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Judge dismisses NextEra challenge to Texas right-of-first-refusal law

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Judge dismisses NextEra challenge to Texas right-of-first-refusal law

Another federal district judge has dismissed a lawsuit seeking to overturn a state law giving local utilities the first right to build power lines that connect to their facilities.

In that lawsuit, NextEra Energy Inc. had argued that a Texas state law passed in May 2019 violates the Commerce Clause of the U.S. Constitution because it discriminates against out-of-state transmission developers. But Judge Lee Yeakel, who heard the case on behalf of the U.S. District Court for the Western District of Texas, Austin Division, said the law "does not single out Texas transmission-line providers as the sole beneficiaries of the right of first refusal."

"Indeed, most incumbent providers in Texas are owned by out-of-state companies, and [the law] allows out-of-state providers a means to enter the Texas market for transmission services by buying a Texas utility," Yeakel said.

The Federal Energy Regulatory Commission in 2011 issued Order 1000, through which it sought to open the doors for developers other than incumbent utilities to undertake new transmission projects by eliminating any federal right of first refusal for utilities to build needed new transmission facilities in their service territories. Texas legislators responded by passing Senate Bill 1938 and companion House Bill 2995, which granted existing transmission and distribution utilities the exclusive right to build lines that interconnect to their infrastructure.

Prior to the law's passage, bill sponsor and state Rep. Dade Phelan said Texas utilities and other interested parties had "made a strong case ... that transmission operations are best managed by accountable companies with boots on the ground in our communities." However, those against the bill testified that it would eliminate competition and thus competitive transmission build-out costs.

For instance, Trent Carlson, senior vice president of regulatory and corporate service at GridLiance GP LLC, testified that stakeholders need to consider "what is being left on the table in terms of lost opportunity and missed value that could have been directly delivered to transmission customers." And Jaren Taylor, a partner at Dallas-based law firm Vinson & Elkins who testified on behalf of companies including Oncor, CenterPoint Energy Inc. and AEP Texas Inc., asserted that the legislative change could not squelch competition in the Lone Star State because the industry is fully regulated. "There is no competition in Texas today," Taylor said.

But NextEra in its June 2019 lawsuit said its subsidiary NextEra Energy Transmission Midwest LLC has "lost the opportunity to compete for, construct, own, or acquire transmission projects in Texas" and risks missing out on building the 500-kV, 23-mile Hartburg-Sabine Junction Transmission Project, which would run through Texas' Jasper, Newton and Sabine counties, because of the law. The Midcontinent ISO in 2018 selected the NextEra unit to build the Hartburg-Sabine line through the grid operator's FERC Order 1000 competitive solicitation process, but NextEra said the law will result in it being barred from obtaining a certificate of convenience and necessity for the project from state regulators because it does not already operate in Texas.

According to NextEra's complaint, the Texas law violates the U.S. Constitution because it "was intended to benefit local entities — giving electric utilities that already operate in Texas the sole right to build transmission lines with an end point in Texas, even when those transmission lines deliver power in interstate commerce."

"That is what the Constitution does not allow," NextEra said.

Yeakel disagreed, however, noting in his Feb. 26 decision (NextEra Energy Capital Holdings et al. v. Chairman of the Public Utility Commission of Texas; Cause 1:19-CV-626-LY) that the commerce clause "does not elevate free trade above all other values" even though it may significantly limit the ability of states and localities to control the flow of interstate commerce.

In this case, Yeakel said, the law "does not purport to regulate the transmission of electricity in interstate commerce; it regulates only the construction and operation of transmission lines and facilities within Texas." The court also noted the monopolistic nature of electric utilities in the state and cited U.S. Supreme Court precedent that "grants controlling weight to the monopoly market" and the explicit burden it places on incumbent utilities to provide adequate, reliable service to customers in their service territories.

Yeakel further pointed to FERC's Order 1000, which the judge said "recognizes that states can continue to regulate electric transmission lines," as nothing in that order limits state or local transmission facility construction regulations.

The court also rejected claims that the law results in a violation of the Constitution's Contracts Clause, noting that under the terms of NextEra's agreement with MISO, the utility's contractual right to build the Hartburg-Sabine transmission line is subject to receiving approval from agencies such as the Public Utility Commission of Texas. Moreover, even if the law infringes on NextEra's contractual interest to some extent, Yeakel found it to be constitutional as it "rests on, and is prompted by, significant and legitimate state interests."

NextEra declined to comment as to whether the Florida-based energy company would appeal the decision.

Texas' right-of-first-refusal law is not the first to be upheld by a federal district court in the wake of FERC Order 1000. In June 2018, a judge in Minnesota similarly ruled that that state's law did not violate the so-called dormant implication of the Constitution's Commerce Clause, but that decision currently is undergoing appeal.