In LSP Transmission Holdings, LLC v. Lange, 2018 WL 3075976 (D. Minn. June 21, 2018), a court upheld a “traditional” state-based regulation approved by the Federal Energy Regulatory Commission (“FERC”) that restricts the wholesale transmission electricity market. The United States District Court for the District of Minnesota upheld Minnesota Statute § 216B.246,[i] granting incumbent electric transmission owners the right of first refusal to construct transmission lines over merchant transmission developers. It found that neither interstate commerce nor the dormant Commerce Clause was violated, based on the FERC’s approval of such “traditional” state regulation. An interesting concept for those attempting to move from “traditional” state monopolies of wholesale transmission to a de-regulated marketplace.

Interstate electric energy transmission and wholesale rates have become a matter of federal public interest since the Federal Power Act was enacted in 1935, granting FERC the authority to regulate the transmission and sale of electricity at wholesale rates in interstate commerce. FERC has since enacted a series of reforms to promote development of competitive markets to address the finding that “the economic self-interest of electric transmission monopolists lay in denying transmission or offering it only on inferior terms to emerging competitors,” S.C. Pub. Serv. Auth., 762 F.3d at 50; FERC Order No. 888 (requiring each jurisdictional electric public transmission provider to unbundle its wholesale generation and transmission services).Thereafter, FERC issued Order No. 2000, encouraging interstate electric transmission operators to cede operation of their transmission systems to independent system operators (“ISOs”) or regional transmission organizations (“RTOs”) to coordinate transmission planning, operation, and use on a regional and interregional basis.[ii]

Prior to 2011, incumbent utilities had a federal right of first refusal (“ROFR”). In 2011, FERC Order 1000 eliminated the federal ROFR. See 136 FERC 61051, 2011 WL 2956837 (“Order 1000”) ¶ 7. However, FERC Order 1000 recognized that states could continue to regulate electric transmission lines. (Order 1000 ¶ 107). Accordingly, Minnesota enacted its own ROFR law, Minn. Stat. § 216B.246.3, which authorized the Public Utility Commission to require an incumbent to build the electric transmission line. FERC approved MISO’s tariff, and its decision to honor state ROFR laws.[iii]

LSP challenged the construction of the Huntley-Wilmarth line, a proposed 40 mile 345 kilovolt electric transmission line. Specifically, LSP challenged the constitutionality of Minn. Stat. § 216B.246 under the dormant Commerce Clause, arguing Minnesota’s ROFR law facially discriminated, or discriminated in purpose or effect, against interstate commerce in the construction and ownership of large transmission facilities. The court applied a two-step inquiry. First, it addressed whether the law overtly discriminates against interstate commerce.[iv] A state law “overtly discriminates” if it is discriminatory on its face, in its purpose, or in its effects. Id. If the state law is not overtly discriminatory, the second tier of the Pike-test is applied: whether the law imposed a burden on interstate commerce that “is clearly excessive in relation to its putative local benefits.”[v] LSP bore the burden of proof.[vi]

Relying upon General Motors Corp. v. Tracy,[vii] the Court found no overt discrimination.[viii] In Tracy, the Supreme Court found that since in-state gas utilities served residential consumer end-users through monopolies and interstate companies—out-of-state marketers did not, for such sales to the residential consumers, the dormant Commerce Clause had “no job to do.” Id. at 303. For industrial consumers, although there was the “possibility of competition” between the local utilities and private business, the Supreme Court nonetheless found the state was justified in treating utilities differently in both markets. The Court explained that “[w]here a choice is possible . . . the importance of traditional regulated service to the captive market makes a powerful case against any judicial treatment that might jeopardize [the utilities’] continuing capacity to serve the captive market.” Id. Thus, the Ohio statute did not discriminate against interstate commerce or run afoul of the dormant Commerce Clause.

The Second Circuit Court of Appeals applied Tracy to uphold a Connecticut program that required state electric utilities to either produce renewable energy or to purchase renewable energy credits from “renewable energy producers located in the region.”[ix] Regardless of the national market for renewable energy credits, the state program was found to advance legitimate interests in the local market. Id. The court noted that FERC had established a regional market (and geographic boundaries), and that FERC’s involvement weighed strongly against intervention by the court. Id. The Connecticut renewable energy credit program was “well within the scope of what Congress and FERC have traditionally allowed the States to do in the realm of energy regulation.” Id. at 106.

Although the Court recognized that local utilities in Minnesota and out-of-state entities competed for the right to build transmission lines, nonetheless, under Tracy, Minnesota is entitled “to give the greater weight to the captive market and the local utilities’ singular role in serving it.” [x] Since Minnesota both gave existing owners a right of first refusal to build new transmission lines connecting to their existing facilities and subjected them to extensive regulation, any intervention by the Court was seen to upset the balance. The Court also rejected any notion that Tracy was inapposite. Notwithstanding Tracy’s reference to residential consumers, the Court found Tracy’s finding was not so limited. Thus, the fact that Minn. Stat. § 216B.246 did not concern residential consumers was not persuasive. The main principle was that there cannot be discrimination between entities that are not similarly situated. The Court found that regulated utilities are not similarly situated with unregulated entities, such as LSP.[xi]

The Court also rejected, under the Pike balancing test, the assertion that Minn. Stat. § 216B.246 unduly burdened interstate commerce by restricting entry to the transmission market in Minnesota. The Pike test required the balancing of a legitimate public interest against any incidental burdens on interstate commerce. The Court concluded that Minnesota demonstrated a strong interest in enacting Minn. Stat. § 216B.246 and various resulting benefits. It found that FERC expressly approved the use of state ROFR laws.[xii] Regarding ROFR statutes, FERC took a familiar line that it had “struck an important balance” between promoting competition and allowing the continued “regulation of matters reserved to the states.”[xiii] Applying the Pike test, the Court concluded that any burden on interstate commerce was outweighed by the “benefits” of Minnesota’s ROFR statute. Ironically, the Court noted that the free market was better left to legislators. Yet, that appeared to be precisely LSP’s point: Congress and FERC had spoken and purportedly sought deregulation, which would mean that continued “traditional” state regulation or any favor to monopolies should no longer apply.

FERC continues to muddy the waters. Deregulation—to be or not to be—the question remains.