Update – June 22, 2018 – Federal Court Dismisses Complaint about Minnesota Right of First Refusal Law

Yesterday, a federal district court granted motions to dismiss a complaint filed by a merchant transmission company that argued the state’s right-of-first-refusal (ROFR) law violates the dormant Commerce Clause. Minnesota’s law grants utilities a right to build new transmission lines that will connect to their existing facilities. Complainant LSP argued that the law discriminates against out-of-state developers and unduly burdens interstate commerce in violation of the dormant Commerce Clause.

The court sided with the state and utilities who filed briefs defending the law, relying primarily on a 1997 Supreme Court case, General Motors v. Tracy, about an Ohio tax on natural gas purchases. In that case, the Court held that Ohio’s exemption of sales by in-state utilities did not discriminate against out-of-state marketers. According to the Court, utilities and marketers serve different markets (captive vs. competitive) and sell different products (“bundled” vs. “unbundled” gas). Because any notion of discrimination under the dormant Commerce Clause assumes a comparison of substantially similar entities, the Court held that the state’s differential treatment of utilities and marketers was not unconstitutionally discriminatory. The Court was also reluctant to second-guess Ohio’s regulation of utilities, “lest [it] imperil the delivery . . . of bundled gas to the noncompetitive captive market.”

In this case, the Minnesota court concluded that the state “is entitled to consider the effect on the public utilities and the consumers that the utilities serve” and feared that the “negative impact on the ability of utilities to serve consumers in the monopoly market weighed against invalidating the challenged statute.” The court also observed that utilities are subject to extensive state regulation and its intervention “could upset the balance between those burdens” and the benefit of the ROFR. Ultimately, the Court said, “Congress, FERC, and the Minnesota legislature are better-situated than the courts to determine the economic wisdom and the health and safety effects of a decision on the correct balance between competition” and regulated monopolies.

The court also concluded that the law does not discriminate against out-of-state entities. Rather, the law “draws a neutral distinction between existing electric transmission owners whose facilities will connect to a new line and all other entities, regardless of whether they are in-state or out-of-state.” Moreover, the court observed that five of the sixteen incumbent transmission owners are headquartered out of state and held that “incumbency bias is not the same as discrimination against out-of-state interests.”

Finally, the court dispensed with the claim that law unduly burdens interstate commerce. This aspect of the decision likely reflects the fact that courts are reluctant to strike down otherwise valid state legislation based on the judicially created fact-intensive balancing test that weighs a law’s purported benefits against its damage to interstate markets.

The decision is available on the Minnesota page.