By Gabe Rosen*
Washington State’s Grant County, as of April 2019, has become what is likely the first American jurisdiction to impose a distinct electricity tariff on cryptocurrency miners.[i] Cryptocurrency miners operating in Grant County, which is known for having some of the cheapest energy in the United States, are now subject to substantially increased electricity costs in the form of an “Evolving Industries” tariff.[ii] The reach of this tariff is currently limited to the jurisdiction of Grant County’s 2nd Public Utility District.[iii] However, jurisdictions throughout the state — and eventually, the country — may decide to follow suit if the tariff survives ongoing litigation in the Federal District Court for the Eastern District of Washington State. In the face of a presumption in favor of the tariff’s reasonableness, the cryptocurrency miners will likely fail in their legal challenge, allowing the tariff to remain in effect.[iv]
The “Evolving Industries” tariff is currently the subject of a lawsuit in the Eastern District of Washington State.[v] Plaintiffs in the case are cryptocurrency miners operating in Grant County.[vi] They are collectively suing Grant County’s 2nd Public Utility District (the District) and its staff over the tariff, formally codified as Rate Schedule-17 (RS-17).[vii] The District simultaneously implemented a priority-queue system, where all “traditional” customers are serviced before any customer whose activities fall within an “evolving industry.”[viii] This system is not the primary subject of the lawsuit, but its existence informs plaintiffs’ claims.[ix]
The plaintiffs allege that RS-17 violates a series of federal and state rate-setting laws as well as federal and state constitutional provisions related to due process.[x] To the plaintiffs, RS-17 represents an unlawful attempt, born out of a flawed public review process, by the District to discriminate against cryptocurrency miners.[xi] The District instead claims that RS-17 was a necessary remedy to grid-resiliency issues posed by a recent influx of crypto-mining activities in Grant County.[xii] The District also claims that RS-17 is a safeguard against any type of commercial activity that falls within the definition of an “evolving industry.”[xiii]
RS-17 established a three-factor test for determining what counts as an “evolving industry.”[xiv] The three factors are: 1) Regulatory Risk, 2) Business Risk, and 3) Concentration Risk.[xv] According to District officials, an industry needs to pose a Concentration Risk (taking up 5% or more of the District’s power load) as well as one of the other two risk factors to count as an “evolving industry.”[xvi] Regulatory Risks emerge when upcoming changes to regulations governing an industry could “render that industry inviable within a foreseeable time horizon.”[xvii] Business risks similarly emerge when an industry is dependent on the value of a volatile primary output.[xviii] It is unclear from the court’s record whether any other industry besides cryptocurrency mining has been designated an “evolving industry.”[xix] As plaintiffs point out, industries with similar energy needs as cryptocurrency mining, such as those that involve large data centers or polysilicon manufacturing, will not be subject to this tariff.[xx] However, the District noted there are many distinctions between those industries and cryptocurrency mining, including the volatility of cryptocurrency prices.[xxi] To the District, this volatility represents a Business Risk that could result in unpaid energy bills from cryptocurrency miners.[xxii] The designation of cryptocurrency mining as an “evolving industry” subjected it to RS-17’s phased rate hikes.[xxiii]
The first phase of RS-17 came into effect in April 2019, raising the base rate of electricity from $148.32/month to $500/month.[xxiv] The second and third phases of RS-17 will be implemented in April 2020 and April 2021, respectively.[xxv] Once completely implemented, rate-payers subject to RS-17 will pay a Basic Charge of $1000/month for electricity, along with a $30/kW Demand Charge, based on the 15 minutes of greatest electricity use during each billing period, and a $.035/kWh Energy Charge for all general use throughout the billing period.[xxvi] Plaintiffs estimate that RS-17’s full implementation will represent an increase of their electricity costs by at least 295%, with a higher estimate of up to 400%.[xxvii]
There have already been three major procedural developments in the ongoing case. First, in March 2019, the Federal District Court denied plaintiffs’ motion for preliminary injunctive relief.[xxviii] Alongside a comprehensive analysis of all of plaintiffs’ claims, the court’s decision-making was driven mainly by the four-factor standard laid out in Winter v. Natural Resources Defense Council, Inc.[xxix]The court found that plaintiffs’ claims were favored by only one of the Winter factors (namely, that the balance of equities was in plaintiffs’ favor), so preliminary injunctive relief would be inappropriate.[xxx] While plaintiffs appealed this decision, the court allowed the lawsuit to proceed into discovery.[xxxi]
Second, the court in June 2019 denied the District’s Rule 56(b) motion for summary judgment.[xxxii] The court instead granted plaintiffs’ Rule 56(d) motion, noting that discovery had not yet run its full course.[xxxiii] Critical to the court’s analysis was an application of the five-factor test established in Visa Int’l Serv. Ass’n v. Bankcard Holders of Am.[xxxiv] After applying the Visa test, the court noted how the record makes it plausible that discovery in this case will yield evidence in support of plaintiffs’ claims.[xxxv] This simply indicates that the plaintiffs’ claims are worthy of the discovery process, not that the plaintiffs are expected to prevail in trial. After the court granted plaintiffs’ motion, discovery was allowed to continue.[xxxvi]
