Update – April 16, 2018 – U.S. Government Argues Minnesota transmission law violates the dormant Commerce Clause

On Friday, the U.S. Department of Justice Antitrust Division (DOJ) filed a brief in federal district court in Minnesota in support of a dormant Commerce Clause challenge to that state’s right-of-first refusal (ROFR) law. Enacted in 2012 in reaction to FERC’s Order No. 1000, the law provides in-state utilities with “the right to construct, own, and maintain” an electric transmission line that has been approved by a FERC-regulated transmission planning process. According to DOJ, “Minnesota’s right of first refusal statute fails both the antidiscrimination test and the undue burden test because it raises entry barriers, segments the interstate market in developing transmission lines, favors in-state incumbents, and causes substantial anticompetitive effects in interstate commerce.”

FERC’s Order No. 1000 mandated pro-competitive reforms to regional transmission planning, including prohibiting federally regulated tariffs from granting a utility the right of first refusal to construct a transmission project. FERC concluded that ROFRs discourage new entrants in the transmission development market and may result in transmission rates that are not just and reasonable. Nonetheless, FERC declined to preempt state ROFR laws.

In September, independent transmission developer LSP filed a complaint alleging that the Minnesota Legislature enacted a state-level ROFR “to protect its incumbent utilities from being required to compete with out-of-state-developers.” The company argues that the law has no legitimate, non-protectionist purpose and asks the court to declare the law unconstitutional because it violates the dormant Commerce Clause.

In Friday’s filing, DOJ agreed with LSP, arguing that the ROFR law “discriminates against interstate commerce” by “favoring local monopolists” and “rais[ing] significant entry barriers” for non-incumbents. DOJ rejects the defense from the state and its allied utilities that there is a general exemption from dormant Commerce Clause scrutiny for utilities.

According to DOJ, the defendants misread the relevant Supreme Court decision, Tracy v. General Motors. In that case, the Court held that a state’s differing tax treatment of competitive gas suppliers and utilities was not discriminatory because the two entities were not “similarly situated.” Minnesota argues that the Court’s “central premise [is] that local energy utilities with monopolies are not similarly situated to private businesses for purposes of the dormant Commerce Clause.” DOJ counters that the Court’s holding was fact-specific and predicated on the competitive suppliers and utilities serving different markets, regardless of the state’s discriminatory regulation. Here, DOJ argues that “but for Minnesota’s [ROFR] statute, both in-state incumbents and out-of-state entrants would be competing to serve the same transmission development market.”

DOJ also rejects the state’s defense that its statute is permissible under the Pike test. Crafted by the Supreme Court in 1970, courts apply the test “where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental.” Courts will uphold the state law “unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits.” In practice, courts rarely strike down state laws under Pike. Nonetheless, DOJ argues that the court should find the ROFR law unconstitutional under Pike because it is “more burdensome” than the statute at issue in Pike. The ROFR law “effectively forecloses” non-incumbents from entering the market, whereas the Pike plaintiff merely faced an expensive hurdle to enter the market. Moreover, any benefits are “de minimis at best” and are outweighed by “substantial harm to competition and consumers in interstate commerce.”

DOJ’s filing is available on the Minnesota page.