NextEra v. Lake ( 2022 )

United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
August 30, 2022
No. 20-50160 Lyle W. Cayce
Clerk
NextEra Energy Capital Holdings, Incorporated;
NextEra Energy Transmission, L.L.C.; NextEra Energy
Transmission Midwest, L.L.C.; Lone Star Transmission,
L.L.C.; NextEra Energy Transmission Southwest, L.L.C.,
Plaintiffs—Appellants,
versus
Chairman Peter Lake, Public Utility Commission of
Texas, in his official capacity, Commissioner Lois Cobos, Public
Utility Commission of Texas, in her official capacity;
Commissioner Jimmy Glotfelty, Public Utility
Commission of Texas, in his official capacity; Commissioner
Kathleen Jackson, Public Utility Commission of Texas,
in her official capacity; and Commissioner Will McAdams, Public
Utility Commission of Texas, in his official capacity,
Defendants—Appellees.
Appeal from the United States District Court
for the Western District of Texas
USDC No. 1:19-CV-626
No. 20-50160
Before Dennis, Elrod, and Costa, Circuit Judges.
Gregg Costa, Circuit Judge:
Imagine if Texas—a state that prides itself on promoting free enter-
prise—passed a law saying that only those with existing oil wells in the state
could drill new wells. It would be hard to believe. It would also raise signifi-
cant questions under the dormant Commerce Clause. Cf. Granholm v. Heald,
544 U.S. 460, 465–66 (2005) (holding unconstitutional two state laws that
allowed only wineries with an in-state physical presence to ship wine to state
residents).
Texas recently enacted such a ban on new entrants in a market with a
more direct connection to interstate commerce than the drilling of oil wells:
the building of transmission lines that are part of multistate electricity
grids. A 2019 law says that the ability to build, own, or operate new lines
“that directly [connect] with an existing utility facility . . . may be granted
only to the owner of that existing facility.” TEX. UTIL. CODE § 37.056(e).
The law applies not just to transmission lines that are part of Texas’s
intrastate electricity market, but also to lines that are part of interstate
transmission networks. Those lines that carry electricity through multiple
states are classic instrumentalities of interstate commerce.
The operator of one such multistate grid awarded Plaintiff NextEra
Energy Capital Holdings, Inc. the right to build new transmission lines in an
area of east Texas that is part of an interstate grid. The grid operator
determined that NextEra’s bid offered an “outstanding combination of low
cost and high value” and would produce “substantial benefits to ratepayers
over time.” But before NextEra obtained the necessary construction
certificate from the Public Utilities Commission of Texas, the state enacted
the law that bars new entrants from building transmission lines.
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No. 20-50160
NextEra challenges the new law, as it applies to the interstate
electricity networks in Texas (but not the intrastate ERCOT network), on
dormant Commerce Clause grounds. It also argues that the law violates the
Contracts Clause by upsetting its contractual expectation that it would be
allowed to build the new lines. Once we wade through the thicket of
electricity regulation, the ban’s interference with interstate commerce
becomes as clear as it is for the oil well hypothetical. We thus conclude that
the dormant Commerce Clause claims should proceed past the pleading
stage. But the Contracts Clause claim fails as a matter of law under the
modern, narrow reading of that provision.
I
A
Powering the modern world is no easy task. An energy source must
first generate electricity; that electricity must then travel, often for long
distances, over high-voltage wires for distribution; and distributors must
deliver electricity to consumers over low-voltage wires. Some providers,
known as vertically integrated utilities, perform all of these functions. S.C.
Pub. Serv. Auth. v. FERC, 762 F.3d 41, 49 (D.C. Cir. 2014). Others—like
plaintiff NextEra, a transmission-only company—perform just one. Id. at 50.
In the early 1900s, when the power industry was dominated by
vertically integrated utilities, electricity providers were subject to only state
and local oversight. FERC v. Elec. Power Supply Ass’n, 577 U.S. 260, 265–66
(2016). That changed in 1927, when the Supreme Court held that the
Commerce Clause prohibited states from regulating “wholesale [electricity]
sales (i.e., sales for resale) across state lines.” Id. (citing Pub. Util. Comm’n
of R.I. v. Attleboro Steam & Elec. Co., 273 U.S. 83, 89–90 (1927)). While states
could continue to oversee local retail markets, only Congress could regulate
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No. 20-50160
interstate wholesale transactions. Ark. Elec. Co-op. Corp. v. Ark. Pub. Serv.
Comm’n, 461 U.S. 375, 378 (1983).
Congress exercised its new-found authority for the first time as part of
the New Deal. In enacting the Federal Power Act of 1935 , Congress declared
“that federal regulation of interstate electric energy transmission and its sale
at wholesale is ‘necessary in the public interest.’” S.C. Pub. Serv. Auth., 762
F.3d at 49 (quoting 16 U.S.C. § 824(a)). Congress also established the
Federal Power Commission, the precursor to the Federal Energy Regulatory
Commission (FERC), and gave it jurisdiction to regulate “all facilities for
such transmission or sale of electric energy.” 16 U.S.C. § 824(b)(1); see also
Nat’l Ass’n of Regul. Util. Comm’rs v. FERC, 964 F.3d 1177, 1181 (D.C. Cir.
2020) (noting that the Federal Power Act provides FERC with “exclusive
authority over” the wholesale transmission market).
As the power industry evolved, so did the federal regulatory approach.
In the decades following passage of the Federal Power Act, federal regulators
policed vertically integrated utilities—most of which were local
monopolies—by setting “just and reasonable” wholesale prices. 16 U.S.C.
§ 824d(a); Elec. Power, 577 U.S. at 267. But in the 1970s and 1980s,
technological advances encouraged market entrants to challenge vertically
integrated utilities. New York v. FERC, 535 U.S. 1, 7 (2002). As a result,
“[i]ndependent power plants now abound, and almost all electricity flows not
through ‘the local power networks of the past,’ but instead through an
interconnected ‘grid’ of near-nationwide scope.” Elec. Power, 577 U.S. at 267
(quoting New York, 535 U.S. at 7). Adapting to “this new world,” FERC
shifted away from price setting—the traditional tool “used to prevent
monopolistic pricing”—and instead focused on enhancing competition. Id.To that end, FERC encouraged utilities that owned transmission lines
to form voluntary associations that would coordinate and “manage wholesale
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No. 20-50160
markets on a regional basis.” Id.; see also 16 U.S.C. § 824a(a) (“direct[ing]
[FERC] to divide the county into regional districts for the voluntary
interconnection and coordination of facilities for the . . . transmission and sale
of electric energy”). These associations, called regional transmission
organizations (RTOs) and independent system operators (ISOs), 1 now
control most of the electrical grid. Ill. Com. Comm’n v. FERC, 721 F.3d 764,
769 (7th Cir. 2013). This map shows the various RTOs and ISOs:2
1
RTOs and ISOs are similar umbrella entities that “operate the transmission
system independently of wholesale market participants and foster competition for
electricity generation.” Federal Energy Regulatory Commission, Energy
Primer: A Handbook of Energy Market Basics 39 (April 2020),
https://www.ferc.gov/sites/default/files/2020-06/energy-primer-2020.pdf.
2
Image from RTOs and ISOs, FERC, https://www.ferc.gov/industries-
data/electric/power-sales-and-markets/rtos-and-isos (last visited August 28, 2022).
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No. 20-50160
For years, RTOs and ISOs included rights of first refusal to build
transmission lines in their FERC-sanctioned rate agreements. MISO
Transmission Owners v. FERC, 819 F.3d 329, 332 (7th Cir. 2016). That meant
utilities that already owned transmission lines, called “incumbents,” would
“have a first crack at constructing a[] . . . transmission project.” Id. at 331–
32. In other words, they would have “the opportunity to build it without
having to face competition from other firms that might also like to build it.”
Id. at 331.
In 2011, FERC abolished those provisions. The agency reasoned that
federal rights of first refusal might “be leading to rates . . . that are unjust and
unreasonable,” in large part because “it is not in the economic self-interest
of incumbent[s] to permit new entrants to develop transmission facilities,”
even if those facilities “would result in a more efficient or cost-effective
solution.” Transmission Planning & Cost Allocation by Transmission
Owning & Operating Public Utilities, 136 FERC ¶ 61,051, at ¶ 256 (F.E.R.C.
July 21, 2011) (final rule) (Order 1000); see also id. at ¶ 253 (explaining that
failing to remove federal rights of first refusal might “result in rates . . . that
are unjust and unreasonable”). In making its decision, FERC considered—
and rejected—the argument “that the reliability of the transmission system
is a function of the number of public utility transmission providers of that
system.” Id. at ¶ 266. Historical data suggested the opposite, as “public
utility transmission providers have . . . connected to the transmission systems
of others” “to enhance reliability.” Id. (noting that “nonincumbent
transmission developers[] that successfully develop a transmission
project[] . . . must comply with all applicable reliability standards”).
