The Eighth Circuit affirmed a lower court’s dismissal of a complaint alleging that a Minnesota law regulating transmission development violates the dormant Commerce Clause. The panel held that the state’s right-of-first-refusal (ROFR) law is not facially discriminatory, does not have unconstitutionally discriminatory purposes or effects, and does not unduly burden interstate commerce. Last month, a federal district court in Texas dismissed dormant Commerce Clause claims about a similar Texas law, and parties in that case have recently filed appeals in the Fifth Circuit.

Minnesota’s ROFR law grants entities that own transmission facilities in Minnesota the right to build new transmission lines that will connect to their existing facilities. Developer LSP argued that the law “discriminates against interstate commerce three times over.” First, the law discriminates on its face by “securing lucrative business opportunities . . . for favored local operators.” Second, the law discriminates in effect by “granting entities with an in-state presence a preference at the direct expense of out-of-state entities that lack such a presence.” Third, the legislature enacted the law for the discriminatory purpose of insulating in-state companies from competition. The Eighth Circuit panel rejected each claim.

The panel concluded that the ROFR law “draws a neutral distinction between existing electric transmission owners . . . and all other entities, regardless of whether they are in-state or out-of-state.” It noted that incumbent owners include entities headquartered in four nearby states and that many of these entities also own facilities in states other than Minnesota. The law’s preference for owners of existing facilities “applies evenhandedly to all entities,” according to the panel, and is not facially discriminatory against out-of-state developers.

In rejecting LSP’s claims that the law has a discriminatory purpose and discriminatory effects, the panel emphasized that states have broad authority to regulate utilities and accepted the state’s representations that the ROFR’s restrictions actually serve the state’s goal of delivering reliable and cost-effective power. Despite its apparent focus on utility regulation, the panel fails to appreciate how the ROFR reinforces utility incentives created by the century-old regulatory model.

Under cost-of-service ratemaking, utilities profit from investing in capital assets, such as new transmission lines. Yet the panel finds that the ROFR is merely an “incidental hurdle” for non-incumbents, speculating that some incumbents may choose not to construct projects that they are statutorily entitled to build. It also finds insufficient evidence to conclude that the law would “eliminate competition in the market completely.” Both conclusions ignore the utility business model.

The panel’s failure to appreciate utility incentives infects its conclusion that the ROFR law does not have a discriminatory purpose. The panel observes that the vast majority of in-state transmission is owned by Minnesota entities, but then overlooks that those in-state entities will therefore be the primary beneficiaries from the ROFR. Rather than finding that the ownership data supports a discriminatory purpose, the panel instead concludes from the undisputed facts that the “law is not primarily aimed at protecting in-state interests but at maintaining a regulatory system that has worked” to deliver energy reliably.

Similarly, in evaluating whether the law has discriminatory effects, the court finds that focusing on disproportionate ownership “misses the point.” The panel notes that a non-utility developer can qualify as an incumbent and benefit from the ROFR if it already owns facilities in the state and reiterates that the law distinguishes between entities based on ownership of existing assets and not on whether the entity is an in-state or out-of-state business. The panel doesn’t clarify what “the point” is, and instead tersely concludes that it can “discern no discriminatory effect.”

Finally, the panel determined that the burdens the law places on interstate commerce are not clearly excessive in relation to its local benefits. Courts typically weigh this test in favor of states and rarely strike down laws based solely on this balancing of burdens and benefits. The panel finds that preserving the status-quo in transmission development is “within the purview of a State’s legitimate interest in regulating the intrastate transmission of electric energy.”

Here the panel makes another error about the regulatory construct. Although the panel refers to FERC’s authority repeatedly and finds support for its decision in the fact that FERC has never affirmatively concluded that ROFRs are “ineffective” at achieving state regulatory policy goals, it errs in finding that transmission is “intrastate.” Under the Federal Power Act, all transmission over facilities connected across state lines is “in interstate commerce” (a fact that the 8th Circuit panel understood in a 2016 decision striking down another Minnesota law). The distinction between intra- and inter-state is not trivial. LSP argued that state authority over utilities is not relevant to the dormant Commerce Clause analysis because the ROFR targets electric transmission lines approved by a FERC-regulated RTO, a product clearly in interstate commerce.

The panel’s decision and the 8th Circuit’s 2016 decision about another Minnesota law are available on the Minnesota page.