Electricity Markets

Court agrees to dismiss complaint tied to Minn. grid law

The U.S. District Court for the District of Minnesota on June 21 issued a ruling granting motions to dismiss a complaint filed by LSP Transmission Holdings LLC against officials of the state of Minnesota, alleging that Minnesota’s right of first refusal law violates the dormant Commerce Clause.

LSP Transmission Holdings and its affiliates build and operate transmission lines. While it currently does not have an in-state presence in Minnesota, LSP has developed transmission lines elsewhere. LSP wants to compete to construct transmission lines in Minnesota.

Defendants in the proceeding included commissioners with the Minnesota Public Utilities Commission and the Commissioner of the Minnesota Department of Commerce.

Law enacted following FERC Order No. 1000

Minnesota enacted its law following a 2011 FERC rule, Order No. 1000, which eliminated certain federal rights of first refusal.

In its landmark Order No. 1000, FERC reformed its transmission planning and cost allocation requirements. Among other things, the final rule removed from FERC-approved tariffs and agreements a federal right of first refusal for certain new transmission facilities.

Specifically, FERC directed utility transmission providers to remove from their open access transmission tariffs or other commission-jurisdictional tariffs and agreements any provisions that granted a federal right of first refusal to build transmission facilities that were selected in a regional transmission plan for purposes of cost allocation.

In April, the antitrust division of the U.S. Department of Justice said in a filing with the court that the Minnesota transmission right of first refusal law “discriminates against and unduly burdens” interstate commerce in violation of the Commerce Clause of the U.S. Constitution.

Defendants point to history of deference to utility regulation

In its decision granting the motions to dismiss the LSP complaint, the U.S. District Court for the District of Minnesota noted that defendants in the case contend that the Supreme Court’s 1997 decision in General Motors v. Tracy is dispositive and forecloses LSP’s discrimination claim.  LSP had argued that the Tracy case is not suitable in the circumstances and that the defendants misconstrued and attempted to overextend the decision in that case.

In Tracy, the Supreme Court reviewed an Ohio statute that granted a tax exemption on retail sales and use of natural gas to in-state regulated public utilities and denied the same tax exemption to interstate natural gas transmission companies. 

General Motors, a purchaser of natural gas from out-of-state marketers whose sales were subject to the taxes, challenged the tax exemption under the dormant Commerce Clause, arguing that the exemption discriminated against interstate commerce.  The Supreme Court considered the threshold issue of whether the Ohio statute applied to “substantially similar entities.”

In Tracy, the Supreme Court found that in-state gas utilities served residential consumer end-users through monopolies that exist independent of the state statute at issue. In contrast, interstate companies -- out-of-state marketers whose sales were subject to the taxes -- did not serve those residential consumers. Thus, with respect to sales to consumers in these monopolies, the local gas utilities and the out-of-state marketers were not similarly situated because they did not compete.  As to the sales to the consumers, the dormant Commerce Clause had “no job to do,” the Supreme Court said.

The Supreme Court also considered the sale of natural gas to industrial consumers. With respect to these sales, the Supreme Court noted the possibility of competition between local utilities and private businesses, and therefore also a possibility of a dormant Commerce Clause violation.

Despite the possibility of competition in the noncaptive market, the Supreme Court held that the state was justified in treating the utilities differently in both markets and held that it would give controlling weight to the captive, monopoly market.

The Supreme Court held that the Ohio statute did not discriminate against interstate commerce and did not run afoul of the dormant Commerce Clause.

Reasoning applies in LSP case, court says

The Minnesota court concluded that the reasoning behind the dismissal of the dormant Commerce Clause challenge in Tracy applied to the LSP case.

The Minnesota law at issue is part of Minnesota’s “broader regulation of the provision of electricity to the consumer market,” the court said. “Many of the entities that own existing transmission facilities are regulated public utilities, who serve captive markets and have monopolies with respect to the sale of electricity to consumers. Thus, for these sales, there is no competition and the dormant Commerce Clause does not apply.”

At the same time, the court said it recognizes that local utilities in Minnesota and out-of-state entities may compete for the right to build transmission lines. In this case, LSP alleges that it wishes to compete against Minnesota electric utilities for the right to build transmission lines, but that it is being discriminated against by the Minnesota law.

“Under Tracy, however, the court grants controlling weight to the monopoly market. Minnesota is entitled to consider the effect on the public utilities and the consumers that the utilities serve and ‘to give the greater weight to the captive market and the local utilities’ singular role in serving it,’” the court said in its ruling. 

“Moreover, like in Tracy, where the Supreme Court determined that the possibility of a negative impact on the ability of utilities to serve consumers in the monopoly market weighed against invalidating the challenged statute, the same holds true here.”

The court said that the reasons cited in support of giving greater weight to the monopoly market in Tracy apply in the LSP proceeding; specifically, to avoid any jeopardy or disruption to the service of electricity to the state electricity consumers and to allow for the provision of a reliable supply of electricity.

In addition, the court said that the economic consequences of any court intervention to strike down the state law are unclear.

Under the law, Minnesota “not only gives existing owners a right of first refusal to build new transmission lines that will connect to their existing facilities, but in return Minnesota also places extensive regulatory burdens on those owners. Any intervention by the court could upset the balance between those burdens and regulation.”

The court noted that Congress and the Federal Energy Regulatory Commission have both indicated that Minnesota is entitled to make the policy decision to adopt a right of first refusal to build new transmission lines. “And as it has been noted many times before, 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 a right of first refusal in the area of the building of electric transmission facilities. The court, therefore, properly defers to their judgment.”

The court concluded that Tracy forecloses LSP’s allegation that the right of first refusal law overtly discriminates against out-of-state transmission developers.

Court says preference does not discriminate

Even if LSP’s claim of overt discrimination was not foreclosed by Tracy, LSP’s argument that Minnesota’s right of first refusal law “facially discriminates because it grants incumbents the right to build federally approved transmission line projects in Minnesota fails,” the court said.

The court acknowledged that there is no dispute that the statute grants a preference to “incumbent electric transmission owners,” but it added that that preference does not discriminate against out-of-state entities. 

“Instead, it affords companies whose facilities will connect to new transmission lines the first chance to build the new line.  The statute’s preference does not apply to all incumbent electric transmission owners, but only to those directly connected to the proposed line, whether those incumbents are in-state or out-of-state.”

The statute 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, the court went on to say.

The court determined that Minnesota’s right of first refusal law does not violate the dormant Commerce Clause and therefore dismissed LSP’s complaint.