Third, in November 2019, the Ninth Circuit Court of Appeals affirmed the District Court’s decision to deny preliminary injunctive relief.[xxxvii] The Court of Appeals, while agreeing with the District Court’s decision, noted that the District Court overread precedent related to the Federal Power Act.[xxxviii] Instead of exempting Grant County’s Public Utility Districts from Section 20 of the FPA, the relevant regulatory proceeding simply precludes FERC from enforcing that section against the county.[xxxix] Section 20 of the FPA contains a provision requiring that rates for energy provided by municipal entities “shall be reasonable, nondiscriminatory, and just to the customer and all unreasonable discriminatory and unjust rates or services are hereby prohibited and declared to be unlawful.”[xl] The ruling by the Court of Appeals appears to open the door to plaintiffs’ discrimination claims under this federal provision. It also seems to invite federal oversight in some capacity over future activities by the District. However, as this language is similar to that of Washington State’s own relevant laws, such a distinction likely will not impact plaintiffs’ ability to prevail in this case.[xli]
The actions taken by the courts so far in this case indicate that plaintiffs will likely prevail only if they can establish that the process resulting in RS-17’s creation was in fact arbitrary and capricious.[xlii] This standard of review, while usually applied in federal matters, also applies to Washington State rule-making.[xliii] Obtaining a determination of an arbitrary and capricious process appears to be the sole avenue left for plaintiffs to demonstrate a violation of rate-setting laws and their due process rights.[xliv] The Federal District Court, in its ruling on a preliminary injunction, noted that the only potentially credible theory put forward by plaintiffs about federal due process violations is that they were denied an opportunity to be heard on the issue of being designated an “evolving industry.”[xlv] The court at the time did not view that issue as material enough to warrant inclusion in its analysis so it is unclear whether it falls under the broader category of “arbitrary and capricious” behavior.[xlvi] Furthermore, the court heavily criticized plaintiffs’ federal and state claims about rate-setting, essentially limiting plaintiffs’ grounds for success to a finding of an arbitrary and capricious process.[xlvii] The court also implied that a finding of an arbitrary and capricious process would satisfy plaintiffs’ due process claims under Washington State’s Constitution.[xlviii] Therefore, much seems to hinge on whether plaintiffs can gather enough evidence to demonstrate that the process leading up to RS-17 was arbitrary and capricious.
As laid out by the Federal District Court, “arbitrary and capricious” is defined under Washington precedent as actions that are “willful and unreasoning and taken without regard to the attending facts or circumstances.”[xlix] As made clear in other Washington precedent, “arbitrary and capricious” is also defined where “there is no support in the record for the action.”[l] To try meeting these standards, plaintiffs are seeking information on the following subjects:
“Defendants’ cost-of-service model; the actual load on Defendants’ power grid caused by cryptocurrency miners; the effects of the evolving industry queue; damages suffered by Defendants as a result of cryptocurrency miners, if any; any discriminatory motives Defendants might have fostered against cryptocurrency miners; the decision-making process that classified cryptocurrency miners as an evolving industry; or any alternatives to RS-17 considered by Defendants before implementing RS-17.”[li]
As is clear from this list, plaintiffs appear to be proceeding under a theory that the District’s actions were arbitrary and capricious. In line with this theory, the evidence could end up showing that there does not exist a material difference between the actions of crypto-miners and other electricity users under the District’s purview. It could also very well turn out from the evidence that plaintiffs do place a verifiably disproportionate burden on the District’s power grid, supporting the District’s claims.[lii] Economic research conducted into the issue of cryptocurrency electricity consumption indicates a global lack of data on the actual electricity consumption of cryptocurrency-related activities.[liii] This arguably makes the type of information the District relied on to make its regulatory decision even more salient to the resolution of this case. Such information is especially important in light of the Supreme Court’s influential decision in Motor Vehicles Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., which established guidelines for applications of the “arbitrary and capricious” standard of review.[liv] As laid out in that case, rule-making agencies must demonstrate a “rational connection” between their judgment and the facts they relied on to pass muster under the standard.[lv]
However, it is unlikely that the plaintiffs will be able to support their claims by the end of discovery. Washington precedent establishes a rebuttable presumption that a utility’s rates are reasonable.[lvi] This presumption can be defeated either by a showing that the rates are unreasonable, or that they are arbitrary and capricious.[lvii] The court in this case has already indicated that trying to defeat this presumption by claiming the rates are unreasonable is not likely to be successful.[lviii] This leaves just the ground of “arbitrary and capricious,” which will be subject to the same high bar that the presumption sets against unreasonableness.[lix] While discovery offers the best hope for plaintiffs to meet these burdens, the presumption in the District’s favor will still likely prove formidable. It is of note that the scope of discovery under the Federal Rules of Civil Procedure is wider than the scope of requests that can be made under Washington’s Public Records Act.[lx] This led the Federal District Court to find that the discovery process could likely end up providing material information to the plaintiffs that was otherwise inaccessible to the public before the start of the lawsuit.[lxi] Time will tell if the evidence that emerges out of discovery supports the plaintiffs or the District. Regardless, the plaintiffs face an uphill battle against the presumption of reasonableness protecting the tariff. It appears that in the absence of especially clear-cut evidence of an arbitrary and capricious process, the tariff is likely to survive this litigation, opening up a new frontier in the regulation of cryptocurrency mining.