Despite its many reforms, Order 1000 took “great pains to avoid
intrusion on the traditional role of the States.” S.C. Pub. Serv. Auth., 762
F.3d at 76. So even if the prohibition created “opportunities for
nonincumbents, such developers must still comply with state law.” Id.
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No. 20-50160
B
Order 1000 is consistent with the Federal Power Act in leaving room
for state regulation. Elec. Supply Ass’n, 136 S. Ct. at 780 (observing that the
Act “makes federal and state powers ‘complementary’ and
‘comprehensive’”). States may, for example, oversee “facilities used for the
generation of electric[ity,] . . . local distribution or only for the transmission
of electric[ity] in intrastate commerce.” 16 U.S.C. § 824(b)(1). States also
have “authority over the location and construction of electrical transmission
lines.” Ill. Com. Comm’n, 721 F.3d at 773; see also Piedmont Envt’l Council v.
FERC, 558 F.3d 304, 310 (4th Cir. 2009) (“The states have traditionally
assumed all jurisdiction to approve or deny permits for the siting and
construction of electrical transmission facilities.”). But cf. Piedmont, 558
F.3d at 310 (noting that 16 U.S.C. § 824p “gives FERC the authority in
national interest corridors to issue permits for the construction . . . of
transmission facilities in certain instances”).
In Texas, the Public Utility Commission of Texas (PUCT) regulates
electric utilities. TEX. UTIL. CODE § 14.001. To build a new transmission
line in the state, a utility must first obtain a certificate of “convenience and
necessity” from PUCT. Id. § 37.051(a). This process is independent of any
approvals that the utility must also obtain from its governing ISO or RTO.
As shown below, an ISO—the Electric Reliability Council of Texas
(ERCOT)—covers most of Texas, including the Houston, Dallas-Fort
Worth, San Antonio, and Austin areas. Because ERCOT is wholly within
Texas, PUCT has exclusive jurisdiction over utilities in its territory. Pub.
Util. Comm’n of Tex. v. City Pub. Serv. Bd. of San Antonio, 53 S.W.3d 310, 312
(Tex. 2001).
Three other RTOs also operate in Texas, but because they also cover
areas outside the state, they are subject to concurrent state and federal
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No. 20-50160
jurisdiction. Pertinent here, the Midwest Independent System Operator
(MISO) and the Southwest Power Pool (SPP) control territory in East
Texas.3
In line with Order 1000, SPP and MISO removed federal rights of first
refusal from their agreements and established competitive systems to build
transmission lines. Texas followed suit, with the PUCT declaring that
utilities without any presence in Texas could construct transmission lines in
SPP and MISO territory. Joint Petition of Sw. Pub. Serv. Co. & Sw. Power
Pool, Inc. for Declaratory Order, 341 P.U.R. 4th 195, 2017 WL 5068379, at
3
Image from Electric Maps, Public Utility Commission of Texas,
http://www.puc.texas.gov/industry/maps/maps/ERCOT.pdf (last visited August 28,
2022).
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*15 (Oct. 26, 2017). The declaration clarified that transmission-only
companies, and not just vertically integrated monopolies, could engage in
that work. Id.This regime allowing open competition in the building of transmission
lines did not last long. In May 2019, the Texas Legislature overruled
PUCT’s decision and barred companies from competing in MISO or SPP
territory unless they already owned a transmission facility in Texas.4 Under
the new law, Senate Bill (or SB) 1938, a certificate of convenience and
necessity to build, operate, or own transmission lines “that directly [connect]
with an existing utility facility . . . may be granted only to the owner of that
existing facility.” TEX. UTIL. CODE § 37.056(e) (emphasis added). If that
incumbent chooses not to pursue a project, other owners may step into its
shoes. But not just any owner—the incumbent utility may only “designate
another electric utility that is currently certificated by [PUCT] within the
same electric power region,” for example, SPP or MISO, “to build . . . a
portion or all of” the new lines. Id. § 37.056(g). So the only way a company
without a Texas presence can build, operate, or own transmission lines is to
buy a utility that already owns a power facility in the state. See id. § 37.154(a)
(requiring that the buyer also convince PUCT that its purchase “will not
diminish the retail rate jurisdiction of this state” and will result in continued
“adequate service”).
Five other states restored incumbent’s rights of first refusals after
FERC took them away. See MINN. STAT. § 216B.246, subdiv. 3; NEB.
REV. STAT. § 70-1028; OKLA. STAT. tit. 17 § 292; S.D. CODIFIED
LAWS § 49-32-20; N.D. CENT. CODE § 49-03-02(2). But none of those
4
A similar restriction applies to ERCOT under its statutorily binding Protocols.
TEX. UTIL. CODE § 39.151(j); ERCOT Nodal Protocols § 3.11.4.8 (August 1, 2020),
http://www.ercot.com/mktrules/nprotocols/current (last visited August 28, 2022).
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laws is as restrictive as Texas’s. Only one other (North Dakota) is like Texas
in placing no time limit on the incumbent to exercise its right; the others
require incumbents to exercise their right of first refusal within 90 days. And
no other state completely bars out-of-state entrants or allows an incumbent
to designate its replacement if it declines a project.
C
Against the changing regulatory landscape in Texas, NextEra and two
of its subsidiaries sought to enter the state’s market. NextEra is a Florida
corporation that, together with its affiliates, owns “approximately 7,300
miles of transmission line[s] . . . in multiple states.” It does not, however,
have a foothold in Texas. After the removal of the federal rights of first
refusal, NextEra tried to build and buy high-voltage transmission lines in
Texas.
The project that the parties focus on, the Hartburg-Sabine Line,
envisioned the construction of five new high-voltage transmission lines and a
substation in East Texas. Although the new lines would be built in Texas,
they would form part of MISO’s interstate grid and, as a result, be paid for
by customers across MISO’s 15 states. In November 2018, after a
competitive bidding process, MISO selected NextEra to build the line,
concluding that the company’s proposal offered “an outstanding
combination of low cost and high value, with best-in-class cost and design,
best-in-class project implementation plans, and top-tier plans for operations
and maintenance.” MISO also noted that the proposal would reap
“substantial benefits to ratepayers over time.”
NextEra and MISO entered into a “Selected Developer Agreement”
for the project. But before starting construction, the agreement required
NextEra to obtain a certificate of convenience and necessity from PUCT.
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No. 20-50160
NextEra “anticipated being able to” get a certificate at the time, but once SB
1938 was enacted it could no longer obtain one.
The Hartburg-Sabine Line was not NextEra’s only intended project
in Texas. In 2017, NextEra “entered into an asset purchase agreement to
acquire 30 miles of . . . transmission line[s] from” a utility located in SPP’s
jurisdiction, again in East Texas. This project, called the Jacksonville-
Overton Line, required the utility to transfer its certificate of convenience
and necessity to NextEra, which needed PUCT’s approval. Id. § 37.154(a).
NextEra applied for the transfer, and although PUCT staff recommended
approval in October 2018, the application remains pending. SB 1938 requires
that it be denied.
Having been shut out of Texas’s power market by SB 1938, NextEra
sued PUCT Commissioners in federal court a month after the law was
enacted. Citing its two stalled projects, NextEra alleged that the Texas ban
violates the Commerce and Contracts Clauses. It asked the district court for
declaratory and injunctive relief.
The Commissioners moved to dismiss for failure to state a claim. The
district court agreed and dismissed NextEra’s complaint with prejudice.
Starting with the Commerce Clause allegation, the district court concluded
that “SB 1938 does not . . . regulate the transmission of electricity in
interstate commerce; it regulates only the construction and operation of
transmission lines and facilities within Texas.” And rejecting NextEra’s
argument that SB 1938—in its text, through its purpose, and by its effect—
unconstitutionally discriminates against out-of-state providers, the district
court determined that:
• the law’s text establishes a preference for incumbency, not geography;
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• “legislative history indicates that the Texas Legislature disagreed
with . . . PUCT’s declaratory order and enacted SB 1938 to eliminate
any uncertainty in Texas law”; and
• “most incumbent providers in Texas are owned by out-of-state com-
panies.”
The district court also rejected NextEra’s argument that, under Pike v. Bruce
Church, Inc., 397 U.S. 137, 142 (1970), the burden imposed by SB 1938 is
“clearly excessive in relation to the putative local benefits.” It then held that
NextEra failed to state a Contracts Clause claim, as the company did not have
reasonable contractual expectations that the law could impair.
NextEra appeals.
