5th Circuit Argues Texas Law Allowing Blocking Competing Transit Owners From Building New Lines Violates Commerce Clause | Troutman pepper

On August 30, 2022, the United States Court of Appeals for the Fifth Circuit issued an order in NextEra Energy Capital Holdings, Inc. vs. Lake, a case raising dormant Commerce Clause challenges to a 2019 Texas law that prohibits new entrants from building transmission lines that are part of a multi-state power grid. The majority overruled the lower court’s Rule 12(b)(6) dismissing NextEra’s motion, thereby allowing the case to proceed to trial in the district court.

Texas law, SB 1938, only permits persons who own an existing utility facility in Texas to construct, own, or operate new transmission lines that interconnect directly with that facility.

NextEra owns approximately 7,300 miles of transmission lines in multiple states, but has no assets in Texas. In November 2018, the Midwest Independent System Operator (“MISO”) granted NextEra the right to build a new transmission line in East Texas, in an area that is part of an interstate network. Despite the Texas Public Utility Commission (“PUCT”) recommending approval of NextEra’s transmission line, the application remains pending as SB 1938 requires its denial.

NextEra issued the instant challenge against the PUCT looking to build their lines. NextEra claimed that, among othersSB 1938 discriminates against non-incumbents—that’s to say, utilities that do not own transmission lines in the state – to participate in the Texas interstate transmission market on its face, purpose and effect. The PUCT sought dismissal for failure to report, and the US District Court for the Western District of Texas agreed, finding that “SB 1938 does not…regulate the transmission of electricity in interstate commerce; it only regulates the construction and operation of transmission lines and facilities in Texas. He rejected NextEra’s argument that SB 1938, by purpose and effect, unconstitutionally discriminates against out-of-state suppliers.

On appeal, the Fifth Circuit determined that the case was ripe for review even though NextEra never sought a certificate of public convenience and necessity from the PUCT. The Court ruled the case mature on the grounds that it presented constitutional issues and that NextEra would suffer hardship if, before filing a lawsuit, it had to expend resources to apply for a certificate which would ultimately be denied.

The Court then considered whether SB 1938 is prima facie discriminatory. In doing so, the Court noted that SB 1938’s presence requirement amounts to a residency requirement that a recent U.S. Supreme Court case found “clearly” in favor of state interests in violation. of the commerce clause.

The Court then considered the extent to which the purpose and effects of Texas law are discriminatory. The Court determined that assessing the purpose and effects of a law is a very fact-dependent inquiry that benefits from a full trial record. The Court therefore concluded that because NextEra’s motion raised plausible allegations of discriminatory purpose and effect, the lower court erred in dismissing the motion.

The Court then relied on the analysis of the Supreme Court of the United States in Pike v. Bruce Church, which requires assessing whether the alleged local benefit of the law at issue outweighs the burden imposed on out-of-state providers. The Court found that NextEra had plausibly argued that the alleged local benefit of reliability was “insignificant and illusory” to warrant further factual development at trial.

Circuit Judge Elrod agreed in part and dissented in part, opposing the majority’s conclusion that SB 1938 is apparently discriminatory. According to Justice Elrod, the majority – but not SB 1938 itself – reads a distinction into the statute, but the statute itself “makes a neutral distinction between entities based on incumbent status, which does not depend on the residence”.

A copy of the decision is available here.