*Gabe Rosen is a Junior Editor on MJEAL. They can be reached via email at firstname.lastname@example.org.
[i] Blocktree Props., Ltd. Liab. Co. v. Pub. Util. Dist. No. 2 of Grant Cty. Wash., 380 F. Supp. 3d 1102, 1127 (E.D. Wash. 2019).
[ii] Id. at 1110, 1113.
[iii] Id. at 1110-11.
[iv] Id. at 1116.
[v] Id. at 1109.
[vi] Id. at 1110.
[vii] Id. at 1110.
[viii] Id. at 1111.
[ix] Id. at 1109.
[x] Id. at 1114.
[xi] Id. at 1114.
[xii] Id. at 1115.
[xiii] Id. at 1117.
[xiv] Id. at 1111-12.
[xv] Id. at 1112.
[xvi] Id. at 1112.
[xvii] 380 F. Supp. 3d at 1112.
[xviii] Id. at 1112.
[xix] Id. at 1116.
[xx] Id. at 1116.
[xxi] Id. at 1117.
[xxii] Id. at 1117.
[xxiii] Id. at 1112.
[xxiv] Id. at 1112.
[xxv] Id. at 1112.
[xxvi] Id. at 1112-13.
[xxvii] Id. at 1113.
[xxviii] Id. at 1102.
[xxix] 555 U.S. 7 (2008).
[xxx] 380 F. Supp. 3d at 1126.
[xxxi] Blocktree Props., Ltd. Liab. Co. v. Pub. Util. Dist. No. 2 of Grant Cty. Wash., No. 2:18-CV-390-RMP, 2019 U.S. Dist. LEXIS 97968 at *4 (E.D. Wash. June 11, 2019).
[xxxii] Id. at *11.
[xxxiii] Id. at *11.
[xxxiv] 784 F.2d 1472 (9th Cir. 1986).
[xxxv] 2019 U.S. Dist. LEXIS 97968 at *8.
[xxxvi] Id. at *11.
[xxxvii] Blocktree Props., Ltd. Liab. Co. v. Pub. Util. Dist. No. 2 of Grant Cty. Wash., No. 19-35277, 2019 U.S. App. LEXIS 33063 at *3 (9th Cir. Nov. 5, 2019).
[xxxviii] Id. at *3.
[xxxix] Id. at *3 (quoting The Yakama Nation v. Public Util. Dist. No. 2 WA, 101 FERC ¶ 61,197 (2002), 2002 WL 31990298)).
[xl] 16 U.S.C. § 813 (2019).
[xli] 380 F. Supp. 3d at 1121.
[xlii] Blocktree Props., Ltd. Liab. Co. v. Pub. Util. Dist. No. 2 of Grant Cty. Wash., No. 2:18-CV-390-RMP, 2019 U.S. Dist. LEXIS 97968, at *8 (E.D. Wash. June 11, 2019).
[xliii] Id. at *8.
[xliv] 380 F. Supp. 3d at 1123.
[xlv] Id. at 1123.
[xlvi] Id. at 1123.
[xlvii] Id. at 1123.
[xlviii] Id. at 1123 (quoting Earle M. Jorgensen Co. v. City of Seattle, 665 P.2d 1328 (1983)).
[xlix] Blocktree Props., Ltd. Liab. Co. v. Pub. Util. Dist. No. 2 of Grant Cty. Wash., No. 2:18-CV-390-RMP, 2019 U.S. Dist. LEXIS 97968 at *8 (quoting Hillis v. State Dep’t of Ecology, 932 P.2d 139, 144 (Wash. 1997)).
[l] Id. at *8 (quoting Dorsten v. Port of Skagit Cty., 650 P.2d 220, 224 (Wash. Ct. App. 1982)).
[li] Id. at *7.
[lii] 380 F. Supp. 3d at 1115.
[liii] Jonathan Koomey, Ph.D., Estimating Bitcoin Energy Use: A Beginner’s Guide. (May 7, 2019),
[liv] 463 U.S. 29 (1983).
[lv] Id. at 57.
[lvi] 380 F. Supp. 3d at 1116.
[lvii] Id. at 1116 (quoting Lincoln Shiloh Assocs., Ltd. v. Mukilteo Water Dist., 724 P.2d 1083, 1087 (1986)).
[lviii] Id. at 1119.
[lix] Id. at 1116.
[lx] Blocktree Props., Ltd. Liab. Co. v. Pub. Util. Dist. No. 2 of Grant Cty. Wash., No. 2:18-CV-390-RMP, 2019 U.S. Dist. LEXIS 97968, at *10 (E.D. Wash. June 11, 2019).
[lxi] Id. at *10.