because Kentucky’s coal severance tax makes it discriminatory. By requiring the Commission to pretend that the price of Kentucky coal is 4.5% lower than its true price, SB 257 gives Kentucky coal a comparative price advantage over out-of-state coal that does not receive this pretend discount,” Batchelder wrote.

Batchelder, who was appointed to the court by George W. Bush, said it's an important distinction to make  – the majority’s opinion found the law to be discriminatory on its face, while she finds it to be discriminatory in effect.

Friday's ruling does not mean that the fight over SB 257 is finished, as the case will now be remanded to the lower court to consider the other claims raised by Foresight when it originally sought an injunction.

U.S Circuit Judge Eric Clay, a Bill Clinton appointee, rounded out the Sixth Circuit panel.

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