II
We first consider whether there is a jurisdictional impediment to this
case even though the Commissioners do not see one. The claims related to
the Hartburg-Sabine Line might seem premature because NextEra never
applied for a certificate of convenience and necessity. The Constitution’s
cases-and-controversies requirement prohibits federal courts from resolving
“abstract disagreements.” Abbott Lab’ys v. Gardner, 387 U.S. 136, 148
(1967), abrogated on other grounds by Califano v. Sanders, 430 U.S. 99 (1977);
see also Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 670 n.2
(2010) (explaining that the ripeness doctrine “reflects constitutional
considerations that implicate ‘Article III limitations on judicial power,’ [and]
‘prudential reasons for refusing to exercise jurisdiction’” (quoting Reno v.
Cath. Soc. Servs., Inc., 509 U.S. 43, 57 n.18 (1993)). So when a “case is
abstract or hypothetical,” a court must dismiss it for lack of ripeness. New
Orleans Pub. Serv., Inc. v. Council of City of New Orleans, 833 F.2d 583, 586
(5th Cir. 1987). In determining whether a case is ripe, we examine “the
fitness of the issues for judicial decision” and “the hardship to the parties of
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No. 20-50160
withholding court consideration.” Nat’l Park Hospitality Ass’n v. Dep’t of
Interior, 538 U.S. 803, 808 (2003).
Generally speaking, a case is ripe if it presents questions of law;
“conversely, a case is not ripe if further factual development is required.”
Choice Inc. of Tex. v. Greenstein, 691 F.3d 710, 715 (5th Cir. 2012) (quoting
New Orleans, 833 F.2d at 587). This case presents two constitutional
questions: whether SB 1938 violates the dormant Commerce Clause or the
Contracts Clause. No further factual development or exercise of agency
discretion is required for resolution of those legal questions. It would be futile
to require NextEra to obtain agency rejection of its application when SB 1938
makes that a foregone conclusion. See Blanchette v. Conn. Gen. Ins. Corps.,
419 U.S. 102, 143 (1974) (“Whe[n] the inevitability of the operation of a
statute against certain individuals is patent,” a plaintiff need not “await the
consummation of threatened injury to obtain preventative relief.” (quoting
Pennsylvania v. West Virginia, 262 U.S. 553, 593 (1923))). The Supreme
Court recognized as much in another case involving the power industry.
Because a state moratorium on the approval of new nuclear power plants left
no possibility of agency approval, the utility’s suit challenging the law was fit
for immediate judicial resolution. Pac. Gas & Elec. Co. v. State Energy Res.
Conservation & Dev. Comm’n, 461 U.S. 190, 201–02 (1983).
Pacific Gas also recognizes that NextEra would suffer hardship if,
before filing suit, it had to spend time and money applying for a certificate all
agree would be denied. Pac. Gas, 461 U.S. at 201 (finding hardship even
though the utilities had not yet applied for certification, as postponing
resolution of the case would force them to “proceed in hopes that, when the
time for certification came, either the required findings would be made or the
law would be struck down”); Cooper v. McBeath, 11 F.3d 547, 552 n.7 (5th Cir.
1994) (“Substantial hardship—the touchstone for determine when review
i[s] appropriate—exists whe[n] the enforcement of a statute is assured and
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No. 20-50160
the only obstacle to ripeness is merely a delay before the action or
proceedings commence.”).
We therefore agree with the parties that the claims are ripe for review.
III
The Constitution extends to Congress the “Power . . . [t]o regulate
Commerce . . . among the several States.” U.S. Const. art. I, § 8, cl. 3.
On its face, this provision says nothing about state authority over interstate
commerce. But it is settled that because Congress can regulate interstate
commerce, the states cannot erect barriers to the free flow of that commerce.
“This ‘negative’ aspect” of that power, known as the dormant Commerce
Clause, “prevents the States from adopting protectionist measures and thus
preserves a national market for goods and services.” Tenn. Wine & Spirits
Retailers Ass’n v. Thomas, 139 S. Ct. 2449, 2459 (2019) (quoting New Energy
Co. of Ind. v. Limbach, 486 U.S. 269, 273 (1988)).
A
Although this “negative aspect” of the Commerce Clause (especially
a judicially enforceable one) remains controversial, see, e.g., Comptroller of
Treasury of Md. v. Wynne, 575 U.S. 542, 571–72 (2015) (Scalia, J., dissenting);
Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 610
(1997) (Thomas, J., dissenting), it has a deep pedigree. During the tumultu-
ous 1780s, fledgling state governments—beset by a collapsing economy and
other crises—“began discriminating against the trade of their neighbors.”
Michael J. Klarman, The Framers’ Coup 23 (2016). Predictably,
victims of those “protective laws” retaliated, “rais[ing] costs of importing,
shipping, and selling goods.” Brannon P. Denning, Confederation-Era Dis-
crimination Against Interstate Commerce and the Legitimacy of the Dormant
Commerce Clause Doctrine, 94 Ky. L.J. 37, 47 (2005); see also id. at 72–73
(“States eager to gain commercial advantage and retain the revenue that
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trade afforded . . . passed laws that palpably affected the commerce of other
states.”). That harmful patchwork of legislation undermined the Articles of
Confederation and helped inspire the Constitutional Convention. See Tenn.
Wine, 139 S. Ct. at 2460; Klarman, supra, at 23.
Convention debate about the Commerce Clause Power was limited.
Denning, supra, at 83. But when the issue came up, it “was uniformly men-
tioned as a device for preventing obstructive or partial regulations by the
states.” Albert Abel, The Commerce Clause in the Constitutional Convention
and in Contemporary Comment, 25 Minn. L. Rev. 432, 471 (1941). And
although “[t]here was even less commentary at state ratifying conventions,”
Denning, supra, at 83, the Federalist Papers critiqued state protectionism in
advocating for national control over interstate commerce, see Abel, supra at
473 (citing The Federalist No. 22 (Alexander Hamilton)). Years later,
James Madison remembered that the Commerce Power “grew out of the
abuse of the power by the importing States in taxing the non-importing, and
was intended as a negative and preventative provision against injustice among
the States themselves, rather than as a power to be used for the positive pur-
poses of the General Government.” W. Lynn Creamery, Inc. v. Healy, 512
U.S. 186, 193 n.9 (1994) (quoting 3 Max Farrand, Records of the
Federal Convention of 1787, 478 (1911)).
One of the early landmark decisions of the Supreme Court recognized
“great force” in the argument that, “as the word ‘to regulate’ implies in its
nature, full power over the thing to be regulated, it excludes, necessarily, the
action of all others that would perform the same operation on the same
thing.” Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1, 209 (1824). By the end of
the nineteenth century, this notion of a dormant or negative Commerce
Clause was “firmly established.” Tenn. Wine, 139 S. Ct. at 2459–60 (citing
Case of the State Freight Tax, 82 U.S. (15 Wall.) 232, 279–80 (1873)). And
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just last year, the Supreme Court “reiterate[d] that the Commerce Clause by
its own force restricts state protectionism.” Id. at 2461.
As is so often the case, Justice Jackson expressed the principle best:
Our system, fostered by the Commerce Clause, is that every
farmer and every craftsman shall be encouraged to produce by
the certainty that he will have free access to every market in the
Nation, that no home embargoes will withhold his export, and
no foreign state will by customs duties or regulations exclude
them. Likewise, every consumer may look to the free
competition from every producing area in the Nation to protect
him from exploitation by any. Such was the vision of the
Founders; such has been the doctrine of this Court which has
given it reality.
H.P. Hood & Sons, Inc. v. Du Mond, 336 U.S. 525, 539 (1949).
B
Like the farmers and craftsmen of old, NextEra seeks “free access”
to the interstate transmission market. Id. The company contends that
although Texas may restrict competition in its intrastate ERCOT market
without Commerce Clause scrutiny, excluding nonincumbents from the
interstate transmission market violates the Constitution.
The Commissioners respond that even their regulation of the
interstate transmission market enjoys immunity from the Commerce Clause.
They rely on General Motors Corp. v. Tracy, 519 U.S. 278 (1997), which
rejected a claim that a law discriminated against interstate commerce by
granting a tax exemption to local monopoly distributers of natural gas but not
to out-of-state bulk gas sellers.
This much is certain: Utilities, despite their history as monopolies and
the vestiges of that tradition even in deregulated markets, are not “immune
from [] ordinary Commerce Clause jurisprudence.” Tracy, 519 U.S. at 291
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n.8; see also Wyoming v. Oklahoma, 502 U.S. 437, 457, 458–59 (1992)
(invalidating an Oklahoma law on dormant Commerce Clause grounds
because it required in-state “utilities to supply 10% of their needs for fuel
from Oklahoma coal”); New England Power Co. v. New Hampshire, 455 U.S.
