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. v. 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
No. 20-50160
United States Court of Appeals for the Fifth Circuit
August 30, 2022
Appeal from the United States District Court for the Western District of Texas, USDC No. 1:19-CV-626
Before DENNIS, ELROD, and COSTA, Circuit Judges.
Imagine if Texas—a state that prides itself on promoting free enterprise—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 significant 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.”
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.
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 interstate wholesale transactions. Ark. Elec. Co-op. Corp. v. Ark. Pub. Serv. Comm‘n, 461 U.S. 375, 378 (1983).
Congress
As the power industry evolved, so did the federal regulatory approach. In the decades following passage of the
To that end, FERC encouraged utilities that owned transmission lines to form voluntary associations that would coordinate and “manage wholesale markets on a regional basis.” Id.; see also
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.
B
Order 1000 is consistent with the
In Texas, the Public Utility Commission of Texas (PUCT) regulates electric utilities.
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 jurisdiction. Pertinent here, the Midwest Independent System Operator (MISO) and the Southwest Power Pool (SPP) control territory in East Texas.3
*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.”
Five other states restored incumbent‘s rights of first refusals after FERC took them away. See
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
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.
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.
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;
- “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 companies.”
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
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
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
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 tumultuous 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 Discrimination 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
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 mentioned 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 purposes 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
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
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”
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
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
Act gives general authority over interstate transmission markets to federal regulators.
Consequently, unlike the Tracy tax exemption, SB 1938 has no application in a “noncompetitive, captive market in which the local utilities alone operate.” Tracy, 519 U.S. at 303–04. We would have a Tracy issue if the challenged law provided vertically integrated utilities with the same
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
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
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.
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
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 nondiscriminatory for Commerce Clause purposes because the local interests it benefits are incorporated or headquartered in another state.7
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
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 (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
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 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 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
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. at 42; 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, 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
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 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.”
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
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.
35
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.13
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
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. 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 proposed 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 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) (quoting 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 treatment of out-of-state entities. That something more would have to be evidence of discriminatory purpose or discriminatory effect. And as the majority stated, the “pleadings-stage dismissal of [the discriminatory-purpose, 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.