Update – February 27, 2020 – Federal Court in Texas Dismisses Complaint about Law that Restricts Competition in Transmission Development

a federal district court in Texas granted a motion to dismiss a complaint filed by NextEra that argued the state’s right-of-first-refusal (ROFR) law violates the dormant Commerce Clause. The Eighth Circuit is currently considering an appeal of a 2018 federal district court’s dismissal of a similar complaint about Minnesota’s ROFR law. These state laws insulate utilities from competition. Both states enacted their ROFR laws following FERC-led efforts to open transmission development to competition, a possibility that utilities have fervently resisted before FERC, federal courts, public utility commissions, and at statehouses across the country.

SB 1938, signed into law last May, provides that the Public Utility Commission may grant Certificates of Public Convenience and Necessity (CPCN) for transmission development only to the owner of the existing facility that connects to the new line. The law also limits utility transfers of CPCNs. According to NextEra’s complaint, the law is “meant to reserve business opportunities . . . which used to be available to all businesses, only to existing electric utilities that currently own facilities in Texas.” The company argued such discrimination against out-of-state businesses is invalid under dormant Commerce Clause precedent.

The court disagreed, concluding that the laws at issue in cases cited by NextEra were not “analogous” to the Texas Law. NextEra urged the court to invalidate Texas’s law based on dormant Commerce Clause cases “which involve the flow of goods in interstate commerce.” The ROFR law, according to the court “does not purport to regulate the transmission of electricity in interstate commerce; it regulates only the construction and operation of transmission lines and facilities within Texas.”

Following this threshold determination, the court agreed with two key conclusions of the Minnesota district court. First, both courts found that the ROFR laws do not discriminate against out-of-state entities in-part because many utilities that benefit from the law are headquartered in other states. Second, both courts concluded that under the Supreme Court’s 1997 decision in Tracy the state is “entitled to consider the effect on consumers.” In Tracy, the Supreme Court was reluctant to second-guess the state’s differential treatment of utilities and interstate gas marketers “lest [it] imperil the delivery” of gas to captive ratepayers. The Minnesota and Texas courts expressed similar concerns that competition in transmission development might jeopardize reliability.

The Texas court also held that the law does not have a discriminatory purpose, rejecting NextEra’s claim that the Texas Legislature passed the law in reaction to the company winning a FERC-regulated process to build a transmission line in East Texas. Instead, the court found that the legislative history indicates that the Legislature “disagreed with the statutory analysis reflected in a 2017 PUCT declaratory order and enacted SB 1938 to eliminate any uncertainty in Texas law.” The ROFR law, according to the court, merely “continues the long-term practice in Texas of allowing existing providers to build needed new transmission lines.”

Finally, the court also dismissed NextEra’s Contracts Clause claim tied to its agreement with the Regional Transmission Organization (RTO) that awarded the company the right to build the East Texas project.

The decision is available on the Texas page.