331, 339 (1982) (applying the dormant Commerce Clause to invalidate a New
Hampshire agency ruling that prohibited a utility “from selling its
hydroelectric energy outside the State”); Pennsylvania, 262 U.S. at 596–600
(holding unconstitutional a West Virginia law that required pipeline
companies to serve in-state customers first).
Harder to decipher is when Tracy cuts into the general principle that
utilities are subject to the dormant Commerce Clause. The Ohio local
distributors exempt from the state’s 5% general tax on goods and services
primarily sold natural gas in a “captive market.” Tracy, 519 U.S. at 282, 303–
04, 310. In that market, gas one was one of the “bundled” services over
which they enjoyed a monopoly. Id. at 297–98. As a regulated monopoly in
that local distribution market, the distributors had to serve all customers at
restricted rates. Id. at 299. But the utilities also competed, “at least at the
margins,” in a separate market with independent companies that sold
“unbundled” gas to bulk industrial customers like General Motors. Id. at
297–98, 307. Contending that its out-of-state gas suppliers operated at a
disadvantage because they did not enjoy the tax exemption, General Motors
sought a refund, on dormant Commerce Clause grounds, of the taxes it paid.
Id. at 285.
A key to unraveling Tracy is the type of claim it considered. As we will
discuss further, a dormant Commerce Clause challenge can be based on the
text of the law, its effects, or its intent. Tracy emphasized that it was just
dealing with the first type: a claim that the law discriminated on its face,
which if true results in a “virtually per se rule of invalidity.” Tracy, 519 U.S.
at 298 (noting that the Court was just considering a challenge to the text of
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the Ohio law); id. at 310 (holding that the “enterprises should not be
considered ‘similarly situated’ for purposes of a claim of facial discrimination
under the Commerce Clause”). The problem with saying that the Ohio tax
exemption was discriminatory on its face was that it operated in two different
retail markets. There were no legal concerns with giving the tax exemption
in the residential market; the utilities had a lawful monopoly there. The
problem was that the utilities-only exemption also applied in the competitive
gas market for large industrial users. Id. at 303–04. The case thus came down
to whether the Court should “accord controlling significance to the
noncaptive market in which they compete, or to the noncompetitive captive
market in which the local utilities alone operate.” Id.The Supreme Court determined that the local, captive market was the
utilities’ “core market.” Id. at 301. There was only a “possibility of
competition” in the noncaptive market for industrial users. Id. at 302. The
predominance of the monopoly market prevented classifying the statute as
discriminatory on its face. Because the law gave the utilities a tax exemption
for all retail sales—those occurring in its primary monopoly market as well as
in the incidental competitive one—the utilities and out-of-state sellers were
not similarly situated for all, or even most applications, of the statute.
Accordingly, the text of the statute did not discriminate against interstate
commerce, which would trigger the strong medicine of per se invalidity.
The dilemma that the Ohio tax exemption posed—how to treat a law
that gives in-state businesses a preference in both captive and noncaptive
retail markets—does not exist here. The statute limiting who can build
transmission lines governs only a competitive market. In the market for
transmission of electricity, vertically integrated utilities and transmission-
only companies compete and offer the same services: building, operating, and
owning transmission lines. Unlike the congressional decision to give states
exclusive authority over retail sales, Tracy, 519 U.S. at 310, the Federal Power
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No. 20-50160
Act gives general authority over interstate transmission markets to federal
regulators. 16 U.S.C. § 824(a). And for the state authority that remains over
matters like siting and certification, transmission-only companies face the
same regulatory requirements as vertically integrated utilities. See Pub. Util.
Comm’n of Tex. v. Cities of Harlingen, 311 S.W.3d 610, 617 (Tex. App.—
Austin 2010, no pet.).
Consequently, unlike the Tracy tax exemption, SB 1938 has no
application in a “noncompetitive, captive market in which the local utilities
alone operate.” 519 U.S. at 303–04. We would have a Tracy issue if the
challenged law provided vertically integrated utilities with the same benefit
in both the monopolistic distribution market and the competitive
transmission market. But as a law addressing a single market
(transmission)—one that is undoubtedly competitive—SB 1938 is not
immune from Commerce Clause scrutiny. See Camps Newfound, 520 U.S. at582 n.16 (observing that the Tracy court “premised its holding that the
statute at issue was not facially discriminatory on the view that [the marketers
and utilities] were principally competing in different markets”); Tracy, 519
U.S. at 298–99 (emphasizing that the utilities and marketers “provide
different products”). Put another way, when it comes to transmission, a
vertically integrated utility and a transmission-only company are similarly
situated.
The Commissioners and their supporting amici read Tracy more
broadly. They essentially contend that it provides Commerce Clause
immunity to any law that grants a preference to a company that has at least
one foot in a captive market. To be sure, Tracy explained Ohio’s rationale
for giving the utilities the exemption even in the competitive market: it
enhanced their economic viability and thus their ability to meet their public
obligation of universal service in the captive market. Id. at 307 (explaining
that doing away with the exemption in the competitive market would reduce
19
No. 20-50160
the utilities’ customer base and thus “increase the unit cost of the [regulated]
bundled product”). But if that alone were enough, Tracy would not have had
to grapple with the Ohio law’s application in both captive and noncaptive
retail markets and decide which was the utilities’ “core” market. Id. at 301–
02. The Commissioner’s broad reading is also irreconcilable with the
longstanding principle, reiterated in Tracy, that there is no “public utilities
exception” to the dormant Commerce Clause. Tracy, 519 U.S. at 291 n.8. If
a state law’s propping up a utility in a noncaptive market to enhance its
viability in a captive market created immunity from Commerce Clause
scrutiny, then a state could grant in-state utilities the exclusive right to
operate coal mines in the state (or, for that matter, the exclusive right to sell
ice cream in the state).
Texas has an interest in promoting reliable electricity service,
including the power to approve the siting and construction of transmission
lines. But as with other police powers a state enjoys, that authority is not
immune from Commerce Clause scrutiny when it impacts the interstate
market.5 Tracy prevented classifying a law as textually discriminatory only
because it applied primarily to grant utilities a tax preference in a market
where they were monopolies. SB 1938 operates at “the opposite end of the
local-to-interstate spectrum,” LSP Transmission Br. at 21–22, in a wholly
competitive market, and is an outright ban on new entrants. The state’s
safety interest may end up justifying that differential treatment, but it does
5 The Supreme Court’s most recent dormant Commerce Clause decision involved
the state police power over alcohol that the Constitution expressly recognizes. U.S.
Const. Amdt. XXI, § 2; see Tenn. Wine, 139 S. Ct. at 2449. Even that police power, the
Supreme Court held, is not immune from dormant Commerce Clause scrutiny. Tenn.
Wine, 139 S. Ct. at 2467–2474.
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No. 20-50160
not prevent us from answering the threshold dormant Commerce Clause
question: whether SB 1938 is discriminatory.
C
Because Tracy does not shield SB 1938 from dormant Commerce
Clause scrutiny, we must decide whether the law “discriminates against
interstate commerce.” Dep’t of Revenue of Ky. v. Davis, 553 U.S. 328, 338
(2008). A law can discriminate against interstate commerce by its text (or
“face”),6 effects, or purpose. Allstate Ins. Co. v. Abbott, 495 F.3d 151, 160
(5th Cir. 2007). We first address whether the words of the statute
discriminate against interstate commerce.
1
Supported by the Department of Justice’s Antitrust Division,
NextEra argues that the reasons the district court cited for rejecting the
Commerce Clause challenge are flawed. We agree.
6
Despite the overlapping “facial” labels, whether a statute discriminates on its
face for dormant Commerce Clause purposes is a different concept from the general notion
of a facial challenge to a statute. NextEra is not bringing the latter type of suit. It recognizes
that the part of SB 1938 regulating the intrastate ERCOT market is constitutional. As a
result, the remedy it seeks—which is what the general concept of “facial challenges” is
about, see Citizens United v. FEC, 558 U.S. 310, 331 (2010) (noting that, although the
difference between “facial” and “as-applied” challenges “is not so well defined,” the
distinction “goes to the breadth of the remedy employed by the Court”)—is not holding
the entire law unconstitutional.
The facial inquiry for dormant Commerce Clause challenges is just one asking
whether the statutory language is discriminatory (as opposed to whether the statute has a
discriminatory purpose or effect). That question can be asked of laws, like SB 1938, that
apply to both intrastate and interstate markets. See Dean Milk v. City of Madison, 340 U.S.
349, 354 n.4 (1945) (“It is immaterial that Wisconsin milk from outside the Madison area
is subject to the same proscription as that moving in interstate commerce.”). As NextEra
concedes here, only the enforceability of the law in the interstate market is at issue.
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No. 20-50160
One of the district court’s rationales was that SB 1938 does not
discriminate against interstate commerce because it “regulates only the
construction and operation of transmission lines and facilities within Texas.”
