Yesterday, the Fifth Circuit reversed a federal district court’s dismissal of a complaint alleging that a Texas law regulating transmission line siting violates the dormant Commerce Clause. After “wad[ing] through the thicket of electricity regulation,” the panel concluded that Texas’s law discriminates against interstate commerce. The court remanded the case to the district court with instructions to consider whether the State can defend the law by showing that it has no other means of advancing a legitimate local purpose and to allow the plaintiff to pursue its claims that the law discriminates in purpose and effect.

SB 1938, signed into law in May 2019, provides that the Public Utility Commission of Texas may grant Certificates of Public Convenience and Necessity for new transmission projects only to the owner of an existing facility that connects to the new line. A transmission developer that had been designated by a regional transmission organization to construct a new line in Texas filed a lawsuit in federal court. The developer argued that because the law blocks companies without a physical presence in Texas from building transmission facilities and reserves development opportunities for in-state utilities, the law violates the dormant Commerce Clause. The district court granted the state’s motion to dismiss, concluding that the law “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.”

The Fifth Circuit reversed. As an initial matter, the panel held that Texas’s authority over infrastructure siting “is not immune from Commerce Clause scrutiny when it impacts the interstate market.” Because the developer’s project would have been part of the FERC-regulated interstate transmission network (and not the Texas-only ERCOT grid), the transmission line would be an “instrumentality of interstate commerce” that is “much

closer to the heartland of interstate commerce than the wine stores, dairies, or waste processing facilities that have faced dormant Commerce Clause scrutiny” by the Supreme Court.

Turning to the statute, the panel concluded that SB 1938 “prevents those without a presence in the state from ever entering the portions of the interstate transmission market that cross into Texas.” The panel rejected the State’s defense that the law’s preference for “incumbents” is geographically neutral and therefore beyond the scope of the dormant Commerce Clause doctrine. According to the panel, “limiting competition based on the existence or extent of a business’s local foothold is the protectionism that the Commerce Clause guards against.”

The panel also found that the location of incumbents’ corporate headquarters and states of incorporation are not relevant to a dormant Commerce Clause inquiry. In 2020, the Eighth Circuit upheld a similar law enacted by Minnesota in part because the law benefitted incumbents who were headquartered outside of Minnesota. The Eighth Circuit panel therefore concluded that Minnesota’s law “law applies evenhandedly to all entities, regardless of whether they are Minnesota-based entities or based elsewhere.” Reviewing Supreme Court precedent, the Fifth Circuit disagreed, holding that for a dormant Commerce Clause claim “all that was required to be ‘in state’ was a physical presence in the state.”

Texas’s law is not dead yet. The Fifth Circuit panel reversed the lower court’s dismissal, concluding that “pleadings-stage dismissal of these claims was premature.” It remanded back to the district court for factual determinations on three issues:

1) Legitimate local purpose: To defend its discriminatory law, Texas has the burden of showing that SB 1938 is the least discriminatory means for advancing a legitimate local purpose;

2) Discriminatory purpose: Because the plaintiff developer “has at least raised plausible allegations that SB 1983 had a discriminatory purpose, that claims gets to the discovery stage;” and

3) Discriminatory effects: The plaintiff may also pursue its claim that the law has discriminatory effects because it has “at least plausibly alleged” that the law’s “complete ban on new entrants” has only “insignificant and illusory” benefits.

The decision is available on the Texas page.