District court rejects challenge to Texas right-of-first-refusal transmission law

Utilities in Texas retained the right of first refusal to build new transmission lines, following a recent district court ruling.

In 2011, the Federal Energy Regulatory Commission issued its Order No. 1000 that aimed to open the building of new transmission lines to competition.

In the wake of Order 1000, several states passed right-of-first-refusal laws to affirm the right of utilities under their jurisdiction to build in-state power lines.

In the ruling, the United States District Court for the Western District of Texas dismissed a lawsuit that challenged Texas’ right-of-first-refusal law. Senate Bill 1938, passed in May 2019, provides that the Public Utility Commission of Texas (PUCT) may only grant a certificate of convenience and necessity (CCN) for new transmission facilities to the endpoint owners of the existing facilities to which the new line would interconnect.

A similar district court ruling involving a Minnesota law is on appeal in the United States Court of Appeals for the Eighth Circuit. In that case, the U.S. District Court for the District of Minnesota in June 2018 dismissed a complaint filed by LSP Transmission Holdings LLC against Minnesota state officials, alleging that Minnesota’s right of first refusal law violated the dormant Commerce Clause of the U.S. Constitution.

In the Texas case, NextEra Transmission Midwest LLC said the Texas law would block it from obtaining a CCN for a project it sought to build because it does not currently operate in Texas.

The Midcontinent ISO in November 2018 selected NextEra Transmission Midwest to build the Hartburg-Sabine Junction Transmission Project, a 500-kilovolt transmission line and substation proposed to run within Orange and Newton counties in East Texas. The parties signed an agreement in January 2019 that required NextEra Midwest to secure any necessary state approvals.

In its filing, NextEra Transmission Midwest alleged that SB 1938 discriminates against interstate commerce by giving electric utilities that already operate in Texas the sole right to build transmission lines with an end point in Texas, violating both the Commerce Clause and Contracts Clause of the United States Constitution.

State laws are subject to scrutiny under the Commerce Clause if they mandate differential treatment that benefits in-state and burdens out-of-state economic interests.

The Texas district court found that SB 1938 “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 court also noted that the U.S. Supreme Court, in General Motors Corp. v. Tracy, grants “controlling weight” to a regulatory monopoly market to take into account the effect economic actions could have on consumers served by utilities.

Nor does SB 1938 “overtly discriminate” by granting incumbent providers right of first refusal because “most incumbent providers in Texas are owned by out-of-state companies, and SB 1938 allows out-of-state providers a means to enter the Texas market for transmission services by buying a Texas utility.”

The district court also found that the burdens imposed by SB 1938 on interstate commerce are not “clearly excessive in relation to the putative local benefits” and, therefore, the law passes the test established in the Supreme Court case of Pike v. Bruce Church, Inc.

Regarding NextEra Transmission Midwest’s allegation that SB 1938 violates the Contracts Clause, the district court noted that the agreement between NextEra Midwest and Midcontinent ISO was not subverted by legislation as the agreement itself stipulated that it was subject to regulatory approval by PUCT.

The court also noted Texas’ “long and extensive history” of regulating “every aspect of the production, transmission, distribution, and retail sale of electricity” and cited the Supreme Court ruling in Hudson Water Co. v. McCarter, which observed that “[o]ne whose rights, such as they are, are subject to state restriction, cannot remove them from the power of the State by making a contract about them.”