That is wrong for the areas of Texas that are part of interstate electricity
networks. SPP and MISO territory in East Texas is part of an
“interconnected ‘grid’ of near-nationwide scope” that has long been subject
to FERC oversight. Elec. Power, 577 U.S. at 267; see also North Dakota v.
Heydinger, 825 F.3d 912, 915 (8th Cir. 2016) (“MISO controls over 49,000
miles of transmission lines, a grid that spans fifteen states . . . and parts of
Canada.”). New lines in these areas thus are instrumentalities of interstate
commerce that carry electricity over a broad swath of the country. That
certain lines might run entirely within Texas is irrelevant, as “any electricity
that enters the grid immediately becomes part of a vast pool of energy that is
constantly moving in interstate commerce.” New York, 535 U.S. at 7; cf. Buck
v. Kuykendall, 267 U.S. 307, 316 (1925) (holding that an Oregon law limiting
what parties could travel on a stretch of highway within the state was “a
regulation, not of the use of [Oregon’s] highways, but of interstate
commerce”). These transmission lines cannot and do not serve Texas
consumers alone.
Indeed, transmission lines that are part of an interstate grid are much
closer to the heartland of interstate commerce than the wine stores, dairies,
or waste processing facilities that have faced dormant Commerce Clause
scrutiny. See Tenn. Wine, 139 S. Ct. at 2462; C&A Carbone, Inc. v.
Clarkstown, 511 U.S. 383, 391–92 (1994); Dean Milk Co. v. City of Madison,
340 U.S. 349, 352 (1951). The Supreme Court recognized the interstate
character of the electricity market a decade before it recognized that
Congress could regulate factories because of their effect on interstate
commerce. Compare Attleboro Steam & Elec. Co., 273 U.S. at 90 (1927), with
NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1, 40–41 (1937). Because the
22
No. 20-50160
electricity grid is on its own an interstate market, state protectionist measures
regulating its instrumentalities run a much greater risk of harming out-of-
state interests—the ability of companies to compete, the prices consumers
pay—than regulations on retail wine stores. Ark. Elec. Co-op Corp., 461 U.S.
at 377 (“[T]ransmission of energy is an activity particularly likely to affect
more than one State, and its effect on interstate commerce is often significant
enough that uncontrolled regulated by the States can patently interfere with
broader national interests.”); Old Dominion Elec. Coop. v FERC, 898 F.3d
1254, 1257 (D.C. Cir. 2018) (discussing FERC order that allocated costs for
new transmission lines built in Virginia to numerous utilities located
throughout the states in the interstate grid). The interstate transmission lines
SB 1938 regulates are part of interstate commerce.
Nor does it save SB 1938 that most of the in-state incumbents it
protects are incorporated outside Texas. In finding dormant Commerce
Clause violations, the Supreme Court did not even mention the place of
incorporation for the wineries in New York, coal mines in Oklahoma, or
dairies in Madison, Wisconsin that received an unlawful benefit because of
their local presence. Granholm, 544 U.S. at 475; Wyoming, 502 U.S. at 457–
59; Dean Milk, 340 U.S. at 352 (holding unconstitutional an ordinance that
discriminated on the basis of where milk pasteurization occurred, not the
facility owner’s state of incorporation); see also Healy, 512 U.S. at 203–04
(holding that law benefitting dairy farms located in Massachusetts violated
Commerce Clause without asking whether those farms were owned by
Massachusetts citizens or companies). We also do not know the place of
incorporation of the company that operated the solid waste transfer station
granted an unlawful monopoly by a small New York town. C&A Carbone,
Inc., 511 U.S. at 387 (calling the company a “local private contractor”). The
Commissioners cite no Supreme Court case holding that a law is
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No. 20-50160
nondiscriminatory for Commerce Clause purposes because the local interests
it benefits are incorporated or headquartered in another state.7
Most circuits have rejected the idea that a law survives Commerce
Clause scrutiny if many of the favored interests are incorporated elsewhere.
As the Eleventh Circuit explained, if “place of incorporation alone” were
controlling, “then a state[’s] dormant Commerce Clause liability would turn
on the empty formality of where a company’s articles of incorporation were
filed, rather than where the company’s business takes place or where its
political influence lies.” Fla. Transp. Servs., Inc. v. Miami-Dade Cnty., 703
F.3d 1230, 1259 (11th Cir. 2012); accord Walgreen Co. v. Rullan, 405 F.3d 50,
58 (1st Cir. 2005). That reasoning strikes at what the Supreme Court has
recognized as a primary concern of the dormant Commerce Clause: “when
‘the burden of state regulation falls on interests outside the state, it is unlikely
to be alleviated by the operation of those political restraints normally exerted
when interests within the state are affected.’” United Haulers Ass’n, Inc. v.
Oneida-Herkimer Solid Waste Mgmt. Auth., 550 U.S. 330, 345 (2007) (quoting
7 A state can discriminate based on business form. See Wal-Mart Stores, Inc. v.
Texas Alcoholic Beverage Comm’n, 945 F.3d 206 (5th Cir. 2019) (considering a Texas law
“ban[ning] all public corporations from obtaining” a permit to sell alcohol), cert. denied,
141 S. Ct. 874 (2020); Exxon Corp. v. Maryland, 437 U.S. 117, 125 (1978) (rejecting a facial
discrimination claim because the law discriminated based on business form, not an entity’s
local contacts). The district court did not conclude that SB 38 was such a law, but the
Commissioners suggest it is. They argue that because most incumbent transmission
facilities are owned by vertically integrated utilities, the law is a permissible protection of
companies with that business form.
But SB 1938 does not itself make that business-form distinction. It allows
incumbent entities other than vertically integrated utilities, namely electric cooperatives,
to compete. See TEX. UTIL. CODE § 37.056(f). Indeed, NextEra’s Jacksonville-Overton
project hinges on its ability to buy high-voltage lines from Rayburn Country Electric
Cooperative, Inc. And SB 1938 does not allow vertically integrated utilities without a Texas
presence to build lines in the state. SB 1938 conditions a company’s ability to compete only
on its preexisting operations in Texas, not on its corporate form.
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No. 20-50160
S. Pac. Co. v. Arizona ex rel. Sullivan, 325 U.S. 761, 767–68 (1945)). For the
concern about in-state interests being able to obtain favorable treatment over
out-of-state interests, local presence, rather than place of incorporation,
should matter. Which business is more likely to have the clout to enact
protectionist measures: a Delaware corporation that employs thousands of
workers in a state, or a company that paid a nominal filing fee to be
incorporated in state but has its “principal operations” elsewhere? Lewis v.
BT Inv. Managers, Inc., 447 U.S. 27, 42 (1980). Surely the former, as the swift
enactment of SB 1938 after the state regulatory agency rejected rights of first
refusal may demonstrate.
One circuit has taken the opposite view that place of incorporation
controls. See LSP Transmission Holdings, LLC v. Sieben, 954 F.3d 1018, 1027–
29 (8th Cir. 2020), cert. denied, No. 20-641, 2021 WL 769770 (Mar. 1, 2021).
The Eighth Circuit case involved a Minnesota law that will sound familiar: it
grants incumbent utilities a right-of-first refusal to build new transmission
lines, though it does not go nearly as far as the Texas law in banning new
entrants outright. Compare MINN. STAT. § 216B.246, subdiv. 3 (providing
a right of first refusal that allows any entity—even those without a Minnesota
transmission facility—to seek to enter the market if the incumbent does not
exercise its rights to compete within 90 days), with TEX. UTIL. CODE
§ 37.056. The court concluded that the preference for incumbents was not
discriminatory because it “applie[d] evenhandedly to all entities, regardless
of whether they are Minnesota-based entities or based elsewhere.” LSP
Transmission Holdings, LLC, 954 F.3d at 1028.8 As we have explained,
8
LSP Transmission seems to equivocate a bit on this point. A footnote says that
the court is not deciding “whether an entity that has an in-state presence but is
headquartered elsewhere is considered an in-state entity for the purpose of dormant
Commerce Clause review.” 954 F.3d at 1029 n.7. Yet its rejection of the facial
discrimination claim seems to rely on the notion that “incumbents in Minnesota include
25
No. 20-50160
however, a focus on where a company is “based,” which could mean either
where it is incorporated or headquartered, is irreconcilable with Supreme
Court dormant Commerce Clause jurisprudence addressing physical-
presence requirements. In light of that Supreme Court precedent, the
majority view of courts of appeals that where a company is “based” is not
controlling, and the underlying concern about local clout leading to
protectionist legislation, a law can discriminate against interstate commerce
even though most of the incumbent transmission-line providers that benefit
from SB 1938 are incorporated or headquartered outside Texas.9
What matters instead is that the Texas law prevents those without a
presence in the state from ever entering the portions of the interstate
transmission market that cross into Texas. A law that “discriminates among
affected business entities according to the extent of their contacts with the
local economy” may violate the Commerce Clause. Lewis, 447 U.S. at 42
entities headquartered in Iowa, North Dakota, South Dakota, Wisconsin, and Minnesota”
and “[m]any of these entities also own and operate facilities in states other than
Minnesota.” Id. at 1028.
