A 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, the antitrust division of the U.S. Department of Justice said in a recent filing with the U.S. District Court for the District of Minnesota.
The filing was made in a proceeding that involves LSP Transmission Holdings LLC. LSP Transmission Holdings and its affiliates build and operate transmission lines. LSP currently does not have an in-state presence in Minnesota, but it has developed transmission lines elsewhere.
LSP, which wants to compete to construct transmission lines in Minnesota, filed a complaint against officials of the state of Minnesota, alleging that Minnesota’s right of first refusal law violates the dormant Commerce Clause.
“The challenged law effectively prevents new entrants who lack a preexisting physical presence in Minnesota from building transmission lines within the state,” the DOJ’s antitrust division said in its April 13 filing. The antitrust division said it does so by giving any incumbent electric transmission owner a right of first refusal to build new high-voltage transmission lines that connect to the incumbent’s facilities.
An incumbent can exercise this right to build transmission lines adjacent to its territory even where the new entrant proposing to build those lines has invested in conceiving of the new project, proving the merits of the new line, and winning approval for construction, the antitrust division said.
According to the complaint, 87 percent of all transmission lines in Minnesota are owned by incumbents with Minnesota headquarters.
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 its filing, the antitrust division of the DOJ notes that the dormant Commerce Clause prohibits states from interfering with interstate commerce by either “discriminating against” or “imposing excessive burdens” on interstate commerce.
“Minnesota’s right of first refusal statute fails both the antidiscrimination test and the undue burden test because it raises entry barriers, segments the interstate market in developing transmission lines, favors in-state incumbents, and causes substantial anticompetitive effects in interstate commerce. Moreover, the federal government has not authorized or approved such state regulation of interstate commerce,” the antitrust division said.
The division said that Minnesota’s right of first refusal law has an unconstitutional discriminatory effect because it favors in-state entities by benefitting only those entities that already have the required presence in Minnesota. “As recognized in FERC Order No. 1000, this preference can result in an entity with an in-state presence developing transmission lines, even when an entity located elsewhere can identify and develop those transmission lines more efficiently—if the line is developed at all.”
Moreover, the statute predominantly benefits entities with Minnesota headquarters, the DOJ division asserted. “As LSP alleges, nearly 90 percent of transmission line miles in Minnesota are owned by entities headquartered in Minnesota.”
The DOJ’s antitrust division went on to say that incumbents and out-of-state developers are similarly situated for constitutional purposes, and therefore the statute’s discrimination between them runs afoul of the dormant Commerce Clause.
The division said that the dormant Commerce Clause doctrine would not apply if the different entities serve different markets, and would continue to do so even if the supposedly discriminatory burden were removed. “Here, but for Minnesota’s statute, both in state incumbents and out-of-state entrants would be competing to serve the same transmission development market,” the filing said.
“As the Seventh Circuit has recognized, the very fact that incumbent transmission owners want rights of first refusal indicates that the incumbents and non-incumbents compete—that is, the non-incumbents pose a competitive threat to the incumbents. Thus, there is at least a factual question of whether LSP and incumbent transmission providers are similarly situated in that they would serve the same product and geographic markets, but for the right of first refusal law.”
At a later point in the filing, the division said that the “excessive burden” imposed by Minnesota’s right of first refusal on interstate commerce is not justified by a legitimate local interest.
A state law also violates the dormant Commerce Clause if the burden imposed on interstate commerce is clearly excessive in relation to the putative local benefits, the division said. “Here, the entry barriers on interstate commerce are unduly burdensome and clearly exceed any legitimate local benefits, which are at most de minimis.”
Incumbents with in-state facilities can block LSP and similar entrants from building new transmission lines in Minnesota and establishing an in-state presence, “even if LSP were willing to and could afford to spend unnecessary money in-state and even if the proposed lines” advanced the Midcontinent Independent System Operator’s interstate transmission plan, the division argued. “In such circumstances, outside companies are unlikely to invest in identifying and proposing valuable new lines in the first place” and therefore incumbents will be under less competitive pressure to identify such projects, as well.
“With fewer transmission lines, the output, prices, and quality of service of the transmission network will be reduced, harming both in-state and out-of-state consumers who buy electricity from Minnesota,” the DOJ’s antitrust division said. Moreover, the higher costs of Minnesota transmission lines may be passed on to consumers in other states under the regional cost-allocation process.
The division goes on to argue that Minnesota’s assertion that striking down Minnesota’s right of first refusal law would inject uncertainty and risks into Minnesota’s electric energy market is belied by history and experience.
FERC removed the federal rights of first refusal because they restricted competition, the division said, were not just and reasonable, and created opportunities for undue discrimination and preferential treatment—findings upheld by federal courts in subsequent litigation. “Many states have not imposed rights of first refusal after the federal repeal, and defendants do not offer the court a reason to believe their electric energy markets have suffered as a result.”
Even if Minnesota’s law advances some legitimate local purposes, the state “could use a variety of less restrictive means” to achieve those purposes through its authority to regulate siting, permitting, and construction.
“In addition, FERC has required that regulated public utility transmission providers create qualification criteria such that a non-incumbent transmission company must prove that ‘it has the necessary financial resources and technical expertise to develop, construct, own, operate and maintain transmission facilities.’ Moreover, if necessary, Minnesota could establish more rigorous qualification criteria and other even-handed regulations to allay any concerns about the construction and operation of transmission lines by non-incumbents.”