9
The district court also cited SB 1938’s allowing a nonincumbent to enter the
market by purchasing a Texas incumbent as a reason why the law is not discriminatory.
Tex. Util. Code § 37.154(a). But holding that a law complies with the Commerce
Clause because an out-of-state firm can obtain the in-state favoritism by acquiring a firm
with the required in-state presence would require wiping away a broad swath of dormant
Commerce Clause jurisprudence. In many cases, the excluded entity would have had the
ability to buy the in-state entity and thus obtain the benefit of protectionism. To take just
one example, consider again Dean Milk. 340 U.S. at 352. What would have prevented a
dairy operating in Illinois from purchasing a pasteurization facility in Madison and then
selling milk from that acquired facility to Madisonians?
There is a more fundamental problem with the view that a law’s allowing an out-
of-state interest to acquire a protected incumbent precludes a finding of discrimination. It
ignores that the dormant Commerce “Clause protects the interstate market, not particular
interstate firms, from prohibitive or burdensome regulations.” Exxon, 437 U.S. at 127–28.
The harm to the market flows from the granting of the exclusive right to in-state interests.
That protectionism lessens thus raises prices in the interstate market.
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No. 20-50160
(concluding that a Florida statute was discriminatory, as only financial
institutions “with principal operations outside Florida [we]re prohibited from
operating . . . within the State”). In fact, “in-state presence requirement[s]”
have been a fertile ground for recent dormant Commerce Clause challenges.
See Granholm, 544 U.S. at 475. Consider the New York winery case. Id. A
New York statute was discriminatory because it required out-of-state
wineries to establish “a branch factory, office, or storeroom within the state”
to make direct sales to consumers. Id. at 470 (quoting N.Y. Alco. Bev. Cont.
§ 3(37)). The law did not define in-state wineries as those incorporated or
headquartered in New York. Swedenburg v. Kelly, 358 F.3d 223, 228 (2d Cir.
2004), rev’d by Granholm, 544 U.S. at 493. All that was required to be “in-
state” was a physical presence in the state. Id. at 229. The Court equated
that presence requirement—for a brick-and-mortar facility in the state—to a
residency requirement. Granholm, 544 U.S. at 475.
The Supreme Court’s most recent dormant Commerce Clause case,
one also involving alcohol, readily concluded that a law requiring two-years
of residency to own a liquor store “plainly” favored in-state interests. Tenn.
Wine, 139 S. Ct. at 2462 (addressing law that required individual owners to
be residents of Tennessee for at least two years and required officers and
owners of corporation to be Tennessee residents for two years). It took a
single sentence to note that such a residency requirement would violate the
Commerce Clause for the typical business; the tougher issue was whether the
authority the Twenty-First Amendment grants States over alcohol regulation
changed that result. Id. at 2474. An earlier case also found “plain[]”
discrimination when a Madison, Wisconsin ordinance allowed sales of milk
only by companies with a pasteurization facility within five miles of the city
center. Dean Milk, 340 U.S. at 354; see also Lewis, 447 U.S. at 38–44 (finding
discriminatory a Florida law that prevented banks with their “principal
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No. 20-50160
operations” outside the state from owning investment advisory businesses in
the state).
What is true for alcohol and milk under the dormant Commerce
Clause must be true for electricity transmission.10 Cf. Elec. Power Supply
Ass’n, 136 S. Ct. at 767 (discussing the near century long application of the
Clause to the power industry). Requiring boots on the ground discriminates
against interstate commerce. See also Lewis, 447 U.S. at 42 n.9 (instructing
that “discrimination based on the extent of local operations is itself enough
to establish the kind of local protectionism we have [cautioned against]”).
And SB 1938’s defining feature is a local-presence requirement. Only
companies that already have transmission lines can build new lines that
connect to the existing lines. Only such companies can receive a transfer of
rights from another incumbent owner that chooses not to build lines
connecting to its existing lines.
The Commissioners and partial dissent contend that a law limiting
competition to incumbents is not subject to dormant Commerce Clause
review. But “incumbent” is just another word for an entity that already has
a presence. Incumbent, Merriam Webster (defining incumbent as “one
that occupies a particular position or place”). In fact, an incumbency
requirement is a more anticompetitive version of the in-state presence
requirements held unconstitutional in cases like Granholm or Dean Milk. SB
10
The alcohol and milk cases cannot be distinguished, as the district court thought,
on the ground that they involved “the flow of goods in interstate commerce” or
“precondition[s] for allowing the flow of goods.” The dormant Commerce Clause has long
applied to both “goods and services.” Tenn. Wine, 139 S. Ct. at 2459; C&A Carbone, 511
U.S. at 391 (“[T]he article of commerce is not so much the solid waste itself, but rather the
service of processing and disposing of it.”); Camps Newfound/Owatonn, 520 U.S. at 577
n.10 (“We have long noted the applicability of our dormant Commerce Clause
jurisprudence to service industries.”).
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No. 20-50160
1938 is a local-presence requirement frozen in place. If a company had not
built transmission lines in Texas before 2019, it can never build such lines. In
contrast, a dairy with facilities in Illinois could still sell milk in Madison if it
built a pasteurization facility there. And a winery with California vineyards
could sell wine to New Yorkers by establishing a winery in the Empire State.
It is hard to see why the more stringent physical-presence requirement of SB
1938 should escape the fate of the physical-presence laws that still allowed
ways for those without a local footprint to establish one and compete.11
We fail to see the partial dissent’s distinction between the laws in
Granholm and Dean Milk, which “add requirements that discriminate against
out-of-state entities,” and SB 1938, which “merely recognizes a pre-existing
physical-presence requirement.” Opinion Concurring in Part and Dissenting
in Part 3. Id. 4. SB 1938 was not meaningless; it added a physical-presence
requirement to Texas utility law. Before SB 1938, NextEra had the right to
build the new transmission lines. Indeed, in 2017 the PUCT declared that
utilities without any presence in Texas could construct transmission lines in
11 The Commissioners and partial dissent rely on the Fourth Circuit’s comment
that “incumbency bias . . . is not a surrogate” for the protectionist impulses the dormant
Commerce Clause seeks to prevent. Colon Health Ctrs. of Am., LLC v. Hazel, 813 F.3d 145,
154 (4th Cir. 2016). But the ellipses hide three critical words: “in this context.” Id. And
the context of that case was that it addressed a Virginia law that required all medical service
providers—both those with current operations in the commonwealth and those with no
history in Virginia—to obtain a certificate of public need before adding operations. Id. at
149. As the challenged law had no in-state presence requirement, the plaintiffs did not even
argue that it was discriminatory on its face. Id. at 152. So the court considered only
whether the law was discriminatory in its purpose or effects. Id. at 153–60. The court made
the statement about “incumbency bias”—far from an incumbency requirement—in
explaining why an expert report concluding that incumbent medical providers were more
successful in the facially neutral process for obtaining certificates did not require a finding
of discriminatory purpose or effects. Id. at 154. Colon Health Centers thus says nothing
about a law that restricts economic opportunities to firms that already have a presence in a
state.
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No. 20-50160
SPP and MISO territory. Supra 9–10. In 2018, MISO approved NextEra to
build the Hartburg-Sabine Line despite the company’s not having a physical
presence in Texas. Supra 11. And NextEra would be allowed to build new
transmission lines for interstate grids in any other state. The vast majority of
states would not disfavor NextEra in any way for being a nonincumbent; five
states would give incumbents a right-of-first refusal. Supra 10–11. Only in
Texas do nonincumbents like NextEra face a lifetime ban on building lines
for interstate grids that reach into the state. Id. Nothing, then, in the natural
order of things makes SB 1938 any less of an intrusion on interstate commerce
than the (less onerous) physical-presence requirements in cases like
Granholm, Dean Milk, and C & A Carbone. See also United Haulers, 550 U.S.
at 338 (explaining that “discrimination” under the dormant Commerce
Clause “simply means differential treatment of in-state and out-of-state
economic interests that benefits the former and burdens the latter” (citation
omitted)).
The Commissioners justify SB 1938’s incumbency requirement as a
law that promotes the safety and reliability of the electricity grid by ensuring
that only those with a track record of building transmission lines in Texas can
build new lines. That may end up justifying the discrimination against out-
of-state interests, but it does not avoid the conclusion that the law
discriminates. Companies with existing transmission lines in Texas may
continue to compete in the transmission line market; companies without any
lines in Texas cannot build lines in the state. That is no different than the oil
well hypothetical we posed at the beginning. Limiting competition based on
the existence or extent of a business’s local foothold is the protectionism that
the Commerce Clause guards against. Granholm, 544 U.S. at 466; Lewis, 447
U.S. at42; Dean Milk, 340 U.S. at 352.
We therefore reverse the Rule 12(b)(6) dismissal of the claim that the
very terms of SB 1938 discriminate against interstate commerce. On remand,
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No. 20-50160
the district court will consider whether the Commissioners can show that
Texas has no other means to “advance[] a legitimate local purpose.” Or.
Waste Sys., Inc. v. Dep’t of Envtl. Quality of State of Or., 511 U.S. 93, 94 (1994).
2
Our conclusion that SB 1938 discriminates on its face may focus the
remaining litigation on that aspect of dormant Commerce Clause
jurisprudence alone. But NextEra also challenges the dismissal of its claims
that SB 1939 has a discriminatory purpose or effect. In addition, it invokes
the strand of dormant Commerce Clause caselaw providing that a law having
only incidental effects on interstate commerce may nonetheless be unlawful
if the “burden imposed on such commerce is clearly excessive in relation to
the putative local benefits.”12 Pike, 397 U.S. at 142. Apart from what we have
said about general Commerce Clause principles, pleadings-stage dismissal of
these claims was premature. Claims that turn on intent and effects typically
require factual development. Healy, 512 U.S. at 201 (recognizing that
Commerce Clause decisions require a “sensitive, case-by-case analysis of
purposes and effects); Wal-Mart, 945 F.3d at 218 (noting that
“discriminatory intent is factual matter”); Colon Health Ctrs. of Am., LLC v.
Hazel, 733 F.3d 535, 545 (4th Cir. 2013) (reversing the Rule 12 dismissal of
dormant Commerce Clause purpose and effects claims because of the “fact-
intensive quality of the substantive inquiry”); Cachia v. Islamorada, 542 F.3d
839, 840–41 (11th Cir. 2008) (reversing the dismissal of a discriminatory-
12
We have previously recognized that the difference is not clear between a
“discriminatory effects” claim and a Pike balancing claim, which also turns on effects.
Churchill Downs Inc. v. Trout, 589 F. App’x 233, 235 (5th Cir. 2014) (observing that the
Supreme Court “has failed to produce a readily discernable standard for distinguishing
between statutes that have discriminatory effects and those that merely create incidental
burdens” on interstate commerce). We need not flesh that out at this stage of this litigation
when there is no evidence of the law’s effect.
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No. 20-50160
effects claim); Waste Mgmt. Holdings, Inc. v. Gilmore, 252 F.3d 316, 334 (4th
Cir. 2001) (denying summary judgment because whether the challenged law
discriminated in its effects or purpose were “[q]uite obviously . . . questions
of fact”). That is the case here.
Start with the discriminatory-purpose claim. It requires us to consider
several factors, including “the specific sequence of events leading up to the
challenged decision.” Allstate, 495 F.3d at 160. NextEra’s allegation, though
far from proven at this stage, supports a plausible inference of discrimination
based on the on the timing of SB 1938. It contends that, at incumbents’
prodding, the legislature suddenly enacted the law excluding new entrants
after MISO selected NextEra’s bid to build the Hartburg-Sabine Line. If
proven, such a reaction to the entry of a disfavored group could support a
finding of discriminatory purpose. See Lewis, 447 U.S. at 32 (“There is
evidence that the amendment was a direct response to Banker Trust’s
pending application, and that it had the strong backing of the local financial
community.”). Other “purpose” factors are likewise factbound. Indeed,
our most recent dormant Commerce Clause “purpose” case had the benefit
of a full trial record. Wal-Mart, 945 F.3d at 212. Because NextEra has at least
raised plausible allegations that SB 1983 had a discriminatory purpose, that
claims gets to the discovery stage.
The effects-focused claims are just as, if not more, fact dependent.
The Pike inquiry requires assessing both the burdens and benefits of the law.
In response to the contention that allowing only incumbents to build new
lines promotes reliability, NextEra points to FERC’s rejection of that notion,
MISO’s requirements for reliable service, and the successful record of the
few out-of-state transmission companies that have run lines in ERCOT
before SB 1938. Given that SB 1938 is a complete ban on new entrants and
NextEra has at least plausibly alleged that the claimed local benefit of
reliability is “insignificant and illusory,” this claim warrants the factual
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No. 20-50160
development that effects claims typically receive. See, e.g., Wal-Mart, 945
F.3d at 221 (reviewing Pike claim after bench trial); United Transp. Union v.
Foster, 205 F.3d 851, 863 (5th Cir. 2000) (reversing summary judgment on
the plaintiffs’ Pike claim because “of an empty record”); Colon, 733 F.3d at
546 (reversing the dismissal of the plaintiffs’ Pike claim because it
“present[ed] issues of fact that cannot be properly resolved on a motion to
dismiss”); Cachia, 542 F.3d at 841 (reversing the dismissal of a
discriminatory-effects claim because the complaint alleged that the challenge
ordinance did “not simply raise the costs of operating a [chain] restaurant in
Islamorada, but entirely prohibit[ed] such restaurants from opening”); see
also Colon, 813 F.3d at 153–55 (holding, after reversing Rule 12 dismissal of
effects claims, that claim did not survive summary judgment based on record
that included expert testimony from both sides).
We reverse the Rule 12(b)(6) dismissals of the purpose, effects, and
Pike claims.
IV
The district court did not err, however, in dismissing NextEra’s claim
under the Contracts Clause. One of the original Constitution’s only express
limitations on state power, it directs that “No State shall . . . pass any . . . Law
impairing the Obligation of Contracts.” U.S. Const. Art. I, § 10. The
Contracts Clause was a response to the state laws relieving debtors during
the 1780s. James W. Ely, Jr., The Contract Clause: A
Constitutional History 1, 8, 15–17 (2016). In the first century or so
of the Republic, before the Bill of Rights restricted states, the Contracts
Clause was “the primary vehicle for federal review of state legislation.” Id.
at 1. Some of the greatest hits of the antebellum Supreme Court were
Contracts Clause cases. See Fletcher v. Peck, 10 U.S. (6 Cranch) 87 (1810);
Trs. of Dartmouth Coll. v. Woodward, 17 U.S. (4 Wheat.) 518 (1819);
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Proprietors of Charles River Bridge v. Proprietors of Warren Bridge, 36 U.S. (11
Pet.) 420 (1837).
But unlike the dormant Commerce Clause, the Contracts Clause is
not what it once was. See Sveen v. Melin, 138 S. Ct. 1815, 1827–28 (2018)
(Gorsuch, J., dissenting); Ely, supra, at 5–6, 220–23, 245–47. The Supreme
Court substantially narrowed its scope during the Great Depression. Home
Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 428 (1934) (“[T]he [Clause’s]
prohibition is not an absolute one and is not to be read with literal exactness
like a mathematical formula.”). Under modern caselaw, states have some
leeway to alter parties’ contractual relationships “to safeguard the vital
interests of [their] people.” Energy Reserves Grp., Inc. v. Kan. Power & Light
Co., 459 U.S. 400, 410 (1983) (quoting Blaisdell, 290 U.S. at 434).
A related principle that has sapped the Contracts Clause of its earlier
force applies here. We now recognize that parties contract with an
expectation of possible regulation. See Energy Reserves Grp., 459 U.S. at 413.
That is especially true in highly regulated industries like power. That history
of regulation put NextEra on notice that Texas could enact additional
regulations affecting its two projects. Id. (“Significant here is the fact that
the parties are operating in a heavily regulated industry.”); Ely, supra, at
246 (explaining that Energy Reserves recognized that “parties in regulated
industries must be deemed to enter contracts with the understanding that
further regulations might affect their contractual terms”). After Order 1000,
there was substantial uncertainty about how state regulators would respond.
See Chrysler Corp. v. Kolosso Auto Sales, Inc., 148 F.3d 892, 897 (7th Cir. 1998)
(highlighting that the plaintiff “should have known . . . that it did not have a
solid right to prevent a dealer from changing the location of the dealership”).
Despite PUCT’s declaration that transmission-only companies could enter
the market, Texas courts never weighed in on the issue. Moreover, the
emergence of state rights of first refusal signaled that Texas could enact
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something similar, if not even more restrictive. Cf. id. at 895 (concluding that
the challenged law “was in the direct path of the plausible . . . evolution of
Wisconsin’s program for regulating automobile dealership contracts”).
Given all that, SB 1938 did not impair NextEra’s reasonable expectations.
At a more basic level, SB 1938 did not interfere with an existing
contractual right of NextEra’s. Both of NextEra’s contracts required it “to
secure any necessary” certificates of convenience and necessity to build the
Hartburg-Sabine Line or purchase the Jacksonville-Overton Line. Yet
PUCT never issued them. Consequently, NextEra did not have a concrete,
vested right that the law could impair. See Colon de Meijas v. Lamont, 963
F.3d 196, 202–03 (2d Cir. 2020) (rejecting a similar challenge because “no
contractual right exist[ed]”); Lazar v. Kroncke, 862 F.3d 1186, 1200 (9th Cir.
2017) (“Because Lazar never possessed a vested contractual right, she
suffered no contractual impairment.”); Burlington N. R.R. Co. v. Nebraska,
802 F.2d 994, 1106 (8th Cir. 1986) (affirming the denial of relief because the
alleged right was “conditional”). It thus fails at the threshold question for
proving a modern Contracts Clause violation. Energy Reserves Grp., 459 U.S.
at 413.
***
We AFFIRM the dismissal of the Contracts Clause claim. We
REVERSE the dismissal of the Commerce Clause claims and remand those
for further proceedings consistent with this opinion. We leave it for the
district court to determine whether NextEra is entitled to any preliminary
injunctive relief.
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Jennifer Walker Elrod, Circuit Judge, concurring in part and
dissenting in part:
Today’s holding about S.B. 1938 applies only “to the interstate
electricity networks in Texas (but not the intrastate ERCOT network).”
Ante at 2. The territory at issue, which is controlled by MISO and SPP, “is
part of an ‘interconnected “grid” of near-nationwide scope’ that has long
been subject to FERC oversight.” Ante at 22. Because the majority opinion
specifically excludes the intrastate ERCOT grid, I concur in much of the
majority’s opinion. But I dissent from its further conclusion that S.B. 1938
discriminates on its face.*
The “regulation of utilities is one of the most important of the
functions traditionally associated with the police power of the States.” Ark.
Elec. Co-op Corp. v. Ark. Pub. Serv. Comm’n, 461 U.S. 375, 377 (1983). And
as the majority opinion recognizes, “Texas has an interest in promoting
reliable electricity service, including the power to approve the siting and
construction of transmission lines.” Ante at 20. To ensure “a robust,
reliable, and well-regulated electric grid,” S.B. 1938 ties construction rights
to endpoint ownership to determine who can build, own, and operate new
transmission facilities. Tex. H. Comm. on State Affs., Bill Analysis, Tex.
H.B. 3995, 86th Leg., C.S.H.B. at 1 (2019). As one of the amici stresses, S.B.
1938 “is an exercise of local control over what is inherently a local business.
This local character is seen especially in the areas of ERCOT served by public
power utilities, which are community-owned or managed, vertically
integrated monopoly systems.” Brief for The Lower Colorado River
Authority, as Amicus Curiae Supporting Defendants–Appellees, at 9.
*
As the majority opinion notes, this facial discrimination claim under the dormant
Commerce Clause should not be confused with a facial challenge to S.B. 1938, which this
claim is not. Ante at 21 n.6.
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Although the majority opinion does not disturb ERCOT’s grid, which is
wholly intrastate and makes up most of Texas’s electrical system, the right
of first refusal so crucial to ERCOT may also be important to the portion of
Texas’s grid within FERC’s jurisdiction.
As the majority opinion states, a law may discriminate against
interstate commerce in three ways: on its face (i.e., by its very text), by its
purpose, or in its effect. Ante at 21 (citing Allstate Ins. Co v. Abbott, 495 F.3d
151, 160 (5th Cir. 2007)). And a law having only incidental effects on
interstate commerce may nonetheless be unlawful if the “burden imposed on
such commerce is clearly excessive in relation to the putative local benefits.”
Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). While I agree with the
majority that we should reverse the 12(b)(6) dismissals of NextEra’s
discriminatory-purpose, discriminatory-effect, and Pike claims, ante at 33, I
disagree that “S.B. 1938 discriminates on its face” against interstate
commerce, ante at 31.
The majority opinion purports to draw a distinction in S.B. 1938
between in-state and out-of-state entities or interests. In reality, it draws a
distinction into S.B. 1938, because the text does not bear that out. Rather,
S.B. 1938 draws a neutral distinction between entities based on incumbency
status, which does not depend on residency. In LSP Transmission Holdings,
LLC v. Sieben, the Eighth Circuit considered an incumbency preference
nearly identical to this one. 954 F.3d 1018, 1023–24 (8th Cir. 2020). In
holding that the law was not facially discriminatory, the court noted that the
law’s “preference is for electric transmission owners who have existing
facilities, and its law applies evenhandedly to all entities, regardless of
whether they are Minnesota-based entities or based elsewhere.” Id. at 1028.
True, “laws that restrain both intrastate and interstate commerce may be
discriminatory,” but “[t]his is not such an instance.” Id. The incumbency
requirement here, as in Sieben, is not an illicit residency requirement. Cf.
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Hignell-Stark v. City of New Orleans, No. 21-30643, 2022 WL 3584037, at *5
(5th Cir. Aug. 22, 2022) (holding that New Orleans’s “residency
requirement discriminated against interstate commerce”).
Similarly, S.B. 1938 draws a neutral distinction based only on
incumbency status. Thus, the majority needs a further inferential step to
conclude that S.B. 1938 amounts to discrimination against out-of-state
entities. Citing three Supreme Court cases, the majority opinion makes that
inferential step by saying that “[w]hat is true for alcohol and milk under the
dormant Commerce Clause must be true for electricity transmission.
Requiring boots on the ground discriminates against interstate commerce.”
Ante at 28 (citations omitted). But this inferential step lands beyond the
realm of facial discrimination. If the text does not distinguish between in-
state and out-of-state interests—which it does not—S.B. 1938 cannot be
facially discriminatory.
To illustrate, S.B. 1938’s incumbency requirement is meaningfully
different than discriminatory in-state presence requirements. In each of
these three cases, the laws add requirements that discriminate against out-of-
state entities. Tenn. Wine & Spirits Retailers Ass’n v. Thomas, 139 S. Ct. 2449,
2456–59 (2019); Granholm v. Heald, 544 U.S. 460, 465–66 (2005); Dean Milk
Co. v. City of Madison, 340 U.S. 349, 350–52 (1951). Without the
discriminatory laws in Granholm and Dean Milk, the goods at issue—wine
and milk, respectively—could readily be supplied by providers without any
physical presence in the state. Wineries could ship wine directly to
consumers in New York and Michigan, and milk producers could send their
dairy products into Madison from Chicago. Granholm, 544 U.S. at 467–68;
Dean Milk, 340 U.S. at 352–53. And without the law in Tennessee Wine &
Spirits, out-of-state entities and individuals could open new liquor stores
without residing in Tennessee for any meaningful period of time. 139 S. Ct.
at 2458. Under those laws, however, out-of-state producers could no longer
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ship product into the state or the city, and out-of-state entities could not
immediately open liquor stores. Thus, those laws violate the Commerce
Clause because they add requirements that discriminate against out-of-state
entities.
In contrast, S.B. 1938 does not add any such requirements. By offering
a right of first refusal to owners of incumbent utility facilities, S.B. 1938
merely recognizes a pre-existing physical-presence requirement: an electric
company cannot provide transmission-and-distribution services without
some sort of existing physical presence in the state. Thus, unlike the three
cases cited by the majority, S.B. 1938 does not add, either explicitly or
implicitly, any in-state presence requirements.
Moreover, the nature of the transmission-and-distribution market
means that all existing market providers must have some sort of physical
presence within the state. Thus, the mere fact that an entity had a physical
presence in Texas before 2019 says only that the entity was an existing market
provider at that time, and nothing more. It says nothing about whether the
entity is an in-state or an out-of-state entity, or whether the law favors in-
state over out-of-state interests. See Colon Health Ctrs. of Am., LLC v. Hazel,
813 F.3d 145, 154 (4th Cir. 2016) (“[I]ncumbency bias in this context is not a
surrogate for the ‘negative[] impact [on] interstate commerce’ with which
the dormant Commerce Clause is concerned.” (alterations in original) (quot-
ing Colon Health Ctrs. of Am., LLC v. Hazel, 733 F.3d 535, 543 (4th Cir.
2013))).
The distinction between incumbents and non-incumbents in S.B.
1938’s text, without more, does not constitute facially discriminatory treat-
ment of out-of-state entities. That something more would have to be evi-
dence of discriminatory purpose or discriminatory effect. And as the major-
ity stated, the “pleadings-stage dismissal of [the discriminatory-purpose,
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discriminatory-effect, and Pike] claims was premature. Claims that turn on
intent and effects typically require factual development.” Ante at 31. On
remand, I have no doubt that the able district court will carefully analyze
these thorny issues.
40